Unfair Competition
In the United States, unfair competition is an umbrella term for a number of different economic torts. Unfair competition can be used in reference to a number of deceptive practices which can ultimately cause harm to both businesses and consumers.
Examples of unfair competition include such practices as:
- False, misleading, and deceptive advertising,
- Fraudulent activities,
- Artificial lowering of prices,
- “Passing off” goods in a way that hides their true origin,
- Bait-and-switch or other unauthorized substitutions of one brand of goods for another,
- Trade libel or rumor mongering, and
- Misappropriation of trade secrets, among other practices.
While many of these economic torts are prohibited by state laws, unfair competition can often involve some level of trademark or trade dress infringement, or even the selling of counterfeit goods where one party is copying the shape, size, colorways, or feel of another product or its packaging.
What is Unfair Competition?
Unfair competition is a term that encompasses several different deceptive business practices that are meant to confuse consumers as to the source of goods or services or harm the reputation or goodwill of other businesses.
Sometimes, the phrase “deceptive trade practices” is used to specifically refer to actions where consumers are misled, while “unfair competition” specifically refers to actions designed to restrict a company’s revenue.
Penalties for unfair competition may include:
- Restitution to businesses injured by the action in the form of lost profits or other monetary damages,
- Punitive damages, designed to punish the defendant,
- Attorney’s fees and costs, and
- Equitable relief in the form of an injunction.
In the United States, most forms of unfair competition are generally governed at the state level, although the federal Lanham Act, which regulates trademark infringement, is often invoked in false advertising claims. Additionally, the Federal Trade Commission (FTC) was established to protect consumers from this sort of deceptive trade practice. If state and federal laws or regulations conflict, federal laws will generally preempt the conflicting state laws.
Although unfair competition is typically governed by civil law, federal and state governments do have the ability to bring criminal sanctions against certain offenders.
There are a number of public policies that unfair competition laws are meant to address.
First, these types of laws protect business owners who invest time and money on improving their goods and services, as well as on distinguishing themselves from their competitors. Without these laws, businesses would have greater difficulty surviving among competitors selling sub-par products, designed to look like authentic items.
Second, businesses are able to create goodwill among their customers and consumers of their products because consumers are able to make informed decisions about the goods and services they purchase. This ability to make informed decisions encourages consumers to spend money confidently.
Third, these laws encourage honest competition among businesses to provide goods and services at a price appropriate to their quality. Healthy competition keeps prices in balance and avoids monopolies in certain markets. Because prices are kept in check, these laws protect consumers.
Fourth, unfair competition laws are designed to punish bad actors. By making deceptive statements or creating confusingly similar products, people and companies that engage in unfair competition are not profiting honestly. Our laws are designed to discourage and prohibit such behavior. Although the ultimate goal is prevention, states and the federal government have the ability to bring criminal actions against particularly bad actors.
It is important to remember that often, unfair competition laws are an important source of economic protection for small businesses, which may not see a profit for several years, or may have tight profit margins. These regulations give business owners an opportunity to participate in a level playing field.
Elements
Generally, unfair competition consists of two elements:
First, there is some sort of economic injury to a business, such as loss of sales or consumer goodwill. Second, this economic injury is the result of deceptive or otherwise wrongful business practice.
However, because unfair competition can refer to a variety of different economic torts, each tort will have its own test that must be met before a plaintiff can succeed in his or her case, although elements may overlap.
For example, if the unfair competition consists of false advertising, the plaintiff would need to prove:
- The defendant made a false or misleading statement of fact,
- The statement was used in an advertisement,
- The statement deceived or is likely to deceive customers in a material way, and
- The statement caused or is likely to cause injury to the plaintiff.
If the unfair competition consists of some element of fraud, the plaintiff would have to prove:
- The defendant made a false statement of material fact
- The defendant knew the statement was false
- The defendant intended to deceive
- The victim relied on the statement, and
- The victim suffered injury as a result of their reliance.
Generally, the different economic torts involve some level of intentional deception of consumers, whether as to price, quality, or origin of the goods or services.
Acts that constitute unfair competition may be different across industries, so inquiries into the existence of unfair competition typically require a fact-heavy analysis. However, the underlying action giving rise to this cause of action typically involves some level of fraud, deception, or bad faith.
Unfair Competition Under the Lanham Act
Federal unfair competition laws can be found in Section 43(a) of the Lanham Act which prohibitions against false advertising and trademark infringement.
Many practices that amount to unfair competition involve intentional or unintentional consumer confusion, which is the standard for bringing a case for trademark infringement under the Lanham Act. The unfair competition could stem from false statements made regarding the trademarked goods or services, or it could be included in a case against counterfeiters of branded goods.
If a plaintiff wins their case under the Lanham Act, they can receive monetary damages, which can include:
- Lost profits,
- Reasonable royalties,
- Funds to issue “corrective advertising,” meant to re-educate the public as to the correct source of goods or services affected by the unfair competition
- Attorney fees and costs, in certain situations, and
- Punitive or treble damages, if the defendant’s actions were particularly extreme.
Additionally, plaintiffs can seek equitable relief in the form of preliminary and permanent injunctions, which are designed to prevent defendants from engaging in further unfair competitive business practices.
There is no federal statute of limitations in the Lanham Act. Instead, federal courts look to the relevant state statute of limitations. In California, the statute of limitations for unfair competition is four years.
