Sleepy's LLC v. Select Comfort Wholesale Corp.

• Decision Date: 27 November 2018
• Docket Number: Docket Nos. 15-3560, 16-3595 August Term, 2016
• Citation: 909 F.3d 519
• Parties: SLEEPY’S LLC, Plaintiff-Appellant, v. SELECT COMFORT WHOLESALE CORP., Select Comfort Retail Corp., Select Comfort Corp., Defendants-Appellees.
• Court: U.S. Court of Appeals — Second Circuit

909 F.3d 519

SLEEPY’S LLC, Plaintiff-Appellant,

v.SELECT COMFORT WHOLESALE CORP., Select Comfort Retail Corp., Select Comfort Corp., Defendants-Appellees.

Docket Nos. 15-3560

16-3595 August Term, 2016

United States Court of Appeals, Second Circuit.

Argued: June 27, 2017

Decided: November 27, 2018

Paul D. Sarkozi (Lewis D. Prutzman, on the brief ), Tannenbaum Helpern Syracuse & Hirschtritt LLP, New York, NY, for Plaintiff-Appellant.

Andrew S. Hansen (Heidi A.O. Fisher, on the brief ), Fox Rothschild LLP, Minneapolis, MN, for Defendants-Appellees.

Before: Sack, Hall, and Droney, Circuit Judges.

Sack, Circuit Judge:

At all relevant times, Sleepy’s LLC (‘‘Sleepy’s" or the ‘‘plaintiff") was a bed and mattress retailer obtaining products for resale from a variety of manufacturers. In that endeavor, it entered into a ‘‘Retail Partnership" with Select Comfort¹ —a mattress manufacturer and retailer—to sell Select Comfort’s ‘‘Personal Preference" line of ‘‘Sleep Number" beds in Sleepy’s stores. As the parties were aware, Select Comfort retained exclusive rights to sell its ‘‘Core" (rather than Personal Preference) line of Sleep Number beds.

Sleepy’s was unhappy with its Personal Preference sales. It suspected that the poor performance resulted, at least in part, from Select Comfort’s disparagement of both Sleepy’s stores and the Personal Preference line of products that Sleepy’s sold. Sleepy’s CEO therefore arranged for its representatives to conduct ‘‘secret shops" at Select Comfort stores in an attempt to gather evidence for use in a possible lawsuit against Select Comfort to recoup the damage Select Comfort had allegedly inflicted on Sleepy’s business.

Sleepy’s asserts that its suspicions were confirmed and, accordingly, it brought this lawsuit. The amended complaint ultimately addressed by the district court contained ten alleged causes of action under six theories of liability: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, (3) unfair competition, (4) slander per se, (5) fraudulent inducement, and (6) the Lanham Act. After a bench trial, the district court dismissed all the plaintiff’s claims. On appeal, we vacated the district court’s judgment in part and remanded the case to the district court. Sleepy’s LLC v. Select Comfort Wholesale Corp. , 779 F.3d 191, 206 (2d Cir. 2015). The case was reassigned to another judge upon its return to the district court. The court again decided in favor of Select Comfort on all remaining claims against it and awarded Select Comfort attorney’s fees under the Lanham Act.

Sleepy’s now argues that the district court improperly dismissed each of its remaining claims, that attorney’s fees should not have been granted, and that in any event the attorney’s fee award was excessive. As to the district court’s dismissal of its claims, we conclude that the court erred in dismissing Sleepy’s slander per se claims on the ground that the publication element cannot be met under New York law when the statement in question is only made to the plaintiff’s representative. We, therefore, vacate the district court’s dismissal of Sleepy’s slander claims and remand for the court to determine whether Sleepy’s consented to the allegedly defamatory statements.

We also vacate the district court’s fee award judgment on two grounds: First, we conclude that Octane Fitness, LLC v. ICON Health & Fitness, Inc. , 572 U.S. 545, 134 S.Ct. 1749, 188 L.Ed.2d 816 (2014), which sets forth the standard for determining whether an award of attorney’s fees under the Patent Act is permissible, also applies to the Lanham Act. We therefore remand to the district court to determine whether the defendants are entitled to attorney’s fees under the Octane Fitness standard. Second, we conclude that although district courts enjoy broad discretion in apportioning attorney’s fees under the Lanham Act, they must provide adequate justification for their apportionment. The district court’s award based on its ‘‘overall sense" of what is appropriate in light of its familiarity with the lawsuit—which the district court relied on in the case at bar—is insufficient.

The judgment of the district court is therefore affirmed in part, vacated in part, and remanded for further proceedings.

