Sleepy's LLC v. Select Comfort Wholesale Corporation, 2:07-cv-04018

Background

Sleepy’s and Select Comfort entered a 2005 Dealer Agreement for Select Comfort’s Personal Preference line; Sleepy’s sales underperformed and Sleepy’s suspected Select Comfort salespeople were disparaging Sleepy’s products.
Beginning in fall 2006 Sleepy’s organized directed “secret shops” (investigations) of Select Comfort retail stores (a November 2006 “blitz” and additional shops in Jan–Feb 2007) to collect evidence of alleged disparagement; Sleepy’s threatened litigation and sought a non‑disparagement letter, which Select Comfort refused.
The parties executed a Wind‑Up Agreement in April 2007; Sleepy’s then sued Select Comfort in August 2007 asserting, inter alia, slander per se and Lanham Act claims based on statements elicited during those secret shops.
After a bench trial and several appeals, the Second Circuit (909 F.3d 519) held that publication can be satisfied by statements made to a company’s representatives, vacated the district court’s finding of exceptionality and fee award, and remanded to decide whether Sleepy’s consented to the remaining slander claims and to re‑evaluate fees under Octane Fitness.
On remand the district court found Sleepy’s had consented to the alleged defamatory statements elicited by the secret‑shop campaign (so slander claims were properly dismissed) and that the case was not "exceptional" under Octane Fitness; no Lanham Act attorneys’ fees were awarded.

Issues

Issue	Plaintiff's Argument	Defendant's Argument	Held
Whether Sleepy’s slander per se claims were barred because Sleepy’s consented to publication	Sleepy’s: investigations were honest inquiries motivated to verify disparagement; Dealer Agreement prohibited disparagement so Sleepy’s did not consent	Select Comfort: Sleepy’s directed and organized secret shops (Acker/Bookbinder "blitz") to elicit disparaging statements to build a lawsuit; Sleepy’s had high certainty the inquiry would produce defamatory replies	Court: Sleepy’s consented to the challenged publications; slander claims dismissed
Validity of claims tied to November 2006 secret shops (Colon, Zaffron, Grinnan)	Sleepy’s: some early shops predated Acker’s litigation‑oriented comments and were honest inquiries	Select Comfort: November shops were part of the directed campaign; Sleepy’s had reason to anticipate defamatory responses	Court: claims based on the November 2006 shops were barred by consent; testimony showed shops were directed to elicit disparagement
Validity of claims tied to January–February 2007 secret shops	Sleepy’s: January 23, 2007 McLaughlin letter reassured Sleepy’s, so later shops were honest follow‑ups	Select Comfort: Sleepy’s Jan 9 instruction email and contemporaneous threats to sue show the shops were aimed at collecting litigation evidence; no effective "reset" occurred	Court: claims from Jan–Feb 2007 shops barred by consent; the letter did not negate Sleepy’s litigation‑motivated campaign
Whether this is an "exceptional" case under Octane Fitness and whether Select Comfort is entitled to Lanham Act fees	Sleepy’s: claims had arguable legal basis, survived motions and trial phases; no bad faith or intent to extract nuisance settlements	Select Comfort: claims frivolous, pursued in bad faith to gain leverage; spoliation and weak pre‑suit investigation justify fees	Court: case not "exceptional" under Octane; Sleepy’s litigation not frivolous or brought in bad faith sufficient to justify fees; spoliation found grossly negligent but not proven intentional, so insufficient for fee award

Key Cases Cited

Sleepy’s LLC v. Select Comfort Wholesale Corp., 909 F.3d 519 (2d Cir. 2018) (held publication may be satisfied by statements to company representatives; remanded consent and fee issues)
Sleepy’s LLC v. Select Comfort Wholesale Corp., 779 F.3d 191 (2d Cir. 2015) (discussed when eliciting statements constitutes consent under New York law)
Octane Fitness, LLC v. ICON Health & Fitness, Inc., 572 U.S. 545 (2014) (framework for determining when a case is "exceptional" for fee awards)
Albert v. Loksen, 239 F.3d 256 (2d Cir. 2001) (elements of defamation under New York law)
4 Pillar Dynasty LLC v. New York & Company, Inc., 933 F.3d 202 (2d Cir. 2019) (discusses Octane standard and district court discretion)
Romag Fasteners, Inc. v. Fossil, Inc., 866 F.3d 1330 (Fed. Cir. 2017) (addresses fee awards and notes denial of Rule 50(a) motion does not preclude a fees finding)