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Sleepy's LLC v. Select Comfort Wholesale Corp.

United States Court of Appeals, Second Circuit

February 27, 2015

SLEEPY'S LLC, Plaintiff-Appellant,
v.
SELECT COMFORT WHOLESALE CORPORATION, SELECT COMFORT RETAIL CORPORATION, SELECT COMFORT CORPORATION, Defendant-Appellees

Argued August 21, 2013

Page 192

Plaintiff Sleepy's, LLC appeals from the judgment of the United States District Court for the Eastern District of New York (Platt, J.) granting judgment on partial findings for Defendant Select Comfort. The Court of Appeals (Leval, J.) concludes that the district court's dismissal of some of Sleepy's 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 contract. The judgment as to those claims is VACATED. The judgment dismissing Sleepy's claims of slander per se is also VACATED. The dismissal of the remaining contract claims is AFFIRMED.

VINCENT J. SYRACUSE (L. Donald Prutzman, George F. du Pont, on the brief), Tannenbaum Helpern Syracuse & Hirschtritt LLP, New York, New York, for Plaintiff-Appellant.

ANDREW S. HANSEN (Heidi A.O. Fisher, Michelle R. Schjodt, on the brief), Oppenheimer Wolff & Donnelly LLP, Minneapolis, Minnesota, for Defendant-Appellees.

Before: LEVAL, WESLEY, and HALL, Circuit Judges.

OPINION

Page 193

LEVAL, Circuit Judge

Plaintiff Sleepy's, LLC appeals from the judgment of the United States District Court for 8 the Eastern District of New York (Platt, J.) in favor of Defendant Select Comfort[1] rendered upon 9 a bench trial. This action arises out of a contractual agreement between Sleepy's and Select Comfort pursuant to which Sleepy's sold beds manufactured by Select Comfort. After the parties ended their business relationship, Sleepy's brought suit, asserting numerous claims, including claims for breach of contract, breach of the contract's implied covenant of good faith and fair dealing, unfair competition, and slander per se.

The case proceeded to a bench trial in the spring of 2012. In June 2012, toward the end of Sleepy's presentation of its case, Select Comfort moved for judgment on partial findings pursuant to Federal Rule of Civil Procedure 52(c).[2] The district court granted judgment for Select Comfort on all claims. The court's dismissal of many of Sleepy's contract-based claims depended on its determination that the contract had expired on September 30, 2006, and, by its terms, could not be extended past that date except by written waiver. The court dismissed the claims of defamation primarily on the ground that Sleepy's had consented to the allegedly slanderous statements. On appeal, Sleepy's contends these rulings were based on errors of law. Sleepy's also challenges several of the district court's evidentiary rulings.

We affirm the judgment dismissing one of the contract claims. As for the other claims, we vacate the judgment and remand for further proceedings.

BACKGROUND

Plaintiff Sleepy's, LLC is a New York-based retailer of mattresses and bedding products. Defendant Select Comfort, based in Minnesota, manufactures and sells a line of bedding called the Sleep Number, which is known as " alternative bedding" because, unlike traditional spring-filled mattresses, Select Comfort's Sleep Number beds are filled with inflatable air chambers that can be adjusted to vary the firmness of the mattress. Select Comfort sells its Sleep Number beds through its own retail stores.

In October 2000, Select Comfort launched a Retail Partner Program to sell Sleep Number beds in the stores of other retailers. Sleepy's began negotiations with Select Comfort in early 2005 to join the Retail Partner Program. In June 2005, Sleepy's and Select Comfort executed a written Dealer Agreement (the " Dealer Agreement" ) making Sleepy's an authorized retailer of Sleep Number beds.

Under the terms of the Dealer Agreement, the only Select Comfort merchandise

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to be sold by Sleepy's was the " Personal Preference" line. In contrast, Select Comfort sold its " Core" line in its company-owned retail stores. The Personal Preference and Core lines differed from one another in several respects, including differences of foundation and of controls to adjust firmness. The foundation of the Personal Preference beds sold by Sleepy's was wooden; the Core beds had a plastic polymer foundation. The controls of the Personal Preference line were wired, while the Core line came with wireless remote controls.

The Dealer Agreement between Sleepy's and Select Comfort in Section 4(a) required Select Comfort to provide Sleepy's with " first quality merchandise . . . meeting all mutually agreed upon specifications." Joint App'x (" JA" ) at 1712. In Section 4(c), each side agreed not to " adversely affect the character, reputation and good will (collectively the 'Brand Image') of the other party." Id. Section 9 provided, " Subject to earlier termination in accordance with any provision of this Agreement, the term of this Agreement . . . will expire September 30, 2006." JA 1715.

