15‐3560 (L) Sleepyʹs LLC v. Select Comfort

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT August Term, 2016 (Argued: June 27, 2017 Decided: November 27, 2018) Docket Nos. 15‐3560, 16‐3595

SLEEPYʹS LLC, Plaintiff‐Appellant,

v.

SELECT COMFORT WHOLESALE CORP., SELECT COMFORT RETAIL CORP., SELECT COMFORT CORP., Defendants‐Appellees.

Before: SACK, HALL, AND DRONEY, Circuit Judges.

The plaintiff Sleepyʹs LLC agreed to purchase beds from the Select

Comfort defendants for resale in Sleepyʹs stores. Thereafter, Sleepyʹs began to

suspect that Select Comfort was disparaging both Sleepyʹs stores and the

particular line of Select Comfort beds it sold. It brought suit against Select

Comfort in New York State court, later removed to the United States District

Court for the Eastern District of New York, on several theories of liability,

including slander per se, breach of contract, unfair competition, breach of the 15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

implied covenant of good faith and fair dealing, and the Lanham Act. After a

bench trial, the district court (George C. Platt, Judge) dismissed the action. We

vacated and remanded in part. On remand, the district court (Joanna Seybert,

Judge) again entered a judgment for Select Comfort on the merits and concluded

that attorneyʹs fees were warranted because the case was ʺexceptionalʺ under the

Lanham Act.

Sleepyʹs appeals both the merits determinations and the fee award. We

vacate and remand with respect to the district courtʹs dismissal of Sleepyʹs

slander claims because they had not been ʺpublishedʺ under New Yorkʹs law of

defamation and remand for a determination by the court as to whether the

plaintiff consented to each of the slanderous statements, except for the Zaffron

incident as to which the district court already considered Sleepyʹs consent and as

to which we affirm. As to the fee award, we direct the district court to apply on

remand the standard articulated in Octane Fitness, LLC v. ICON Health & Fitness,

Inc.,

,

(2014), for evaluating whether a Lanham Act

claim is ʺexceptional.ʺ So as to justify the award of legal fees, we also conclude

that the district court erred by not sufficiently explaining or justifying the

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15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

amount of the defendantsʹ attorneyʹs fees awarded under the Act. Accordingly,

the district courtʹs judgment is:

AFFIRMED in part, VACATED in part, and REMANDED.

PAUL D. SARKOZI (Lewis D. Prutzman, on the brief), Tannenbaum Helpern Syracuse & Hirschtritt LLP, New York, NY, for Plaintiff‐ Appellant. ANDREW S. HANSEN (Heidi A.O. Fisher, on the brief), Fox Rothschild LLP, Minneapolis, MN, for Defendants‐Appellees. SACK, Circuit Judge:

At all relevant times, Sleepyʹs LLC (ʺSleepyʹsʺ or the ʺplaintiffʺ) was a bed

and mattress retailer obtaining products for resale from a variety of

manufacturers. In that endeavor, it entered into a ʺRetail Partnershipʺ with

Select Comfort1—a mattress manufacturer and retailer—to sell Select Comfortʹs

ʺPersonal Preferenceʺ line of ʺSleep Numberʺ beds in Sleepyʹs stores. As the

parties were aware, Select Comfort retained exclusive rights to sell its ʺCoreʺ

(rather than Personal Preference) line of Sleep Number beds.

The defendants are Select Comfort Wholesale Corporation, Select Comfort Retail 1

Corporation, and Select Comfort Corporation. We refer to them collectively as ʺSelect Comfort.ʺ 3

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

Sleepyʹs was unhappy with its Personal Preference sales. It suspected that

the poor performance resulted, at least in part, from Select Comfortʹs

disparagement of both Sleepyʹs stores and the Personal Preference line of

products that Sleepyʹs sold. Sleepyʹs CEO therefore arranged for its

representatives to conduct ʺsecret shopsʺ at Select Comfort stores in an attempt

to gather evidence for use in a possible lawsuit against Select Comfort to recoup

the damage Select Comfort had allegedly inflicted on Sleepyʹs business.

Sleepyʹs asserts that its suspicions were confirmed and, accordingly, it

brought this lawsuit. The amended complaint ultimately addressed by the

district court contained ten alleged causes of action under six theories of liability:

(1) breach of contract, (2) breach of the implied covenant of good faith and fair

dealing, (3) unfair competition, (4) slander per se, (5) fraudulent inducement, and

(6) the Lanham Act. After a bench trial, the district court dismissed all the

plaintiffʹs claims. On appeal, we vacated the district courtʹs judgment in part and

remanded the case to the district court. Sleepyʹs LLC v. Select Comfort Wholesale

Corp.,

(2d Cir. 2015). The case was reassigned to another judge

upon its return to the district court. The court again decided in favor of Select

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Comfort on all remaining claims against it and awarded Select Comfort

attorneyʹs fees under the Lanham Act.

Sleepyʹs now argues that the district court improperly dismissed each of its

remaining claims, that attorneyʹs fees should not have been granted, and that in

any event the attorneyʹs fee award was excessive. As to the district courtʹs

dismissal of its claims, we conclude that the court erred in dismissing Sleepyʹs

slander per se claims on the ground that the publication element cannot be met

under New York law when the statement in question is only made to the

plaintiffʹs representative. We therefore vacate the district courtʹs dismissal of

Sleepyʹs slander claims and remand for the court to determine whether Sleepyʹs

consented to the allegedly defamatory statements.

