Opinion · Court of Appeals for the Second Circuit
Sleepy's LLC v. Select Comfort
sleepys-llc-v-select-comfort-4344699-6ca4d73e6f463395-2018-11-27
- Type
- Opinion
- Court
- Court of Appeals for the Second Circuit
- Jurisdiction
- Federal
- Date
- 2018-11-27
- Topic
- general
15‐3560 (L) Sleepyʹs LLC v. Select Comfort UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2016 (Argued: June 27, 2017 Decided: November 27, 2018) Docket Nos. 15‐3560, 16‐3595 SLEEPYʹS LLC, Plaintiff‐Appellant, v. SELECT COMFORT WHOLESALE CORP., SELECT COMFORT RETAIL CORP., SELECT COMFORT CORP., Defendants‐Appellees. Before: SACK, HALL, AND DRONEY, Circuit Judges. The plaintiff Sleepyʹs LLC agreed to purchase beds from the Select Comfort defendants for resale in Sleepyʹs stores. Thereafter, Sleepyʹs began to suspect that Select Comfort was disparaging both Sleepyʹs stores and the particular line of Select Comfort beds it sold. It brought suit against Select Comfort in New York State court, later removed to the United States District Court for the Eastern District of New York, on several theories of liability, including slander per se, breach of contract, unfair competition, breach of the 15‐3560, 16‐3595 Sleepyʹs v. Select Comfort implied covenant of good faith and fair dealing, and the Lanham Act. After a bench trial, the district court (George C. Platt, Judge) dismissed the action. We vacated and remanded in part. On remand, the district court (Joanna Seybert, Judge) again entered a judgment for Select Comfort on the merits and concluded that attorneyʹs fees were warranted because the case was ʺexceptionalʺ under the Lanham Act. Sleepyʹs appeals both the merits determinations and the fee award. We vacate an…
15‐3560 (L)
Sleepyʹs LLC v. Select Comfort
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
August Term, 2016
(Argued: June 27, 2017 Decided: November 27, 2018)
Docket Nos. 15‐3560, 16‐3595
SLEEPYʹS LLC,
Plaintiff‐Appellant,
v.
SELECT COMFORT WHOLESALE CORP., SELECT COMFORT RETAIL CORP., SELECT
COMFORT CORP.,
Defendants‐Appellees.
Before: SACK, HALL, AND DRONEY, Circuit Judges.
The plaintiff Sleepyʹs LLC agreed to purchase beds from the Select
Comfort defendants for resale in Sleepyʹs stores. Thereafter, Sleepyʹs began to
suspect that Select Comfort was disparaging both Sleepyʹs stores and the
particular line of Select Comfort beds it sold. It brought suit against Select
Comfort in New York State court, later removed to the United States District
Court for the Eastern District of New York, on several theories of liability,
including slander per se, breach of contract, unfair competition, breach of the
15‐3560, 16‐3595
Sleepyʹs v. Select Comfort
implied covenant of good faith and fair dealing, and the Lanham Act. After a
bench trial, the district court (George C. Platt, Judge) dismissed the action. We
vacated and remanded in part. On remand, the district court (Joanna Seybert,
Judge) again entered a judgment for Select Comfort on the merits and concluded
that attorneyʹs fees were warranted because the case was ʺexceptionalʺ under the
Lanham Act.
Sleepyʹs appeals both the merits determinations and the fee award. We
vacate and remand with respect to the district courtʹs dismissal of Sleepyʹs
slander claims because they had not been ʺpublishedʺ under New Yorkʹs law of
defamation and remand for a determination by the court as to whether the
plaintiff consented to each of the slanderous statements, except for the Zaffron
incident as to which the district court already considered Sleepyʹs consent and as
to which we affirm. As to the fee award, we direct the district court to apply on
remand the standard articulated in Octane Fitness, LLC v. ICON Health & Fitness,
Inc., 572 U.S. 545
,134 S. Ct. 1749
(2014), for evaluating whether a Lanham Act
claim is ʺexceptional.ʺ So as to justify the award of legal fees, we also conclude
that the district court erred by not sufficiently explaining or justifying the
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Sleepyʹs v. Select Comfort
amount of the defendantsʹ attorneyʹs fees awarded under the Act. Accordingly,
the district courtʹs judgment is:
AFFIRMED in part, VACATED in part, and REMANDED.
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.
SACK, Circuit Judge:
At all relevant times, Sleepyʹs LLC (ʺSleepyʹsʺ or the ʺplaintiffʺ) was a bed
and mattress retailer obtaining products for resale from a variety of
manufacturers. In that endeavor, it entered into a ʺRetail Partnershipʺ with
Select Comfort1—a mattress manufacturer and retailer—to sell Select Comfortʹs
ʺPersonal Preferenceʺ line of ʺSleep Numberʺ beds in Sleepyʹs stores. As the
parties were aware, Select Comfort retained exclusive rights to sell its ʺCoreʺ
(rather than Personal Preference) line of Sleep Number beds.
The defendants are Select Comfort Wholesale Corporation, Select Comfort Retail
1
Corporation, and Select Comfort Corporation. We refer to them collectively as ʺSelect
Comfort.ʺ
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Sleepyʹs v. Select Comfort
Sleepyʹs was unhappy with its Personal Preference sales. It suspected that
the poor performance resulted, at least in part, from Select Comfortʹs
disparagement of both Sleepyʹs stores and the Personal Preference line of
products that Sleepyʹs sold. Sleepyʹs CEO therefore arranged for its
representatives to conduct ʺsecret shopsʺ 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 Sleepyʹs business.
Sleepyʹs 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
plaintiffʹs claims. On appeal, we vacated the district courtʹs judgment in part and
remanded the case to the district court. Sleepyʹs 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
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Sleepyʹs v. Select Comfort
Comfort on all remaining claims against it and awarded Select Comfort
attorneyʹs fees under the Lanham Act.
