After a 5-0 vote, on July 2, 2024, the U.S. Federal Trade Commission sought to block mattress manufacturer (the “Manufacturer”) contemplated $4 billion acquisition of a mattress retailer (“Retailer”) by filing both an administrative complaint and a complaint in the U.S. District Court for the Southern District of Texas, the latter with a request for preliminary relief to enjoin the transaction pending the administrative proceeding. According to the FTC, the proposed acquisition would combine the world’s largest mattress supplier with the nation’s largest mattress retailer. Notably, the issuance of this complaint has bipartisan support with Republican Commissioner Holyoak releasing a statement in support of the FTC staff’s thorough investigation.
The merging parties indicated in a May 9, 2023 announcement that they had submitted premerger notification forms with the U.S. antitrust agencies in October 2022, subsequently receiving a Request for Additional Information and Documentary Materials (“Second Request”) from the FTC on December 16, 2022. The parties certified substantial compliance with the Second Request on November 20, 2023. Eight months later, the FTC sued to block the transaction, and the parties have stated they expect the preliminary injunction proceedings to be completed in the coming months, allowing for a late 2024 or early 2025 closing.[1]
In its press release on the challenge,[2] the FTC cites comments from Henry Liu, the Director of the FTC’s Bureau of Competition, who remarked that “[t]hrough emails, presentations, and other deal documents, [the Manufacturer] has made it abundantly clear that its acquisition of [the Retailer] is intended to kneecap competitors and dominate the market,” also stating that “[t]his deal isn’t about creating efficiencies; it’s about crippling the competition, which would raise prices on an essential good and could lead to layoffs for good paying American manufacturing jobs in nearly a dozen states.”
In its administrative complaint, the agency asserts that the proposed acquisition would substantially lessen competition in the market for premium mattresses throughout the country in violation of Section 7 of the Clayton Act, 15 U.S.C. § 18, and Section 5 of the FTC Act, 15 U.S.C. § 45. The complaint raises competitive concerns caused by foreclosure effects, stating that post-acquisition, the Manufacturer would be incentivized to disfavor rival mattress suppliers while expanding its own brands, thus enabling it to entrench its dominant position. The FTC emphasizes that the Retailer is the nation’s largest multi-vendor retailer with significant power in determining which mattress brands succeed at retail. A competitor’s entry into the mattress market is used as an example of the Retailer’s ability to determine which brands “win out,” as the competitor’s revenue surged shortly after it began selling through the Retailer in 2017. The competitor became publicly traded later that same year and is now the fourth-largest U.S. premium mattress supplier by revenue.
The complaint, although heavily redacted, notes that the Manufacturer has a “history of using exclusionary deals” to block rival mattress suppliers and that this acquisition would “further cement its dominance and deprive independent brands of the opportunity to engage in free and fair competition,” with the consequences ultimately passed onto consumers. While the Retailer was able to resist the Manufacturer’s pressures in prior years, the complaint suggests that the Manufacturer’s ownership of the Retailer would allow this playbook to be deployed unilaterally.
According to the complaint, the Manufacturer’s plans to disadvantage rivals could include offering them less or less favorable display space, increasing share of retail margin of competitors’ products, restructuring commissions such that they would favor sales of the Manufacturer’s brands, or using the Retailer’s access to competitively sensitive information on pricing and products of rival suppliers for its own gain. By playing both offense and defense, the complaint concludes that the Manufacturer “would reap huge profits by disfavoring rival brands at [the Retailer] while growing its own presence.”
The complaint moreover describes negative impacts on American mattress manufacturers as plants across the country “could lose access to the most competitively significant distribution channel in the United States, impairing their ability to compete and potentially leading them to reduce output, close factories, and lay off workers.”
The simultaneous complaint filed in the Southern District of Texas echoes the competitive concerns in the FTC’s administrative complaint and further petitions the court to enter a temporary restraining order (TRO) and grant a preliminary injunction until the FTC concludes its pending administrative processing.
The parties filed their answer and defense on July 9, asserting that their merger will not diminish horizontal competition and that the “vast majority” of mattress manufacturers and retailers would not be affected. They state that “[r]ather than show harm to competition, the complaint alleges potential harm to the tiny handful of mattress manufacturers who use [the Retailer],” identifying a single manufacturer, who is the only other supplier than the Manufacturer who uses the Retailer as a nationwide retail outlet. The Manufacturer states that it stands behind the Retailer’s “successful multi-brand strategy,” consistent with the Retailer’s position that it attributes its success to its wide array of offerings.
The parties claim that the FTC has not asserted a proper market definition, as there is a lack of precise market share data in the complaint and the FTC has not accounted for alternative means of distribution outside of retail stores. The Manufacturer states in its answer that “[g]iven the thousands of mattress retailers, the prevalence of online sales, and the many ‘premium’ brands that rely mostly on their own retail operations, it is not surprising that the Complaint fails to allege anything about market share or the amount of foreclosure.” The Retailer points to the drawn-out Second Request investigation that took place prior to the FTC’s challenge, stating, “After over a year of investigative discovery, the FTC should be able to set forth [the Retailer’s] market share in a relevant retail product market, and a complete failure to do so is telling.”
In addition, the parties asserted constitutional defenses, arguing that agency adjudication of their merger is a violation of their constitutional rights—a defense that has been used by many recent defendants in FTC merger challenges.
On July 16, the district court granted the FTC’s motion for a TRO, which was stipulated to and unopposed by the merging parties. Under the terms of the TRO, the merging parties have agreed not to close the proposed deal pending the FTC’s administrative proceeding.
[1]See Press Release, Tempur Sealy International Issues Statement on U.S. Federal Trade Commission Challenge of Proposed Acquisition of Mattress Firm, Tempur Sealy (July 2, 2024), https://investor.tempursealy.com/news-releases/news-release-details/tempur-sealy-international-issues-statement-us-federal-trade.
[2]See Press Release, FTC Moves to Block Tempur Sealy’s Acquisition of Mattress Firm, Federal Trade Commission (July 2, 2024), https://www.ftc.gov/news-events/news/press-releases/2024/07/ftc-moves-block-tempur-sealys-acquisition-mattress-firm.
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