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CAUSE NO. 2017-22062
MATTRESS FIRM, INC., IN THE DISTRICT COURT OF
Plaintiff,
HARRIS COUNTY, TEXAS
TEMPUR PEDIC NORTH AMERICA,
LLC and SEALY MATTRESS COMPANY,
Defendants. JUDICIAL DISTRICT
PLAINTIFF THIRD AME_NDED PETITION
TO THE HONORABLE JUDGE OF SAID COURT:
COMES NOW Plaintiff Mattress Firm, Inc. ( Plaintiff” or Mattress Firm ) and files this
Third Amended Petition against Defendants Tempur Pedic North America, LLC and Sealy Mattress
Company (collectively, “Tempur-Sealy” or Defendants ), and for its causes of action would
respectfully show the Court and Jury as follows:
INTRODUCTION
Formany years, Mattress Firmand the Tempur Sealy enjoyed along term, mutually
beneficial relationship in which Mattress Firm purchased inventory fromTempur Sealy
and sold that
inventory to consumers through its network of 3,500 retail locations in the United States. When it
came time to renew their retail sales agreements in January however, Mattress Firm and
Tempur- Sealy were unable to agree upon commercial terms, giving Mattress Firm no choice but to
tenminate the relationship.
The termination
resulted in Tempur Sealy losingits largest retailer. Tempur Sealy
shareholders did not take this news well.Shortly
aft er the termination
was announced, shares of
Tempur-Sealy s parent, Tempur-Sealy Intemational, Inc. (NYSE: TPX), plummeted. Over two
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trading days, shares of Tempur Sealy fell nearly 30% and the company lost approximately $1 billion
in market capitalizatio Thenews of this downfall was covered extensively by the financial press:
Tempur Sealy Shares Drop After Mattress FirmContracts Terminated ALL TREET
OURNAL, Jan. 30, 2017.
Tempur Sealys stock rocked after Mattress Firm contracts are terminated: Mattress
maker shares suffer biggest one day selloff in nine years ARKET ATCH, Jan. 31,
Shares
of Tempur Sealy Crash After It Ends Contracts
With Biggest Customer EUTERS
Jan. 30, 2017.
Tempur Sealy Tumbles After Losing Contracts With Mattress Firm LOOMBERG, Jan.
YOU RE FIRED: Tempur Sealy Loses Major Contract with Mattress Firm Holdings,
Shares Plunmmet ANK OIN, Jan. 30, 2017.
One article
even questioned. Is Tempur Sealy s Nightmare]
ust Beginning? AHOO INANCE, Jan.
In retaliation, and contrary to the earlier representations of its executives, Tempur
Sealy announced that it would stop shipping its product to Mattress Firm immediately, thereby
cutting off Mattress Firm s supply of inventory, despite knowing that hundreds of orders were
pending and millions of households in the country had recently received Mattress Firm
advertisements for Tempur Sealy products. After extracting a $10million payment
from Mattress
Firmas acondition
to enteringinto nagreement forasmooth transition period, Tempur Sealy and
Mattress Firm entered into two identical letter agreements (one with Tempur Pedic
and one with
Sealy) dated January 30, 2018, (hereafterthe LetterAgreements wherebyTempur Sealy agreed to
continue to pt orders from Mattress Finm for Tempur Sealy products during a wind down
period lasting until Apmil 3, 2017.
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Within days of entering into these agreements, however, Tempur Sealy embarked on.
a systematic, bad faith campaign aimed at extracting retribution for their losses and depriving
Mattress
Firm of the benefits of the Letter AgreementsTempur Sealy
s tactics included not
delivering product on time, not taking orders for product, not shipping product from all warehouse
locations, ceasing production of Mattress Firm exclusive product lines, shipping product that failed
to conform
to agreed specifications, refusing
to allow orders
up to Apnil 3 refusing
to process
back order of product ordered on or before April 3
Tempur Sealy also began purchasingGoogle adwords withthe Mattress Fimname
and used them to embark on a nationwide intemet advertising campaign implying that shoppers
should avoid Mattress
Firm s alleged aitand witch sales tactics and instead buy direct ly from
Tempur Sealy.In addition, Tempur Sealy encouraged
its other retailers to run false advertisements
stating
that Tempur Sealy products were not available at Mattress Firm, although Tempur Sealy was
well aware that Mattress Firm had more than $100 million of Tempur Sealy inventory to sell and
was fully authorized under the Letter Agreements to not only sell such inventory
but also to utilize
Tempur Sealy s trademarks in its advertisements
to do so
These actions, which are described
in detail below, breached
the Letter Agreements
deprived Mattress Firm of the benefits of those agreements, and interfered
with Mattress Firm
relationshipswith
its retail customers Mattress Firm therefore seeks an award of damages and its
reasonable attomey s fees.
DISCOVERY CONTROL PL
Discovery is being conducted under Level 3 pursuantto IV
Mattress Firm seeks monetary relief far in excess of
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PARTIES
Plaintiff Mattress Firm, Inc. Mattress Firm is a Delaware corporation with its
principal place of business in Harris County, Texas.
Defendant Tempur Pedic North America, LLC ‘Tempur Pedic is a Delaware
limited liability company that does business in Harris County, Texas and has, as its sole member, a
corporation organized and existing under the laws of the State of Delaware. Tempur Pedic has
appeared in this case and may be served throughits attomeys of record
Defendant Sealy Mattress Company Sealy is an Ohio corporation that does
business
in Harris County, Texas. Sealy has appeared in this case and may be served through its
attomeys of record.
JURISDICTION VENUE
This Court has jurisdiction over this case under Article V, Section 8 of the Texas
Constitution and Section 24.007 of the Texas Govemment Code. The damages sought in this case
are within the jurisdictional limits of thisCourt.
Defendants are subject to personal jurisdiction in Texas because they conduct
business in Texas, entered into contracts in Texas, have continuous and systematic contacts with
Texas, and the claims in this case arise out of or relate to Defendants contacts with Texas.
Defendants are also subject to personal jurisdiction in Texas because Defendants contractually
consented to jurisdiction in Texas.
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Venue is proper
in Harris County, Texas because a substantial part of the events
giving rise to the claims
in this case occurred in Hanis County, Texas. Venueis
also properin Hanis
County because Defendants contractually agreedto venue in Texas, and Plaintiff principal place of
business is in Haris County, Texas.
