Sleepy's LLC v. Select Comfort Wholesale Corp.

Citations: 222 F. Supp. 3d 169; 2016 U.S. Dist. LEXIS 138410; 2016 WL 8672951Docket: 07-CV-4018(JS)(ARL)

Court: District Court, E.D. New York; September 30, 2016; Federal District Court

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Magistrate Judge Arlene R. Lindsay has issued a Report and Recommendation (R. R.) regarding the defendants—Select Comfort Corporation and its affiliates—request for attorneys’ fees, totaling $3,507,388.65. The plaintiff, Sleepy’s LLC, has filed objections to this recommendation. The Court has partially overruled and sustained these objections and has adopted and rejected parts of the R. R. 

The case originated from claims initiated by Sleepy’s against Select Comfort, including breach of contract and fraudulent inducement, stemming from a sales agreement that authorized Sleepy’s to sell Select Comfort’s products. Following a bench trial, Select Comfort's motion for judgment was granted on all claims, leading to partial appeals and a remand, where four claims remained. Ultimately, the Court dismissed these remaining claims on September 22, 2015.

On November 5, 2015, Select Comfort filed for attorneys’ fees under the Lanham Act, asserting the case was exceptional. The Court agreed on January 11, 2016, but did not set an amount at that time. Select Comfort subsequently requested $4,483,755.57 in fees on February 19, 2016, which Sleepy’s opposed, arguing that fees should be limited to those related specifically to the Lanham Act claim. The motion was then referred to Judge Lindsay for further recommendation on the fee amount.

On August 8, 2016, Judge Lindsay issued a recommendation regarding the defendant's motion for attorneys’ fees and costs, suggesting a reduction from the amount requested. The defendant was represented by Oppenheimer Wolff, which later merged with Fox Rothschild LLP, and also retained Olshan Frome Wolosky LLP and Bryan Cave LLP as local counsel. The recommendation noted that Oppenheimer's billing rates should remain unchanged; however, fees for the time billed by attorneys Thomas Marek and Sally Tange were not awarded due to insufficient information about their roles. Similarly, fees for Olshan Frome and Bryan Cave were not awarded because of a lack of data on their qualifications.

Judge Lindsay rejected the plaintiff's argument that fees should be limited to work related to the Lanham Act claim, concluding that the claims were too intertwined to separate. She noted that the plaintiff's ten claims were based on a unified set of facts and a common theory of unfair business practices. Fees incurred after the dismissal of the Lanham Act claim on September 25, 2012, were not recommended for award. A ten percent reduction of Oppenheimer's hours prior to September 26, 2012, was recommended to account for duplicative work. Fees for preparing the motion for attorneys’ fees were also recommended to be awarded with a ten percent reduction.

Regarding costs, Judge Lindsay recommended awarding travel and meal expenses with a fifty percent reduction, as well as online research costs. After adjustments, the total recommended attorneys’ fees and costs amounted to $3,507,388.05.

In response, the plaintiff objected to the recommendation, arguing that the claims were distinct and should not support an award of fees for all claims. The plaintiff contended that each claim involved separate facts and issues, thus asserting that fees should be allocated to exclude non-Lanham Act claims, particularly regarding five unrelated motions. The plaintiff estimated that at least $250,000 of fees pertained solely to non-Lanham Act-related tasks. Due to the vague nature of Oppenheimer’s billing records, the plaintiff proposed that the court subtract those fees and utilize an “even allocation” for the remaining fees, resulting in a proposed award of $325,738.86 to the defendant.

Defendant contends that Plaintiff has merely reiterated its previous arguments and introduced new elements that should have been included in its initial briefing. Consequently, Defendant requests that the Court dismiss Plaintiff's new claims and review the magistrate judge's report for clear error. Defendant asserts that Judge Lindsay rightly did not recommend apportioning fees, as the claims were based on a common core of facts and related legal theories. It argues that Plaintiff has set an unwarranted, elevated standard for determining when claims are “intertwined.” Furthermore, Defendant rejects Plaintiff's contention that fees for five unrelated motions should not be awarded, claiming that these motions were indeed connected to the Lanham Act claim and that the work performed on them informed the overall litigation. Reducing the recommended fee, according to Defendant, would undermine the legislative intent behind fee awards in exceptional cases, especially those involving bad faith. Additionally, Defendant states that the Court has the discretion to award fees based on inherent authority or as spoliation sanctions.

In evaluating a magistrate judge's report and recommendation, the district court may adopt unobjected portions unless they are clearly erroneous. Parties can file specific objections within fourteen days of receiving the recommendation, after which the court may accept, reject, or modify the findings. Objections must specify the contested portions; otherwise, the court reviews only for clear error. If objections are general or merely restate prior arguments, the court can limit its review to clear error.

Plaintiff's objections to the report and recommendation (R. R) are noted, with the Court observing that neither party has contested specific recommendations, including the exclusion of certain billed hours and a ten percent reduction in Oppenheimer’s overall hours. The Court, finding no clear error, will review the R. R accordingly. The applicable standard of review for Plaintiff’s objections is established, with the Court agreeing that it should review the exclusion of non-Lanham Act motions for clear error while reviewing the broader apportionment objection de novo. Plaintiff's argument regarding the exclusion of five non-Lanham Act motions is deemed a reiteration of previous arguments, prompting a clear error review. Conversely, the Court recognizes that Plaintiff's objection concerning apportionment is not merely a rehash of prior arguments, as it presents specific new legal support not previously included, challenging Judge Lindsay’s conclusion on apportionment.

