Sephora Settles Virus Furloughs Dispute With JCPenney

By Hailey Konnath
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Law360 (May 7, 2020, 11:32 PM EDT) -- Sephora has agreed not to pull out of its long-term agreement to operate mini-stores in hundreds of JCPenney locations after the retailers butted heads about employee furloughs and reopening stores amid the coronavirus pandemic, the retailers announced Thursday, saying that they'd agreed to "mutually beneficial revisions" to their agreement.

According to the suit brought by J.C. Penney Corp. Inc., Sephora USA Inc. had threatened to prematurely end a 16-year agreement that places Sephora stores in about 600 JCPenney locations nationwide. The disagreement began after JCPenney temporarily closed all its locations and furloughed store associates, including those who worked with Sephora for the mini-stores, JCPenney said.

JCPenney won a temporary restraining order forcing Sephora to stay in the agreement, but Sephora told a court earlier this week that the order was procured by "improper means" based on a "fanciful, one-sided narrative" it didn't have a chance to refute.

JCPenney and Sephora told a Texas federal court on Thursday that they had reached a confidential agreement, and U.S. District Judge Amos L. Mazzant III dismissed the suit the same day. Both parties will handle their own attorney fees, per the order.

In a joint statement Thursday, the retailers said they had resolved the dispute, agreeing to unspecified revisions to their joint enterprise operating agreement. The deal brings the litigation to a halt on the eve of a scheduled hearing on Sephora's emergency motion looking to dissolve the restraining order.

The companies have worked together since 2006 to "serve our customers and be relevant in an evolving retail landscape," they said in the statement.

"Today's amendment remains consistent with this shared goal and the companies are committed to continuing to expand and innovate [the pair's] offerings in order to deliver the beauty experience customers expect in the future," the companies said.

Texas-based JCPenney took the matter to Collin County District Court on April 27, a day before Sephora had allegedly threatened it would walk away from their agreement. According to JCPenney, the issues began in March when it temporarily shuttered its 850 locations and furloughed store associates. JCPenney argued that its agreement gave it authority over all associates.

But Sephora was purportedly dissatisfied with the furloughs and claimed in email correspondence that JCPenney had breached their agreement, per the suit. JCPenney attached emails 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 told the court that Sephora made an "explicit threat" in late April that if JCPenney didn't agree to shorten its agreement, Sephora would terminate the partnership without going through the prescribed process. That process was supposed to involve referring the matter to an operating committee to reach a resolution, JCPenney said.

The Collin County District Court granted JCPenney's request for a temporary restraining order before the case was removed to federal court earlier this week.

On Tuesday, Sephora lodged an emergency motion arguing that JCPenney had made numerous misrepresentations to the court to procure its order. Sephora said it wasn't even given notice about the hearing on what it called an "ex parte temporary restraining order."

"Acting by stealth, JCP manufactured a false impression of Sephora as supposedly attempting to use minor grievances to suddenly pull from JCP the ability to sell any beauty products," Sephora said.

It added, "In reality, the only 'threat' Sephora made was to begin a long termination process based on independent defaults, in exact compliance with the agreement, that would have no immediate effect or impose any imminent harm on JCP's business, and which the parties had already been negotiating."

Judge Amos had scheduled a hearing on that emergency motion for Friday.

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, Joshua W. Mahoney, Nicholas W. Laird and David B. Lurie 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.

--Additional reporting by Katie Pohlman and Michelle Casady. Editing by Michael Watanabe.

For a reprint of this article, please contact reprints@law360.com.

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