FACTUAL BACKGROUND
For nearly
two decades, Mattress Firm was the premier retailer of Tempur Sealy
products. The relationship was mutually beneficial for much of that time. As the relationship grew,
Mattress Firm devoted increasing resources and advertising dollars — support the Tempur Sealy
business
and brands. At the same time, Mattress Firm was increasing its own national footprint
through organic growth and acquisitions of other mattress retailers. Mattress Fim long tem
bility to be the premier Tempur Sealy retailer played a crucial role in that continued growth. But,
unfortunately, Tempur Sealy chose to capitalize on Mattress Firm s efforts to grow as a company
rather than support it, which ultimately led to Mattress Firm tenminating the relationship.
The relationship between Mattress Firm and Sealy was govemed by a Master Retail
Agreement effectiveJanuary 1, 2014 anda2015 2017 Annual Merchandising
Program greement
together with various amendments to these agreements (collectively the Sealy Agreement
Likewise, the relationship between Mattress Firm and Tempur Pedic was govemed by a Master
Retail Agreement, effective January 1, 2014, and a 2015 2017 Business Development Program
Agreement, together
with various amendments
to these agreements (collectively, the Tempur Pedic
Agreement
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he Sealy Agreement provides, among other things, that Mattress Firm is an
authorized retailer of Sealy products and obligates Sealy to sell its products to Mattress Firm.
Likewise, the Tempur Pedic Agreement provides, among other things, that Mattress
Firm is an
authorized retailer of Tempur Pedic products and obligates Tempur Pedic to sell its products to
Mattress Firm.
Over
the years, Tempur Sealy gradually imposed more and more exacting economic
conditions and operational restrictions on Mattress Firm and Mattress Firm had little choice but to
accept those requirements because it needed to keep Tempur Sealy products
on its sales floors.
om the beginning of 2016strategically
timed to threaten crucial events
in Mattress Firm
businessTempur Sealy threatened to cancel the existing agreements unless Mattress Firmagreed to
revise or renegotiate their deal to incorporate economic terms that were increasingly favorable to
Tempur Sealy at the expense of Mattress Fim Mattress
Firm acquiesced to several of these
demands, but Tempur Sealy continued
to push formore. By the beginning
of 2017, the parties had
reached an economic impasse
On January 23, 2017, representatives of Mattress Firm met with representatives of
Sealy and Tempur Pedic and informed
them that, due to the evolving nature of the mattress business
and Defendants unwillingness
to accept reasonable economic terms, Mattress
Firm had decided to
end its relationship with Sealy and Tempur Pedicand discontinue selling their products. Because
oth theTempur Pedic Agreement
and the Sealy Agreement
require at least 30 days advance written
notice of termination, and because of the logistics of winding up such an extensive relationship,
Mattress Firm suggested ending the relationship on or shortly after May 1, 2017.
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Tn response to Mattress Firm decision, Scott Thompson ( Thompson _ the Chief
Executive Officer of Tempur Sealy Intemational, Inc. (the parent company of Sealy and Tempur
Pedic), assured Mattress Firm that:
whatever we do, we want to do it in a way that is first rate, classy for both
organizations, and in a way that is the most stable and useful way for you,
Mattress Firm. That whatever you need to do in transition, I will be the first
to tell you that we will be there to transition with quality product, ontime, for
whatever
you need; let s just get that off the table to start with and there will
be no hesitation
in the supply chain.
Thompson further committed to orking together ona transition plan and to do itin
a way that both companies
can feel good about it. He even closed the meeting by saying let
make this smooth and as professional as possible.
In the days that followed, Tempur Sealy tried to salvage the Mattress Fim
relationship and encouraged further negotiations. Mattress Firm was of course willing to continue
discussions, and proposed commercial terms that struck a greater economic balance between the
parties but nonetheless were still more favorable for Tempur Sealy than Mattress Firm hese
discussions ultimately proved unsuccessful, however, as Tempur Sealy was unwillingto compromise
its rigid commercial position.
Notwithstanding
its statements and assurances of Tempur Sealy executives that the
transition would be smooth and stable, and in direct contravention of the obligation
to provide
30 days advance notice of termination, Sealy
and Tempur Pedic sent letters to Mattress Firm late in
the aftemoon
on Friday, January 27, 2017, purporting to terminate the agreements immediately. The
letters stated that Sealy and Tempur Pedic would send no further products to Mattress Firm and
would even stop delivery of products already in transit They declared
that they do not accept
and
will not deliverany pending orders and will reclaim any products that arein transit. Suchswiftand
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immediate action not only had a detrimental impact on Mattress Firm s business but adversely
affected existing customers whose orders would be cancelled without xplanation. Further, Mattress
Firm wes at risk of being in direct violation of consumer protection laws as future customers were
likely to visit Mattress Finm in response to the substantial amounts of Tempur Pedic focused
advertising
deployed in anticipation of the upcoming holiday weekend and would need to be told that
those Tempur Sealy products were not available as advertised. Defendants
also demanded that
Mattress
Firm promptly cease all use of Sealy and Tempur Pedic trademarks, trade names, images,
and promotional materials, and that Mattress Firm cease holding itself out in any way as an
authorized retailer
of their products. The letters further demanded
that, within
five business days,
Mattress
Firm cancel all advertising referring to SealyorTem —_ Pedicand
take downall signsinits
stores referencing their names.
Throughout
the weekend, Mattress Firm urged Sealy and Tempur Pedic
to work with
Mattress
Firm on a reasonable transition timetable as their CEO had assured Mattress Firm they
would. n January 29, 2017, Mattress Firm sent Sealy
and Tempur Pedic a letter attempting to
convince them to uphold their obligation
to provide thirty days notice of termination, stressing that
termination
without the required notice was improper and would adversely affect Mattress Fimand
its customers.
