By Karen Freifeld
NEW YORK (Reuters) - Macy's Inc
After a month-long mediation effort failed to yield a settlement, the trial resumed in New York state court over whether Macy's has an exclusive right to sell certain Martha Stewart home goods products.
The legal battle has hampered a key part of turnaround plans for Penney, which opened the first of its in-store home goods boutiques last week for designers Jonathan Adler and Michael Graves. It plans to open Martha Stewart shops in coming weeks.
Late in the day, news came of the ouster of Johnson, who has been under fire since sales fell 25 percent at the department store last year. The chain said it would replace Johnson with his predecessor Mike Ullman. It is unclear how Johnson's departure will affect the lawsuit.
Johnson, who tried to replace sales and coupons with everyday low prices, had repeatedly told investors that the retailer's revamped home section would put the company back on the path to growth.
The turnaround plan has been "very close to a disaster," hedge fund manager William Ackman, the J.C. Penney board member who handpicked Johnson, said Friday at an investment conference sponsored by Thomson Reuters.
The judge overseeing the case, Justice Jeffrey Oing, last month ordered Macy's, Penney and Martha Stewart Living Omnimedia into mediation in hopes of resolving the dispute while the non-jury trial was in recess because of scheduling conflicts.
Macy's claims Martha Stewart Living granted it the exclusive right to manufacture and sell the Martha Stewart-branded home goods in some categories under a 2006 agreement that, with a renewal last year, runs until 2018.
Macy's sued Martha Stewart Living Omnimedia last year after it signed an agreement to sell Martha Stewart-branded products at J.C. Penney. Macy's claims the agreement breaches its contract to sell certain products exclusively at Macy's.
Macy's also sued J.C. Penney over the deal. Martha Stewart is the No. 1 home brand at Macy's.
Last year, Oing issued a preliminary injunction against Martha Stewart Living, barring it from selling some branded items at J.C. Penney. Penney agreed to abide by the injunction.
Arguments are expected in court Thursday on whether the preliminary injunction should be expanded. Macy's also wants to bar J.C. Penney from selling Martha Stewart-designed goods in the exclusive product categories under the "JCP Everyday" label.
Penney shares rose nearly 11 percent after an initial CNBC report that Johnson was out as chief executive, then fell 6 percent after the company said Ullman was back.
The lingering battle has been a blow to Penney, which agreed to hold off on its plan to sell Martha Stewart bedding, cookware and bath items, which are covered in the Macy's deal.
Martha Stewart, 71, Macy's Chief Executive Terry Lundgren and J.C. Penney CEO Johnson all have testified.
Lundgren testified that Stewart did not tell him she was doing a deal with J.C. Penney until the night before it was announced publicly, while Stewart professed surprise at Lundgren's angry reaction to the deal.
Johnson, who built up Apple Inc's
The cases are Macy's Inc v Martha Stewart Living Omnimedia Inc, 650197/2012, and Macy's Inc v J.C. Penney Corp, 652861/2012, New York State Supreme Court, New York County.
(Additional reporting and writing by Phil Wahba in New York; editing by Edmund Klamann, Matthew Lewis and Andrew Hay)