INSIDERS: Macy's Is Out For Blood Against JCPenney

APMacy's CEO Terry Lundgren.Macy's, JCPenney, and Martha Stewart have returned to court after failing to reach an agreement in mediation.

Now, it will be up to a judge to decide what will become of JCPenney's planned home goods line with Martha Stewart, which Macy's says violates their existing agreement with the home maven.

Insiders with direct knowledge of what's happening behind closed doors in court say that Macy's is playing hardball because it recognizes a chance to take out the competition.

"Macy's sees the opportunity to inflict further damage on a struggling competitor," one person, who wished to remain anonymous, told us. "Martha Stewart is an attractive target for Macy's to get to JCPenney."

In mediation, it was clear that Macy's was going after JCPenney, the source said. The company's CEO Ron Johnson just stepped down after a disastrous year on the job.

"Macy's began mediation by asking for terms that it knew JCPenney wouldn't be able to give from a financial or business standpoint," the source said. "What they were asking for would have caused so much damage to the business."

Five weeks later, Macy's hadn't budged.

"It wasn't a case where you start with your toughest and meet in the middle...we started and ended with nothing in the middle," the source said.

A tenant of JCPenney's turnaround strategy was its partnership with Martha Stewart, who was supposed to design a line of home goods.

But shortly after then-CEO Ron Johnson made the announcement, Macy's announced that it planned to take legal action because it said that Stewart was violating the exclusive agreement she already had.

Johnson openly expressed the importance of the Martha Stewart line to his business, where sales are down a staggering 32 percent.

"Martha could be the foundation of a reinvented home," Johnson wrote in an email revealed at court. "Macy's deal is key. We need to find a way to break the renewal right."

The highly-popular Martha Stewart would undoubtedly bring shoppers back to JCPenney, which faces more uncertainty than ever.

If Macy's succeeds in stopping the line, Macy's stands to gain an even larger share of the market.

Losing the Martha Stewart line would be "the final knife, the final dagger, into the heart of JCPenney," Brian Sozzi, CEO of Belus Capital Advisors, told Yahoo! Finance.

A Macy's spokesman declined to comment on what happened in mediation, citing confidentiality.

Representatives at JCPenney and Martha Stewart Living didn't immediately respond to requests for comment.