De novo review is deemed appropriate under Fed. R. Civ. P. 72(b). The Defendant contends that the Court should disregard the "newly-expanded arguments" presented in Plaintiffs' Objections, which were not included in the initial opposition. The Defendant highlights that the Plaintiffs previously relied on a brief argument stating that their non-Lanham Act claims were "distinctly different" from the Lanham Act claim solely based on claim titles, whereas the Objections provide a detailed claim-by-claim analysis to illustrate alleged errors by Magistrate Judge Lindsay. The Court finds that the additional allegations and legal analyses in the Objections do not introduce new arguments but rather elaborate on previously discussed issues, particularly regarding apportionment.

Despite the Defendant's concerns about new case law cited in the Objections, the Court notes that there is no authority preventing litigants from referencing additional cases in their objections. The Court will consider the additional allegations as "additional evidence," consistent with the discretion granted under both 28 U.S.C. 636(b)(1) and Fed. R. Civ. P. 72(b). However, it acknowledges that courts typically do not entertain new evidence in objections without a compelling reason for its earlier omission. The Court emphasizes that the facts presented were known to the Defendant and that they had an opportunity to respond, which they did, by summarizing the factual and legal theories for each claim.

Regarding the apportionment of fees for non-Lanham Act claims, the Lanham Act allows for attorney fees to be awarded to the prevailing party in exceptional cases (15 U.S.C. § 1117(a)). Generally, in cases with both Lanham Act and non-Lanham Act claims, fees are only awarded for work related to the Lanham Act claims. Although the Second Circuit has not definitively ruled on this issue, district courts in the Circuit have permitted recovery of fees for non-Lanham Act claims when the claims are so intertwined that it is impracticable to separate the work performed on them.

The court may award the full amount of attorneys' fees to the prevailing party if the factual and legal bases of the claims are so intermingled that they cannot be differentiated. The Ninth Circuit, in Gracie v. Gracie, established that fees for non-Lanham Act claims can be included in a fee award if those claims are inseparable from Lanham Act claims. However, if they are distinguishable, the court is obligated to attempt to apportion the fees, even if exact apportionment is impossible. Subsequent cases have reinforced this principle, with courts evaluating the commonality of factual allegations and legal theories between Lanham Act and non-Lanham Act claims to determine the appropriateness of apportionment. In situations where claims arise from the same facts and occurrences, as noted in various case precedents, courts have found it challenging to separate work on specific claims. As a result, the court favors the Ninth Circuit's approach, emphasizing that if claims are "inextricably intertwined," a precise apportionment may not be feasible, but an attempt must still be made to distinguish between the different claims' legal theories and factual bases.

The Court rejects both parties' proposed standards for determining when claims are "inextricably intertwined." The Plaintiff's assertion that an award of attorneys' fees under the Lanham Act and non-Lanham Act claims should only apply to congruent cases lacks supporting authority. The Defendant's reliance on the Supreme Court's decision in Hensley v. Eckerhart is also deemed insufficient, as Hensley pertains to fee applications under 42 U.S.C. 1988 and does not specifically address apportionment under Section 1117(a) of the Lanham Act.

The Plaintiff alleged Lanham Act violations related to false marketing of Sleep Number Beds, citing specific statements in the Defendant's promotional materials and conduct during "secret shops." Judge Platt recognized that the Plaintiff's claims share common factual elements, particularly regarding evidence from the "secret shops," which supported various non-Lanham Act claims, including breach of contract and slander. Despite extensive debate over whether the claims stem from a unified theory, the Court acknowledges that while some claims overlap factually, others are based on distinct legal theories, especially concerning the interpretation of the contractual Agreement.

Plaintiff's unfair competition claim is connected to an Agreement, with the implied covenant of good faith and fair dealing arising from its performance, as recognized by the court. The Uniform Commercial Code mandates good faith in contract performance, and under Minnesota law, this covenant does not extend beyond the contract's terms. The fraudulent inducement claim differs from the Lanham Act claim, focusing on misrepresentations during contract negotiations. The court acknowledges the difficulty of exact apportionment but finds the claims are not so intertwined as to render an estimated adjustment meaningless. A percentage reduction is deemed appropriate due to overlapping work related to the claims. The court declines to simply divide hours among multiple claims and, instead, apportions 75% of the billed time to the Lanham Act claim. The court aims for "rough justice" in fee shifting rather than precise auditing. It denies the defendant's request for fees related to non-Lanham Act claims and rejects concerns that apportionment undermines legislative intent regarding fees in exceptional cases. The plaintiff's objection regarding non-Lanham Act-related motions is noted, but the court's percentage reduction already accounts for this, avoiding any double-dipping. Ultimately, after adjustments, the court recommends a fee award of $3,507,388.05, with 75% attributed to the Lanham Act claim, resulting in a final fee award of $2,630,541.04 after a 25% reduction.

Plaintiffs' objections are partially overruled and sustained, while Judge Lindsay’s recommendations are partially adopted and rejected. The court grants the defendant's motion for attorneys’ fees and costs under 15 U.S.C. § 1117(a), with specific adjustments: exclusion of time billed by Thomas Marek and Sally Tange from the Oppenheimer firm, exclusion of fees from Olshan Frome and Bryan Cave, exclusion of fees incurred after September 25, 2012, a ten percent reduction of Oppenheimer’s total billed hours, a ten percent reduction for the fee application preparation time, and a fifty percent reduction of travel and meal expenses. An additional twenty-five percent reduction will be applied based on the apportionment of claims under the Lanham Act and non-Lanham Act. Consequently, the total awarded attorneys’ fees and costs to the defendant amounts to $2,630,541.04. The court references the defendants collectively as "Defendant" or “Select Comfort.” Select Comfort's motion also included requests for fees under Federal Rules of Civil Procedure 11 and 54(d)(2). Other district courts have recognized that attorneys’ fees for non-Lanham Act claims can be awarded when such claims are closely related to Lanham Act claims, citing relevant case law.