Last week, we reported that Macy's had filed a lawsuit against Martha Stewart Living Omnimedia. Macy's says MSLO has violated their exclusive agreement regarding the manufacture and sale of branded merchandise by entering into a similar arrangement with J.C. Penney Co. The breach of contract claim was filed in New York Supreme Court.

Yesterday, MSLO said in a statement that the arrangement with J.C. Penney was actually permitted under the contract with Macy's. The contract apparently contains a "loophole" that MSLO is taking full advantage of -- namely, that Martha Stewart Living can sell Martha Stewart Living branded products in Martha Stewart Living stores.

It seems J.C. Penney bought close to a 17 percent stake in Martha Stewart Living this past summer. That ownership allows J.C. Penney to open Martha Stewart Living shops in its department stores. The first shops are scheduled to open in 2013.

Macy's asked the court to grant a preliminary injunction that would put the J.C. Penney plan on hold. If the deal does go through, Macy's will suffer "irreparable injury," according to court documents.

That injury amounts to the loss of billions of dollars in sales. And, rubbing salt in the wound, Macy's says its image as an upscale retailer will be damaged if Martha Stewart Living merchandise are sold in the less-prestigious J.C. Penney stores.

Court documents also show that Macy's is hoping the court will find a loophole in the loophole. The shops in the Penney's stores may have the Martha Stewart Living name on them, but they will be operated and staffed by J.C. Penney.

MSLO insists that both Macy's and J.C. Penney will benefit, as will consumers, from having the branded products available in "a wide variety of top retailers."

Source: ThomsonReuters News & Insight, "Martha Stewart Living says Macys deal has loophole," Karen Freifeld, Feb. 3, 2012