California Unfair Competition Law
In addition to potential causes of action under the Lanham Act, plaintiffs in unfair competition cases may be able to bring cases pursuant to state statutes. The California UCL gives standing to both private parties and public prosecutors pursuing unfair competition cases on behalf of state citizens.
This statute recognizes several definitions of unfair competition:
- Unlawful business acts or practices,
- Unfair business acts or practices,
- Fraudulent business acts or practices, and
- Unfair, deceptive, untrue, or misleading advertising.
Because the law is drafted broadly, as a widespread consumer protection measure, any number of actions can fall within its scope, as long as the action:
- Harms consumers or
- Gives one business an unfair benefit over competitors.
In order to succeed in a California unfair competition case specifically related to false advertising, a plaintiff will need to prove two elements:
First, the defendant must have engaged in unfair, deceptive, untrue, or misleading advertising. In California, “advertising” is broadly defined to include any word or definition associated with the sale of goods or services. When considering whether advertising is prohibited under this law, courts must consider the advertisement as a whole, looking at the entirety of the words and messaging, images, format, packaging, and overall impression on the relevant consumer base.
Second, the plaintiff must demonstrate that it suffered an injury, by showing it lost money, property, or some other commercial interest due to the defendant’s actions. This element is important to establish standing. Plaintiffs cannot bring a lawsuit against defendants without demonstrating standing.
If successful in an unfair competition case, private plaintiffs may recover any and all economic damages lost due to the unfair competition, as well as their attorney fees and costs. Plaintiffs may also request equitable relief, in the form of an injunction prohibiting the defendant from committing further actions that qualify as unfair competition.
The statute of limitations to bring an unfair competition case in California is four years. This period begins to run at the time the plaintiff discovered, or should have discovered the unfair competition if he or she had exercised reasonable diligence.
Cases and Examples
Unfair competition laws may be invoked in a variety of different situations and industries.
Businesses in every industry should be concerned with avoiding false advertising claims and making false or misleading statements about their own products, as well as those of their competitors. Companies selling beauty products may overstate their effectiveness or use digital editing to enhance the results of their product. Food products are also often advertised in a misleading manner, often by artificially lowering the serving size, or calling a product that is high in sugar “healthy.”
Companies may also utilize their competitors’ logos in advertising materials when comparing similar products. This is common in advertisements for home cleaning products, and could constitute false or misleading advertising if claims regarding the effectiveness of products are either over- or understated.
In the Tobacco II cases, the California Supreme Court heard a series of cases brought against tobacco companies alleging unfair competition. In these cases, the plaintiffs’ claims looked at false advertising and misrepresentation regarding the health risks of nicotine and tobacco. This case echoes other cases brought in the United States, alleging elements of fraud or fraudulent concealment.
Banks have also been the subject of unfair competition laws. These institutions are subject to the federal Truth in Lending Act (TILA) with regard to commercial loans. A famous California case, Bank of the West v. Superior Court, found violations of TILA when the bank miscalculated and did not disclose interest rates to consumers taking out car loans with the bank. The bank’s failure to abide by federal requirements to properly disclose the rates amounted to an unfair competition practice. Similarly, failure to adhere to other federal and state requirements when making commercial loans can also amount to unfair competition.
Other industries regulated at either the state or federal level, such as pharmaceutical companies, may also be subject to claims of unfair competition for failure to comply with these regulations. Companies making claims about the effectiveness of their products to treat ailments are tightly monitored by the Food and Drug Administration (FDA). If a company fails to adhere to these regulations, it could be subject to an unfair competition claim.
There are many different types of actions that amount to unfair competition. Common methods can include the following:
Bait-and-switch tactics involves substituting a low-cost or quality product for one that is more expensive or of higher quality. Often, these tactics might appear in the retail industry, where a store may advertise a certain product at a certain price, but the only products actually available to consumers are either more expensive or of lower quality. Bait and switch tactics may also be found in elements of a financial transaction that is later changed, such as the interest rate.
Below-cost selling or “dumping” involves selling products at an artificially low price in order to force competition out of the market.
Breach of non-competition agreement or non-compete clause occurs when the defendant, typically a former employee or business partner of the plaintiff, breaches an agreement not to offer competing goods or services in a particular geographic area for a specified period of time.
Counterfeiting occurs when a company makes a replica of a branded good, despite not having authority from the trademark owner to produce the product.
False advertising and false representation of goods or services happen when a defendant makes false statements in advertising materials regarding his or her product in order to promote it. This type of unfair method of competition could involve exaggerating the qualities of a particular product or statements about features or services that are not present.
Misappropriation of trade secrets occurs when the defendant utilizes its competitors trade secrets to its advantage. This could include stealing a secret formula or ingredient, or utilizing a competitor’s customer lists for its own advantage.
Passing off occurs when the defendant misrepresents the origin of goods or services. This type of unfair competition can be broken into different subcategories. Implied reverse passing off occurs when the defendant removes a product’s brand and attempts to “pass off” the product as something else. Express reverse passing off occurs when the defendant removes the product’s brand and then rebrands it, attempting to pass it off as the defendant’s own product.
Trade libel and rumor mongering involve attempts to purposefully damage the name, reputation, or goodwill of a company or its goods and services. The three elements of trade libel are:
- A false statement about the quality of the business or its goods or services,
- Publication of the false statement, in print or online, and
- Monetary loss to the business, as a result of the statement.
Each of these methods of unfair competition involves some level of intention to defraud or deceive other companies or the consuming public.
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