We also vacate the district courtʹs fee award judgment on two grounds:

First, we conclude that Octane Fitness, LLC v. ICON Health & Fitness, Inc.,

,

(2014), which sets forth the standard for determining whether

an award of attorneyʹs fees under the Patent Act is permissible, also applies to

the Lanham Act. We therefore remand to the district court to determine whether

the defendants are entitled to attorneyʹs fees under the Octane Fitness standard.

Second, we conclude that although district courts enjoy broad discretion in

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15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

apportioning attorneyʹs fees under the Lanham Act, they must provide adequate

justification for their apportionment. The district courtʹs award based on its

ʺoverall senseʺ of what is appropriate in light of its familiarity with the lawsuit—

which the district court relied on in the case at bar—is insufficient.

The judgment of the district court is therefore affirmed in part, vacated in

part, and remanded for further proceedings.

BACKGROUND

Factual Background

At all relevant times, Sleepyʹs LLC was a limited liability company

organized under the laws of Delaware. It was a retailer selling to the public a

variety of beds and mattresses manufactured by third parties. The defendants,

Select Comfort Wholesale Corporation, Select Comfort Retail Corporation, and

Select Comfort Corporation, are corporations incorporated under the laws of

Minnesota. Select Comfort manufactures, produces, and sells its own mattresses

and beds. Among its products is the Sleep Number Bed. The bedʹs mattress

contains inflatable air chambers that can be adjusted to provide varying degrees

of support for its userʹs body.

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Beginning in 2000, Select Comfort launched a ʺRetail Partnerʺ program.

Through the program, ʺretail partnersʺ would, pursuant to a contract entered

into with Select Comfort, purchase a line of Select Comfortʹs Sleep Number

mattresses and frames for resale in the partnerʹs retail stores.

On June 17, 2005, Sleepyʹs and Select Comfort executed such an

Agreement. Dealer Agreement, Appʹx 119‐27. During the negotiations

preceding the execution of the contract, representatives of Select Comfort

explained to those of Sleepyʹs that its retail partners sold the ʺPersonal

Preferenceʺ line of Sleep Number beds, which were slightly different from the

model sold in Select Comfortʹs own stores, the ʺCoreʺ line. The primary

difference between these models was the bedframe. The Core line used a plastic‐

polymer frame, while the Personal Preference line used a frame made of wood.

Nevertheless, the district court found that ʺ[t]he technology and basic

components of the Personal Preference Line products were exactly the same as

those of the Core Line, and they were both covered by the same warranty.ʺ

Sleepyʹs LLC v. Select Comfort Wholesale Corp.,

(E.D.N.Y.

2015).

7

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

Sleepyʹs and Select Comfort maintained their retail partnership from June

17, 2005, through January 2007.2 The results of Sleepyʹs efforts to sell the

Personal Preference line of Sleep Number beds were disappointing. The parties

disagreed as to the reason. Select Comfort asserted that the problems were

attributable to Sleepyʹs failure to adequately advertise the product. Sleepyʹs

contended to the contrary, however, that the poor performance was largely the

result of Select Comfortʹs disparagement of the Personal Preference line being

sold by Sleepyʹs.

Beginning in late 2006, Sleepyʹs sought evidence to support its position in

the dispute. It arranged for ʺsecret shopperʺ visits to Select Comfort retail stores

during which persons acting on Sleepyʹs behalf, but pretending to be potential

customers of Select Comfort, asked members of its sales staff about the

differences between the Core bed sold by Select Comfort, and the Personal

Preference line sold by Sleepyʹs. According to the district courtʹs findings of fact,

the first two secret shops were made on November 4, 2006, and November 5,

Although the Dealer Agreement expired on September 30, 2006, Sleepyʹs continued 2

to sell Sleep Number beds for several additional months.

8

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

2006, respectively. 3 See Sleepyʹs LLC, 133 F. Supp. 3d at 489‐91. Sleepyʹs first

secret shopper, Anthony Colon, alleged that a Select Comfort salesperson told

him that Select Comfortʹs Core line of Sleep Number beds was superior to

Sleepyʹs Personal Preference line because, among other things, the Core line was

ʺmade to orderʺ and more comfortable.

Sleepyʹs second secret shopper was a

Sleepyʹs district manager, Deborah Zaffron, who asserted that she was told by a

Select Comfort salesperson that Sleepyʹs Personal Preference line was inferior, at

least in part because Sleepyʹs mattresses were stored in a warehouse, its box

springs could warp and break, and its beds were generally not protected by a

warranty.

at 491‐92.

On November 6, 2006, Sleepyʹs founder and Chief Executive Officer Harry

Acker was told about the results of the initial secret shops during a conference

call with Sleepyʹs personnel, which was recorded. He said:

This may be an enormous, fabulous lawsuit for Sleepyʹs to collect damages . . . . This may be very good because if we start getting involved in a lawsuit especially in a class action and its gets publicity it will not be good for them. This cannot help them at all in the industry. It

There is some confusion in the record, however, as to whether the first shop occurred 3

on September 4, 2006 or November 4, 2006. Sleepyʹs LLC,

n.8. The discrepancy is immaterial. 9

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

wonʹt mean a thing to the consumer, but it will for people who want to do business with [Select Comfort].

(internal citation omitted). Acker ordered additional secret shops,

adding that there was ʺa good chance that [Sleepyʹs] can sue this man personally

for defamation and slander. Make a note that we can sue him.ʺ4

(internal

citation omitted).

Thereafter, between November 8, 2006, and February 6, 2007, Sleepyʹs

conducted approximately ten additional secret shops.

at 492‐94. Sleepyʹs

alleges that its secret shoppers were told by members of Select Comfortʹs sales

staff that the Core lineʹs plastic‐polymer frame was superior to the Personal

Preference lineʹs wood frame because it was stronger, sturdier, fresher, and less

likely to warp or sag.