OnJanuary 30, 2017, the parties agreed that Sealy
and Tempur Pedic would continue
toperformtheAgreement through Apmil 3, 2017. The parties executed letteragreements
providing,
among other things, that —_ ttress Firm would pay $10 million to Sealy and Tempur Pedic no later
than February 28, 2017 to ensure that Sealy and Tempur Pedic would (a) continue
to accept orders
from Mattress Firm through Apnil 3, 2017; (b) timely fulfill and deliver
such orders at the locations
and dates specified the orders; and (c) provide retum credits for products that were retumed before
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January 30, 2017 (the LetterAgreements ). In connection
with the Letter Agreements, Sealy and
Tempur Pedic informed Mattress Firm that they had elected not to exercise their right to repurchase
Tempur Sealy products from Mattress Firm at the conclusion of the transition period and that
Mattress Firm was responsible for the sale or disposal of all remaining inventory.
Sealy and Tempur Pedic have not honored the January 30, 2017 Letter Agreements.
Specifically on or about March 3, 2017, Sealy
and Tempur Pedic stated for the first time that they
would not ship any products, including
any open back orders, after April 3, 2017. That meant at
Mattress Firm had to prematurely stop selling Tempur Pedic and Sealy products to ensure all
products would be shipped before that date.
Furthermore, Sealy and Tempur Pedic took steps to put Mattress Fim
competitive disadvantage during this transition period. In particular, they sought at every tum to
censor Mattress Firm s advertising efforts by repeatedly accusing Mattress Firm of violating brand
standards applicable
to its advertising Tempur Sealy products. heseaccusations
were basedona
discriminatory interpretation of the brand standards that Sealy and Tempur Pedic do not apply to
Mattress Firm competitors and that go beyond the express language of the standards The thrust of
their actions has placed Mattress Firm ata competitive disadvantage as the company attempted to
sell off its remaining Tempur Sealy inventory Also contrary to the express terms of the Letter
Agreements, Sealy and Tempur Pedic informed Mattress Firm that
the only intellectual property that
could be used by Mattress Finm in the sale of remaining inventory is the product label stitched or
otherwise affixed to the product itself.
At the same time, Sealy and Tempur Pedic engaged in false and misleading
advertising designed to injure Mattress Firm s business
and reputation. Forexample, afterdelaying
or refusing
to fulfill order from Mattress Firm, in violation of the Letter Agreements, Sealy and
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Tempur Pedic publishedadvertising specifically
targeted at Mattress Firm s customers
and directly
tied with the search
term Mattress
Firm urging them to Avoid he Bait Switch at
Mattress Firm and, instead, buy direct from Sealy and Tempur Pedic. The targeted nature of Sealy
and Tempur Pedic s deceptive advertisingis clea ly illustrated by online Google searches forseveral
major U.S. markets. For instance, searches for Mattress Firm conducted on March 7, 2017 for
Boston, New
Y ork, San Diego, and San Francisco produce alist of links where the very first item
listedeven before Mattress Firmwas one of Defendants Bait And Switch vertisements
suggesting that Mattress Firm promises to deliver Sealy and Tempur Pedic products
but is unable to
keep its promise, so the consumer should purchase the items direct from Sealy
and Tempur Pedic.
This campaign was conducted in numerous other markets as well, including Indianapolis, Oklahoma
City, Philadelphia, and Portland. And Defendants misleading
narrative is made more effective (and
damaging)
by Defendants wrongful delays and refusals to deliver products to Mattress Firm, which
ultimately impacts Mattress Firm s customers.
CAUSES OF ACTION
Breach of Contract
Plaintiff alleges and incorporates by reference the previous allegation of this
Petition.
The Sealy Agreement, Tempur Pedic Agreement, and Letter Agreement
collectively, the Agreements are valid and enforceable contract Because the Agreements
pertain to the sale of goods, they are subject
to the applicable provisions of the Uniform Commercial
Code (“UCC”), as codified
in US ODE et seg. and§ 2.101 et seq.As part o
their contractual obligations required under the Agreements, Defendants were obligated to ship
mattress as specified in the purchase orders placed by Mattress Fim. Within
48 hours after
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Mattress Firm paid Defendants $10 million for a smooth transition pursuant to the Letter
Agreements, Defendants began to breach the Agreements by putting Mattress Finm’s deliveries “at
the back
of the li ” behind its other retailer customers (and Mattress
Firm’ s competitors) resulting
in system wide delivery delays across Mattress Firm's 3,500 retail stores. This wrongful conduct
took a substantial toll on Mattress Finm’s business and has cost the company millions of dollars in
damages and substantially injured the company’s goodwill.
Moreover, Defendants
have taken an on again off again approach
to their
obligations to accept orders through April Throughout
the transition period, several markets
were subjected to unexpected shipping delays, farin excess of historical experience. As the actual
termination
date drew near, Defendants repeatedly stated that the shipment of products would cease
as of April 3, 2017. When Mattress Firm operational personnel questioned them on this issue,
Defendants held firm to the position that deliveries would be cut off on April 3 and back orders that
remained open on that date would be cancelled and unfulfilled This position, which
was in direct
violation
of the obligation to fulfill orders placed
by that date, caused Mattress
Firm to terminate
sales Tempur Sealyproduct rather than face thevery
real risk that customers
would feel that a
bait
and switch tactic
had been used when orders
did not comein In an about face, Defendants
indicated late on March 29 that
it would continue
to fulfill orders placed through Apmil 3. At
that point, however, the damage
had been done. In anticipation
of the loss of product supply,
Mattress Firm had already deactivated Tempur Sealy products from its system and lost sales as a
sult.
Defendants have further breached the Agreements (a) delaying
their delivery of
products; (b) not accepting orders for product; (c) not delivering product on time; (d) not shipping
product from all warehouse locations; (e) ceasing production of Mattress Firm exclusive product
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lines (e.g., the HD product line); (f) failing to deliver products in accordance with Plaintiff s orders
and specifications (g) shipping
the wrong products; and (h) refusing to allow orders up to April 3
While Defendants’ actions described above were straightforward breaches of the
Agreements, since the Agreements are subjectto the UCC, Defendants
were obligated to comply
with the duty of good faith mandated by the UCC. See ODE§ 1.304. That duty
obligated the Defendants to “observe reasonable commercial standards of fair dealing” in
performing
their obligations under
the Agreements. ODE. § 1.201(b)(20). The
Defendants various misbehaviors do not reflect “reasonable commercial standards of fair dealing.”