Sleepyʹs now argues that the district court improperly dismissed each of its
remaining claims, that attorneyʹs fees should not have been granted, and that in
any event the attorneyʹs fee award was excessive. As to the district courtʹs
dismissal of its claims, we conclude that the court erred in dismissing Sleepyʹs
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
plaintiffʹs representative. We therefore vacate the district courtʹs dismissal of
Sleepyʹs slander claims and remand for the court to determine whether Sleepyʹs
consented to the allegedly defamatory statements.
We also vacate the district courtʹs 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
(2014), which sets forth the standard for determining whether
an award of attorneyʹs 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 attorneyʹs fees under the Octane Fitness standard.
Second, we conclude that although district courts enjoy broad discretion in
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Sleepyʹs v. Select Comfort
apportioning attorneyʹs fees under the Lanham Act, they must provide adequate
justification for their apportionment. The district courtʹs award based on its
ʺoverall senseʺ 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, Sleepyʹs 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 bedʹs mattress
contains inflatable air chambers that can be adjusted to provide varying degrees
of support for its userʹs body.
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Sleepyʹs v. Select Comfort
Beginning in 2000, Select Comfort launched a ʺRetail Partnerʺ program.
Through the program, ʺretail partnersʺ would, pursuant to a contract entered
into with Select Comfort, purchase a line of Select Comfortʹs Sleep Number
mattresses and frames for resale in the partnerʹs retail stores.
On June 17, 2005, Sleepyʹs and Select Comfort executed such an
Agreement. Dealer Agreement, Appʹx 119‐27. During the negotiations
preceding the execution of the contract, representatives of Select Comfort
explained to those of Sleepyʹs that its retail partners sold the ʺPersonal
Preferenceʺ line of Sleep Number beds, which were slightly different from the
model sold in Select Comfortʹs own stores, the ʺCoreʺ 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 ʺ[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.ʺ
Sleepyʹs LLC v. Select Comfort Wholesale Corp., 133 F. Supp. 3d 483, 488
(E.D.N.Y.
2015).
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Sleepyʹs v. Select Comfort
Sleepyʹs and Select Comfort maintained their retail partnership from June
17, 2005, through January 2007.2 The results of Sleepyʹs 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 Sleepyʹs failure to adequately advertise the product. Sleepyʹs
contended to the contrary, however, that the poor performance was largely the
result of Select Comfortʹs disparagement of the Personal Preference line being
sold by Sleepyʹs.
Beginning in late 2006, Sleepyʹs sought evidence to support its position in
the dispute. It arranged for ʺsecret shopperʺ visits to Select Comfort retail stores
during which persons acting on Sleepyʹs 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 Sleepyʹs. According to the district courtʹs findings of fact,
the first two secret shops were made on November 4, 2006, and November 5,
Although the Dealer Agreement expired on September 30, 2006, Sleepyʹs continued
2
to sell Sleep Number beds for several additional months.
8
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Sleepyʹs v. Select Comfort
2006, respectively. 3 See Sleepyʹs LLC, 133 F. Supp. 3d at 489‐91. Sleepyʹs first
secret shopper, Anthony Colon, alleged that a Select Comfort salesperson told
him that Select Comfortʹs Core line of Sleep Number beds was superior to
Sleepyʹs Personal Preference line because, among other things, the Core line was
ʺmade to orderʺ and more comfortable. Id.
Sleepyʹs second secret shopper was a Sleepyʹs district manager, Deborah Zaffron, who asserted that she was told by a Select Comfort salesperson that Sleepyʹs Personal Preference line was inferior, at least in part because Sleepyʹs 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, Sleepyʹs founder and Chief Executive Officer Harry
Acker was told about the results of the initial secret shops during a conference
call with Sleepyʹs personnel, which was recorded. He said:
This may be an enormous, fabulous lawsuit for Sleepyʹs
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
There is some confusion in the record, however, as to whether the first shop occurred
3
on September 4, 2006 or November 4, 2006. Sleepyʹs LLC, 133 F. Supp. 3d at 489
n.8. The
discrepancy is immaterial.
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Sleepyʹs v. Select Comfort
wonʹt 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 ʺa good chance that [Sleepyʹs] can sue this man personally for defamation and slander. Make a note that we can sue him.ʺ4Id.
(internal
citation omitted).
Thereafter, between November 8, 2006, and February 6, 2007, Sleepyʹs
conducted approximately ten additional secret shops. Id.
at 492‐94. Sleepyʹs alleges that its secret shoppers were told by members of Select Comfortʹs sales staff that the Core lineʹs plastic‐polymer frame was superior to the Personal Preference lineʹs 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 Sleepyʹs beds are exposed to moisture, pests, and allergens as a result of their having been stored in a warehouse; that Sleepyʹs offered inferior warranty terms; and that it is preferable to buy from the manufacturer directly to avoid Sleepyʹs ʺknockoffs.ʺId. at 492
.
It is not clear from the transcript or the district courtʹs opinion to whom Acker is
4
referring as ʺthis man.ʺ
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Sleepyʹs v. Select Comfort
On January 3, 2007—before most of the additional secret shops were
made—Sleepyʹs executives presented Select Comfort with the findings from its
initial secret‐shopper investigation. Sleepyʹs 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 Sleepyʹs stores. In response, Select Comfortʹs executives insisted that no
such letter was necessary because the Dealer Agreement already contained non‐
disparagement provisions.5 On January 11, 2007, as Sleepyʹs additional secret
shops began, Select Comfort notified Sleepyʹs that it was terminating the retail
That was apparently not true. The Dealer Agreement contained a unilateral non‐
5
disparagement provision that protected Select Comfort from a retail partnerʹs efforts to
divert customers from Select Comfortʹs retail stores:
[Sleepyʹs will] [n]ot disparage Select Comfort or any product
distributed through Select Comfortʹs retail stores or any of
Select Comfortʹs other retail partners and not interfere with
any of Select Comfortʹs retail storeʹs [sic] relationships with
customers or potential customers[.]