Some secret shoppers said that they had been told by

sales personnel at Select Comfort stores that Sleepyʹs beds are exposed to

moisture, pests, and allergens as a result of their having been stored in a

warehouse; that Sleepyʹs offered inferior warranty terms; and that it is preferable

to buy from the manufacturer directly to avoid Sleepyʹs ʺknockoffs.ʺ

.

It is not clear from the transcript or the district courtʹs opinion to whom Acker is 4

referring as ʺthis man.ʺ 10

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

On January 3, 2007—before most of the additional secret shops were

made—Sleepyʹs executives presented Select Comfort with the findings from its

initial secret‐shopper investigation. Sleepyʹs threatened litigation unless it

received a letter from Select Comfort to the effect that it would cease making

disparaging comments about the Personal Preference line of Sleep Number beds

sold in Sleepyʹs stores. In response, Select Comfortʹs executives insisted that no

such letter was necessary because the Dealer Agreement already contained non‐

disparagement provisions.5 On January 11, 2007, as Sleepyʹs additional secret

shops began, Select Comfort notified Sleepyʹs that it was terminating the retail

That was apparently not true. The Dealer Agreement contained a unilateral non‐ 5

disparagement provision that protected Select Comfort from a retail partnerʹs efforts to divert customers from Select Comfortʹs retail stores:

[Sleepyʹs will] [n]ot disparage Select Comfort or any product distributed through Select Comfortʹs retail stores or any of Select Comfortʹs other retail partners and not interfere with any of Select Comfortʹs retail storeʹs [sic] relationships with customers or potential customers[.]

Dealer Agreement, Section 3(j), Appʹx 120. Although a sentence in the warranty provision did prohibit both parties from ʺimpair[ing], infring[ing] upon or adversely affect[ing] the character, reputation and good will (collectively the ʹBrand Imageʹ) of the other party,ʺ

at Section 4(c), Appʹx 121, we agree with the district court that this sentence only applied to the warranty services, and not the mattresses themselves. See Sleepyʹs LLC, 133 F. Supp. 3d at 495‐96. 11

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

partnership, which had been slated in the Dealer Agreement to terminate in

September 2006.

Procedural History

On March 21, 2007, Sleepyʹs instituted this litigation in New York State

Supreme Court, Nassau County. About six months later, on September 25, 2007,

Select Comfort removed it to the United States District Court for the Eastern

District of New York on grounds of diversity of citizenship. On February 8, 2008,

the district court denied a motion by Select Comfort to dismiss the complaint.

On January 6, 2010, Sleepyʹs filed an amended complaint comprising ten causes

of action: two for breach of contract alleging that Select Comfortʹs statements

violated the Dealer Agreement; one for fraudulent inducement alleging that

Select Comfort misrepresented the quality of the Personal Preference line during

contract negotiations; four for slander per se alleging that specified statements

made to secret shoppers were defamatory; one for breach of the implied

covenant of good faith and fair dealing alleging that Select Comfort acted in bad

faith; one for unfair competition alleging that Select Comfort misappropriated its

commercial advantage in bad faith; and one for a violation of the Lanham Act,

12

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et seq., alleging that Select Comfort gave false and misleading

descriptions of Sleepyʹs products.

In March 2012, the district court (George C. Platt, Judge) began a bench trial

on the plaintiffʹs claims. After Sleepyʹs presented its evidence and rested its case,

Select Comfort moved under Federal Rule of Civil Procedure 52(c) for judgment

upon partial findings of fact. The district court granted the motion, deciding in

favor of Select Comfort on all claims that remained in dispute. Sleepyʹs LLC v.

Select Comfort Wholesale Corp., No. 07‐cv‐4018,

, at *50

(E.D.N.Y Sept. 26, 2012).

Sleepyʹs appealed the judgment, and this Court affirmed in part, vacated

in part, and remanded with instructions to the district court to engage in further

factfinding. Sleepyʹs LLC,

. We vacated the district courtʹs decision

as to the unfair competition and breach of contract claims, which had been

dismissed in the district court on the ground that ʺSleepyʹs had presented no

evidence of hostile conduct that took place prior to the expiration date [of the

Dealer Agreement] of September 30, 2006.ʺ

. We concluded that the

district courtʹs ruling was clearly erroneous because it rested on the mistaken

understanding ʺthat the [Dealer] Agreement could not be extended except by

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written waiver and therefore necessarily ended on September 30, 2006.ʺ

Because the partiesʹ relationship in fact extended well beyond the formal

termination date specified in the Dealer Agreement, we vacated and remanded

that part of the district courtʹs order for consideration of whether the Dealer

Agreementʹs non‐disparagement clause prohibited Select Comfortʹs statements.

We also vacated the district courtʹs order dismissing Sleepyʹs slander per

se claims, which had been based on the courtʹs understanding ʺthat Sleepyʹs

solicited the allegedly defamatory statements and was therefore deemed in law

to have consented to them, which precluded suit.ʺ

. We concluded that

the district courtʹs judgment was ʺbased on an incorrect understanding of the

New York law of defamation,ʺ under which ʺ[a]n honest inquiry or investigation

by the person defamed to ascertain the existence, source, content or meaning of a

defamatory publication is not a defense to an action for its republication by the

defamer.ʺ

(internal quotation marks omitted). Accordingly, we remanded

with instructions to the district court to ʺmake findings . . . as to whether Sleepyʹs

[secret‐shopper] inquiries were motivated by a good faith attempt to learn

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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.ʺ

.