Defendants failed to comply with this required standard of conduct by, among other things:
engineering the unavailability of products at Mattress Firm by refusing to timely ship
products and then running ads questioning Mattress Firm's ability to provide Defendants
productsto consumer
purchasing Mattress Firm “ad words” or “key words” in an effort
to divert intemet shoppers
to Defendants instead;
encouraging and facilitating competitors to nm false and misleading advertisements
conceming Mattress Firm;
undermining Mattress Firm's efforts to advertise
and promote the sale of Defendants
products;
causing Mattress Finm’s advertising expenses to increase as a result of the Defendants
actions;and.
frustrating the value of the Agreements to Mattress Firm, includingthe value of the
advertisingco op, as a result of the Defendants wrongful conduct.
Defendants simply did not live up to their promise to make the transition “smooth and as
professional as possible.”
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Plaintiff
as sustained damagesasaresult
of Defendants breaches
of the Agreements
in an amount in excess of the jurisdictional limits of this Court. Mattress Firm’ s damages in this
case are as high as $49,000,000.00.
Promissory Fraud
Plaintiff re alleges and incorporates by reference the previous allegations of this
Petition.
As shownabove, the backdrop for the execution of the Letter Agreements shows that
the path for unwinding the parties’ relationship was going to look like a bitter divorce. Once
Mattress Firm announced its intent to tenninate their contracts, the executivesatTempu Sealy knew
it would be a rocky road ahead for their business. With the announcement
of the loss of Mattress
Firmas a customer, Tempur Sealy was hit with a loss of $1 billion in corporate
value that set the
stage for a series of acts designed to impede Mattress Firm's business, as Tempur Sealy
contemplated
a world without access to Mattress Firm’s 3,500 retail outlets. This started with the
extraction of $10 million from Mattress Firm for a smooth transition pursuant to the Letter
Agreements. However, the evidence indicates that Tempur Sealy had no intention of making the
transition smooth for Mattress Firm. Within hours of execution of the letter Agreements Tempur
Sealy began to breach
the Agreements by: (a) delaying
their delivery of products; (b) not accepting
orders for product; (c) not delivering product on time; (d) not shipping product from all warehouse
locations; (e) ceasing production of Mattress Firm exclusive product lines (e.g., the HD product
line); (f) failing
to deliver products
in accordance with Mattress Finm’s orders and specifications; (g)
shipping the wrong products; and (h) refusing to allow orders up to April 3.Despite a clear
contractual requirement
to deliver products as specified in Mattress Firm product orders, Tempur
Sealyplanned to put Mattress Firm shipments behind their other “go forward” customersa plan
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that would clearly have the effect of disrupting Mattress Firm’ s business to the benefit of those very
same forward customers. Of course, Tempur Sealy combined their actions with intemet
marketing efforts designed to suggest to intemet shoppers that they would get hit with a “bait and
switch” from Mattress Firm at a time when they orchestrated product delays approaching 40% of
Mattress Finm’s orders.
Under Texas law, a promise to do an act in the future is actionable fraud when made
withno intent of performing theact. Lack of intent to perform can be inferred from Defendants’ acts
after the promise
was made. Because intent to defraud
is not susceptible
to direct proof, itinvariably
must be proven by circumstantial evidence. Indeed, slight circumstantial evidence
of fraud, when
considered with the breach of the promise to perform is sufficient to show fraudulent intent The
events leading up to the execution of the Letter Agreements provide evidence that
Defendants’ conduct before and after the Agreements were signed detailed above
provides strong circumstantial evidence that Defendants had no intention of performing the
Agreements
at the time they were made.
Mattress Firm has sustained damages as a result of Tempur Sealy’s fraudulent
promise
in an amountin excess of the jurisdictional limits of this Court. Mattress Firm’ sdamagesin
this case are as high as $49,000,000.00.
VII.
EXEMPLARY DAMAGES
Mattress Firm allege and incorporate by reference the preceding paragraphs of
this Petition.
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Tempur Sealy acted with fraud and/or malice as defined by Texas Civil Practice and
Remedies Code § 41.001(6) & (7). Accordingly, Plaintiff entitled to an award of exemplary
damages against Tempur Sealyin an amount to be determined
at trial.
VII.
CONDITIONS PRECEDENT.
All conditions precedent to the assertion of the causes of action herein, and the
remedies sought herein, have been performed or have occurred or have been waived or excused by
Tempur Sealy
VIII.
ATTORNEYS FEES
This action is founded on written contracts between the arties and Plaintiff is
therefore entitled to recover its reasonable attomeys fees incurred in addition to the amounts
otherwise recoverable. IV. RAC ODE§ 38.001. Mattress
Firmis represented by an
attomey, Plaintiff claim was presented
to Tempur Sealy more than 30 days prior to the trial of this
action by the service
of Plaintiff Original Petition, and the just amount owed has not been tendered.
REQUEST FOR JURYTRIAL
Pursuant
to Texas Rule of Civil Procedure 216, Plaintiff requests trial by Jury
and has
tendered
the required fee.
RAYER
WHEREFORE, PREMISES CONSIDERED, Plaintiff Mattress Finn, Inc. respectfully
requests that Defendants
Tempur Pedic North America, LLC and Sealy Mattress Company beserved
and cited
to appear, and that upon final trial Plaintiffhave judgment for
actual damagesfor breach of contract
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actual damages for promissory fraud;
exemplary damages to be awarded in the Jury’ s discretion
reasonable and necessary attomeys fees;
prejudgment
and post judgment interest;
costs
of suit and
such otherand furtherrelief, general and special, legal and equitable,
to which Plaintiffmay show itself to be justly entitled.
DATE August Respectfully submitted,
ICKS HOMAS
/s/ John B. Thomas
John B. Thomas (Attorney charge
Texas Bar No. 19856150
jthomas@hicks thomas.com
Paul L. Mitchell
Texas Bar No. 14217920
pmitchell@hicks thomas.com
J. Stephen Barrick
Texas Bar No. 00796168
sbamick@hicks thomas.com
KelseyM. Machado
Texas Bar No. 24078968
kmachado@hicks thomas.com
700 Louisiana Street, Ste. 2000
Houston, Texas 77002
Tel.: (713) 547
Fax: (713) 5
ATTORNEYS FOR PLAINTIFF
MATTRESS FIRM, INC.