Sleepy's began selling Sleep Number beds in August 2005. Sales were disappointing. In response to reports it received that Select Comfort salespeople were disparaging Sleepy's and its Personal Preference line, in late 2006 Sleepy's began conducting " secret shops," sending hired personnel into Select Comfort stores posing as customers to assess whether this was true. Sleepy's contends its undercover shopping revealed a regular pattern of disparagement. In particular, Sleepy's presented evidence that Select Comfort's salespeople told Sleepy's secret shoppers that the wooden foundation sold at Sleepy's was inferior to the plastic polymer foundation of the Core line sold at Select Comfort stores; that beds sold at Sleepy's were stored in warehouses where they attracted allergens and dust mites, while beds sold through Select Comfort's stores were made to order; and that Sleepy's offered inferior sales terms and deceitfully refused to honor its warranties.

At a meeting on January 3, 2007, Sleepy's presented Select Comfort with results of some of its secret shops. Sleepy's continued to conduct additional secret shops thereafter. On January 11, 2007, Select Comfort sent Sleepy's a letter stating that it saw " no reason to extend the term of [the parties'] Agreement" and wanted to " wind-up . . . the dealer relationship." JA 1590. The letter proposed that Sleepy's " continue to sell its remaining inventory of Select Comfort product through the end of February, following which [Select Comfort would] arrange for the timely retrieval of [its] merchandising materials and fixtures." Id. On April 18, 2007, the parties entered into a Wind-Up Agreement (the " Wind-Up Agreement" ), which provided that between April 30 and May 11 Select Comfort would retrieve all Select Comfort materials from Sleepy's stores and warehouses. Under the Wind-Up Agreement, Select Comfort agreed to " fill all Sleepy's orders" until two weeks before the final date of product removal, subject to certain limitations, and Sleepy's agreed to " operate according to the terms and conditions of [the parties'] previous agreement during this period . . . ." JA 1675-76.

PROCEDURE

On August 24, 2007, Sleepy's began this suit in New York state court. Select Comfort removed the case to federal court on the basis of diversity of citizenship. Sleepy's complaint alleged that Select Comfort breached the Dealer Agreement by failing to provide it with " first quality

Page 195

merchandise," as required by the agreement, and by violating the Dealer Agreement's non-disparagement clause. Sleepy's also asserted claims of fraudulent inducement, slander per se, breach of the implied covenant of good faith and fair dealing, unfair competition, and violation of the Lanham Act. After several months of trial, toward the end of Sleepy's presentation of its case, Select Comfort made its motion for judgment on partial findings pursuant to Federal Rule of Civil Procedure 52(c). On September 26, 2012, the district court, acting as fact-finder, found in Select Comfort's favor on all claims. This appeal followed.[3]

DISCUSSION

We review the district court's findings of fact for clear error and its conclusions of law de novo. MacDraw, Inc. v. CIT Grp. Equip. Fin., Inc., 157 F.3d 956, 960 (2d Cir. 1998).

I. Breach of Contract Claims

Sleepy's alleged that Select Comfort breached § 4(a) of the Dealer Agreement by failure to deliver " first quality merchandise" and § 4(c) by disparaging Sleepy's merchandise and business practices. We agree with the district court that Sleepy's failed to prove a breach of § 4(a), and we therefore affirm the dismissal of the claim based on that provision. As for the claim under § 4(c), however, the district court erred in construing the Dealer Agreement as barring extension of the contract term past the stated expiration date except by written waiver, and dismissing the claim on that basis.

(a) Section 4(a) -- First Quality Merchandise

Sleepy's contends its evidence showed that Select Comfort breached the requirement of § 4(a) of the Dealer Agreement that Select Comfort provide Sleepy's with " first quality merchandise." The parties dispute the meaning of " first quality." Relying on evidence from the contract negotiation, Sleepy's maintains that this term required Select Comfort to provide it with beds that were in no way inferior to the beds sold at Select Comfort stores. Select Comfort contends the generally accepted meaning of the term in product manufacturing is " new, 21 unflawed products which are distinguished from defective or damaged goods." Sleepy's LLC v. Select Comfort Wholesale Corp., No. 07-CV-4018, slip op. at 11 (E.D.N.Y. Sept. 26, 2012). The district court found the term ambiguous and, acting as fact-finder, adopted Select Comfort's construction. The court further found that Select Comfort did not breach its obligation to provide Sleepy's with new, unflawed products.

We need not decide whether the district court properly interpreted the term " first quality." Even if Sleepy's is correct that this clause required Select Comfort to deliver to Sleepy's merchandise that was in no way inferior to what Select Comfort sold in its own stores, Sleepy's failed to establish a breach. The district court found that Sleepy's failed to show that the Personal Preference beds it received were of inferior quality to Select Comfort's Core line. We find no flaw ...


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