Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—2d Cir: Dismissal of bedding retailer’s breach of dealership agreement claims reversed, (Mar 3, 2015)

By Linda O’Brien, J.D., LL.M.

A district court erred in dismissing a bedding retailer’s breach of contract claims against a bedding manufacturer based on its determination that the dealership agreement between the parties had expired and there was no evidence that the breach occurred while the agreement was in force, the U.S. Court of Appeals in New York City has ruled. Thus, the district court judgment was reversed and remanded for further proceedings (Sleepy’s LLC v. Select Comfort Wholesale Corporation, February 27, 2015, Leval, P.).

Sleepy’s is a New York-based retailer of mattresses and bedding products. Select Comfort manufactures and sells a line of bedding called “Sleep Number.” An alternative to spring-filled mattresses, Sleep Number beds are filled with inflatable air chambers which can be adjusted to vary the firmness of the mattress.

Select Comfort launched a retail partner program to sell Sleep Number beds in the stores of other retailers. In June 2005, Sleepy’s and Select Comfort executed a dealership agreement that made Sleepy’s an authorized retailer of Sleep Number beds. Under the terms of the agreement, Sleepy’s could sell only the “Personal Preference” line, while Select Comfort retained the right to its “Core” line in its company owned stores. The agreement, which expired in September 2006, required Select Comfort to provide Sleepy’s with first-quality merchandise and barred the parties from disparaging the brand image of the other party.

After Sleepy’s began selling Sleep Number beds, it received reports that Select Comfort salespeople were disparaging Sleepy’s and the Personal Preference line. To confirm the reports, Sleepy’s conducted undercover shopping, which revealed a regular pattern of disparagement. After Sleepy’s presented the results of the undercover shopping to Select Comfort in January 2007, the parties agreed to terminate the dealer relationship.

Sleepy’s filed suit against Select Comfort, alleging a breach of the dealership agreement and asserting claims, in part, for unfair competition and breach of the implied covenant of good faith and fair dealing. During trial, the district court granted judgment for Select Comfort and dismissed all Sleepy’s claims. The court’s dismissal of the contract-based claims was based on its determination that the agreement expired in September 2006 and could not be extended past that date without a written waiver. Sleepy’s appealed.

Breach of contract. The appellate court found that the dismissal of the contract-based claims —disparagement, breach of the implied covenant of good faith and fair dealing, and unfair competition — was based on an erroneous interpretation of the dealership agreement. The district court ruled that Sleepy’s failed to prove a breach of the non-disparagement clause because there was no evidence that the disparagement took place while the agreement was in effect. The ruling was predicated on its interpretation of subsections of the agreement stating that the agreement would expire on September 30, 2006 and, after termination, the agreement could not be extended except by an express written waiver by the terminating party.

According to the appellate court, the terms “expiration” and “termination” were erroneously construed as interchangeable, referring to the end of the agreement term, regardless of how it occurred. The agreement used those terms to refer to different ways of ending the agreement. “Expiration” referred to the end of the initial term of September 30, 2006. In contrast, “termination” was used to describe an affirmative act by a party prior to its expiration. Furthermore, the prohibition of extension absent an express written waiver applied only after the termination of the agreement.

The subsections did not prevent the agreement from being extended by the parties’ conduct after its initial term expired on September 30, 2006. Therefore, the district court’s ruling was based on an invalid interpretation of the agreement. Since Sleepy’s contention that the dealer agreement was in fact extended by the parties conduct and that Select Comfort’s disparagement occurred while the agreement was in force was not considered, the dismissal was vacated and the issues were remanded for a ruling.

The case is No. 12-4437-cv.

Attorneys: Vincent J. Syracuse (Tannenbaum Helpern Syracuse & Hirschtritt LLP) for Sleepy’s LLC. Andrew S. Hansen (Oppenheimer Wolff & Donnelly LLP) for Select Comfort Wholesale Corporation, Select Comfort Retail Corporation, and Select Comfort Corporation.

Companies: Sleepy’s LLC; Select Comfort Wholesale Corporation; Select Comfort Retail Corporation; Select Comfort Corporation

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