The move reported by the New York Post follows a year and half three-way legal battle with rival Macy's and Martha Stewart Living Omnimedia Inc. over a partnership with the home designer.
Emails seeking comment from Martha Stewart and Penney on the newspaper report were not immediately returned.
The Post cited unidentified sources as saying Mike Ullman, who returned as Penney's CEO in April, made the decision. A judge is expected to rule on the case in the coming days.
Penney's former CEO Ron Johnson, who was ousted in April, signed a merchandising deal with Martha Stewart in late 2011 and touted it as a key part of his plan to reinvent the chain.