On remand to the district court, the case was reassigned to Judge Joanna

Seybert. The parties agreed that the record that had been compiled before Judge

Platt prior to the appeal was complete for purposes of Judge Seybertʹs

consideration of the matter on remand, except for the testimony of two expert

witnesses. The district court therefore heard these witnessesʹ testimony on July

21 and 22, 2015.

On September 22, 2015, the district court again decided in favor of Select

Comfort on all its remaining claims. Sleepyʹs LLC, 133 F. Supp. 3d at 495‐502.

Specifically, the district court dismissed Sleepyʹs claim that Select Comfort

breached the non‐disparagement clause contained in § 4(c) of the Dealer

Agreement on the ground that ʺthe mutual obligation on the parties to not

impair the respective brand image of their counterpart[] relates solely to the

warranty service provided by Select Comfort in connection with the Personal

Preference line.ʺ Id. at 495‐96. The court concluded with respect to Sleepyʹs

claim for breach of the implied covenant of good faith and fair dealing, that the

Dealer Agreement was a sales contract that ʺis subject to the Uniform

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15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

Commercial Code, which imposes an obligation of good faithʺ but ʺdoes not

beget a separate cause of action.ʺ Id. at 497 (internal quotation marks omitted).

With respect to the unfair competition claim, the district court determined that

ʺSelect Comfortʹs sales representatives sought to distance their own products

from those of the Personal Preference [l]ine; they endeavored to maximize their

own competitive advantage, not usurp Sleepyʹs.ʺ Id. at 502. The district court

acknowledged that Sleepyʹs claims might amount to product disparagement, but

not unfair competition as alleged. Id.

Finally, regarding Sleepyʹs slander claims, the district court held that ʺall of

[Sleepyʹs] claims for slander per se failʺ because ʺ[i]n all of the instances pleaded

in the Amended Complaint, the allegedly defamatory statement was made only

to Sleepyʹs representatives,ʺ and ʺ[a] defamatory writing is not published if it is

read by no one but the defamed.ʺ Id. at 499 (emphasis in original) (internal

quotation marks omitted). Although the district court identified one instance in

which a third party may have overheard a potentially slanderous statement, the

court dismissed it on the ground that Sleepyʹs consented to the statement by

eliciting it in bad faith. Id. at 499‐500; see also id. at 500 (ʺ[B]ecause the evidence

shows that Sleepyʹs was both virtually certain that its inquiry would elicit

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allegedly slanderous statements and substantially motivated by the desire to

bolster a contemplated lawsuit, Sleepyʹs consented to the publication of these

allegedly defamatory statements.ʺ).

After the completion of this second bench trial, Select Comfort moved for

$4,539,305.93 in attorneyʹs fees as the prevailing party in a Lanham Act case. The

district court granted Select Comfortʹs request for fees in principle, finding that

ʺthere are substantial overtone[s] to suggest that the case was filed as a

competitive ploy.ʺ Sleepyʹs LLC v. Select Comfort Wholesale Corp., No. 07‐cv‐4018,

, at *4,

, at *12 (E.D.N.Y Jan. 11, 2016)

(brackets in original) (internal quotation marks omitted) (memorandum and

order granting motion for attorneyʹs fees). In the district courtʹs view, ʺSleepyʹs

had undertaken a mission to gather ammunition for a future lawsuit against

Select Comfort,ʺ making this an ʺexceptional caseʺ for which fees are available

under the Lanham Act.

(internal quotation marks omitted).

The district court did not, however, decide the amount of the fee award.

Instead, it referred the case to United States Magistrate Judge Arlene R. Lindsay

for her to determine the appropriate amount of attorneyʹs fees to be awarded.

The magistrate judge made findings of fact and recommended an award in the

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15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

amount of $3,507,388.65. Sleepyʹs LLC v. Select Comfort Wholesale Corp., No. CV

07‐4018 (JS)(ARL),

,

, at *28‐29

(E.D.N.Y. Aug. 8, 2016), report and recommendation adopted in part, rejected in part,

(E.D.N.Y. 2016). The magistrate judge rejected Sleepyʹs

argument that fees related to defending the Lanham Act claim should be

separated from fees defending the non‐Lanham Act claims because, as the

magistrate judge decided, all the plaintiffʹs claims rested on a common set of

operative facts and were ʺsufficiently intertwinedʺ to permit full recovery.

at

*19‐20.

The district court adopted these findings in part, ultimately awarding

Select Comfort seventy‐five percent of the magistrate judgeʹs recommended fee

award, or $2,630,541.04. Sleepyʹs LLC v. Select Comfort Wholesale Corp.,

, 179‐80 (E.D.N.Y. 2016). The court called it ʺbeyond cavil that

Plaintiffʹs [Lanham Act and non‐Lanham Act] claims share common facts.ʺ

. But it did not agree with the magistrate judge that those claims were so

intertwined that it would be impossible to apportion fees between those claims.

It determined, instead, that a twenty‐five percent reduction would be

18

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

reasonable based on what it called its ʺoverall sense of th[e] suit.ʺ

at 179‐80

(internal quotation marks omitted).

In this appeal, Sleepyʹs challenges both the merits determination and the

fee determination. Regarding the merits, Sleepyʹs argues: First, that the district

court erroneously held that the publication element of a cause of action for

slander cannot be met under New York law when the statement is made to the

defamed partyʹs agent. Second, that the district court mistakenly dismissed its

breach‐of‐contract claim by disregarding parol evidence that the parties intended

the non‐disparagement clause in § 4(c) of the Dealer Agreement to apply in non‐

warranty contexts. Third, that contrary to the district courtʹs conclusion, Select

Comfort breached the implied covenant of good faith and fair dealing under

Minnesota state law. Fourth, that the district court erred by ruling in Select

Comfortʹs favor on the unfair competition claim by disregarding evidence

showing that Select Comfort in fact misappropriated Sleepyʹs ʺcommercial

advantage.ʺ Appellantʹs Brief 28.