Dealer Agreement, Section 3(j), Appʹx 120. Although a sentence in the warranty
provision did prohibit both parties from ʺimpair[ing], infring[ing] upon or adversely
affect[ing] the character, reputation and good will (collectively the ʹBrand Imageʹ) of the
other party,ʺ id.
at Section 4(c), Appʹx 121, we agree with the district court that this
sentence only applied to the warranty services, and not the mattresses themselves. See
Sleepyʹs LLC, 133 F. Supp. 3d at 495‐96.
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Sleepyʹs v. Select Comfort
partnership, which had been slated in the Dealer Agreement to terminate in
September 2006.
Procedural History
On March 21, 2007, Sleepyʹs instituted this litigation in New York State
Supreme Court, Nassau County. About six months later, on September 25, 2007,
Select Comfort removed it to the United States District Court for the Eastern
District of New York on grounds of diversity of citizenship. On February 8, 2008,
the district court denied a motion by Select Comfort to dismiss the complaint.
On January 6, 2010, Sleepyʹs filed an amended complaint comprising ten causes
of action: two for breach of contract alleging that Select Comfortʹs statements
violated the Dealer Agreement; one for fraudulent inducement alleging that
Select Comfort misrepresented the quality of the Personal Preference line during
contract negotiations; four for slander per se alleging that specified statements
made to secret shoppers were defamatory; one for breach of the implied
covenant of good faith and fair dealing alleging that Select Comfort acted in bad
faith; one for unfair competition alleging that Select Comfort misappropriated its
commercial advantage in bad faith; and one for a violation of the Lanham Act,
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Sleepyʹs v. Select Comfort
15 U.S.C. § 1051
et seq., alleging that Select Comfort gave false and misleading
descriptions of Sleepyʹs products.
In March 2012, the district court (George C. Platt, Judge) began a bench trial
on the plaintiffʹs claims. After Sleepyʹs presented its evidence and rested its case,
Select Comfort moved under Federal Rule of Civil Procedure 52(c) for judgment
upon partial findings of fact. The district court granted the motion, deciding in
favor of Select Comfort on all claims that remained in dispute. Sleepyʹs LLC v.
Select Comfort Wholesale Corp., No. 07‐cv‐4018, 2012 U.S. Dist. LEXIS 191002
, at *50
(E.D.N.Y Sept. 26, 2012).
Sleepyʹs appealed the judgment, and this Court affirmed in part, vacated
in part, and remanded with instructions to the district court to engage in further
factfinding. Sleepyʹs LLC, 779 F.3d at 206
. We vacated the district courtʹs decision as to the unfair competition and breach of contract claims, which had been dismissed in the district court on the ground that ʺSleepyʹs had presented no evidence of hostile conduct that took place prior to the expiration date [of the Dealer Agreement] of September 30, 2006.ʺId. at 198
. We concluded that the
district courtʹs ruling was clearly erroneous because it rested on the mistaken
understanding ʺthat the [Dealer] Agreement could not be extended except by
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Sleepyʹs v. Select Comfort
written waiver and therefore necessarily ended on September 30, 2006.ʺ Id.
Because the partiesʹ relationship in fact extended well beyond the formal termination date specified in the Dealer Agreement, we vacated and remanded that part of the district courtʹs order for consideration of whether the Dealer Agreementʹs non‐disparagement clause prohibited Select Comfortʹs statements.Id.
We also vacated the district courtʹs order dismissing Sleepyʹs slander per
se claims, which had been based on the courtʹs understanding ʺthat Sleepyʹs
solicited the allegedly defamatory statements and was therefore deemed in law
to have consented to them, which precluded suit.ʺ Id. at 199
. We concluded that the district courtʹs judgment was ʺbased on an incorrect understanding of the New York law of defamation,ʺ under which ʺ[a]n honest inquiry or investigation by the person defamed to ascertain the existence, source, content or meaning of a defamatory publication is not a defense to an action for its republication by the defamer.ʺId.
(internal quotation marks omitted). Accordingly, we remanded
with instructions to the district court to ʺmake findings . . . as to whether Sleepyʹs
[secret‐shopper] inquiries were motivated by a good faith attempt to learn
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Sleepyʹs v. Select Comfort
whether the Select Comfort sales force was carrying on a consistent pattern of
slander, or were merely a ruse to decoy Select Comfort into a lawsuit.ʺ Id. at 201
.
On remand to the district court, the case was reassigned to Judge Joanna
Seybert. The parties agreed that the record that had been compiled before Judge
Platt prior to the appeal was complete for purposes of Judge Seybertʹs
consideration of the matter on remand, except for the testimony of two expert
witnesses. The district court therefore heard these witnessesʹ testimony on July
21 and 22, 2015.
On September 22, 2015, the district court again decided in favor of Select
Comfort on all its remaining claims. Sleepyʹs LLC, 133 F. Supp. 3d at 495‐502.
Specifically, the district court dismissed Sleepyʹs claim that Select Comfort
breached the non‐disparagement clause contained in § 4(c) of the Dealer
Agreement on the ground that ʺthe mutual obligation on the parties to not
impair the respective brand image of their counterpart[] relates solely to the
warranty service provided by Select Comfort in connection with the Personal
Preference line.ʺ Id. at 495‐96. The court concluded with respect to Sleepyʹs
claim for breach of the implied covenant of good faith and fair dealing, that the
Dealer Agreement was a sales contract that ʺis subject to the Uniform
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Sleepyʹs v. Select Comfort
Commercial Code, which imposes an obligation of good faithʺ but ʺdoes not
beget a separate cause of action.ʺ Id. at 497 (internal quotation marks omitted).
