FTC v. Tempur Sealy: Court Finds No Likely Anticompetitive Foreclosure

Tempur Sealy International, Inc., a manufacturer of mattresses and bedding products, entered into an agreement to acquire Mattress Firm Group Inc., a large mattress retailer with hundreds of physical retail locations across the United States. The transaction was structured as a vertical acquisition, combining a major upstream mattress supplier with a downstream retail distributor.

Before the transaction closed, the Federal Trade Commission filed an action in the United States District Court for the Southern District of Texas seeking to block the acquisition. The FTC alleged that the merger would substantially lessen competition in violation of Section 7 of the Clayton Act.

The FTC’s Competitive Concerns

The FTC alleged that Tempur Sealy already possessed significant market power in the wholesale mattress market and that acquiring Mattress Firm would give it the ability and incentive to disadvantage rival mattress manufacturers. According to the FTC, the combined entity could restrict competitors’ access to critical retail shelf space, raise rivals’ costs, or limit consumer choice through exclusive arrangements.

The FTC focused on Mattress Firm’s role as the largest specialty mattress retailer in the country. The agency asserted that Mattress Firm’s extensive store footprint and sales volume made it an essential distribution channel for mattress manufacturers seeking to compete effectively.

Tempur Sealy’s Response to the Allegations

Tempur Sealy disputed the FTC’s characterization of the market and the alleged competitive effects. The company asserted that the mattress industry remained highly competitive, with numerous manufacturers, retailers, and alternative distribution channels, including online direct-to-consumer sales.

Tempur Sealy also emphasized that Mattress Firm continued to sell a wide range of competing brands and that contractual obligations and market incentives would prevent foreclosure or exclusionary conduct following the acquisition.

Legal Standard Applied by the Court

The court reviewed the FTC’s request for a preliminary injunction under Section 13(b) of the Federal Trade Commission Act. Under that framework, the FTC was required to show a likelihood of success on the merits and that the balance of equities favored injunctive relief.

The court evaluated whether the FTC established that the proposed acquisition was likely to substantially lessen competition. This required analysis of market definition, market power, potential foreclosure effects, and whether anticompetitive outcomes were probable rather than speculative.

Court’s Analysis of Market Definition and Foreclosure

The court examined the FTC’s proposed relevant markets, including wholesale mattress manufacturing and retail mattress sales through specialty stores. The court found deficiencies in the FTC’s market definitions, concluding that they did not adequately account for competitive constraints from online retailers, big-box stores, and alternative distribution channels.

The court also analyzed the FTC’s foreclosure theory. It concluded that the FTC did not sufficiently demonstrate that Tempur Sealy would have the incentive to foreclose rival manufacturers from Mattress Firm stores or that such conduct would be economically rational given the revenue Mattress Firm generated from selling competing brands.

The court noted evidence showing that Mattress Firm relied heavily on sales of non-Tempur Sealy products and that limiting those offerings could reduce overall profitability.

Evaluation of Competitive Effects Evidence

The court reviewed economic testimony, internal documents, and industry evidence presented by both sides. The court determined that the FTC’s evidence did not persuasively show that the acquisition would likely lead to higher prices, reduced output, or diminished innovation.

The court also considered evidence regarding post-merger incentives and concluded that existing contractual arrangements and competitive pressures would constrain the combined firm’s behavior.

The Court’s Ruling

The district court denied the FTC’s request for a preliminary injunction. The court held that the FTC failed to establish a likelihood that the acquisition would substantially lessen competition. As a result, the court allowed the transaction to proceed.

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