The Federal Trade Commission’s (FTC’s) failure to obtain a preliminary injunction to block Tempur Sealy’s $4 billion proposed acquisition of Mattress Firm is yet another loss in a string of failed vertical challenges by the agency. The FTC confirmed that it will not appeal the federal court’s decision, and the parties expect to close the transaction this week. The decision not to appeal is perhaps unsurprising given the judge’s opinion, which found against the FTC on virtually every material issue.
In July 2024, the FTC voted unanimously to challenge the Tempur Sealy/Mattress Firm deal, showing that the FTC commissioners believed the complaint to be a strong one.1 In a statement explaining her vote in favor of a challenge, FTC Republican Commissioner Melissa Holyoak cited “substantial evidence” generated by the FTC’s investigation, including company documents suggesting that the transaction would reduce competition.2 Ultimately, the U.S. District Court for the Southern District of Texas found the FTC had failed to prove any of the essential elements of its case, ruling that the FTC had failed to establish the relevant market, that the deal’s effect, like most vertical mergers, was either neutral or procompetitive, and that the remedial commitments made by Tempur Sealy and Mattress Firm would address any lingering concerns regarding competitive effects. While the FTC’s theories of harm were not erroneous, the FTC’s case appears to have suffered from an over-reliance on cherry-picked documents, testimony from rival firms that the court found “exaggerated” and “self-serving,” FTC economic evidence that appeared erroneous and inconsistent with other documentary and witness testimony, and the FTC’s failure to impeach company executives, whose testimony the court found credible regarding future plans for the combined firm (including undertakings to divest stores and maintain relationships with rival mattress suppliers).
Ultimately this case, like AT&T/Time Warner and Microsoft/Activision before it, shows that vertical merger challenges are difficult for the agencies to win, especially when the parties proffer persuasive testimony from key executives, a compelling procompetitive rationale for the transaction, and “fix-it-first” solutions that mitigate potential foreclosure concerns.
Background
Tempur Sealy, the world’s largest mattress supplier and manufacturer, agreed to acquire Mattress Firm, the nation’s largest mattress retailer, in May 2023. Tempur Sealy sells mattresses through multiple channels, including Mattress Firm stores, direct-to-consumer through its e-commerce channel, and single-vendor mattress specialty retailers it owns, all of which carry only Tempur Sealy brands. Post-transaction, Tempur Sealy will transform from being primarily a manufacturer to primarily a retailer, with approximately 65 percent of its revenue generated from retail operations.
The FTC alleged the acquisition would enable Tempur Sealy to disadvantage rival mattress suppliers, including by eliminating or restricting rivals’ access to Mattress Firm’s more than 2,300 stores nationwide.3 The agency argued Mattress Firm was a vital distribution channel, quoting internal Tempur Sealy documents referring to Mattress Firm as a “kingmaker” because of its vast brick-and-mortar footprint, scale, product assortment, reputation, and sales expertise.4 The FTC also alleged that Tempur Sealy had a history of using exclusionary deals to block rivals, including contracts with some retailers that prevented stores from displaying competitor brands.5 The FTC argued that, short of totally excluding rivals (total foreclosure), Tempur Sealy could use its control over Mattress Firm to disadvantage competitors by offering fewer slots for rival mattress suppliers in retail stores, assigning rival products to worse store placements, and lowering sales commissions for competitor products (partial foreclosure).6 Mirroring the approach it used in its successful opposition to the proffered fixes in the proposed Kroger/Albertsons merger, the FTC also took issue with the “hodgepodge” of potential fixes proposed by Tempur Sealy and Mattress Firm, which include the divestiture of several stores and the commitment to preserve floor space for rival suppliers in Mattress Firm stores post-acquisition.7 According to the agency, neither of these proposals would be sufficient to mitigate the proposed acquisition’s harm to competition.8
In defense of their proposed deal, Tempur Sealy and Mattress Firm challenged the FTC’s proposed relevant product market of “premium” mattresses, defined with suspect precision as those priced $2,000 or above.9 On foreclosure, Tempur Sealy argued that it was in its profit-maximizing interest to maintain Mattress Firm’s multi-brand model and that there was zero contemporaneous evidence of any plan to do otherwise.10 Tempur Sealy also argued that Mattress Firm was not essential for rivals to compete, that entry and expansion was easy, and that the companies’ voluntary commitments, including divestitures, reservations of mattress slots at Mattress Firm locations for third-party mattress suppliers, and post-merger supply agreements with various mattress suppliers, alleviated any remaining competitive concerns.11
Federal Court Decision
The court agreed with Tempur Sealy that the FTC failed to establish a relevant product market with respect to “premium” mattresses, defined only as mattresses priced at $2,000 and above, and concluded that the agency’s failure to prove a relevant antitrust market alone required denial of the FTC’s request for a preliminary injunction.12
