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Confidentiality In Court: JCPenney’s Problems With Macy’s

JCPenney is up and down these days. Sales, including same-store sales, were up. But profits, and the stock price (by almost 10%), are down. And then there’s their latest loss in the courtroom.

Yesterday, an Appellate Division here in New York found that Macy’s should be allowed to pursue its claims for misuse of confidential information and unfairly competing with Macy’s, arising out of JCP’s sale of Martha Stewart products. The court also confirmed that a lower court ruled properly on a separate count of tortious interference.

In a nutshell: JCPenney and Martha Stewart tried to formulate a way around Martha Stewart’s exclusivity with Macy’s. They created a store-within-store concept, whereby Martha Stewart products would be sold at the store-within-store at JCPenney. They hope to sidestep contractual restrictions that prohibit Martha Stewart products being sold by other retailers outside of its exclusive deal with Macy’s.

The case gives an interesting look at general unfair competition and use of confidential information between parties. Confidentiality provisions are exchanged every day. Companies often realize that they are still assuming a risk even when they restrict confidentially under agreement. People are people, and documents (sometimes intentionally, sometimes inadvertently) find a way into hands which should not have them. Other times that information is virtually jack-hammered out of one party by another. As this case shows us, you need to, at minimum, take certain steps to protect how far confidential information gets circulated.

This is also the somewhat rare case that defines unfair competition, usually limited to specific types of acts, more in broad terms of right or wrong. As is often the case, the facts the court discusses are extreme, and the resulting interpretation of what exactly is “unfair competition” also ends up being pretty extreme.

How could a large, experienced and sophisticated company like Martha Stewart Living Omnimedia be fraudulently “induced” to do something it should not? According to yesterday’s opinion, it was Martha Stewart, seeking to raise revenue, which approached JCPenney about finding a way around Stewart’s exclusive arrangement with Macy’s to sell hundreds of home goods items branded with the Martha Stewart marks. Yesterday’s opinion says that without JCPenney’s activities, the breach would not have happened. (This is what the lower court had found as well.) The decision said that JCPenney also, as a condition of its contract with Martha Stewart, demanded the company to disclose confidential details of its Macy’s contract. This confidential information was then circulated somewhat freely among JCPenney executives. The court implied but did not say that perhaps a more restrictive use of the confidential information may have protected JCPenney against this type of claim. According to this opinion, JCPenney was relentless in demanding that Martha Stewart disclose facts from its Macy’s deal.

The court also said that JCPenny was fully aware of Macy’s “commercial advantage as the exclusive distributor of these branded products…[and] its actions in attempting to misappropriate this commercial advantage by inducing Martha Stewart” to breach the agreement falls squarely within the definition of unfair competition. JCPenney “exceeded the minimum level of ethical behavior in the marketplace” and used Macy’s confidential competitive information obtained from Martha Stewart, resulting in a misappropriation of Macy’s “labor, skill, expenditures, and goodwill,” all the while demonstrating bad faith.

But, oh, those damaging emails! The court hardly painted JCPenny in a favorable light here. The court derided JCPenney for “a certain degree of malicious gloating over the supposed coup of obtaining” Martha Stewart products for the company, and apparently also referring to the “angst” that would cause to Macy’s executives. The court concluded that “the conduct of JCP’s personnel in this case was intentional and clearly below any minimum standard of business practices and ethical behavior. However, those emails, while distasteful and far beneath what one would expect from executives of a major corporation” may be part of the “unsavory atmosphere” surrounding the conduct, but at the end of the day, it was not the “high degree of moral turpitude to imply a ‘criminal indifference’ to civil obligations” the court said would be necessary to reach this high-level of punitive damages in a contract law case.

If nothing else, this part of the decision shows that courts can be relied upon to properly apply business principles between business entities and may help to dispel the unfortunate image that litigation always has for outrageous verdicts based on policy decisions that don’t appear in the law. I doubt JCPenney is sitting around this morning feeling vindicated on that basis however.

So outside the context of JCPenney and Macy’s and the fact that this case now can go back for further trial on those two additional issues, what are the lessons?

1. It can in fact become your problem if you are negotiating with a company which is under exclusive agreement with someone else, and devise a plan to circumvent that contract. Both parties can be at risk.

2. Relentless demand for someone else’s confidential information can, under the right circumstances, violate the law if that information is in fact turned over. And that can be the case even when there are highly skilled, highly sophisticated business entities involved. So no transaction is immune. (Many would say that Martha Stewart’s investors are certainly sophisticated enough to know what they were doing and could not truly cave to intense pressure unless they were willing to compromise where they know they shouldn’t have.)

3. For the billionth time, we see that internal emails are the smoking guns of our time, creating way more smoke and much higher damage volume than all the six-shooters in the West. So, save your snarky remarks, or, for goodness sake, at least don’t put them in writing.

This article originally appeared on Forbes

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