Sleepyʹs also appeals the fee award against it on three grounds: First, it

argues that the district court erred when it determined that Sleepyʹs Lanham Act

claim was ʺexceptionalʺ and therefore supported a punitive fee award. Second,

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Sleepyʹs contends that the district court abused its discretion by apportioning

seventy‐five percent of the magistrate judgeʹs recommended fee award when the

Lanham Act claim was but one of ten causes of action alleged in the complaint.

Third, Sleepyʹs argues that the district court incorrectly reviewed part of the

magistrate judgeʹs recommendations and findings for clear error, rather than de

novo.

DISCUSSION

We review findings of fact after a bench trial for clear error and

accompanying conclusions of law de novo. MacDraw, Inc. v. CIT Grp. Equip. Fin.,

Inc.,

(2d Cir. 1998). With respect to the appeal from the fee

award, we review the district courtʹs decision for abuse of discretion. Matthew

Bender & Co., Inc. v. West Publʹg Co.,

(2d Cir. 2001).

I. The Merits Determination

We affirm the district courtʹs decision to dismiss Sleepyʹs breach of

contract, unfair competition, and implied covenant of good faith and fair dealing

claims for the reasons relied upon by the district court. As to its dismissal of

Sleepyʹs slander claims, however, we vacate the district courtʹs judgment insofar

as it dismisses Sleepyʹs slander claims because the communication in question

20

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had not been ʺpublished.ʺ We instruct the district court, on remand, to

reexamine whether Sleepyʹs consented to the slander claims.

Under New York law, the elements for a slander cause of action are ʺ(i) a

defamatory statement of fact, (ii) that is false, (iii) published to a third party,

(iv) ‘of and concerning’ the plaintiff, (v) made with the applicable level of fault

on the part of the speaker, (vi) either causing special harm or constituting slander

per se, and (vii) not protected by privilege.ʺ Albert v. Loksen,

, 265–66

(2d Cir. 2001). The district court held that ʺall of Plaintiffʹs claims for slander per

se failʺ because the publication element cannot be met when the defamatory

statements were ʺmade only to Sleepyʹs representatives.ʺ Sleepyʹs LLC,

(emphasis in original). Although the court concluded that there

may have been one instance in which a third party overheard the defamatory

statement, when Zaffron called Select Comfort in the presence of a customer who

heard the disparaging remarks, satisfying the publication element, it held that

Sleepyʹs consented to that statement, barring Sleepyʹs slander claim.

.

Sleepyʹs argues that the district court erroneously determined that the

publication requirement could not be satisfied under New York law if a

defamatory statement was made to the defamed companyʹs representatives. We

21

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agree. In Teichner v. Bellan,

(4th Depʹt 1959), a New York

Appellate Division explained:

There are decisions in some States that a communication of defamatory matter to an agent of the person defamed in response to an inquiry does not constitute a publication to a third person . . . [b]ut the better view seems to us to be that taken in another line of cases, holding that the communication to the plaintiff’s agent is a publication, even though the plaintiff’s action may ultimately be defeated for other reasons. The agent is, in fact, a different entity from the principal; the communication to the agent is, in fact, a publication to a third person.

Id. at 249 (emphasis added) (internal citations omitted); see also 43A N.Y. Jur. 2d

Defamation & Privacy § 94 (ʺNew York . . . adheres to the view that

communication to an agent of the defamed party constitutes publication . . . .ʺ);

cf. Ostrowe v. Lee,

(1931) (deciding that a statement made to the

slandererʹs agent constituted publication). Although the New York Court of

Appeals does not appear to have addressed whether statements to a plaintiffʹs

agent constitute publication, this court is ʺbound . . . to apply the law as

interpreted by New Yorkʹs intermediate appellate courts . . . unless we find

persuasive evidence that the New York Court of Appeals . . . would reach a

different conclusion.ʺ Zaretsky v. William Goldberg Diamond Corp.,

(2d Cir. 2016) (brackets and internal quotation marks omitted). Relying on

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Teichner and finding no reason to think that the New York Court of Appeals

would decide otherwise, we conclude that Select Comfortʹs statements could

meet the publication element notwithstanding the fact that they were made to

Sleepyʹs representatives. We, therefore, vacate the district courtʹs dismissal of the

plaintiffʹs slander claims, since the dismissals were based on the conclusion that

the alleged slanderous statements were not ʺpublishedʺ under New York law.

We nevertheless remand the matter to the district court for it also to

consider whether Sleepyʹs consented to the utterance of each of those statements.

In our previous decision, we observed:

When a plaintiff sues for defamation based on a statement of the defendant elicited by the plaintiff with some reason to expect that the defendantʹs statement might be defamatory, the more the evidence supports the proposition that the plaintiff elicited the statement with a high degree of certainty that it would be defamatory, for the purpose of enabling a lawsuit, the stronger the defendantʹs case for deeming the statement consented to, thus barring the claim. Sleepyʹs LLC,

; see also Teichner,

(ʺ[A] plaintiff

who had authorized an agent to make an inquiry on his behalf is not to be

charged with consent to a defamatory statement made in reply to the inquiry,

unless he had reason to anticipate that the response might be a defamatory one. . . .ʺ

(emphasis added)).