The court drew a distinction with the recent FTC win in the Tapestry merger challenge, in which the merging parties, industry members, and ordinary-course documents “frequently and consistently” pointed to “accessible luxury” and “affordable luxury” as a market, and in which the FTC economic expert’s testimony was clear, reliable, and consistent with other evidence.13 In this matter, by contrast, there was no evidence that mattress market participants agreed on what products “premium” encompassed. Moreover, the FTC’s proposed market definition focused on a precise price point ($2,000), which, as the court pointed out, yielded bizarre results. Under the FTC’s definition, a king-sized version of a mattress priced over $2,000 would be in a different market than the queen-sized version of the same mattress, if the queen-sized version happened to be priced below $2,000, even if the mattresses were identical in all respects except for dimensions.14 Similarly, the FTC’s definition would deem a mattress priced at $2,001 as not reasonably interchangeable with a mattress priced $1,999—a result that the court found non-sensical.15
Although the case might have ended on market definition, the court addressed other aspects of the FTC’s case. While the court accepted the FTC’s position that Tempur Sealy had the technical ability and some incentive to foreclose, this was to no avail, as the FTC could not show sufficient likelihood or size of foreclosure that would support a finding of harm to competition.16 In assessing the likelihood of competitive effects even assuming total foreclosure of every rival brand from Mattress Firm, the court accepted the defendants’ expert’s calculations that only 8.8 percent of the overall “premium” mattress market, as defined by the FTC (or 1.3 percent of the total mattress market), was at risk of foreclosure, a proportion that the court found too small to threaten anticompetitive effects.17
Over the last few years, leaders of the FTC and the DOJ have been vocal about the supposed evils of “competitive moat building.”18 In their case-in-chief and cross-examination, the FTC made much of three transaction-related documents asserting that the acquisition of Mattress Firm would create or strengthen a “competitive moat.” The court seemed unperturbed by these references to competitive moats, however, apparently accepting defendants’ contention that a moat referred to a “competitive advantage” and that a moat was procompetitive and virtuous.19
Relatedly, the court found that despite internal documents referring to Mattress Firm as a kingmaker, Mattress Firm was not essential for other mattress brands to continue to compete, as competitors had many other channels to market, including direct sales. The judge also found Tempur Sealy’s history of past deals in which it maintained multi-brand stores supported its assertion that it intended to keep Mattress Firm multi-branded.20
Finally, even if it were wrong about market definition and competitive effects, the court found that the parties’ remedial commitments would sufficiently mitigate any lingering concerns about competition.21 Tempur Sealy’s divestiture commitment guaranteed reasonable retail alternatives for its top competitors, Serta Simmons and Purple, and for its other rivals.22 The court was also moved by Tempur Sealy’s last-minute decision to expand its slot guarantees for rivals upon questioning by the court, stating that the swift revision indicated “remarkable good faith” by Tempur Sealy in response to the court’s concerns about the scope of the slot guarantees.23
Conclusion
After the district court decision, the FTC indicated it would not pursue an appeal—perhaps an unsurprising decision based on the almost total failure of proof for the FTC and the judge’s numerous credibility findings, which would be difficult for the FTC to challenge on appeal.
While it’s unclear where the agencies should go from here in challenging future vertical cases, the lessons for merging parties from this case are clear. Vertical merger challenges can be effectively defended if the merging parties 1) produce credible executive testimony regarding the absence of plans to foreclose rivals; 2) produce consistent internal business plans and financial modeling showing no foreclosure; 3) produce rigorous expert economic analysis consistent with documents and testimony; and 4) proffer a robust “fix-it-first” solution to address any “lingering” competitive concerns.
[1] https://www.ftc.gov/legal-library/browse/cases-proceedings/231-0016-tempur-sealy-international-inc-mattress-firm-group-inc-matter.
[2] https://www.ftc.gov/legal-library/browse/cases-proceedings/public-statements/statement-commissioner-melissa-holyoak-matter-tempur-sealy-international-inc-mattress-firm-group-inc.
[3] Complaint. Tempur Sealy International, Inc. and Mattress Firm Group Inc. FTC Docket No. 9433 (July 2, 2024).
[4] Id. at ¶ 47.
[5] Id. at ¶ 6.
[6] Id. at ¶ 11.
[7] Id. at ¶ 118.
[8] Id.
[9] Answer, at 5.
[10] Id. at 4.
[11] Id. at 36.
[12] FTC v. Tempur Sealy Int’l Inc. and Mattress Firm Group Inc., No. 24-CV-2508 (S.D. Tex. Jan. 31, 2025).
[13] FTC v. Tapestry, Inc. et al, 2024 WL 4647809 (S.D.N.Y. Apr. 23, 2024), at *20-21.
[14] Tempur Sealy at 41.
[15] Id. at 36.
[16] Id. at 73-74.
[17] Id. at 93.
[18] Recent speeches by the FTC and the DOJ have addressed the concept of “competitive moats” in the context of antitrust enforcement, particularly in digital markets and emerging technologies like artificial intelligence (AI). See, e.g., DOJ’s Antitrust Chief Outlines Aggressive Approach to Enforcement Against Digital Market Companies (Apr. 6, 2022), https://www.jdsupra.com/legalnews/doj-s-antitrust-chief-outlines-9566546/; A few key principles: An excerpt from Chair Khan’s Remarks at the January Tech Summit on AI (Feb. 8, 2024), https://www.ftc.gov/policy/advocacy-research/tech-at-ftc/2024/02/few-key-principles-excerpt-chair-khans-remarks-january-tech-summit-ai; Jonathan Kanter, Solving the Problem of Global Monopolization (Sept. 16, 2022), https://www.justice.gov/archives/opa/speech/assistant-attorney-general-jonathan-kanter-antitrust-division-delivers-keynote-fordham.
[19] Tempur Sealy at 60-61.
[20] Id. at 43, 61-63, 69-70.
[21] Id. at 107-108.
[22] Id. at 109.
[23] Id. at 110.
