FTC Bid to Stop Mattress Deal Puts Spotlight on Vertical Mergers

The Federal Trade Commission’s suit to block Tempur Sealy International Inc.‘s plans to purchase Mattress Firm for $4 billion will provide insights into how courts evaluate vertical deals between two firms at different levels of the supply chain.

The FTC last week unanimously voted to bring a lawsuit to stop the acquisition, which would combine a manufacturer of top brands including Tempur-Pedic, Sealy Posturepedic, and Stearns & Foster with Mattress Firm, a US specialty retailer with thousands of brick-and-mortar stores.

The case is the first FTC challenge involving a vertical deal since the agency and the Justice Department in December published merger guidelines cautioning against conduct that interferes with distribution channels and makes rival products less readily available.

Its outcome could set an important precedent on deals involving the exclusion—known as foreclosure—that results when rivals are cut off from placing products on shelves at key distribution points or are denied access to key materials, antitrust attorneys say.

While the merger guidelines don’t exactly define foreclosure, courts can use them when evaluating whether a vertical deal can lead to anticompetitive effects, said Jeff Cross, counsel in the litigation practice at Smith Gambrell & Russell LLP in Chicago and an antitrust professor at University of Illinois Chicago.

“The big issue here is going to be the denial of access to a retailer that the FTC claims is basically the only player in town,” Cross said.

The FTC alleges the acquisition would further raise high barriers to entry for premium mattress suppliers by blocking access to Mattress Firm, which the agency called the “most competitively significant mattress retailer in the United States.” Mattress Firm is owned by South African retailer Steinhoff International Holdings NV.

Looking Vertically

“There is not a lot of case law that deals with vertical foreclosures,” Henry Hauser, antitrust counsel at Perkins Coie LLP in Denver and a former antitrust enforcer with the DOJ and FTC, said. The vast majority of merger challenges involve horizontal deals among competitors at the same level.

“It will help us have another data point on how the agencies and the court think about what is substantial foreclosure and how that foreclosure can effectuate,” Hauser said.

The deal’s potentially anticompetitive effects include completely foreclosing rivals—like expelling other premium mattress suppliers from Mattress Firm stores entirely—or merely disadvantaging rivals within Mattress Firm stores, by offering them fewer slots to display their products or awarding lower sales associate commissions on non-Tempur Sealy products, Hauser said.

“The complaint is alleging that Tempur Sealy and others know that to compete in the premium mattress space, the way to do it is through good promotion and retail outlets that are motivated to sell your product,” Hauser said.

Tempur Sealy denied the agency’s claims in a statement responding to the suit and said it has been open to making changes to address the FTC’s concerns, such as divesting stores. “We are confident in the procompetitive rationale for this transaction and look forward to presenting the many benefits of the combination,” according to a statement issued by the company.

Vertical mergers can yield pro-competitive benefits, and Tempur is likely to emphasize them, said Amanda Wait, partner with DLA Piper in Washington and a former FTC lawyer.

“There could be very good reasons for vertical integration,” Wait said. “You can do it to save costs, you can do it to make sure your brand is getting the attention in a retail store that it deserves.”

Foreclosing Rivals

The FTC relies on a large number of documents to prove the deal would hinder competition, including communication from high-ranking Tempur Sealy executives expressing a desire to eliminate rival mattress suppliers and brands from Mattress Firm once the deal is consummated. It also cites Tempur’s past conduct of blocking rivals with exclusionary deals.

A key question the court will consider is whether the combined companies will have a strong incentive to foreclose rival suppliers, said Leigh Oliver, head of the US antitrust practice at Clifford Chance in Washington. The court will also look hard at alternative options for purchasing mattresses, such as online channels, she said.

“I am sure this will be an economists’ field day in terms of showing choices and people’s ability to switch between those retail channels,” Oliver said.

Cross said Tempur Sealy will almost certainly argue there are many alternative channels of mattress distribution.

“Tempur will say ‘there are a lot of online distribution hubs where you get mattresses in boxes,’” Cross said. “They may very well put on the stand these alternative substitutes and say that ‘they can deliver, they’ve got the capacity, they have the number of stores.’”

The FTC’s team is led by Allyson Maltas, a longtime Latham & Watkins LLP attorney who joined the agency in January. Tempur is represented by Cleary Gottlieb Steen & Hamilton LLP. Mattress Firm is represented by Simpson Thacher & Bartlett LLP.

The case is FTC v. Tempur Sealy Int’l Inc., S.D. Tex., No. 4:24-cv-02508, 7/2/24.