Martha Stewart defends J.C. Penney deal in Macy's trial

Martha Stewart said on Tuesday she was shocked that Macy's Inc had objected so strongly when she signed a deal with rival retailer J.C. Penney Co Inc .

Stewart was testifying in a trial over claims by Macy's that her agreement to sell certain products in J.C. Penney stores violated an existing contract to sell her products at Macy's.

Stewart said the J.C. Penney deal was an earnest, honest and forthright business decision for her company, Martha Stewart Living Omnimedia . "It just boggles my mind that we're sitting here," she said.

Whether the J.C. Penney deal can go ahead is crucial to the retailers. Macy's needs the Martha Stewart brand to drive growth, while J.C. Penney has said Martha Stewart is essential to its turnaround plan.

Under questioning on Tuesday, Stewart said she had been disappointed that Macy's had failed to maximize her sales and said J.C. Penney Chief Executive Ron Johnson's vision had appealed to her. Macy's "kept us pretty static," she said.

Last week, Macy's Chief Executive Terry Lundgren said he felt "sick to my stomach" when Stewart told him she was doing a deal with J.C. Penney. He said Macy's took a chance on Stewart when she came out of prison in 2005, where she had served time for lying about a stock trade.

Asked by Macy's lawyer Theodore Grossman about the phone call, Stewart said: "I was quite taken aback by his response and then he hung up on me. I was kind of flabbergasted."

Lundgren had said Stewart seemed to be reading from a document during the call. Stewart said she was aware of the "talking points" but wasn't sure whether she had them in front of her.

New York state Justice Jeffrey Oing has put in place a temporary order that stops J.C. Penney from selling Martha Stewart-branded products in categories that were deemed exclusive in its contract with Macy's, such as cookware and bedding.

J.C. Penney has since announced plans to sell those products under the "JCP Everyday" brand. Macy's says that, too, violates its contract with Martha Stewart.

Grossman asked Martha Stewart whether a person who buys a cast-iron casserole or cutlery set designed by MSLO at one end of a shopping mall would be less likely to buy one from the Martha Stewart collection at Macy's at the other end.

"They might have two houses. They might have two kitchens," Stewart replied.

Stewart, 71, was dressed in a short brown skirt and matching vest over a cream-colored shirt. She appeared stiff and tense under Grossman's questions, but seemed to relax when Eric Seiler, the lawyer for her company, took over.

In a light moment, Seiler misspoke when asking how Stewart spends her time, using the words "do your time" instead. Stewart replied, "I did my time," to laughter from the courtroom.

Susan Scafidi, a professor at Fordham University School of Law, said the judge, who is hearing the case without a jury, will ultimately decide that some products are exclusive to Macy's while others are not.

"I think at the end of the day this is a contract case and the judge knows that," Scafidi told Reuters Television. "And so there probably will be some kind of a split decision based on the details of the contract."

If the case is not over by Friday, Oing has said he could consider expanding the preliminary injunction to include the unbranded products. J.C. Penney has said it wants to stock them before Mother's Day in May.

The trial consolidated Macy's cases against MSLO and Penney's. The cases are Macy's Inc v Martha Stewart Living Omnimedia Inc.n 650297/2012, and Macy's Inc. v J. C. Penney Corp., 652861/2012, New York state Supreme Court, New York County.

(Reporting by Karen Freifeld; Editing by Eddie Evans and Leslie Gevirtz)