With respect to the unfair competition claim, the district court determined that
ʺSelect Comfortʹs sales representatives sought to distance their own products
from those of the Personal Preference [l]ine; they endeavored to maximize their
own competitive advantage, not usurp Sleepyʹs.ʺ Id. at 502. The district court
acknowledged that Sleepyʹs claims might amount to product disparagement, but
not unfair competition as alleged. Id.
Finally, regarding Sleepyʹs slander claims, the district court held that ʺall of
[Sleepyʹs] claims for slander per se failʺ because ʺ[i]n all of the instances pleaded
in the Amended Complaint, the allegedly defamatory statement was made only
to Sleepyʹs representatives,ʺ and ʺ[a] defamatory writing is not published if it is
read by no one but the defamed.ʺ Id. at 499 (emphasis in original) (internal
quotation marks omitted). Although the district court identified one instance in
which a third party may have overheard a potentially slanderous statement, the
court dismissed it on the ground that Sleepyʹs consented to the statement by
eliciting it in bad faith. Id. at 499‐500; see also id. at 500 (ʺ[B]ecause the evidence
shows that Sleepyʹs was both virtually certain that its inquiry would elicit
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Sleepyʹs v. Select Comfort
allegedly slanderous statements and substantially motivated by the desire to
bolster a contemplated lawsuit, Sleepyʹs consented to the publication of these
allegedly defamatory statements.ʺ).
After the completion of this second bench trial, Select Comfort moved for
$4,539,305.93 in attorneyʹs fees as the prevailing party in a Lanham Act case. The
district court granted Select Comfortʹs request for fees in principle, finding that
ʺthere are substantial overtone[s] to suggest that the case was filed as a
competitive ploy.ʺ Sleepyʹs LLC v. Select Comfort Wholesale Corp., No. 07‐cv‐4018,
2016 WL 126377
, at *4,2016 U.S. Dist. LEXIS 3064
, at *12 (E.D.N.Y Jan. 11, 2016) (brackets in original) (internal quotation marks omitted) (memorandum and order granting motion for attorneyʹs fees). In the district courtʹs view, ʺSleepyʹs had undertaken a mission to gather ammunition for a future lawsuit against Select Comfort,ʺ making this an ʺexceptional caseʺ for which fees are available under the Lanham Act.Id.
(internal quotation marks omitted).
The district court did not, however, decide the amount of the fee award.
Instead, it referred the case to United States Magistrate Judge Arlene R. Lindsay
for her to determine the appropriate amount of attorneyʹs fees to be awarded.
The magistrate judge made findings of fact and recommended an award in the
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Sleepyʹs v. Select Comfort
amount of $3,507,388.65. Sleepyʹs LLC v. Select Comfort Wholesale Corp., No. CV
07‐4018 (JS)(ARL), 2016 WL 11266558
,2016 U.S. Dist. LEXIS 105290
, at *28‐29 (E.D.N.Y. Aug. 8, 2016), report and recommendation adopted in part, rejected in part,222 F. Supp. 3d 169
(E.D.N.Y. 2016). The magistrate judge rejected Sleepyʹs argument that fees related to defending the Lanham Act claim should be separated from fees defending the non‐Lanham Act claims because, as the magistrate judge decided, all the plaintiffʹs claims rested on a common set of operative facts and were ʺsufficiently intertwinedʺ to permit full recovery.Id.
at
*19‐20.
The district court adopted these findings in part, ultimately awarding
Select Comfort seventy‐five percent of the magistrate judgeʹs recommended fee
award, or $2,630,541.04. Sleepyʹs LLC v. Select Comfort Wholesale Corp., 222 F. Supp. 3d 169
, 179‐80 (E.D.N.Y. 2016). The court called it ʺbeyond cavil that Plaintiffʹs [Lanham Act and non‐Lanham Act] claims share common facts.ʺId. at 179
. But it did not agree with the magistrate judge that those claims were so intertwined that it would be impossible to apportion fees between those claims.Id.
It determined, instead, that a twenty‐five percent reduction would be
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Sleepyʹs v. Select Comfort
reasonable based on what it called its ʺoverall sense of th[e] suit.ʺ Id.
at 179‐80
(internal quotation marks omitted).
In this appeal, Sleepyʹs challenges both the merits determination and the
fee determination. Regarding the merits, Sleepyʹs argues: First, that the district
court erroneously held that the publication element of a cause of action for
slander cannot be met under New York law when the statement is made to the
defamed partyʹs agent. Second, that the district court mistakenly dismissed its
breach‐of‐contract claim by disregarding parol evidence that the parties intended
the non‐disparagement clause in § 4(c) of the Dealer Agreement to apply in non‐
warranty contexts. Third, that contrary to the district courtʹs conclusion, Select
Comfort breached the implied covenant of good faith and fair dealing under
Minnesota state law. Fourth, that the district court erred by ruling in Select
Comfortʹs favor on the unfair competition claim by disregarding evidence
showing that Select Comfort in fact misappropriated Sleepyʹs ʺcommercial
advantage.ʺ Appellantʹs Brief 28.
Sleepyʹs also appeals the fee award against it on three grounds: First, it
argues that the district court erred when it determined that Sleepyʹs Lanham Act
claim was ʺexceptionalʺ and therefore supported a punitive fee award. Second,
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Sleepyʹs v. Select Comfort
Sleepyʹs contends that the district court abused its discretion by apportioning
seventy‐five percent of the magistrate judgeʹs recommended fee award when the
Lanham Act claim was but one of ten causes of action alleged in the complaint.
Third, Sleepyʹs argues that the district court incorrectly reviewed part of the
magistrate judgeʹs recommendations and findings for clear error, rather than de
novo.