BACKGROUND

Factual Background

At all relevant times, Sleepy’s LLC was a limited liability company organized under the laws of Delaware. It was a retailer selling to the public a variety of beds and mattresses manufactured by third parties. The defendants, Select Comfort Wholesale Corporation, Select Comfort Retail Corporation, and Select Comfort Corporation, are corporations incorporated under the laws of Minnesota. Select Comfort manufactures, produces, and sells its own mattresses and beds. Among its products is the Sleep Number Bed. The bed’s mattress contains inflatable air chambers that can be adjusted to provide varying degrees of support for its user’s body.

Beginning in 2000, Select Comfort launched a ‘‘Retail Partner" program. Through the program, ‘‘retail partners" would, pursuant to a contract entered into with Select Comfort, purchase a line of Select Comfort’s Sleep Number mattresses and frames for resale in the partner’s retail stores.

On June 17, 2005, Sleepy’s and Select Comfort executed such an Agreement. Dealer Agreement, App’x 119-27. During the negotiations preceding the execution of the contract, representatives of Select Comfort explained to those of Sleepy’s that its retail partners sold the ‘‘Personal Preference" line of Sleep Number beds, which were slightly different from the model sold in Select Comfort’s own stores, the ‘‘Core" line. The primary difference between these models was the bedframe. The Core line used a plastic-polymer frame, while the Personal Preference line used a frame made of wood. Nevertheless, the district court found that ‘‘[t]he technology and basic components of the Personal Preference Line products were exactly the same as those of the Core Line, and they were both covered by the same warranty." Sleepy’s LLC v. Select Comfort Wholesale Corp ., 133 F.Supp.3d 483, 488 (E.D.N.Y. 2015).

Sleepy’s and Select Comfort maintained their retail partnership from June 17, 2005, through January 2007.² The results of Sleepy’s efforts to sell the Personal Preference line of Sleep Number beds were disappointing. The parties disagreed as to the reason. Select Comfort asserted that the problems were attributable to Sleepy’s failure to adequately advertise the product. Sleepy’s contended to the contrary, however, that the poor performance was largely the result of Select Comfort’s disparagement of the Personal Preference line being sold by Sleepy’s.

Beginning in late 2006, Sleepy’s sought evidence to support its position in the dispute. It arranged for ‘‘secret shopper" visits to Select Comfort retail stores during which persons acting on Sleepy’s behalf, but pretending to be potential customers of Select Comfort, asked members of its sales staff about the differences between the Core bed sold by Select Comfort, and the Personal Preference line sold by Sleepy’s. According to the district court’s findings of fact, the first two secret shops were made on November 4, 2006, and November 5, 2006, respectively.³ See Sleepy’s LLC , 133 F.Supp.3d at 489-91. Sleepy’s first secret shopper, Anthony Colon, alleged that a Select Comfort salesperson told him that Select Comfort’s Core line of Sleep Number beds was superior to Sleepy’s Personal Preference line because, among other things, the Core line was ‘‘made to order" and more comfortable. Id. Sleepy’s second secret shopper was a Sleepy’s district manager, Deborah Zaffron, who asserted that she was told by a Select Comfort salesperson that Sleepy’s Personal Preference line was inferior, at least in part because Sleepy’s mattresses were stored in a warehouse, its box springs could warp and break, and its beds were generally not protected by a warranty. Id. at 491-92.

On November 6, 2006, Sleepy’s founder and Chief Executive Officer Harry Acker was told about the results of the initial secret shops during a conference call with Sleepy’s personnel, which was recorded. He said:

This may be an enormous, fabulous lawsuit for Sleepy’s to collect damages .... This may be very good because if we start getting involved in a lawsuit especially in a class action and its gets publicity it will not be good for them. This cannot help them at all in the industry. It won’t mean a thing to the consumer, but it will for people who want to do business with [Select Comfort].

Id. at 490 (internal citation omitted). Acker ordered additional secret shops, adding that there was ‘‘a good chance that [Sleepy’s] can sue this man personally for defamation and slander. Make a note that we can sue him."⁴ Id. (citation omitted).

Thereafter, between November 8, 2006, and February 6, 2007, Sleepy’s conducted approximately ten additional secret shops. Id. at 492-94. Sleepy’s alleges that its secret shoppers were told by members of Select Comfort’s sales staff that the Core line’s plastic-polymer frame was superior to the Personal Preference line’s wood frame because it was stronger, sturdier, fresher, and less likely to warp or sag. Id. Some secret shoppers said that they had been told by sales personnel at Select Comfort stores that Sleepy’s beds are exposed to moisture, pests, and allergens as a result of their having been stored in a warehouse; that Sleepy’s offered inferior warranty terms; and that it is preferable to buy from the manufacturer directly to avoid Sleepy’s ‘‘knockoffs." Id. at 492.

On January 3, 2007—before most of the additional secret shops were made—Sleepy’s executives presented Select Comfort with the findings from its initial secret-shopper investigation. Sleepy’s threatened litigation unless it received a letter from Select Comfort to the effect that it would cease making disparaging comments about the Personal Preference line of Sleep Number beds sold in Sleepy’s stores. In...