Federal Courts Must Referee New York Mattress War

We've all dealt with salespeople who are eager to talk down a competitor's product. But, how far can a salesperson go? This can be an especially thorny issue when retailers enter into business arrangements with one another and assume a contractual duty not to disparage each other's products. A federal court in New York recently examined these issues in the context of an ongoing lawsuit between two well-known mattress retailers.

Sleepy's v. Select Comfort

Sleepy's is a well known New York mattress retail chain. In 2005, Sleepy's signed a retail partnership agreement with Select Comfort, a Minnesota-based manufacturer of adjustable air mattresses. Under the agreement, Sleepy's sold one particular line of Select Comfort mattresses known as “Personal Preference.” These mattress differed from the “Core” line sold directly by Select Comfort in its own retail stores.

After noticing poor sales of the Personal Preference mattresses, Sleepy's officials began to suspect Select Comfort retailers might be disparaging the product. To test this theory, Sleepy's hired “secret shoppers” to go to Select Comfort stores. According to Sleepy's, its shoppers did in fact report that Select Comfort salespeople were claiming the Personal Preference line was “inferior” to the Core brand. The salespeople also claimed Sleepy's improperly stored their mattresses and would not honor its warranties.

Sleepy's informed Select Comfort of these findings and moved to terminate their partnership agreement. Sleepy's then sued Select Comfort for breach of contract and slander. The case was tried, without a jury, before a federal judge in 2012, who ultimately ruled for Select Comfort on all issues.

But, on appeal, the U.S. Second Circuit Court of Appeals partially reversed the trial judge's decision. The appeals court disagreed with the trial judge's finding that Select Comfort had not breached a “non-disparagement” clause in the retail partnership agreement. This is a standard clause found in many business agreements whereby each party agrees not to “impair, infringe upon or adversely affect the character, reputation and good will” of the other party.

Despite the evidence Sleepy's gathered from its secret shoppers, the trial judge held there was no breach because the agreement had already expired. This was a misunderstanding of the contract, the Second Circuit held. Most business agreements contain a specified date the contract will end unless the parties decide otherwise. In this case, through their actions, Sleepy's and Select Comfort continued their relationship for several months after the stated expiration date. It was only after Sleepy's discovered Select Comfort's alleged misconduct that the contract was actually terminated. The Second Circuit therefore ordered the trial judge to reconsider the breach of the non-disparagement clause, together with related claims made by Sleepy's for unfair competition and breach of the implied covenant of good faith.

Sleepy's also accused Select Comfort of “slander per se,” specifically that “Select Comfort salespersons had a practice of defaming Sleepy's merchandise and business practices.” The trial judge dismissed most of the slander claims on the grounds Sleepy's secret shoppers solicited the allegedly defamatory statements. Under New York law, if a person solicits a defamatory statement, he cannot then sue the person for defamation, as the solicitation implies consent.

But, as the Second Circuit explained, New York courts have been inconsistent on this point. Therefore, the appeals court returned the question to the trial judge with additional instructions. Specifically, the judge must determine whether Sleepy's secret shoppers “were motivated by a good faith attempt to learn whether the Select Comfort sales force was carrying on a consistent pattern of slander, or were merely a ruse to decoy Select Comfort into a lawsuit.” And, even if Sleepy's may have solicited some of the slanderous statements, the judge must also look at whether Select Comfort made additional unsolicited statements that were defamatory.

Do You Need Advice?

Business agreements end for a whole host of reasons, most of them unremarkable. But, cases like this illustrate how litigation may occur when one party feels the other has acted outside the boundaries of legal and acceptable conduct. If you find yourself involved in such a dispute and need the assistance of an experienced New York business attorney, contact our offices right away.