DISCUSSION
We review findings of fact after a bench trial for clear error and
accompanying conclusions of law de novo. MacDraw, Inc. v. CIT Grp. Equip. Fin.,
Inc., 157 F.3d 956, 960
(2d Cir. 1998). With respect to the appeal from the fee award, we review the district courtʹs decision for abuse of discretion. Matthew Bender & Co., Inc. v. West Publʹg Co.,240 F.3d 116, 121
(2d Cir. 2001).
I. The Merits Determination
We affirm the district courtʹs decision to dismiss Sleepyʹs breach of
contract, unfair competition, and implied covenant of good faith and fair dealing
claims for the reasons relied upon by the district court. As to its dismissal of
Sleepyʹs slander claims, however, we vacate the district courtʹs judgment insofar
as it dismisses Sleepyʹs slander claims because the communication in question
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Sleepyʹs v. Select Comfort
had not been ʺpublished.ʺ We instruct the district court, on remand, to
reexamine whether Sleepyʹs consented to the slander claims.
Under New York law, the elements for a slander cause of action are ʺ(i) a
defamatory statement of fact, (ii) that is false, (iii) published to a third party,
(iv) ‘of and concerning’ the plaintiff, (v) made with the applicable level of fault
on the part of the speaker, (vi) either causing special harm or constituting slander
per se, and (vii) not protected by privilege.ʺ Albert v. Loksen, 239 F.3d 256
, 265–66 (2d Cir. 2001). The district court held that ʺall of Plaintiffʹs claims for slander per se failʺ because the publication element cannot be met when the defamatory statements were ʺmade only to Sleepyʹs representatives.ʺ Sleepyʹs LLC,133 F. Supp. 3d at 499
(emphasis in original). Although the court concluded that there may have been one instance in which a third party overheard the defamatory statement, when Zaffron called Select Comfort in the presence of a customer who heard the disparaging remarks, satisfying the publication element, it held that Sleepyʹs consented to that statement, barring Sleepyʹs slander claim.Id. at 500
.
Sleepyʹs argues that the district court erroneously determined that the
publication requirement could not be satisfied under New York law if a
defamatory statement was made to the defamed companyʹs representatives. We
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Sleepyʹs v. Select Comfort
agree. In Teichner v. Bellan, 181 N.Y.S. 2d 842
(4th Depʹt 1959), a New York
Appellate Division explained:
There are decisions in some States that a communication of
defamatory matter to an agent of the person defamed in response to
an inquiry does not constitute a publication to a third person . . . [b]ut
the better view seems to us to be that taken in another line of cases,
holding that the communication to the plaintiff’s agent is a publication,
even though the plaintiff’s action may ultimately be defeated for
other reasons. The agent is, in fact, a different entity from the
principal; the communication to the agent is, in fact, a publication to
a third person.
Id. at 249 (emphasis added) (internal citations omitted); see also 43A N.Y. Jur. 2d
Defamation & Privacy § 94 (ʺNew York . . . adheres to the view that
communication to an agent of the defamed party constitutes publication . . . .ʺ);
cf. Ostrowe v. Lee, 256 N.Y. 36, 38
(1931) (deciding that a statement made to the slandererʹs agent constituted publication). Although the New York Court of Appeals does not appear to have addressed whether statements to a plaintiffʹs agent constitute publication, this court is ʺbound . . . to apply the law as interpreted by New Yorkʹs intermediate appellate courts . . . unless we find persuasive evidence that the New York Court of Appeals . . . would reach a different conclusion.ʺ Zaretsky v. William Goldberg Diamond Corp.,820 F.3d 513, 521
(2d Cir. 2016) (brackets and internal quotation marks omitted). Relying on
22
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Sleepyʹs v. Select Comfort
Teichner and finding no reason to think that the New York Court of Appeals
would decide otherwise, we conclude that Select Comfortʹs statements could
meet the publication element notwithstanding the fact that they were made to
Sleepyʹs representatives. We, therefore, vacate the district courtʹs dismissal of the
plaintiffʹs slander claims, since the dismissals were based on the conclusion that
the alleged slanderous statements were not ʺpublishedʺ under New York law.
We nevertheless remand the matter to the district court for it also to
consider whether Sleepyʹs consented to the utterance of each of those statements.
In our previous decision, we observed:
When a plaintiff sues for defamation based on a statement of the
defendant elicited by the plaintiff with some reason to expect that
the defendantʹs statement might be defamatory, the more the
evidence supports the proposition that the plaintiff elicited the
statement with a high degree of certainty that it would be
defamatory, for the purpose of enabling a lawsuit, the stronger the
defendantʹs case for deeming the statement consented to, thus
barring the claim.
Sleepyʹs LLC, 779 F.3d at 201
; see also Teichner,181 N.Y.S. 2d at 846
(ʺ[A] plaintiff
who had authorized an agent to make an inquiry on his behalf is not to be
charged with consent to a defamatory statement made in reply to the inquiry,
unless he had reason to anticipate that the response might be a defamatory one. . . .ʺ
(emphasis added)).
23
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Sleepyʹs v. Select Comfort
The district court did, in fact, consider whether Sleepyʹs consented to one
of the allegedly slanderous statements: when Zaffron called Select Comfort in the
presence of a customer who overheard the disparaging remarks. Sleepyʹs LLC,
133 F. Supp. 3d at 499‐500. The district court found that ʺthe evidence shows that
Sleepyʹs was both virtually certain that its inquiry would elicit allegedly
slanderous statements and substantially motivated by the desire to bolster a
contemplated lawsuit.ʺ Id. at 500. The district court relied on the fact that the
incident occurred after Ackerʹs statements of November 6, 2006, when he
expressed his intent to sue Select Comfort. Id. We therefore agree with the
district courtʹs conclusion that Sleepyʹs consented to the disparaging statements
with regards to the Zaffron incident and, to that extent, affirm the district courtʹs
judgment.
