JCPenney Stalls Sephora Split Over COVID-19 Furloughs

By Katie Buehler
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Law360 (May 4, 2020, 8:55 PM EDT) -- JCPenney is asking a Texas federal court to stop Sephora from pulling out of a long-term agreement to operate mini-stores in hundreds of JCPenney locations after the retailers butted heads about employee furloughs and how to reopen amid the coronavirus pandemic.

J. C. Penney Corp. Inc. wants a declaratory judgment barring Sephora USA Inc. from prematurely ending a 16-year agreement that places Sephora stores in about 600 JCPenney locations nationwide. The Texas-based retail giant claims Sephora threatened to pull out of the agreement without following their agreed-upon dispute resolution process after JCPenney decided to furlough its associates during temporary store closures and refused to use a specific cleaning spray in its reopened stores.

On April 27, a Collin County District Court judge issued a temporary restraining order that prohibits Sephora from walking away and allows the Sephora mini-stores to open. Sephora removed the case to the Eastern District of Texas on Monday.

"Sephora has no basis to assert a knife-edge termination or demand a premature end to the parties contract," JCPenney said. "Terminating a key contract that JCP has depended on for over a decade … would cause irreparable harm. Sephora knows this, and its threats to terminate the agreement immediately are transparent efforts to gain negotiating leverage where Sephora has none."

JCPenney says the disagreements began in March when it decided to temporarily close its 850 locations and furlough store associates, including those who worked at the Sephora mini-stores. The retail giant said its agreement with Sephora for the mini-stores, known as Sephora inside JCPenney, gave it authority over all associates, according to court documents.

Sephora allegedly expressed dissatisfaction about the furlough and claimed in email correspondence that JCPenney had breached their agreement, according to the court documents. JC Penney attached email correspondence from Sephora USA's CEO, Jean-André Rougeot, to JCPenney CEO Jill Soltau in which Rougeot predicted further financial hardship for JCPenney and pushed to "wind down" their working relationship. Rougeot said in the email that the Sephora inside JCPenney concept "is at the end of the road."

JCPenney claims that on April 14, Sephora suggested that it was interested in negotiating an end to the contract establishing the mini-stores, but that the beauty brand never started the prescribed process, which involves first referring the matter to an operating committee that oversees the partnership and then to a senior operating committee if the first committee can't agree on a resolution. If an impasse is declared by the senior operating committee, the dispute must head to binding arbitration, according to the lawsuit.

Sephora instead allegedly made an "explicit threat" April 24 that if JCPenney did not agree to shortening the agreement, Sephora would terminate the partnership April 28 and would not ship its product or launch any new products at any JCPenney stores or participate in a brand launch the two had already planned for this summer, according to court documents.

A day before that threat, Sephora had demanded that JCPenney use a "specific, electrostatic spray for hard surfaces" at locations it planned to reopen. JCPenney refused, saying that the spray wasn't part of the agreed-to hygiene standards in the parties' agreement and that it isn't recommended by the U.S. Centers for Disease Control and Prevention, according to court documents.

JCPenney petitioned a Collin County District Court for help April 27, a day before Sephora allegedly threatened it would walk away from the agreement.

A representative of JCPenney told Law360 in an emailed statement Monday that it hopes to continue its partnership with Sephora.

"We remain committed to working together to drive sustainable, profitable growth, as SiJCP continues to be a beauty destination that serves millions of customers each year," JCPenney said.

JCPenney is seeking a declaratory judgment finding that Sephora is required to use the dispute resolution process the two parties had already agreed to as well as restraining orders to maintain the status quo, according to court documents.

Counsel for both companies and a representative for Sephora did not immediately respond to requests for comment Monday.

J. C. Penney is represented by Jeremy A. Fielding and Michael Kalis of Kirkland & Ellis LLP.

Sephora is represented by C. Scott Jones and M. Taylor Levesque of Locke Lord LLP; and Robert E. Shapiro and Joshua W. Mahoney of Barack Ferrazzano Kirschbaum & Nagelberg LLP.

The case is J.C. Penney Corp. Inc. v. Sephora USA Inc., case number 4:20-cv-00364, in the U.S. District Court for the Eastern District of Texas.

--Editing by Peter Rozovsky.

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