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The district court did, in fact, consider whether Sleepyʹs consented to one

of the allegedly slanderous statements: when Zaffron called Select Comfort in the

presence of a customer who overheard the disparaging remarks. Sleepyʹs LLC,

133 F. Supp. 3d at 499‐500. The district court found that ʺthe evidence shows that

Sleepyʹs was both virtually certain that its inquiry would elicit allegedly

slanderous statements and substantially motivated by the desire to bolster a

contemplated lawsuit.ʺ Id. at 500. The district court relied on the fact that the

incident occurred after Ackerʹs statements of November 6, 2006, when he

expressed his intent to sue Select Comfort. Id. We therefore agree with the

district courtʹs conclusion that Sleepyʹs consented to the disparaging statements

with regards to the Zaffron incident and, to that extent, affirm the district courtʹs

judgment.

The district court did not, however, expressly decide whether Sleepyʹs

consented to the remaining slanderous statements. In its opinion, the court

noted that ʺ[t]hough it need not visit the issue, the Court suspects that even if

Plaintiffʹs other claimed instances of slander per se had been published, those

claims would nonetheless be barred for the same reasons that any claim arising

out of the Zaffron incident is.ʺ Sleepyʹs LLC,

n.19. We

24

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

direct the district court, on remand, to make a determination as to whether

Sleepyʹs consented to the remainder of the relevant statements and to determine

whether, for that reason, those claims were properly dismissed.

II. Fee Award Determination

Sleepyʹs also argues that the district court made errors regarding its fee

determination, both in finding that Select Comfort was entitled to any legal fees

as the prevailing party of an ʺexceptionalʺ Lanham Act case and in the amount of

the award. We agree. Although the inquiry may change somewhat depending

on the courtʹs determination of the substantive issues we are remanding to it, we

nonetheless review it here both because the result may not change, and also

because a review of the fee award will likely be useful and effective even if the

damage award changes.

1. ʺExceptional Caseʺ Under the Lanham Act

Under Section 35(a) of the Lanham Act,

(a), a court ʺmay

award reasonable attorneyʹs fees to the prevailing partyʺ in ʺexceptional cases.ʺ

We have observed previously that the Lanham Act allows recovery of reasonable

attorneyʹs fees only ʺon evidence of fraud or bad faith.ʺ Twin Peaks Prods., Inc. v.

Publications Intl, Ltd.,

, 1383 (2d Cir. 1993) (quoting Transgo, Inc. v.

25

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Ajac Transmission Parts Corp.,

, 1014 (9th Cir. 1985), cert. denied,

(1986)); see also Sterling Drug, Inc. v. Bayer AG,

(2d Cir.

1994). We have also affirmed a district courtʹs decision to award attorneyʹs fees

under the Lanham Act if the lawsuit was ʺinitiated as a competitive ploy,ʺ

Mennen Co. v. Gillette Co.,

(S.D.N.Y. 1983), affʹd,

(2d Cir. 1984), or commenced ʺin bad faith merely to join in the profits from

[the defendant],ʺ Universal City Studios, Inc. v. Nintendo Co.,

(2d

Cir. 1986). The district court relied on these decisions in concluding that this case

was ʺexceptional.ʺ Sleepyʹs LLC,

, at *4,

, at *12.

In Octane Fitness, LLC v. ICON Health & Fitness, Inc.,

,

(2014), the Supreme Court considered the meaning of ʺexceptional caseʺ

under the attorneyʹs fees provision in the Patent Act,

– a

provision that is identical to the Lanham Actʹs attorneyʹs fees provision. Octane

Fitness,

. It concluded that ʺan ʹexceptionalʹ case is simply one that

stands out from others with respect to the substantive strength of a partyʹs

litigating position (considering both the governing law and the facts of the case)

or the unreasonable manner in which the case was litigated.ʺ

The Court

26

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encouraged district courts considering the question to evaluate the totality of the

circumstances, considering a wide variety of factors, including ʺfrivolousness,

motivation, objective unreasonableness (both in the factual and legal components

of the case) and the need in particular circumstances to advance considerations

of compensation and deterrence.ʺ

at 1756 n.6 (quoting Fogerty v. Fantasy, Inc.,

, 534 n.19 (1994)).

Many federal circuit courts, including the Third, Fourth, Fifth, Sixth,

Ninth, and Federal Circuits, have since concluded that Octane Fitness applies to

the Lanham Actʹs attorneyʹs fees provision.6 See Romag Fasteners, Inc. v. Fossil,

Inc.,

, 1334‐36 (Fed. Cir. 2017); SunEarth, Inc. v. Sun Earth Solar Power

Co., Ltd.,

(9th Cir. 2016); Baker v. DeShong,

, 622–

25 (5th Cir. 2016); Georgia‐Pacific Consumer Prods. LP v. von Drehle Corp.,

, 720‐21 (4th Cir. 2015), as amended (Apr. 15, 2015); Slep‐Tone Entmʹt Corp. v.

