Unfair Competition: Everything You Need to Know
Unfair competition occurs when another company uses wrong or deceptive business practices to gain a competitive advantage.10 min read
What Is Unfair Competition?
Unfair competition occurs when another company uses wrong or deceptive business practices to gain a competitive advantage. The major category of unfair competition relates to intentional confusion of customers as to where the product came from, while the secondary category relates to unfair trade practices. Some of the most common forms of unfair competition include:
- Bait-and-switch selling technique, such as substituting a lower-cost product from a different brand for a more expensive, higher-quality product.
- False advertising or making false claims about a product to promote it.
- Misappropriation or use of confidential information, such as stealing a competitor's special formulation or other trade secrets.
- Trade dress violation, or copying the physical appearance of a product and/or packaging in the attempt to fool a customer into buying it.
- Trademark infringement.
- Breach of a restrictive covenant, such as a non-compete clause.
- False representation of services or products, such as exaggerating the capabilities of a product.
- Reverse passing off, or misrepresenting the source of a product by failing to inform the public who created it.
- This often happens when a company removes the mark from a product and then sells it.
- Unauthorized substitution of one brand of goods or products for another.
- Trade libel/slander or rumormongering, such as written or verbal communications that would ruin or harm a company's reputation in the industry.
- In order to qualify as trade libel/slander, the false communication must decrease the confidence, respect, or regard in which your business or product is held. Trade defamation is typically a civil matter, although in serious cases, it can become a criminal matter.
- Imitation or counterfeiting.
- Below-cost selling.
State laws mainly govern unfair competition, although issues of trademark infringement, false advertisement, and copyrights often involve federal laws as well. If the issue poses a conflict between state and federal laws, the federal laws will generally pre-empt the state laws.
The United States Congress established The Federal Trade Commission (FTC) partly to protect consumers and other business owners from unfair competition risks. Title 16 of the Code of Federal Regulations contains more information about specific deceptive trade practices that can cause damage to businesses and confusion among consumers. This branch of intellectual property law particularly relates to the practice of substituting one company's goods or services for another with the intent of misleading the consumers.
There are four main devices used by businesses to distinguish themselves from others. These are:
- Trade names: used to identify the name of a partnership, corporation, sole proprietorship, or other business entity. A business might register the trade name with the government and operate under that name, or it could be an assumed name under which the business is known the public. One example is a restaurant known as "John and Harriet's Bar and Grill" among locals, but is registered under the name "Boston Corner Tavern." In this case, both names would be considered trade names within the unfair competition laws.
- Trademarks: words, symbols, phrases, slogans, emblems, and other devices used to signify authenticity and source to the public. When a company uses a registered trademark, a customer can easily identify the product and maintain loyalty to the brand.
- Service marks: similar to trademarks but for services instead of goods. For example, Orkin Pest Control provides pest control services, so the company's protection is registered as a service mark.
- Trade dress: the physical appearance of a product, or the manner in which it is presented, packaged, wrapped, or promoted, can all fall under trade dress. Trade dress can also include the shape, design, shape, and/or texture of a specific product or packaging. Even certain color combinations can serve as a company's trade dress, such as the red and yellow color scheme used by Chevron Chemical Company.
In order to qualify for protection, these four main devices must be distinctive. Using generic phrasing or words could limit competition, so these are not eligible for trademark protection.
These devices qualify as intangible assets for a business, along with its creative works, inventions, and artistic efforts. The additional intangible assets are considered trade secrets, which could include processes, formulas, patterns, techniques, programs, mechanisms, compounds, or tools that provide the company with the opportunity to gain an advantage over competitors. Trade secrets can't be copyrighted or patented so they are typically only shared with a select group of people who will keep them private.
The owner of a trade secret can exclusively use and benefit from the information. The law of unfair competition provides a way to protect trade secrets through reasonable steps. On the other hand, commercial information that is shared with the public retains little to no commercial value. Theft of trade secrets can result in those releasing the information being held liable for damages and economic injuries. An employee or former employee could also be held liable for sharing trade secrets.
Copyright and patent laws can protect information released to the public, as long as the information is protected under those laws. In order to qualify for patent or copyright protection, you must file applications with the appropriate government agencies. Copyright laws protect original works, such as dramatic creations, movies, sound recordings, pantomimes, musical scores, and books. Patent laws protect inventions, such as chemical formulas, manufacturing processes, mechanical devices, and electrical equipment.
