By Karen Freifeld
NEW YORK (Reuters) - A New York appeals court ruled on Tuesday that J.C. Penney Co Inc
The Plano, Texas, retailer began selling the goods last week under the brand "JCP Everyday."
On Tuesday, the New York State Supreme Court's Appellate Division, First Department, denied Macy's request for a preliminary injunction blocking sale of the goods while a court battle continues over rights to the products.
A spokeswoman for Penney declined comment on the ruling. Spokesmen for Macy's and Martha Stewart did not immediately return calls for comment.
Macy's sued J.C. Penney and Stewart's company, Martha Stewart Living Omnimedia, after the two announced a partnership in December 2011.
A non-jury trial started in New York state court in February. Testimony ended last week and the post-trial briefs are due May 31. It is unclear when a verdict will be rendered.
Macy's claims it has the exclusive right to sell Martha Stewart products in certain categories, including cookware, bedding, and bath, even without her name. Martha Stewart is Macy's number one home brand.
J.C. Penney in September made the risky decision to manufacture the goods under the "JCP Everyday" label after the trial judge blocked their sale under Martha Stewart's name.
Tuesday's decision upholds an April 12 ruling by the trial judge, who refused to expand the block to include the "JCP Everyday" products.
In ruling, Justice Jeffrey Oing of New York State Supreme Court said he could not ignore the economic harm an adverse ruling would have caused Penney, even if it was a result of their own acts.
Former J.C. Penney Chief Executive Ron Johnson viewed Martha Stewart as key to his vision for remaking the struggling retailer. Johnson, who failed to win over shoppers and investors, was ousted April 8.
Tuesday's ruling is a reprieve for J.C. Penney in the larger war. If Oing renders a verdict against Penney, the goods could still be ordered removed from the shelves. The judge also could hold Penney liable for damages.
In addition to the "JCP Everyday" products, Penney is selling Martha Stewart-branded party goods, curtains and other products in categories not claimed by Macy's.
Macy's claims some items Penney is selling under the "Martha" name, including plastic pitchers and stemware, are in violation of the block.
The cases are Macy's Inc v Martha Stewart Living Omnimedia Inc, 650197/2012, and Macy's Inc v J.C. Penney Corp, 652861/2012, New York State Supreme Court, New York County.
(Reporting by Karen Freifeld; Editing by Gerald E. McCormick, Bernard Orr)