Karaoke Kandy Store, Inc.,

, 317‐18 (6th Cir. 2015); Fair Wind Sailing,

These courts observed, as we have above, that the language of the Lanham Act and 6

Patent Act is identical, Romag Fasteners, Inc.,

; Baker, 821 F.3d at 622‐25; Georgia‐Pacific Consumer Prods. LP,

; Slep‐Tone Entmʹt Corp.,

; Fair Wind Sailing, Inc., 764 F.3d at 313‐15, that Congress specifically mentioned the Patent Act when passing the Lanham Act, Romag Fasteners, Inc., 866 F.3d at 1335‐36; Baker,

; Fair Wind Sailing, Inc., 764 F.3d at 314‐15, and that the statutes have parallel structure and purpose, Baker,

. 27

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

Inc. v. Dempster,

, 313‐15 (3d Cir. 2014). We now join them,

concluding that under the Lanham Act, an exceptional case is one that stands out

from others in the manner articulated by Octane Fitness,

. It is on

that basis that we vacate the district courtʹs holding that Sleepyʹs brought an

exceptional case under our prior Lanham Act precedent and remand for a new

determination under Octane Fitness.7

2. Fee Award

Sleepyʹs also objected to the amount of the fee award: seventy‐five percent

of Select Comfortʹs total attorneyʹs fees through September 25, 2012. We find the

district courtʹs high apportionment based solely on the empty, but eventually

abandoned, Lanham Act claim puzzling at best.

It is not altogether clear to us that the case at bar was ʺfrivolous[]ʺ or improperly 7

ʺmotivat[ed].ʺ Octane Fitness,

n.6. Sleepyʹs claims survived summary judgment and were only dismissed after a bench trial on a motion for judgment on partial findings under Federal Rule of Civil Procedure 52(c). On appeal, we revived the unfair competition, breach of contract, and slander per se claims. And although Ackerʹs comments strike us as objectionable and inappropriate, it is not self‐evident that they alone could convert an otherwise‐reasonable response to possible defamation (investigation and litigation) into a bad‐faith competitive ploy. But the district court must decide this in the first instance—in conjunction with other relevant factors, such as Sleepyʹs spoliation—a decision to which we will owe deference in the event of a further appeal.

28

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If the district court determines that no attorneyʹs fee award is warranted

under Octane Fitness, of course that will be the end of the matter, subject to

further appeal if any. But if it again decides the case is ʺexceptionalʺ under the

Lanham Act, and that awarding attorneyʹs fees is therefore warranted, we think

it must revisit its approach to determining the amount of the award.

When the award of attorneyʹs fees is justified, the district court must, of

course, calculate the amount of the fees to which a prevailing party is entitled.

Depending on the facts of the case, this can be challenging, there being no pole

star by which the court can steer a true course. But the district court here

correctly noted that ʺ[t]he prevailing party in a multi‐claim case which includes

both Lanham Act and non‐Lanham Act counts should be entitled to attorney fees

only for work expended in prosecuting or defending the Lanham Act counts.ʺ

Sleepyʹs LLC,

(emphasis added) (quoting N.Y. State Soc. of

Certified Pub. Acct. v. Eric Louis Assocs., Inc.,

(S.D.N.Y.

1999)); see also Gracie v. Gracie,

(9th Cir. 2000) (ʺ[W]e hold that

as a general matter, a prevailing party in a case involving Lanham Act and non‐

Lanham Act claims can recover attorneysʹ fees only for work related to the

Lanham Act claims.ʺ); U.S. Structures, Inc. v. J.P. Structures, Inc.,

,

29

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1193 (6th Cir. 1997) (ʺ[U]nder

(a), attorneysʹ fees are recoverable

only for work performed in connection with claims filed under the Lanham

Act.ʺ). Limiting Lanham Act recovery to Lanham Act work ʺcomports with the

background rule in America—the prevailing party usually cannot recover fees

absent statutory authority.ʺ Procter & Gamble Co. v. Amway Corp.,

(5th Cir. 2002).

The Fifth and Ninth Circuits have created a narrow exception to this rule,

concluding that the prevailing party may recover for total attorneyʹs fees

incurred in a litigation containing both Lanham Act and non‐Lanham Act claims

if ʺthe Lanham Act claims and non‐Lanham Act claims are so intertwined that it

is impossible to differentiate betweenʺ them. Gracie,

(emphasis in

original) (internal quotation marks omitted); see also Procter & Gamble Co.,

(5th Cir. 2002). Nevertheless, as the Ninth Circuit recognized:

[T]he impossibility of making an exact apportionment does not relieve the district court of its duty to make some attempt to adjust the fee award in an effort to reflect an apportionment. In other words, apportionment or an attempt at apportionment is required unless the court finds the claims are so inextricably intertwined that even an estimated adjustment would be meaningless. Gracie,

(third emphasis added).

30

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

We would approach this ʺinextricably intertwinedʺ line of reasoning with

great care were we to address today whether or not to adopt the Fifth and Ninth

Circuitsʹ exception. Indeed, permitting full recovery for both Lanham Act and

non‐Lanham Act claims because of the difficulty of differentiating between them

could permit, as might be the case here, a very small Lanham Act tail to

improperly wag a huge attorneyʹs‐fee dog. But we need not opine on this

possibly fraught approach here because the district court in the case before us

concluded, correctly we think, that the claims here ʺare not ʹso inextricably

intertwined that even an estimated adjustment would be meaningless.ʹʺ Sleepyʹs

LLC,

(emphasis added) (quoting Gracie,

).

Although we agree with the district court that the Fifth and Ninth Circuitʹs

exception, even were we to adopt it, does not apply here, we nevertheless vacate

its fee award for its failure to provide a rationale for its apportionment decision

sufficient to enable us to fulfill our responsibility to provide a meaningful

review. See Perdue v. Kenny A. ex rel. Winn,

(2010) (ʺDetermining

a ʹreasonable attorneyʹs feeʹ is a matter that is committed to the sound discretion

of a trial judge, but the judgeʹs discretion is not unlimited. It is essential that the

judge provide a reasonably specific explanation for all aspects of a fee

31

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

determination . . . . Unless such an explanation is given, adequate appellate

review is not feasible.ʺ (internal citation omitted)); Konits v. Valley Stream Cent.