The district court did not, however, expressly decide whether Sleepyʹs
consented to the remaining slanderous statements. In its opinion, the court
noted that ʺ[t]hough it need not visit the issue, the Court suspects that even if
Plaintiffʹs other claimed instances of slander per se had been published, those
claims would nonetheless be barred for the same reasons that any claim arising
out of the Zaffron incident is.ʺ Sleepyʹs LLC, 133 F. Supp. 3d at 500
n.19. We
24
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Sleepyʹs v. Select Comfort
direct the district court, on remand, to make a determination as to whether
Sleepyʹs consented to the remainder of the relevant statements and to determine
whether, for that reason, those claims were properly dismissed.
II. Fee Award Determination
Sleepyʹs also argues that the district court made errors regarding its fee
determination, both in finding that Select Comfort was entitled to any legal fees
as the prevailing party of an ʺexceptionalʺ Lanham Act case and in the amount of
the award. We agree. Although the inquiry may change somewhat depending
on the courtʹs determination of the substantive issues we are remanding to it, we
nonetheless review it here both because the result may not change, and also
because a review of the fee award will likely be useful and effective even if the
damage award changes.
1. ʺExceptional Caseʺ Under the Lanham Act
Under Section 35(a) of the Lanham Act, 15 U.S.C. § 1117
(a), a court ʺmay award reasonable attorneyʹs fees to the prevailing partyʺ in ʺexceptional cases.ʺ We have observed previously that the Lanham Act allows recovery of reasonable attorneyʹs fees only ʺon evidence of fraud or bad faith.ʺ Twin Peaks Prods., Inc. v. Publications Intl, Ltd.,996 F.2d 1366
, 1383 (2d Cir. 1993) (quoting Transgo, Inc. v.
25
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Sleepyʹs v. Select Comfort
Ajac Transmission Parts Corp., 768 F.2d 1001
, 1014 (9th Cir. 1985), cert. denied,474 U.S. 1059
(1986)); see also Sterling Drug, Inc. v. Bayer AG,14 F.3d 733, 751
(2d Cir. 1994). We have also affirmed a district courtʹs decision to award attorneyʹs fees under the Lanham Act if the lawsuit was ʺinitiated as a competitive ploy,ʺ Mennen Co. v. Gillette Co.,565 F. Supp. 648, 657
(S.D.N.Y. 1983), affʹd,742 F.2d 1437
(2d Cir. 1984), or commenced ʺin bad faith merely to join in the profits from [the defendant],ʺ Universal City Studios, Inc. v. Nintendo Co.,797 F.2d 70, 77
(2d Cir. 1986). The district court relied on these decisions in concluding that this case was ʺexceptional.ʺ Sleepyʹs LLC,2016 WL 126377
, at *4,2016 U.S. Dist. LEXIS 3064
, at *12.
In Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545
,134 S. Ct. 1749
(2014), the Supreme Court considered the meaning of ʺexceptional caseʺ under the attorneyʹs fees provision in the Patent Act,35 U.S. Code § 285
– a provision that is identical to the Lanham Actʹs attorneyʹs fees provision. Octane Fitness,572 U.S. at 554
. It concluded that ʺan ʹexceptionalʹ case is simply one that stands out from others with respect to the substantive strength of a partyʹs litigating position (considering both the governing law and the facts of the case) or the unreasonable manner in which the case was litigated.ʺId.
The Court
26
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Sleepyʹs v. Select Comfort
encouraged district courts considering the question to evaluate the totality of the
circumstances, considering a wide variety of factors, including ʺfrivolousness,
motivation, objective unreasonableness (both in the factual and legal components
of the case) and the need in particular circumstances to advance considerations
of compensation and deterrence.ʺ Id.
at 1756 n.6 (quoting Fogerty v. Fantasy, Inc.,510 U.S. 517
, 534 n.19 (1994)).
Many federal circuit courts, including the Third, Fourth, Fifth, Sixth,
Ninth, and Federal Circuits, have since concluded that Octane Fitness applies to
the Lanham Actʹs attorneyʹs fees provision.6 See Romag Fasteners, Inc. v. Fossil,
Inc., 866 F.3d 1330
, 1334‐36 (Fed. Cir. 2017); SunEarth, Inc. v. Sun Earth Solar Power Co., Ltd.,839 F.3d 1179, 1181
(9th Cir. 2016); Baker v. DeShong,821 F.3d 620
, 622– 25 (5th Cir. 2016); Georgia‐Pacific Consumer Prods. LP v. von Drehle Corp.,781 F.3d 710
, 720‐21 (4th Cir. 2015), as amended (Apr. 15, 2015); Slep‐Tone Entmʹt Corp. v. Karaoke Kandy Store, Inc.,782 F.3d 313
, 317‐18 (6th Cir. 2015); Fair Wind Sailing,
These courts observed, as we have above, that the language of the Lanham Act and
6
Patent Act is identical, Romag Fasteners, Inc., 866 F.3d at 1335
; Baker, 821 F.3d at 622‐25; Georgia‐Pacific Consumer Prods. LP,781 F.3d at 721
; Slep‐Tone Entmʹt Corp.,782 F.3d at 318
; Fair Wind Sailing, Inc., 764 F.3d at 313‐15, that Congress specifically mentioned the Patent Act when passing the Lanham Act, Romag Fasteners, Inc., 866 F.3d at 1335‐36; Baker,821 F.3d at 623
; Fair Wind Sailing, Inc., 764 F.3d at 314‐15, and that the statutes have parallel structure and purpose, Baker,821 F.3d at 624
.
