Commercial Division Blog

Posted: June 23, 2014 / Categories Commercial, Damages

Theories of Damages in the Macy’s v. J.C. Penney Litigation

On June 16, 2014, Justice Oing of the New York County Commercial Division issued a decision in Macy's, Inc. v. J.C. Penny Corporation Inc., Index No. 652861/2012, setting forth findings of law and fact after a non-jury trial.

The case's history, and the contents of Justice Oing's lengthy decision, have been widely reported elsewhere:  Macy's sued J.C. Penney for inducing Martha Stewart Living Omnimedia, Inc., (MSLO) to breach its exclusive agreement with Macy's; Justice Oing issued injunctions before trial, preventing J.C. Penney from selling Martha Stewart-branded products; Macy's settled with MSLO; and, on the merits, the court ruled in favor of Macy's against J.C. Penney.

Instead of re-hashing those well-examined issues, this blog post examines Justice Oing's rulings on Macy's possible remedies, which present some unique questions of fact and law.

Justice Oing first denied Macy's claim for a permanent injunction on the grounds of mootness, because agreements between the parties have resolved any chance of future harm from infringement or unfair competition.

Because Justice Oing awarded Macy's pre-trial injunctive relief prohibiting the sale of Martha Stewart-branded goods at J.C. Penney stores before any such goods were sold, Macy's had no claim on its first lost profits theory.

Macy's only viable claim for lost profits instead centers on 900 product designs that MSLO prepared for J.C. Penney, some of which J.C. Penney accepted and sold under its own brand names. To determine whether Macy's lost any profits under this theory, Macy's will have to prove that (a) a particular design or designs "rightfully belonged to Macy's; (b) if that design were presented to Macy's, Macy's would have accepted it; (c) J.C. Penney manufactured and sold the design; and (d) J.C. Penney "realized a profit on such sales." This question was referred to a Special Referee/JHO for determination, but given Justice Oing's admonition that "speculative damages will not be considered," Macy's faces a high burden.

Macy's also claimed attorneys' fees—despite the absence of a contract provision or statute providing for that remedy—based upon a common-law rule that a party can recover attorneys' fees if

through the wrongful act of his present adversary, a person is involved in earlier litigation with a third person . . . to protect his interests . . . he is entitled to recover the reasonable value of attorneys' fees and other expenses thereby suffered or incurred. Such attorney fees should be reasonable and the natural and necessary consequences of the defendant's tortious acts.

(Internal citations and quotation omitted.)

Here, Macy's claimed that its action against MSLO was caused by J.C. Penney's tortious actions, and that J.C. Penney should therefore be liable for Macy’s attorneys' fees in that action. Justice Oing also referred this claim to a special referee to determine "whether JCP's conduct was the proximate cause of the legal fees incurred by Macy's in its action against MSLO." However, Justice Oing warned that his finding that J.C. Penney tortuously interfered with the Macy's/MSLO contract "may not amount to a finding of proximate cause" and that the Special Referee would have to make a deeper analysis of the parties' actions and motivations. Any award of attorney's fees would also have to be reduced if the Macy's/MSLO settlement required MSLO to pay any of Macy's attorneys' fees.

Finally, Justice Oing addressed Macy's claim for punitive damages. To decide whether to award punitive damages, the finder of fact was required to consider:

the nature and reprehensibility of what JCP did . . . the character of the wrongdoing, whether JCP's conduct demonstrated an indifference to, or a reckless disregard of, the rights of others, whether the acts were done with an improper motive or vindictiveness, whether the acts constituted outrageous or oppressive intentional misconduct [etc.].

Justice Oing stated that this was a difficult decision, because an award of punitive damages against "a major domestic retailer . . . may have unintended and severe collateral economic consequences." Then, despite an earlier finding that J.C. Penney had knowingly and intentionally interfered with Macy's contract with MSLO, Justice Oing declined to award punitive damages. He pointed first to the fact that gaining a commercial advantage was the sole motivation for J.C. Penney's actions, and to the severe consequences that J.C. Penney had already suffered:

If one were to say that a finding of no liability for punitive damages would be to condone such corporate behavior and let JCP get off easy, consider the following facts. [Macy's], the loyal and unsuspecting partners, have been vindicated. JCP terminated [the executive responsible] on April 8, 2013, before this trial ended, a casualty of his own hubris. JCP, its board of directors, and its top executives were publically ridiculed and humiliated as a consequence of this trial. Their grand strategy was a colossal and abject retail failure . . . to the point where it placed JCP on the verge of financial collapse.

This ruling reminds us that the mere fact that an intentional tort has been committed does not automatically entitle a plaintiff to punitive damages. Here, punitive damages were refused because J.C. Penney acted to advance its own interests and not out of malice or vindictiveness towards Macy's. It also highlights a seldom-used avenue to obtain common-law attorney fees. However, the most interesting thing about this ruling is that, despite J.C. Penney's obvious wrongdoing, and its total defeat on the merits, Macy's may be left with no remedy at all. Indeed, despite the trial and the lengthy decision on the merits, it appears as though this litigation was in effect decided at the preliminary injunction stage. Because Macy's sought and received prompt injunctive relief, almost all of its potential damages were forestalled.