How To Ohio Mattress wins Sealy suit; $122M damages awarded to 2 franchise holders
In a verdict likely to have a far-reaching effect on the bedding industry, a federal district court jury awarded two Sealy Inc. franchise holders a total of $122 million in damages after ruling that the parent company violated U.S. anti-trust laws.
The eight-member jury, in the climax to a marathon two-month trial that involved dozens of attorneys, awarded Ohio Mattress Co. $25.6 million and Sealy Mattress Co. of Michigan Inc. $15 million in damages. Under anti-trust statutes, the total award will automatically be trebled by U.S. District Judge Ann C. Williams to $122 million, view other page: Platform assist: Hatchlift's super-stout RV Bedlift Kit provides under-mattress storage access without having to use the ol' noggin for support
"We had a real good case," declared Frederic Brace, Ohio Mattress' lawyer. "I was confident the jury would find in our favor, although I wasn't so sure we'd get such a large award."
"We're very pleased," added Bart Lewis, Michigan Sealy's president. "Our plan now is to go back and try to sell more mattresses."
In five separate lawsuits that were all tried together -- three of them brought by Ohio Mattress--the jury ruled against a provision for right-of-first-refusal that allowed Sealy Inc. to block any sale of licensed franchises to other licensees. Sealy Inc. has employed the provision in acquiring 13 of its 34 manufacturing plants in the U.S. and Canada since 1969.
Significantly, however, the jury refused to grant any damages on a complaint filed by Ohio Mattress against Sealy Inc.'s tradition of exclusive manufacturing territories. Ohio Mattress has long sought to locate a plant of its own in San Diego, but Sealy Inc. has sought to locate a plant of its own in San Diego. Sealy Inc., however, has denied the company permission in order to protect its existing licensee in the area, Sealy Mattress Co. of Southern California, based in South Gate, a suburb of Los Angeles.
"In effect, the jury has said that the exclusive manufacturing clause is valid in all Sealy Inc. contracts," asserted a lawyer representing Sealy Inc. Representatives of Ohio Mattress hinted they might ask Judge Williams for an immediate injunction to ban exclusive manufacturing prohibitions, though another lawsuit on the matter is also possible, they said.
Indeed, the latest verdict signals the start of a new round of appeals that could continue for several years, both sides acknowledged. Sealy Inc. expressed shock at the size of the award. Said Howard Haas, the company's president, said "We're confident our position will ultimately be vindicated on appellate review."
A U.S. Supreme Court decision in 1967 struck down Sealy Inc.'s provisions for exclusive sales territories in its licensee contracts. Ohio Mattress and its strong-willed chairman, Ernest Wuliger, have been fighting in the courts since 1971 to have other restrictive covenants quashed. The licensee won $13 million in damages in a 1975 anti-trust case, but so far hasn't succeeded in overturning Sealy Inc.'s right to maintain exclusive manufacturing territories.
As a result, Ohio mattress has been forced to compete in the lucrative Western marketplace by shipping products from its two Texas plants, leaving it at a distinct pricing disadvantage. "Exclusive territories is worse than price-fixing," the attorney Brace contended in final arguments during the trial. "They eliminate all competition. (Sealy Inc.) has pursued monopolistic profits on the West Coast. ... The company has had one opportunity after another to get straight with the anti-trust laws and it's rejected those opportunities."
An attorney for Sealy Inc., Max Wildman, said that "the franchise system is very much on trial" and argued that Ohio Mattress would usurp Sealy Inc.'s role as franchiser if it were allowed to build plants anywhere.
"The franchise system helped develop Sealy's success," Wildman said. "The company felt from the beginning that if someone worked a territory, developed the Sealy image there, and then he should be afforded some degree of protection. If I work the garden, should someone else reap the harvest?"
Bedding manufacturers generally said the impact of the decision at this point is contained within the Sealy organization, adding that any effects on the industry depend primarily on how Sealy Inc. responds. "I don't think this decision will change the basic conditions, the basic level of competition within the marketplace," said one executive. "I do think it will have an impact on the value of franchises. It will make it more difficult for Sealy Inc. to become company owned and operated, which seems to have been their pattern."
Another said the effects on the industry of the lengthy controversy between Sealy Inc. and Ohio Mattress -- the deep bedding discounts -- "have already been felt and will continue to be felt." The impact of this decision "on Sealy, and the way the situation ultimately ends, will determine how Sealy acts in the marketplace," he said.
