(Reuters) — A federal appeals court in New York has revived a lawsuit accusing bedding retailer Select Comfort Corp. of defamation for employing sales staff who discouraged undercover shoppers from buying beds at rival Sleepy's L.L.C.

The 2nd U.S. Circuit Court of Appeals on Friday overturned a lower court's dismissal of Sleepy's lawsuit against Select Comfort, which also accused the maker of "Sleep Number" adjustable beds of breach of contract.

Circuit Judge Pierre Leval wrote for a three-judge panel that the lower court did not properly assess whether Hicksville, New York-based Sleepy's had a good-faith business motive when it elicited the alleged disparaging statements.

Minneapolis-based Select Comfort did not immediately respond to requests for comment. Sleepy's did not immediately respond to similar requests.

The case arose from a 2005 contract in which Sleepy's began selling Select Comfort's "Personal Preference" line of beds, while Select Comfort sold its "Core" line in its own stores.

When sales proved disappointing, Sleepy's sent people posing as shoppers into Select Comfort stores, in response to reports that salespeople were making disparaging remarks.

It said salespeople told these "secret" shoppers that the Personal Preference beds were inferior in quality and attracted allergens and dust mites while in storage, and that Sleepy's offered inferior sales terms and would not honor warranties.

Sleepy's sued after ending its contract with Select Comfort in 2007, but U.S. District Judge Thomas Platt in Central Islip, New York, dismissed the lawsuit in 2012 after a non-jury trial.

He said there was no defamation because the shoppers, having been first to mention Sleepy's and its sale of Select Comfort beds, "consented" to the salespeople's alleged disparagements.

Judge Leval, though, said the proper test under New York law was "whether Sleepy's inquiries 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."

The 2nd Circuit also revived Sleepy's claims alleging unfair competition and violating a nondisparagement clause in the 2005 contract. It upheld the dismissal of a claim that Select Comfort failed to provide "first-quality merchandise."

The case is Sleepy's L.L.C. v. Select Comfort Wholesale Corp. et al., 2nd U.S. Circuit Court of Appeals, No. 12-4437.