27
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Sleepyʹs v. Select Comfort
Inc. v. Dempster, 764 F.3d 303
, 313‐15 (3d Cir. 2014). We now join them, concluding that under the Lanham Act, an exceptional case is one that stands out from others in the manner articulated by Octane Fitness,572 U.S. at 554
. It is on
that basis that we vacate the district courtʹs holding that Sleepyʹs brought an
exceptional case under our prior Lanham Act precedent and remand for a new
determination under Octane Fitness.7
2. Fee Award
Sleepyʹs also objected to the amount of the fee award: seventy‐five percent
of Select Comfortʹs total attorneyʹs fees through September 25, 2012. We find the
district courtʹs high apportionment based solely on the empty, but eventually
abandoned, Lanham Act claim puzzling at best.
It is not altogether clear to us that the case at bar was ʺfrivolous[]ʺ or improperly
7
ʺmotivat[ed].ʺ Octane Fitness, 572 U.S. at 554
n.6. Sleepyʹs claims survived summary
judgment and were only dismissed after a bench trial on a motion for judgment on
partial findings under Federal Rule of Civil Procedure 52(c). On appeal, we revived the
unfair competition, breach of contract, and slander per se claims. And although Ackerʹs
comments strike us as objectionable and inappropriate, it is not self‐evident that they
alone could convert an otherwise‐reasonable response to possible defamation
(investigation and litigation) into a bad‐faith competitive ploy. But the district court
must decide this in the first instance—in conjunction with other relevant factors, such as
Sleepyʹs spoliation—a decision to which we will owe deference in the event of a further
appeal.
28
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Sleepyʹs v. Select Comfort
If the district court determines that no attorneyʹs fee award is warranted
under Octane Fitness, of course that will be the end of the matter, subject to
further appeal if any. But if it again decides the case is ʺexceptionalʺ under the
Lanham Act, and that awarding attorneyʹs fees is therefore warranted, we think
it must revisit its approach to determining the amount of the award.
When the award of attorneyʹs fees is justified, the district court must, of
course, calculate the amount of the fees to which a prevailing party is entitled.
Depending on the facts of the case, this can be challenging, there being no pole
star by which the court can steer a true course. But the district court here
correctly noted that ʺ[t]he prevailing party in a multi‐claim case which includes
both Lanham Act and non‐Lanham Act counts should be entitled to attorney fees
only for work expended in prosecuting or defending the Lanham Act counts.ʺ
Sleepyʹs LLC, 222 F. Supp. 3d at 176
(emphasis added) (quoting N.Y. State Soc. of Certified Pub. Acct. v. Eric Louis Assocs., Inc.,79 F. Supp. 2d 331, 353
(S.D.N.Y. 1999)); see also Gracie v. Gracie,217 F.3d 1060, 1069
(9th Cir. 2000) (ʺ[W]e hold that as a general matter, a prevailing party in a case involving Lanham Act and non‐ Lanham Act claims can recover attorneysʹ fees only for work related to the Lanham Act claims.ʺ); U.S. Structures, Inc. v. J.P. Structures, Inc.,130 F.3d 1185
,
29
15‐3560, 16‐3595
Sleepyʹs v. Select Comfort
1193 (6th Cir. 1997) (ʺ[U]nder 15 U.S.C. § 1117
(a), attorneysʹ fees are recoverable only for work performed in connection with claims filed under the Lanham Act.ʺ). Limiting Lanham Act recovery to Lanham Act work ʺcomports with the background rule in America—the prevailing party usually cannot recover fees absent statutory authority.ʺ Procter & Gamble Co. v. Amway Corp.,280 F.3d 519, 527
(5th Cir. 2002).
The Fifth and Ninth Circuits have created a narrow exception to this rule,
concluding that the prevailing party may recover for total attorneyʹs fees
incurred in a litigation containing both Lanham Act and non‐Lanham Act claims
if ʺthe Lanham Act claims and non‐Lanham Act claims are so intertwined that it
is impossible to differentiate betweenʺ them. Gracie, 217 F.3d at 1069
(emphasis in original) (internal quotation marks omitted); see also Procter & Gamble Co.,280 F.3d at 527
(5th Cir. 2002). Nevertheless, as the Ninth Circuit recognized:
[T]he impossibility of making an exact apportionment does not
relieve the district court of its duty to make some attempt to adjust
the fee award in an effort to reflect an apportionment. In other
words, apportionment or an attempt at apportionment is required
unless the court finds the claims are so inextricably intertwined that
even an estimated adjustment would be meaningless.
Gracie, 217 F.3d at 1070
(third emphasis added).
30
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Sleepyʹs v. Select Comfort
We would approach this ʺinextricably intertwinedʺ line of reasoning with
great care were we to address today whether or not to adopt the Fifth and Ninth
Circuitsʹ exception. Indeed, permitting full recovery for both Lanham Act and
non‐Lanham Act claims because of the difficulty of differentiating between them
could permit, as might be the case here, a very small Lanham Act tail to
improperly wag a huge attorneyʹs‐fee dog. But we need not opine on this
possibly fraught approach here because the district court in the case before us
concluded, correctly we think, that the claims here ʺare not ʹso inextricably
intertwined that even an estimated adjustment would be meaningless.ʹʺ Sleepyʹs
LLC, 222 F. Supp. 3d at 179
(emphasis added) (quoting Gracie,217 F.3d at 1070
).
Although we agree with the district court that the Fifth and Ninth Circuitʹs
exception, even were we to adopt it, does not apply here, we nevertheless vacate
its fee award for its failure to provide a rationale for its apportionment decision
sufficient to enable us to fulfill our responsibility to provide a meaningful
review. See Perdue v. Kenny A. ex rel. Winn, 559 U.S. 542, 558
(2010) (ʺDetermining
a ʹreasonable attorneyʹs feeʹ is a matter that is committed to the sound discretion
of a trial judge, but the judgeʹs discretion is not unlimited. It is essential that the
judge provide a reasonably specific explanation for all aspects of a fee
31
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Sleepyʹs v. Select Comfort
determination . . . . Unless such an explanation is given, adequate appellate
review is not feasible.ʺ (internal citation omitted)); Konits v. Valley Stream Cent.