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CERTIFICATE OF SERVICE
T hereby certify that a true and correct copy of the foregoing
Third Amended Petition was
served upon all counsel of record viaelectronic serviceAugust
RobertJ. Carty, Jr.
Jesse M. Coleman
John P. Phillips
EYFARTH
700 Milam Street, Suite 1400
Houston, TX 77002
William N. Berkowitz
Brandon Bigelow
William F. Benson
EYFARTH
Two Seaport Lane, Suite 300
Boston, MA 02210
/s/John B. Thom
John B. Thomas
{00215487.D0C}
Preview
CAUSE NO. 2017-22062 MATTRESS FIRM, INC., IN THE DISTRICT COURT OF Plaintiff, HARRIS COUNTY, TEXAS TEMPUR PEDIC NORTH AMERICA, LLC and SEALY MATTRESS COMPANY, Defendants. JUDICIAL DISTRICT PLAINTIFF THIRD AME_NDED PETITION TO THE HONORABLE JUDGE OF SAID COURT: COMES NOW Plaintiff Mattress Firm, Inc. ( Plaintiff” or Mattress Firm ) and files this Third Amended Petition against Defendants Tempur Pedic North America, LLC and Sealy Mattress Company (collectively, “Tempur-Sealy” or Defendants ), and for its causes of action would respectfully show the Court and Jury as follows: INTRODUCTION Formany years, Mattress Firmand the Tempur Sealy enjoyed along term, mutually beneficial relationship in which Mattress Firm purchased inventory fromTempur Sealy and sold that inventory to consumers through its network of 3,500 retail locations in the United States. When it came time to renew their retail sales agreements in January however, Mattress Firm and Tempur- Sealy were unable to agree upon commercial terms, giving Mattress Firm no choice but to tenminate the relationship. The termination resulted in Tempur Sealy losingits largest retailer. Tempur Sealy shareholders did not take this news well.Shortly aft er the termination was announced, shares of Tempur-Sealy s parent, Tempur-Sealy Intemational, Inc. (NYSE: TPX), plummeted. Over two {00215487.D0C} -1- trading days, shares of Tempur Sealy fell nearly 30% and the company lost approximately $1 billion in market capitalizatio Thenews of this downfall was covered extensively by the financial press: Tempur Sealy Shares Drop After Mattress FirmContracts Terminated ALL TREET OURNAL, Jan. 30, 2017. Tempur Sealys stock rocked after Mattress Firm contracts are terminated: Mattress maker shares suffer biggest one day selloff in nine years ARKET ATCH, Jan. 31, Shares of Tempur Sealy Crash After It Ends Contracts With Biggest Customer EUTERS Jan. 30, 2017. Tempur Sealy Tumbles After Losing Contracts With Mattress Firm LOOMBERG, Jan. YOU RE FIRED: Tempur Sealy Loses Major Contract with Mattress Firm Holdings, Shares Plunmmet ANK OIN, Jan. 30, 2017. One article even questioned. Is Tempur Sealy s Nightmare] ust Beginning? AHOO INANCE, Jan. In retaliation, and contrary to the earlier representations of its executives, Tempur Sealy announced that it would stop shipping its product to Mattress Firm immediately, thereby cutting off Mattress Firm s supply of inventory, despite knowing that hundreds of orders were pending and millions of households in the country had recently received Mattress Firm advertisements for Tempur Sealy products. After extracting a $10million payment from Mattress Firmas acondition to enteringinto nagreement forasmooth transition period, Tempur Sealy and Mattress Firm entered into two identical letter agreements (one with Tempur Pedic and one with Sealy) dated January 30, 2018, (hereafterthe LetterAgreements wherebyTempur Sealy agreed to continue to pt orders from Mattress Finm for Tempur Sealy products during a wind down period lasting until Apmil 3, 2017. {00215487.D0C} Within days of entering into these agreements, however, Tempur Sealy embarked on. a systematic, bad faith campaign aimed at extracting retribution for their losses and depriving Mattress Firm of the benefits of the Letter AgreementsTempur Sealy s tactics included not delivering product on time, not taking orders for product, not shipping product from all warehouse locations, ceasing production of Mattress Firm exclusive product lines, shipping product that failed to conform to agreed specifications, refusing to allow orders up to Apnil 3 refusing to process back order of product ordered on or before April 3 Tempur Sealy also began purchasingGoogle adwords withthe Mattress Fimname and used them to embark on a nationwide intemet advertising campaign implying that shoppers should avoid Mattress Firm s alleged aitand witch sales tactics and instead buy direct ly from Tempur Sealy.In addition, Tempur Sealy encouraged its other retailers to run false advertisements stating that Tempur Sealy products were not available at Mattress Firm, although Tempur Sealy was well aware that Mattress Firm had more than $100 million of Tempur Sealy inventory to sell and was fully authorized under the Letter Agreements to not only sell such inventory but also to utilize Tempur Sealy s trademarks in its advertisements to do so These actions, which are described in detail below, breached the Letter Agreements deprived Mattress Firm of the benefits of those agreements, and interfered with Mattress Firm relationshipswith its retail customers Mattress Firm therefore seeks an award of damages and its reasonable attomey s fees. DISCOVERY CONTROL PL Discovery is being conducted under Level 3 pursuantto IV Mattress Firm seeks monetary relief far in excess of {00215487.D0C} PARTIES Plaintiff Mattress Firm, Inc. Mattress Firm is a Delaware corporation with its principal place of business in Harris County, Texas. Defendant Tempur Pedic North America, LLC ‘Tempur Pedic is a Delaware limited liability company that does business in Harris County, Texas and has, as its sole member, a corporation organized and existing under the laws of the State of Delaware. Tempur Pedic has appeared in this case and may be served throughits attomeys of record Defendant Sealy Mattress Company Sealy is an Ohio corporation that does business in Harris County, Texas. Sealy has appeared in this case and may be served through its attomeys of record. JURISDICTION VENUE This Court has jurisdiction over this case under Article V, Section 8 of the Texas Constitution and Section 24.007 of the Texas Govemment Code. The damages sought in this case are within the jurisdictional limits of thisCourt. Defendants are subject to personal jurisdiction in Texas because they conduct business in Texas, entered into contracts in Texas, have continuous and systematic contacts with Texas, and the claims in this case arise out of or relate to Defendants contacts with Texas. Defendants are also subject to personal jurisdiction in Texas because Defendants contractually consented to jurisdiction in Texas. {00215487.D0C} Venue is proper in Harris County, Texas because a substantial part of the events giving rise to the claims in this case occurred in Hanis County, Texas. Venueis also properin Hanis County because Defendants contractually agreedto venue in Texas, and Plaintiff principal place of business is in Haris County, Texas. FACTUAL