There are several additional facets to unfair competition laws. These include:
- The Exhaustion Doctrine
The Exhaustion Doctrine allows a distributor to market a branded item in its original, unchanged state. The distributor can also advertise the sale of a product associated with a well-known service mark or trademark. In order to prevent confusion of origin, the distributor must clearly state the extent of its connection to the owner of the mark. Without proper branding and clarification, the owner of a mark could take legal action against anyone using the mark improperly.
- Implied Reverse Passing Off
Implied reverse passing off occurs when a company or individual removes a mark from a product for sale, attempting to pass off the product as something else. Courts recognize this claim under section 43(a) of unfair competition laws. If the federally registered mark is removed, this can lead to confusion among consumers. Thus, removing it violates section 43(a).
One example of implied reverse passing off was a court case between PIC Design Corp. and Sterling Precision Corp. At that time it was more difficult to prove implied reverse passing off since the Lanham Act only restricted applying a false designation of origin, not removing an existing mark, as a violation. Changes to the Lanham Act in 1988 gave more protection against infringement of trademarks, service marks, trade names, and trade dress.
Within those changes, which came through in The Trademark Revision Act of 1988, Congress also removed the original language related to implied reverse passing off. There is still some confusion around the language within section 43(a) since some courts believe that it doesn't include language requiring express attribution. Several cases have come out since where those involved claim that they were not given credit, or attribution, for their contributions on specific works.
- Express Reverse Passing Off
Express reverse passing off occurs when a company or individual removes the mark on a product or service and then rebrands the item to pass it off as his or her own. Doing so violates section 43(a), although the protection is not limited only to registered marks. Any type of express reverse passing off that causes confusion could still violate section 43(a). Taking legal action against express reverse passing off can be challenging because the courts do not always apply consistent rules and guidelines in terms of what violates the law. Appropriate business behavior, perceived intent, and the subjective nature of the analysis can all factor into a decision and outcome.
The changes in 1988 to section 43(a) also gave the courts a likelihood of confusion test, which is often used to determine whether the incident could cause confusion among consumers. In a court case between Commodore Import Corp. and Hiraoka & Co. Inc., the court ruled that when the defendant purchased replicas of the plaintiff's product and sold them as their own, express reverse passing off did not occur. Courts tend to give deference to goods that are publicly available, such as in the previous example where the defendant could buy replicas.
In another court case, Arrow United Indus. was purchasing dampers from another company, Hugh Richards, Inc. and reselling them with slight modifications. One of those modifications was replacing the Richards mark with Arrow's own mark. Since Arrow was modifying and reselling dampers made by another company, the court found this situation to be fair ground for litigation. There are a number of cases where companies remove the mark and resell the goods as their own. When doing so causes confusion, it could be a violation of express reverse passing off.
However, express reverse passing off does not necessarily require tampering with an existing mark. One example of this is a case between Landoll Inc. and Waldman Publishing Corp. Both companies publish children's books, but Landoll violated the rules around express reverse passing off because the court found that the structure, illustrations, and texts of the competing books are too similar to be coincidental.
A bulletin board operator shared images from Playboy magazine without consent, leading to potential confusion among consumers who might believe that Playboy authorized use of those photographs. That same operator removed the Playboy trademark and replaced it with his own, leading to further confusion. This constituted reverse passing off in the Eleventh Circuit federal district court.
Cases of express reverse passing off exist across a variety of industries, including hospitality, manufacturing, entertainment, printing, and more. When the plaintiff can prove that the actions of the defendant led to confusion among consumers, the court is more likely to rule in their favor in terms of a valid express reverse passing off claim.
- Conversion into a New Product (Altering the File)
If the defendant in a court case converts the plaintiff's product into something different, a reverse passing off violation does not exist. In the Playboy case, the court determined that the defendants only stripped the product of its original identity without converting it into something different. When substantial similarity exists between the products from the defendant and the plaintiff, it could be considered reverse passing off.
Why Are Unfair Competition Laws Important?
Unfair competition laws serve five main purposes. These include:
- Helping to protect intellectual, economic, and creative investments made by business owners.
- Preserve goodwill between businesses and their customers.
