The Franchise Memorandum

In a dispute between a mattress retailer and a bedding manufacturer, the United States Court of Appeals for the Second Circuit has ruled that statements made to representatives of the retailer may have constituted slander. Sleepy’s LLC v. Select Comfort Wholesale Corp., 2018 WL 6174650 (2d Cir. Nov. 27, 2018). Sleepy’s, a mattress and bedding retailer, entered into a dealer agreement with Select Comfort pursuant to which Sleepy’s acquired the right to sell Select Comfort’s ‘‘Personal Preference” line of “Sleep Number” beds in Sleepy’s stores. Select Comfort retained exclusive rights to sell its ‘‘Core” (rather than Personal Preference) line of Sleep Number beds. Sleepy’s was disappointed with sales and came to suspect that Select Comfort salespeople were disparaging the Personal Preference line in order to elevate the Core line. Sleepy’s then conducted undercover shopping visits that it believed revealed a regular pattern of disparagement. After confronting Select Comfort with the results of the secret-shopper investigation, Sleepy’s brought suit and raised claims for slander, unfair competition, and Lanham Act violations, among other causes of action.

Following two bench trials (and an intervening appeal to the Second Circuit), the district court entered judgment in favor of Select Comfort on all of Sleepy’s claims. With respect to the slander claims, the district court held that they failed because the allegedly slanderous statements were made only to Sleepy’s representatives during the secret-shopper visits and, therefore, had not been “published.” The district court reasoned that under New York law, the publication element of a cause of action for slander cannot be met where the statement is made to the defamed party’s agent. Sleepy’s appealed the decision to the Second Circuit, challenging both the district court’s merits determination and its award of $2.6 million in attorneys’ fees to Select Comfort.

On appeal, the Second Circuit affirmed the dismissal of all but the slander claims. Citing precedent from the New York Appellate Division, the Second Circuit concluded that communication to a plaintiff’s agent constitutes publication for purposes of a slander claim because the agent is a different entity from the principal and, therefore, the communication is to a third person. Although the New York Court of Appeals had not addressed the issue, the Second Circuit found no reason to think that the Court of Appeals would reach a different conclusion. Accordingly, the Second Circuit vacated the district court’s ruling and remanded for determination as to whether Sleepy’s consented to the utterance of the statements at issue. The court also vacated and remanded the fee award to Select Comfort.