By Karen Freifeld
NEW YORK (Reuters) - JC Penney Co (JCP.N) interfered with a contract between Macy's Inc (M.N) and Martha Stewart Living Omnimedia Inc (MSO.N) when it cut a deal to sell a line of the celebrity's home goods, a New York judge ruled on Monday.
Macy's is entitled to monetary damages and attorneys' fees from Penney, said Justice Jeffrey Oing of New York state court in Manhattan, but it failed to prove by "clear, unequivocal and convincing evidence" that it deserved punitive damages.
"The behavior exhibited by JCP's top executives, with JCP board ratification, has been less than admirable," Oing wrote in a 63-page decision. A referee or special hearing officer will assess damages and fees, the judge said.
Macy's sued Penney in 2012 over a partnership that Penney and Martha Stewart announced the preceding December.
It accused Penney of breaching its own contract with Martha Stewart Living, which included exclusive rights to sell cookware, bedding and bath products from the company named for the homemaking doyenne.
Oing said Penney might be liable for profit from the sale of 900 designs that Martha Stewart Living prepared, some of which Penney had sold under the "JCP Everyday" label while the case was pending. Macy's had objected to the sales.
The judge also said Martha Stewart Living violated its agreement with Macy's by contracting with Penney, and that Penney encouraged it to do so.
JCPenney, in a statement, said it did not believe damages were warranted, and may appeal. The Plano, Texas-based company has said any payout would not be material to its results.
Macy's said it was "delighted" but "not surprised" by the decision.
In October, Penney and Martha Stewart Living announced a revised agreement that eliminated Stewart's products in Macy's exclusive categories. Macy's this year separately reached its own settlement with Martha Stewart Living.
Penney's partnership with Martha Stewart Living was part of the effort by then-Chief Executive Ron Johnson, to take the retailer upmarket.
Johnson was fired in April 2013 after his changes led to a 25 percent drop in sales the prior year.
In his decision, Oing said Johnson's strategy was a "colossal" failure that placed Penney on the verge of financial collapse, leaving the retailer, its board and top executives "publicly ridiculed and humiliated.
"These significant facts are a sufficient deterrent to JCP and other companies from acting in a similar way in the future," he wrote.
Since Johnson's department, JC Penney has begun turning sales trends around, with comparable store sales rising 6.2 percent in the quarter ended May 3.
On the New York Stock Exchange, Macy's closed down 17 cents at $57.23 and Penney rose 3 cents to $8.64. Martha Stewart Living rose 35 cents, or 8.5 percent, to $4.47 on thin volume.
The case is Macy's Inc v Martha Stewart Living Omnimedia Inc, 650197/2012, New York State Supreme Court, New York County.
(Reporting by Karen Freifeld; Additional reporting by Jonathan Stempel and Jeffrey Dastin in New York; Editing by Richard Chang)