- Deter businesses from stealing ideas and appropriating the goodwill of their competitors
- Promote stability and clarity by making products clear to customers
- Increase competition among companies within similar industries by providing incentives to offer better goods and services
These five purposes allow companies to distinguish themselves and their products from others. Without these laws in place, it would be nearly impossible to establish your company and products, along with any unique aspects that set it apart from others. It would also be much more challenging for customers to maintain any type of brand loyalty since other companies could produce similar or even identical products meant to create confusion.
The Lanham Act also further protects company owners from trademark infringement, copyright infringement, and false advertising. Between the various laws and clauses in federal and state laws, a number of protections help restrict anything from misappropriation to the production of counterfeit products.
Reasons to Consider Not Using Unfair Competition
You should never commit any act that could be considered unfair competition. Doing so puts you at risk for legal action. You could also be responsible to pay monetary damages to the company against which you committed the action.
Reasons to Consider Using Unfair Competition
The only reason to consider using unfair competition is if you are using the laws to your advantage. Business owners should never violate unfair competition laws to get ahead in their industries. You could face serious consequences that could bankrupt your business, so it's never worth it.
Unfair competition laws will not penalize companies simply because they are successful. They also will not hold a company liable for using aggressive marketing techniques to get its products into the market. The ultimate purpose of unfair competition laws is to restrict companies from profiting unfairly at the expense of another company.
Any contract, whether written or oral, qualifies for protection from unfair competition or interference. Malicious and monopolistic practices aimed at injuring a competing company are examples of improper use of competition to get ahead.
What Could Happen When You Suspect Unfair Competition?
If you feel that another company is using unfair competition against your business, you might be able to take legal action. It is easier to win a case if you have legal protection, such as copyrights, trademarks, and/or patents. However, unfair competition laws are also designed to protect consumers as well as owners of businesses of all sizes. If consumers are harmed due to unfair competition, such as through false advertising or bait-and-switch selling techniques, the FTC will often get involved as well.
The U.S. Constitution also includes Article 1, Section 8, Clause 3, also called the Commerce Clause, which further backs unfair competition laws. Through this additional legal protection, Congress can address fraudulent acts that relate to unfair competition. Several states within the U.S. have also adopted the Uniform Trade Secrets Act to protect trade secrets and deal with issues that arise from them.
What Could Happen When You Break Unfair Competition Laws?
If you are breaking unfair competition laws, you could face serious legal consequences. Since federal laws could be at stake, you could end up dealing with the FTC or facing a lawsuit in a federal court. Businesses and consumers have a number of laws on their sides to prevent unfair competition and take action against those who violate those laws. Some states also have additional laws in place that could make the penalty even more severe. For example, California laws allow for injunctive relief and monetary damages where necessary.
When awarding monetary damages, the courts will take several factors into account:
- Length of the misconduct
- Number of violations
- Willfulness of the misconduct of the defendant
- Nature and severity of the misconduct
- The liabilities, assets, and net worth of the defendant
Some examples of how other companies have broken unfair competition laws include imitating or counterfeiting the title, name, color scheme, shape, patterns, size, or distinctive peculiarities of a specific product. Additionally, imitating the general appearance of packaging of another product in a way that misleads the customer also goes against unfair competition laws.
Frequently Asked Questions
- Is using a logo similar to another company's considered unfair competition?
If the logo is similar enough to cause confusion among consumers, it could be considered unfair competition. It is especially difficult to fight against a lawsuit in the case where the other logo has federal trademark protection. Before using any type of logo, make sure to review the trademark database through the United States Patent and Trademark Office (USPTO) to avoid unintentional unfair competition.
- Do I have any legal protection against a company owner who is speaking negatively about my business?
Yes, this could be considered trade defamation. Trade slander (spoken communication) is harder to prove, but trade libel (written communication) could be used as proof in an unfair competition lawsuit. Under the First Amendment, you must prove that any defamatory statement was made with actual malice. The U.S. Supreme Court defines actual malice as any representation made with knowledge of its falsity or in reckless disregard of the truth.
Steps to File
When someone breaks any of the federal or state unfair competition laws, you can take legal action against them. The best way to do so is to hire a lawyer who can review your case and help you better understand the laws. They can be very complex.
If you need help with unfair competition, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.