UPDATE: May 11, 2020: On Thursday, J.C. Penney and Sephora said in a joint press release that they have resolved their legal dispute and reaffirmed their partnership after making "mutually beneficial revisions" to it. The terms of the agreement were confidential, according to court documents closing the case.

The two retailers noted that they have worked together for 14 years and are "committed to continuing to expand and innovate SiJCP's offerings" in the future.

UPDATE: May 6, 2020: In court documents filed Monday, Sephora pushed back against J.C. Penney's temporary restraining order, saying "No part of JCP's fanciful, one-sided narrative was or is true." Sephora claimed in its argument that J.C. Penney was the one aiming to gain negotiating leverage with its actions, "so that JCP can take advantage of an impending bankruptcy." The beauty retailer also disputes claims that it threatened to drop its partnership with J.C. Penney. 

"Despite JCPenney's claims, we did not threaten any action that would have impacted SiJCP operations in the near-term or JCPenney's ability to sell beauty products in its stores," a Sephora spokesperson said in a statement. "While we understand that JCPenney has put itself in a tough position in recent years, this is a very unfortunate development that we hope to resolve quickly."

Dive Brief:

• J.C. Penney and Sephora are squabbling in court over their decade-old branded beauty shop-in-shops after the department store says the beauty retailer threatened to end the partnership. 

• In court documents dated May 4, J.C. Penney says Sephora in late April threatened to abandon the partnership unless the department store agrees to shorten its contract term. J.C. Penney requested a temporary restraining order that would keep Sephora from terminating their agreement. "Terminating a key contract that JCP has depended on for over a decade, while JCP intends to reopen 9 stores this week, would cause irreparable harm," the department store said in documents, noting that it "depends" on Sephora as its only beauty partner.

• "We have been in active discussions with JCPenney regarding our agreement for some time," a Sephora spokesperson said in a statement emailed to Retail Dive. "Although this is a sudden and unfortunate development, we are hopeful of continuing discussions and reaching an amicable agreement for both Sephora and JCPenney." The spokesperson declined to comment on litigation specifics, but Sephora did file a request to dissolve Penney's restraining order. 

Dive Insight:

The pandemic has led many retailers to make tough choices to maintain financial stability, not least of all retailers like J.C. Penney, which was in financial trouble before the pandemic. Now, the coronavirus outbreak has raised tensions between the department store and one of the most successful parts of its business.

According to emailed comments from Credit Suisse analyst Michael Binetti, Sephora's shop-in-shops have the highest productivity in J.C. Penney's stores, and their closure would be a "big negative" for J.C. Penney. The department store seems to think so too.

"The Company filed a temporary restraining order so Sephora could not prevent JCPenney from reopening Sephora inside JCPenney (SiJCP) locations. 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," a company spokesperson said in a statement emailed to Retail Dive.

In the court documents, J.C. Penney said the two companies had disagreements over the department store's decision to furlough staff, which included Sephora associates. They also disagreed about an electrostatic spray Sephora wanted J.C. Penney to use to clean the hard surfaces of its shop-in-shops. 

J.C. Penney said that in mid-April, Sephora suggested negotiations around ending their partnership early, according to the documents, and "made an explicit threat" on April 24 to terminate the agreement on April 28 unless J.C. Penney agreed to shorten the term of the partnership.

If the partnership were to end, it could be detrimental for both parties. The shop-in-shops are in some 600 of J.C. Penney's 850 stores. The department store, already in a precarious position financially, would lose a compelling reason for shoppers to come to its stores. And Sephora runs the risk of donating market share to Ulta, which has significant overlap with Sephora's J.C. Penney stores. According to Binetti, about 50% of Ulta stores are within five miles of a Sephora shop-in-shop at a J.C. Penney.

Prior to the pandemic, Sephora had embarked on its largest expansion in North America to-date, with plans to open 100 stores in the region, mostly outside of malls. The plans would have put the retailer in more direct competition with Ulta, which is focused on locations like power centers rather than malls. Ulta's own expansion plans for the year have been pulled back by the pandemic.

When Sephora announced the expansion plans in February, Jeff Gaul, senior vice president of real estate and store development at Sephora, said the decision was not a move away from its J.C. Penney partnership.

"We love that business, we love that client and we're going to continue to support that," he said.