Lessons from JC Penney: Preventing Unethical Board Behavior

By Gabriella Khorasanee, JD on June 20, 2014 | Last updated on March 21, 2019

On Monday, June 16th, 2014, Judge Oing of the New York State Supreme Court, ruled in favor of Macy's in its legal dispute with JC Penney, over a licensing deal with Martha Stewart.

The problems started in 2011, when JC Penney, under the short-lived and ill-fated tutelage of former CEO Ron Johnson, announced a deal with Martha Stewart outlining plans to create in-store Martha Stewart shops. The problem? Martha Stewart already had an exclusive deal with Macy's to manufacture and sell her line of home goods, reports Bloomberg.

The Lawsuits

One month later, Macy's sued JC Penney and Martha Stewart in separate cases in New York State Supreme Court. Lawyers for Martha Stewart thought they outsmarted Macy's when they cited a supposed loophole that would allow the deal to go through, but apparently the loophole wasn't big enough because earlier this year, in January, the parties settled that case.

JC Penney's Improper Behavior

JC Penney however, did not settle, and on Monday, Judge Oing ruled that JC Penney's board engaged in unethical and improper behavior that "was nothing short of sophomoric." He called the deal "a colossal and abject retail failure" and cited JC Penney's near-financial collapse and public humiliation, reports Reuters. Though the judge found JC Penney's behavior improper, and an interference of contract, Judge Oing did not feel the conduct warranted punitive damages, reports The Associated Press.

How to Prevent Unethical Behavior on the Board

So, as in-house counsel, what can you do to prevent the kind of Board conduct that could put your company in hot water? For one thing, this situation exemplifies the need for attorneys -- that is, general counsel -- to sit on a company's board. But in-house counsel don't need to actually sit on the board to prevent problems like this.

For one thing, the JC Penney deal had to go to at a minimum two sets of attorneys -- JC Penney's and Martha Stewart's -- and both parties knew of the Macy's agreement. It seems like the litigation risks were not examined fully, or at worst ignored. The Board may make decisions, but those decisions usually end up in some way or another in the legal department -- it's up to you to raise the red flags.

Editor's Note, June 21, 2016: This post was first published in June, 2014. It has since been updated.

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