BACKGROUND For nearly two decades, Mattress Firm was the premier retailer of Tempur Sealy products. The relationship was mutually beneficial for much of that time. As the relationship grew, Mattress Firm devoted increasing resources and advertising dollars — support the Tempur Sealy business and brands. At the same time, Mattress Firm was increasing its own national footprint through organic growth and acquisitions of other mattress retailers. Mattress Fim long tem bility to be the premier Tempur Sealy retailer played a crucial role in that continued growth. But, unfortunately, Tempur Sealy chose to capitalize on Mattress Firm s efforts to grow as a company rather than support it, which ultimately led to Mattress Firm tenminating the relationship. The relationship between Mattress Firm and Sealy was govemed by a Master Retail Agreement effectiveJanuary 1, 2014 anda2015 2017 Annual Merchandising Program greement together with various amendments to these agreements (collectively the Sealy Agreement Likewise, the relationship between Mattress Firm and Tempur Pedic was govemed by a Master Retail Agreement, effective January 1, 2014, and a 2015 2017 Business Development Program Agreement, together with various amendments to these agreements (collectively, the Tempur Pedic Agreement {00215487.D0C} he Sealy Agreement provides, among other things, that Mattress Firm is an authorized retailer of Sealy products and obligates Sealy to sell its products to Mattress Firm. Likewise, the Tempur Pedic Agreement provides, among other things, that Mattress Firm is an authorized retailer of Tempur Pedic products and obligates Tempur Pedic to sell its products to Mattress Firm. Over the years, Tempur Sealy gradually imposed more and more exacting economic conditions and operational restrictions on Mattress Firm and Mattress Firm had little choice but to accept those requirements because it needed to keep Tempur Sealy products on its sales floors. om the beginning of 2016strategically timed to threaten crucial events in Mattress Firm businessTempur Sealy threatened to cancel the existing agreements unless Mattress Firmagreed to revise or renegotiate their deal to incorporate economic terms that were increasingly favorable to Tempur Sealy at the expense of Mattress Fim Mattress Firm acquiesced to several of these demands, but Tempur Sealy continued to push formore. By the beginning of 2017, the parties had reached an economic impasse On January 23, 2017, representatives of Mattress Firm met with representatives of Sealy and Tempur Pedic and informed them that, due to the evolving nature of the mattress business and Defendants unwillingness to accept reasonable economic terms, Mattress Firm had decided to end its relationship with Sealy and Tempur Pedicand discontinue selling their products. Because oth theTempur Pedic Agreement and the Sealy Agreement require at least 30 days advance written notice of termination, and because of the logistics of winding up such an extensive relationship, Mattress Firm suggested ending the relationship on or shortly after May 1, 2017. {00215487.D0C} Tn response to Mattress Firm decision, Scott Thompson ( Thompson _ the Chief Executive Officer of Tempur Sealy Intemational, Inc. (the parent company of Sealy and Tempur Pedic), assured Mattress Firm that: whatever we do, we want to do it in a way that is first rate, classy for both organizations, and in a way that is the most stable and useful way for you, Mattress Firm. That whatever you need to do in transition, I will be the first to tell you that we will be there to transition with quality product, ontime, for whatever you need; let s just get that off the table to start with and there will be no hesitation in the supply chain. Thompson further committed to orking together ona transition plan and to do itin a way that both companies can feel good about it. He even closed the meeting by saying let make this smooth and as professional as possible. In the days that followed, Tempur Sealy tried to salvage the Mattress Fim relationship and encouraged further negotiations. Mattress Firm was of course willing to continue discussions, and proposed commercial terms that struck a greater economic balance between the parties but nonetheless were still more favorable for Tempur Sealy than Mattress Firm hese discussions ultimately proved unsuccessful, however, as Tempur Sealy was unwillingto compromise its rigid commercial position. Notwithstanding its statements and assurances of Tempur Sealy executives that the transition would be smooth and stable, and in direct contravention of the obligation to provide 30 days advance notice of termination, Sealy and Tempur Pedic sent letters to Mattress Firm late in the aftemoon on Friday, January 27, 2017, purporting to terminate the agreements immediately. The letters stated that Sealy and Tempur Pedic would send no further products to Mattress Firm and would even stop delivery of products already in transit They declared that they do not accept and will not deliverany pending orders and will reclaim any products that arein transit. Suchswiftand {00215487.D0C} immediate action not only had a detrimental impact on Mattress Firm s business but adversely affected existing customers whose orders would be cancelled without xplanation. Further, Mattress Firm wes at risk of being in direct violation of consumer protection laws as future customers were likely to visit Mattress Finm in response to the substantial amounts of Tempur Pedic focused advertising deployed in anticipation of the upcoming holiday weekend and would need to be told that those Tempur Sealy products were not available as advertised. Defendants also demanded that Mattress Firm promptly cease all use of Sealy and Tempur Pedic trademarks, trade names, images, and promotional materials, and that Mattress Firm cease holding itself out in any way as an authorized retailer of their products. The letters further demanded that, within five business days, Mattress Firm cancel all advertising referring to SealyorTem —_ Pedicand take downall signsinits stores referencing their names. Throughout the weekend, Mattress Firm urged Sealy and Tempur Pedic to work with Mattress Firm on a reasonable transition timetable as their CEO had assured Mattress Firm they would. n January 29, 2017, Mattress Firm sent Sealy and Tempur Pedic a letter attempting to convince them to uphold their obligation to provide thirty days notice of termination, stressing that termination without the required notice was improper and would adversely affect Mattress Fimand its customers. OnJanuary 30, 2017, the parties agreed that Sealy and Tempur Pedic would continue toperformtheAgreement through Apmil 3, 2017. The parties executed letteragreements providing, among other things, that —_ ttress Firm would pay $10 million to Sealy and Tempur Pedic no later than February 28, 2017 to ensure that Sealy and Tempur Pedic would (a) continue to accept