Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. N.Y: Attorney fees awarded following dismissal of breach of dealership agreement claims, (Jan 12, 2016)

By Linda O’Brien, J.D., LL.M.

A bedding manufacturer was entitled to an award of attorney fees, following dismissal of a retailer’s breach of contract claims, based on the court’s determination that the dealership agreement between the parties had expired, the federal district court in Central Islip, New York has ruled (Sleepy’s LLC v. Select Comfort Wholesale Corporation, January 11, 2016, Seybert, J.).

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,” which contains inflatable air chambers that 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, which expired in September 2006, Sleepy’s could sell only the “Personal Preference” line, while Select Comfort retained the right to its “Core” line in its company owned stores.

After Sleepy’s began selling Sleep Number beds, it received reports that Select Comfort salespeople were disparaging Sleepy’s 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.

In August 2007, Sleepy’s filed suit against Select Comfort, alleging a breach of the dealership agreement and asserted claims for unfair competition, breach of the implied covenant of good faith and fair dealing, and false advertising under the Lanham Act. During trial, the district court granted judgment for Select Comfort and dismissed all of Sleepy’s claims. The court’s order was based on its determination that the agreement expired in September 2006 and could not be extended past that date without a written waiver. In February 2015, the appellate court reversed the order and remanded the case. In October 2015, after receiving additional evidence, the district court entered judgment in favor of the defendant. Subsequently, Select Comfort moved for attorney’s fees.

The court found that Select Comfort presented sufficient evidence that Sleepy’s filed the case for an improper purpose. Select Comfort contended that Sleepy’s lawsuit was a competitive ploy to renegotiate the dealer agreement on terms more favorable to Sleepy’s. Evidence that Sleepy’s conducted its undercover shopping to gather information in support of a potential lawsuit was sufficient to raise an inference that the suit was filed for an improper purpose.

Additionally, Select Comfort made a showing that Sleepy’s lacked evidence to support its claims. To establish a claim for false advertising under the Lanham Act, Sleepy’s was required to show that Select Comfort’s alleged statements were commercial speech, made to influence customers to buy Select Comfort products, and disseminated to the relevant purchasers. The court noted that Sleepy’s failed to produce any customers to testify that Select Comfort made disparaging statements.

Finally, attorney’s fees were warranted in light of Sleepy’s “egregious, grossly negligent spoliation of evidence.” The court determined that Sleepy’s made no attempt to preserve any primary evidence of the undercover shopping, including instructions for the secret shops, original notes from employees performing the secret shops, or original reports from the secret shops. Thus, it was within the court’s discretion to grant the defendant’s motion for attorney’s fees.

The case is No. 2:07-cv-04018-JS-ARL.

Attorneys: Andrew W. Singer (Tannenbaum Helpern Syracuse & Hirschtritt LLP) for Sleepy’s LLC. Heidi A.O. Fisher (Fox Rothschild LLP) and Joseph S. Androphy (Michael Faillace & Associates, P.C.) 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

Cases: FranchisingDistribution NewYorkNews