Some added that despite the decision, a unified, cooperative climate will continue to be the factor that drives a licensee organization's success. "There are all kinds of things you can do in business that you don't do," said one executive. "Legally, plants can now ship into any area, and there is nothing you can do about it. You hope your licensees are reasonable businessmen. You foster camaraderie and closeness between plants, and you hope these things don't happen.
"It could happen to any group," he added.
During the trial, the defense also continually emphasized that Ohio Mattress is, as one attorney pointed out, "the largest bedding manufacturer in the world already." Rodney Joslin, a Sealy Inc. attorney, remarked, "Ernest Wuliger has grown and prospered all this time. Ohio Mattress is complaining because it couldn't make enough money. But that's not the goal of anti-trust laws. If you don't allow Sealy restrictions on its locations, then you destroy the (licensee) system."
The right-of-first-refusal principle, while the basis for the jury's award of damages, was seen as less crucial by the parent firm. Sealy Inc. hasn't invoked the contractual clause in six years, and by now most of the old family-owned licensed franchises have already changed hands. Ohio Mattress has acquires seven plants, including facilities in Georgia and Massachusetts.
Michigan Sealy and its chairman, Peter Brown, contended that Sealy Inc.'s right-of-first-refusal blocked its purchase of a licensee, Sealy of Iowa, in 1977. Michigan had an agreement to buy Iowa for $3.4 million, but the Sealy Inc. board of directors ruled against it and ended up buying Iowa itself. Michigan Sealy calculated that its damages, including lost profits and stock appreciation, amounted to more than $13 million.
In a second suit, Michigan said that the parent company interfered with its sales efforts in Southern Canada. Michigan began shipping mattresses into lower Ontario, competing head-on with Sealy of Toronto, in 1983. Even after paying import duties, Michigan's Posture-Pedic mattresses were retailing as low as $101 twin, far below Toronto's $153 twin price. Yet Sealy Inc. brought a suit against a retailer selling Michigan's products, charging improperly registered trademarks, and sent threatening letters to other retailers. Sealy Inc. then acquired Toronto for itself.
"Retailers don't like to be sued, so they stepped carrying Michigan's mattresses. Sealy Inc. stopped us from competing in Canada," said Dan Webb, attorney for Michigan Sealy. Michigan's brief presence in the market forced even rival Serta to drop its prices in lower Ontario by 30 percent, he said.
"Sealy Inc. did everything it could to prevent intra-brand competition in the marketplace," Webb added. "When they bought a territory for themselves, it was to preserve a non-competitive marketplace. In Canada, Sealy had let its prices get too high in the absence of competition. We found we could undercut them."
Ohio Mattress sought more than $30 million in damages resulting from Sealy Inc.'s refusal to approve acquisitions of plants in Pittsburgh, Philadelphia, Portland, Ore., and Lexington, N.C. Co-defendants in three separate suits included Haas; Louis Duncan, deceased chairman; Morris Kaplan, chairman of the parent company until 1978; Morton Yulman, chairman of Sealy of Eastern New York; and William Walzer, chairman of Sealy Connecticut. Related Article: https://futonszone.com/foreign-exchange-commerce-company-exports-mattresses-address-chinese-consumers-worries-product-safety/
The jury may have been swayed against Sealy Inc. on the basis of testimony that demonstrated mattress prices are appreciably lower in the East, where intra-brand competition has been more apparent, than in the closed-off West. "The jury also heard Serta executives explain that they're doing well and growing in recent years without having to resort to the kinds of contracts that Sealy demands of its licensees," Brace said.
Sealy Inc.'s appeal will be based on Judge Williams's instructions to the jury, which called for an award of damages if Sealy Inc. inhibited competition among its own branded licensees at all. Sealy Inc. argued that the plaintiffs should have been forced to prove that competition among all bedding brands had been stifled by Sealy's marketing practices.
"While we were disappointed with the jury's verdict, we weren't surprised in light of the instructions to the jury given by the court," Haas said. "In the opinion of anti-trust experts, those instructions, which virtually commanded the jury to find in favor of the plaintiffs, contravened fundamental anti-trust principles and failed to acknowledge recent U.S. Supreme Court and lower federal appellate decisions on identical issues."
A Sealy Inc. source suggested that the company was prepared to pursue appeals to the High Court, just as it did in the 1967 case. "The judgment is so large here that it ensures a continuation of litigation," the sources said. "This case won't come to a full conclusion for a while yet."