orders from Mattress Firm through Apnil 3, 2017; (b) timely fulfill and deliver such orders at the locations and dates specified the orders; and (c) provide retum credits for products that were retumed before {00215487.D0C} January 30, 2017 (the LetterAgreements ). In connection with the Letter Agreements, Sealy and Tempur Pedic informed Mattress Firm that they had elected not to exercise their right to repurchase Tempur Sealy products from Mattress Firm at the conclusion of the transition period and that Mattress Firm was responsible for the sale or disposal of all remaining inventory. Sealy and Tempur Pedic have not honored the January 30, 2017 Letter Agreements. Specifically on or about March 3, 2017, Sealy and Tempur Pedic stated for the first time that they would not ship any products, including any open back orders, after April 3, 2017. That meant at Mattress Firm had to prematurely stop selling Tempur Pedic and Sealy products to ensure all products would be shipped before that date. Furthermore, Sealy and Tempur Pedic took steps to put Mattress Fim competitive disadvantage during this transition period. In particular, they sought at every tum to censor Mattress Firm s advertising efforts by repeatedly accusing Mattress Firm of violating brand standards applicable to its advertising Tempur Sealy products. heseaccusations were basedona discriminatory interpretation of the brand standards that Sealy and Tempur Pedic do not apply to Mattress Firm competitors and that go beyond the express language of the standards The thrust of their actions has placed Mattress Firm ata competitive disadvantage as the company attempted to sell off its remaining Tempur Sealy inventory Also contrary to the express terms of the Letter Agreements, Sealy and Tempur Pedic informed Mattress Firm that the only intellectual property that could be used by Mattress Finm in the sale of remaining inventory is the product label stitched or otherwise affixed to the product itself. At the same time, Sealy and Tempur Pedic engaged in false and misleading advertising designed to injure Mattress Firm s business and reputation. Forexample, afterdelaying or refusing to fulfill order from Mattress Firm, in violation of the Letter Agreements, Sealy and {00215487.D0C} Tempur Pedic publishedadvertising specifically targeted at Mattress Firm s customers and directly tied with the search term Mattress Firm urging them to Avoid he Bait Switch at Mattress Firm and, instead, buy direct from Sealy and Tempur Pedic. The targeted nature of Sealy and Tempur Pedic s deceptive advertisingis clea ly illustrated by online Google searches forseveral major U.S. markets. For instance, searches for Mattress Firm conducted on March 7, 2017 for Boston, New Y ork, San Diego, and San Francisco produce alist of links where the very first item listedeven before Mattress Firmwas one of Defendants Bait And Switch vertisements suggesting that Mattress Firm promises to deliver Sealy and Tempur Pedic products but is unable to keep its promise, so the consumer should purchase the items direct from Sealy and Tempur Pedic. This campaign was conducted in numerous other markets as well, including Indianapolis, Oklahoma City, Philadelphia, and Portland. And Defendants misleading narrative is made more effective (and damaging) by Defendants wrongful delays and refusals to deliver products to Mattress Firm, which ultimately impacts Mattress Firm s customers. CAUSES OF ACTION Breach of Contract Plaintiff alleges and incorporates by reference the previous allegation of this Petition. The Sealy Agreement, Tempur Pedic Agreement, and Letter Agreement collectively, the Agreements are valid and enforceable contract Because the Agreements pertain to the sale of goods, they are subject to the applicable provisions of the Uniform Commercial Code (“UCC”), as codified in US ODE et seg. and§ 2.101 et seq.As part o their contractual obligations required under the Agreements, Defendants were obligated to ship mattress as specified in the purchase orders placed by Mattress Fim. Within 48 hours after {00215487.D0C} Mattress Firm paid Defendants $10 million for a smooth transition pursuant to the Letter Agreements, Defendants began to breach the Agreements by putting Mattress Finm’s deliveries “at the back of the li ” behind its other retailer customers (and Mattress Firm’ s competitors) resulting in system wide delivery delays across Mattress Firm's 3,500 retail stores. This wrongful conduct took a substantial toll on Mattress Finm’s business and has cost the company millions of dollars in damages and substantially injured the company’s goodwill. Moreover, Defendants have taken an on again off again approach to their obligations to accept orders through April Throughout the transition period, several markets were subjected to unexpected shipping delays, farin excess of historical experience. As the actual termination date drew near, Defendants repeatedly stated that the shipment of products would cease as of April 3, 2017. When Mattress Firm operational personnel questioned them on this issue, Defendants held firm to the position that deliveries would be cut off on April 3 and back orders that remained open on that date would be cancelled and unfulfilled This position, which was in direct violation of the obligation to fulfill orders placed by that date, caused Mattress Firm to terminate sales Tempur Sealyproduct rather than face thevery real risk that customers would feel that a bait and switch tactic had been used when orders did not comein In an about face, Defendants indicated late on March 29 that it would continue to fulfill orders placed through Apmil 3. At that point, however, the damage had been done. In anticipation of the loss of product supply, Mattress Firm had already deactivated Tempur Sealy products from its system and lost sales as a sult. Defendants have further breached the Agreements (a) delaying their delivery of products; (b) not accepting orders for product; (c) not delivering product on time; (d) not shipping product from all warehouse locations; (e) ceasing production of Mattress Firm exclusive product {00215487.D0C} lines (e.g., the HD product line); (f) failing to deliver products in accordance with Plaintiff s orders and specifications (g) shipping the wrong products; and (h) refusing to allow orders up to April 3 While Defendants’ actions described above were straightforward breaches of the Agreements, since the Agreements are subjectto the UCC, Defendants were obligated to comply with the duty of good faith mandated by the UCC. See ODE§ 1.304. That duty obligated the Defendants to “observe reasonable commercial standards of fair dealing” in performing their obligations under the Agreements. ODE. § 1.201(b)(20). The Defendants various misbehaviors do not reflect “reasonable commercial standards of fair dealing.” Defendants failed to comply with this required standard of conduct by, among other things: engineering