Most businesses have competitors that try to gain an advantage with consumers. While a competitor’s conduct may feel “unfair,” it does not always constitute “unfair competition” as defined by state and federal laws. These laws determine which deceptive and wrongful practices fall within the category of unfair competition. Such activities are harmful to other businesses as well as to the public, so it is imperative for companies to know and understand the rules.
What is Unfair Competition?
Unfair competition encompasses a wide variety of conduct that is deceptive, misleading or fraudulent, which causes economic harm to another business or individual. These actions are unlawful because they interfere with a free marketplace or cause confusion for consumers.
Types of Unfair Competition
Federal and/or state law may prohibit the following conduct:
- Theft or Misappropriation of Trade Secrets. Businesses have the right to bring an action to protect certain confidential information from competitors or other parties that could use the information to the business’s detriment. Trade secrets may include formulas, recipes, customer data, manufacturing processes and other information.
- Trademark Infringement (and/or Trade Name Infringement). Intellectual property law prohibits a party from using another party’s trademarks without permission. To establish a trademark infringement claim, there must be proof that the claimant owns a valid trademark, and that the alleged infringer’s use of the mark results in “a likelihood of confusion” with the owner of the mark.
- Palming Off (or Passing Off). It is illegal for a party to misrepresent the origin of goods or services by removing a product’s existing brand and passing it off as another brand.
- Unauthorized Substitution. Laws prevent a party from substituting one type of goods or services with another one without consent. Typically, the replacement goods or services are inferior to the original, thereby causing harm to consumers.
- Bait-and-Switch Selling Tactics. A business cannot advertise a product at a certain price and then claim it is out of stock and offer a similar product at a higher price. There must be some legitimate stock available for sale.
- Trade Libel (and/or Rumor Mongering). A party cannot publish (written or oral) false and malicious statements about a competitor.
- False Labeling or Advertising. False or misleading information about a product or service are prohibited by state and federal law. The Federal Trade Commission may become involved where consumers have been harmed by the false advertising.
- Below-Cost Selling (and/or Dumping). This occurs when businesses sell products below cost in order to entice customers away from competitors. Eventually, they gain a significant market share and can raise prices because competitors have been driven from the business. With dumping, businesses sell at a lower cost oversees than locally in order to receive foreign financial benefits. Generally, both practices are prohibited.
- Breach of Non-Competition Agreement. Employers may prohibit former employees from competing with the employer. However, non-competes are often scrutinized by courts to ensure they are necessary to protect the employer’s legitimate interests, do not impose an undue hardship on the employee, do not harm the public, and are reasonable in time period and geographic scope.
What Are the Elements of an Unfair Competition Claim?
Unfair competition must involve a wrongful business practice that causes an economic injury to a business. The specific requirements for establishing a claim for unfair competition vary depending on the type of misconduct alleged. For example, a false advertising claim would have different elements than a breach of a non-compete agreement. However, they tend to be of a similar nature. The misconduct causing the injury will involve some level of fraud, deception or bad faith. Typically, the economic injury that results is a loss of sales or property. However, it may also include a loss of goodwill.
What Remedies Are Available in Unfair Competition Actions?
An injured plaintiff may recover monetary damages as well as equitable relief in an action for unfair competition. Monetary damages compensate a party for the economic harm suffered, including lost profits. A plaintiff may also recover the profits made by the defendant or the costs the defendant avoided from its misconduct. Where a trade secret is involved, the plaintiff may obtain a reasonable royalty for the unauthorized disclosure or use of the trade secret. Attorney’s fees and punitive or treble damages are also available in certain cases.
Injunctive relief can be granted to force a defendant to cease its illegal conduct. In the case of trademark infringement, this may also include stopping the importation of and seizing and destroying infringing goods.
What Are Some Best Practices?
Where a claim is based on misappropriation of a trade secret, the plaintiff must prove that the information taken was in fact a confidential trade secret. To qualify as a trade secret, the owner must have taken reasonable measures to keep the information secret, the information must have an independent economic value from being not disclosed, and the information must not be readily ascertainable by someone else who can obtain economic value from disclosing or using it.
Thus, it is best practice for businesses to take an inventory of any information that it deems confidential and then institute appropriate protections. These may include strictly controlling access to essential personnel, consistently stating and enforcing security procedures, and documenting costs of developing confidential information. Such measures may help in proving that the information is confidential if the company ever needs to bring an unfair competition claim.
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