Troy, MI, Feb. 13--Kmart Holding Corp.on Friday said it had sued Martha Stewart Living Omnimedia Inc. claiming the home furnishings maker "double-counted" the royalties it is owed for sales of its merchandise in Kmart stores.
But Martha Stewart Living, whose namesake founder is currently on trial on obstruction of justice charges related to a questionable stock trade, countered in a statement that Kmart was trying to reduce its royalty payments.
At issue is $4.5 million in disputed royalties and up to $2 million in advertising spending stemming from a seven year deal the companies signed in 2001 to sell Martha Stewart Everyday brand home decorating, garden products and housewares in Kmart stores.
Kmart filed for bankruptcy protection seven months after the deal and has since closed 600 of its 2,100 stores, leaving fewer outlets for Martha Stewart Everyday merchandise.
Despite this, the retailer has said repeatedly that the brand was selling well.
In the complaint, filed with the U.S. Bankruptcy Court in Chicago on Wednesday, Kmart acknowledged that it fell short of several royalty targets for the year ended Jan. 31, 2004, but said Martha Stewart Living was "double-counting" payments and demanding too much money.
Martha Stewart is "victimizing Kmart by forcing it to pay excessive royalties and advertising dollars based on an untenable interpretation of the agreement," Kmart said in the court filing.
Calls to Kmart and were not returned. A representative for Kmart's lead attorney, Joseph Cohen, said Cohen was traveling until Tuesday. A spokeswoman for Martha Stewart Living said the company has no comment beyond the statement.
In the court document, Kmart said the two sides had agreed to minimum royalty payments based on sales in four product categories, as well as an aggregate minimum royalty. Kmart said it was willing to pay the difference between its sales and the minimum royalties for each product category, and would them make up for any remaining shortfall on the aggregate minimum.
For example, if Kmart fell $1 million short of the minimum in each of the four product categories, the retailer would agree to pay $4 million, and then if that grand total was still below the aggregate minimum, Kmart would pay the extra amount.
However, Kmart said Martha Stewart Living wanted the retailer to pay for any shortfall in the aggregate minimum amount, plus the full amount missing in the four categories.
"Under (Martha Stewart Living's) position, if Kmart had made absolutely zero sales of any relevant products ... then Kmart would owe (Martha Stewart Living) the shortfall from the aggregate minimum royalty, added to the shortfall from each of the four product categories, which would be close to double the minimum guaranteed royalty," Kmart said.
Kmart said it had "repeatedly but unsuccessfully" tried to resolve the issue through negotiations since last fall, and was left with "no choice" but to sue.
Kmart said it "continues to value its relationship" with Martha Stewart Living, and hoped for a prompt resolution.