High Sch. Dist., 350 F. Appʹx 501, 504 (2d Cir. 2009) (summary order) (ʺBecause

we do not have such explanations to review, we cannot tell whether the court

abused its discretion in reaching the determination to reduce by one third the

attorney hours expended before [a specified date].ʺ). The district court devoted

significant time and care to describing the relevant legal standards and why the

facts of this case render apportionment difficult. Unfortunately, it then

summarily concluded that ʺ[b]ased on [its] overall sense of this suit,ʺ8 it would

ʺapportion seventy‐five percent (75%) of the time billed through September 25,

2012, as time spent in relation to the Lanham Act claim.ʺ Sleepyʹs LLC,

(internal quotation marks and brackets omitted). The district

court provided no explanation to justify its apportionment; instead, it simply

cited Fox v. Vice,

(2011), which noted that ʺ[t]he essential goal in

Judge Seybertʹs involvement in this case began long after the Lanham Act claim had 8

been abandoned, further limiting our ability to accept her general and essentially unexplained apportionment decision. See Konits, 350 F. Appʹx at 504 (ʺ[D]iscretionary reductions for limited success may be appropriate, but the district court did not provide an adequate explanation for the reductions, particularly in view of the judgeʹs comparatively limited involvement in the case which would reduce his exposure to counselʹs work over the full life of the litigation . . . .ʺ).

32

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

shifting fees [to either party] is to do rough justice, not to achieve auditing

perfection.ʺ The goal may be rough justice, but it is justice still. And thus, some

explanation is required.9 Instead of untying this Gordian Knot, the district court

seemed to cut it. We can neither untie nor retie it ourselves.

We are more familiar than we would care to be with complaints containing

hopeless claims thrown in for reasons we can only guess. Here, the plaintiff

brought what appears to be just such an all‐but‐the‐kitchen‐sink complaint,

comprising ten causes of action and six theories of liability, only the last of which

purportedly arose under the Lanham Act. Pl. Am. Compl., Appʹx 108‐116.

Indeed, in the introductory portion of the Amended Complaint, which generally

summarized the plaintiffʹs claims to follow, the plaintiff did not so much as

It is not at all clear to us why the district court found seventy‐five percent of the fees 9

to be reasonable. The district court acknowledged in its fee determination opinion that ʺcertain of Plaintiffʹs claims were based on legal theories and/or factual allegations distinct from those underlying the Lanham Act claims,ʺ including the breach of contract, unfair competition, fraudulent inducement, and implied covenant of good faith and fair dealing claims – five of the ten causes of action, and four of the six theories of liability. Sleepyʹs LLC,

. In fact, the only claims the district court did not identify as distinct from the Lanham Act claims for the purposes of the fee award determination were the plaintiffʹs four slander per se claims.

33

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

mention the Lanham Act. 10 Id. at 97. Moreover, in 2013, when the plaintiff first

appealed this case to this Court, it in effect abandoned its Lanham Act claim by

not appealing the district courtʹs dismissal of it. Sleepyʹs LLC,

n.3

(2d Cir. 2015) (noting the absence of an appeal with respect to the Lanham Act

and fraudulent inducement claims in the plaintiffʹs 2013 brief). These factors

suggest that the Lanham Act claim was not the central thrust of the plaintiffʹs

lawsuit—nor a massive burden on the defendantsʹ defense—and therefore may

not have accounted for most—or even much—of the attorneysʹ work. Of course,

The plaintiff described the ʺNature of the Actionʺ in its First Amended Complaint, in 10

its entirety, as follows:

Nature of the Action This is an action to recover the damages Sleepyʹs suffered as a result of the tortious acts and breaches of contract that Select Comfort committed while Sleepyʹs was its ʺRetail Partner.ʺ Select Comfort entered into a dealer agreement with Sleepyʹs and induced Sleepyʹs to commit valuable resources to promote and popularize Select Comfortʹs products. As set forth herein, through a concerted pattern of defamation and disparagement of Sleepyʹs products and Sleepyʹs, express breaches of the dealer agreement, fraudulent misrepresentations, breach of the implied covenant of good faith and fair dealing contained in the dealer agreement, and unfair competition in violation of federal and New York law, Select Comfort damaged Sleepyʹs and effectively deprived it of the benefits of the dealer agreement.

Pl. Am. Compl., Appʹx 97.

34

15‐3560, 16‐3595 Sleepyʹs v. Select Comfort

the district court may have reasons for concluding otherwise, but it must tell us

what they are before we attempt to further evaluate its decision.

We therefore vacate the judgment as to the attorneyʹs fees award, and

remand it to the district court to determine de novo whether the defendants are

entitled to attorneyʹs fees under the Octane Fitness standard, and, if so, to explain

what amount of attorneyʹs fees would reflect the proportion of Select Comfortʹs

legal efforts spent defending against the Lanham Act claim.11

CONCLUSION We have considered the partiesʹ remaining arguments on appeal and

conclude that they are without merit. For the foregoing reasons, we AFFIRM the

judgment of the district court in part, VACATE the judgment of the district court

in part, and REMAND this matter to that court for further proceedings.

While the issue is for the district court to address in the first instance upon remand, 11

a useful starting point might reflect the fact that the Lanham Act claim was one of ten causes of action, or one of six theories of liability; that percentage can then be adjusted to account for common sets of facts, similar theories of liability, or other factors. But of course, the district court must decide its method and make its determination in the first instance, subject to our possible subsequent—albeit deferential—review. 35