the unavailability of products at Mattress Firm by refusing to timely ship products and then running ads questioning Mattress Firm's ability to provide Defendants productsto consumer purchasing Mattress Firm “ad words” or “key words” in an effort to divert intemet shoppers to Defendants instead; encouraging and facilitating competitors to nm false and misleading advertisements conceming Mattress Firm; undermining Mattress Firm's efforts to advertise and promote the sale of Defendants products; causing Mattress Finm’s advertising expenses to increase as a result of the Defendants actions;and. frustrating the value of the Agreements to Mattress Firm, includingthe value of the advertisingco op, as a result of the Defendants wrongful conduct. Defendants simply did not live up to their promise to make the transition “smooth and as professional as possible.” {00215487.D0C} Plaintiff as sustained damagesasaresult of Defendants breaches of the Agreements in an amount in excess of the jurisdictional limits of this Court. Mattress Firm’ s damages in this case are as high as $49,000,000.00. Promissory Fraud Plaintiff re alleges and incorporates by reference the previous allegations of this Petition. As shownabove, the backdrop for the execution of the Letter Agreements shows that the path for unwinding the parties’ relationship was going to look like a bitter divorce. Once Mattress Firm announced its intent to tenninate their contracts, the executivesatTempu Sealy knew it would be a rocky road ahead for their business. With the announcement of the loss of Mattress Firmas a customer, Tempur Sealy was hit with a loss of $1 billion in corporate value that set the stage for a series of acts designed to impede Mattress Firm's business, as Tempur Sealy contemplated a world without access to Mattress Firm’s 3,500 retail outlets. This started with the extraction of $10 million from Mattress Firm for a smooth transition pursuant to the Letter Agreements. However, the evidence indicates that Tempur Sealy had no intention of making the transition smooth for Mattress Firm. Within hours of execution of the letter Agreements Tempur Sealy began to breach the Agreements by: (a) delaying their delivery of products; (b) not accepting orders for product; (c) not delivering product on time; (d) not shipping product from all warehouse locations; (e) ceasing production of Mattress Firm exclusive product lines (e.g., the HD product line); (f) failing to deliver products in accordance with Mattress Finm’s orders and specifications; (g) shipping the wrong products; and (h) refusing to allow orders up to April 3.Despite a clear contractual requirement to deliver products as specified in Mattress Firm product orders, Tempur Sealyplanned to put Mattress Firm shipments behind their other “go forward” customersa plan {00215487.D0C} that would clearly have the effect of disrupting Mattress Firm’ s business to the benefit of those very same forward customers. Of course, Tempur Sealy combined their actions with intemet marketing efforts designed to suggest to intemet shoppers that they would get hit with a “bait and switch” from Mattress Firm at a time when they orchestrated product delays approaching 40% of Mattress Finm’s orders. Under Texas law, a promise to do an act in the future is actionable fraud when made withno intent of performing theact. Lack of intent to perform can be inferred from Defendants’ acts after the promise was made. Because intent to defraud is not susceptible to direct proof, itinvariably must be proven by circumstantial evidence. Indeed, slight circumstantial evidence of fraud, when considered with the breach of the promise to perform is sufficient to show fraudulent intent The events leading up to the execution of the Letter Agreements provide evidence that Defendants’ conduct before and after the Agreements were signed detailed above provides strong circumstantial evidence that Defendants had no intention of performing the Agreements at the time they were made. Mattress Firm has sustained damages as a result of Tempur Sealy’s fraudulent promise in an amountin excess of the jurisdictional limits of this Court. Mattress Firm’ sdamagesin this case are as high as $49,000,000.00. VII. EXEMPLARY DAMAGES Mattress Firm allege and incorporate by reference the preceding paragraphs of this Petition. {00215487.D0C} Tempur Sealy acted with fraud and/or malice as defined by Texas Civil Practice and Remedies Code § 41.001(6) & (7). Accordingly, Plaintiff entitled to an award of exemplary damages against Tempur Sealyin an amount to be determined at trial. VII. CONDITIONS PRECEDENT. All conditions precedent to the assertion of the causes of action herein, and the remedies sought herein, have been performed or have occurred or have been waived or excused by Tempur Sealy VIII. ATTORNEYS FEES This action is founded on written contracts between the arties and Plaintiff is therefore entitled to recover its reasonable attomeys fees incurred in addition to the amounts otherwise recoverable. IV. RAC ODE§ 38.001. Mattress Firmis represented by an attomey, Plaintiff claim was presented to Tempur Sealy more than 30 days prior to the trial of this action by the service of Plaintiff Original Petition, and the just amount owed has not been tendered. REQUEST FOR JURYTRIAL Pursuant to Texas Rule of Civil Procedure 216, Plaintiff requests trial by Jury and has tendered the required fee. RAYER WHEREFORE, PREMISES CONSIDERED, Plaintiff Mattress Finn, Inc. respectfully requests that Defendants Tempur Pedic North America, LLC and Sealy Mattress Company beserved and cited to appear, and that upon final trial Plaintiffhave judgment for actual damagesfor breach of contract {00215487.D0C} actual damages for promissory fraud; exemplary damages to be awarded in the Jury’ s discretion reasonable and necessary attomeys fees; prejudgment and post judgment interest; costs of suit and such otherand furtherrelief, general and special, legal and equitable, to which Plaintiffmay show itself to be justly entitled. DATE August Respectfully submitted, ICKS HOMAS /s/ John B. Thomas John B. Thomas (Attorney charge Texas Bar No. 19856150 jthomas@hicks thomas.com Paul L. Mitchell Texas Bar No. 14217920 pmitchell@hicks thomas.com J. Stephen Barrick Texas Bar No. 00796168 sbamick@hicks thomas.com KelseyM. Machado Texas Bar No. 24078968 kmachado@hicks thomas.com 700 Louisiana Street, Ste. 2000 Houston, Texas 77002 Tel.: (713) 547 Fax: (713) 5 ATTORNEYS FOR PLAINTIFF MATTRESS FIRM, INC. {00215487.D0C} CERTIFICATE OF SERVICE T hereby certify that a true and correct copy of the foregoing Third Amended Petition was served upon all counsel of record viaelectronic serviceAugust RobertJ. Carty, Jr. Jesse M. Coleman John P. Phillips EYFARTH 700 Milam Street, Suite 1400 Houston, TX 77002 William N. Berkowitz Brandon Bigelow William F. Benson EYFARTH Two Seaport Lane, Suite 300 Boston, MA 02210 /s/John B. Thom John B. Thomas {00215487.D0C}