High Sch. Dist., 350 F. Appʹx 501, 504 (2d Cir. 2009) (summary order) (ʺBecause
we do not have such explanations to review, we cannot tell whether the court
abused its discretion in reaching the determination to reduce by one third the
attorney hours expended before [a specified date].ʺ). The district court devoted
significant time and care to describing the relevant legal standards and why the
facts of this case render apportionment difficult. Unfortunately, it then
summarily concluded that ʺ[b]ased on [its] overall sense of this suit,ʺ8 it would
ʺapportion seventy‐five percent (75%) of the time billed through September 25,
2012, as time spent in relation to the Lanham Act claim.ʺ Sleepyʹs LLC, 222 F. Supp. 3d at 180
(internal quotation marks and brackets omitted). The district court provided no explanation to justify its apportionment; instead, it simply cited Fox v. Vice,563 U.S. 826, 838
(2011), which noted that ʺ[t]he essential goal in
Judge Seybertʹs involvement in this case began long after the Lanham Act claim had
8
been abandoned, further limiting our ability to accept her general and essentially
unexplained apportionment decision. See Konits, 350 F. Appʹx at 504 (ʺ[D]iscretionary
reductions for limited success may be appropriate, but the district court did not provide
an adequate explanation for the reductions, particularly in view of the judgeʹs
comparatively limited involvement in the case which would reduce his exposure to
counselʹs work over the full life of the litigation . . . .ʺ).
32
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Sleepyʹs v. Select Comfort
shifting fees [to either party] is to do rough justice, not to achieve auditing
perfection.ʺ The goal may be rough justice, but it is justice still. And thus, some
explanation is required.9 Instead of untying this Gordian Knot, the district court
seemed to cut it. We can neither untie nor retie it ourselves.
We are more familiar than we would care to be with complaints containing
hopeless claims thrown in for reasons we can only guess. Here, the plaintiff
brought what appears to be just such an all‐but‐the‐kitchen‐sink complaint,
comprising ten causes of action and six theories of liability, only the last of which
purportedly arose under the Lanham Act. Pl. Am. Compl., Appʹx 108‐116.
Indeed, in the introductory portion of the Amended Complaint, which generally
summarized the plaintiffʹs claims to follow, the plaintiff did not so much as
It is not at all clear to us why the district court found seventy‐five percent of the fees
9
to be reasonable. The district court acknowledged in its fee determination opinion that
ʺcertain of Plaintiffʹs claims were based on legal theories and/or factual allegations
distinct from those underlying the Lanham Act claims,ʺ including the breach of
contract, unfair competition, fraudulent inducement, and implied covenant of good
faith and fair dealing claims – five of the ten causes of action, and four of the six theories
of liability. Sleepyʹs LLC, 222 F. Supp. 3d at 179
. In fact, the only claims the district court did not identify as distinct from the Lanham Act claims for the purposes of the fee award determination were the plaintiffʹs four slander per se claims.Id.
33
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Sleepyʹs v. Select Comfort
mention the Lanham Act. 10 Id. at 97. Moreover, in 2013, when the plaintiff first
appealed this case to this Court, it in effect abandoned its Lanham Act claim by
not appealing the district courtʹs dismissal of it. Sleepyʹs LLC, 779 F.3d at 196
n.3
(2d Cir. 2015) (noting the absence of an appeal with respect to the Lanham Act
and fraudulent inducement claims in the plaintiffʹs 2013 brief). These factors
suggest that the Lanham Act claim was not the central thrust of the plaintiffʹs
lawsuit—nor a massive burden on the defendantsʹ defense—and therefore may
not have accounted for most—or even much—of the attorneysʹ work. Of course,
The plaintiff described the ʺNature of the Actionʺ in its First Amended Complaint, in
10
its entirety, as follows:
Nature of the Action
This is an action to recover the damages Sleepyʹs suffered as a
result of the tortious acts and breaches of contract that Select Comfort
committed while Sleepyʹs was its ʺRetail Partner.ʺ Select Comfort entered
into a dealer agreement with Sleepyʹs and induced Sleepyʹs to commit
valuable resources to promote and popularize Select Comfortʹs products.
As set forth herein, through a concerted pattern of defamation and
disparagement of Sleepyʹs products and Sleepyʹs, express breaches of the
dealer agreement, fraudulent misrepresentations, breach of the implied
covenant of good faith and fair dealing contained in the dealer agreement,
and unfair competition in violation of federal and New York law, Select
Comfort damaged Sleepyʹs and effectively deprived it of the benefits of
the dealer agreement.
Pl. Am. Compl., Appʹx 97.
34
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Sleepyʹs v. Select Comfort
the district court may have reasons for concluding otherwise, but it must tell us
what they are before we attempt to further evaluate its decision.
We therefore vacate the judgment as to the attorneyʹs fees award, and
remand it to the district court to determine de novo whether the defendants are
entitled to attorneyʹs fees under the Octane Fitness standard, and, if so, to explain
what amount of attorneyʹs fees would reflect the proportion of Select Comfortʹs
legal efforts spent defending against the Lanham Act claim.11
CONCLUSION
We have considered the partiesʹ remaining arguments on appeal and
conclude that they are without merit. For the foregoing reasons, we AFFIRM the
judgment of the district court in part, VACATE the judgment of the district court
in part, and REMAND this matter to that court for further proceedings.
While the issue is for the district court to address in the first instance upon remand,
11
a useful starting point might reflect the fact that the Lanham Act claim was one of ten
causes of action, or one of six theories of liability; that percentage can then be adjusted
to account for common sets of facts, similar theories of liability, or other factors. But of
course, the district court must decide its method and make its determination in the first
instance, subject to our possible subsequent—albeit deferential—review.
35