Unfair Competition

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Unfair Competition

Any fraudulent, deceptive, or dishonest trade practice that is prohibited by statute, regulation, or the Common Law.

The law of unfair competition serves five purposes. First, the law seeks to protect the economic, intellectual, and creative investments made by businesses in distinguishing themselves and their products. Second, the law seeks to preserve the good will that businesses have established with consumers. Third, the law seeks to deter businesses from appropriating the good will of their competitors. Fourth, the law seeks to promote clarity and stability by encouraging consumers to rely on a merchant's good will and reputation when evaluating the quality of rival products. Fifth, the law seeks to increase competition by providing businesses with incentives to offer better goods and services than others in the same field.

Although the law of unfair competition helps protect consumers from injuries caused by deceptive trade practices, the remedies provided to redress such injuries are available only to business entities and proprietors. Consumers who are injured by deceptive trade practices must avail themselves of the remedies provided by state and federal Consumer Protection laws. In general, businesses and proprietors injured by unfair competition have two remedies: injunctive relief (a court order restraining a competitor from engaging in a particular fraudulent or deceptive practice) and money damages (compensation for any losses suffered by an injured business).

General Principles

The freedom to pursue a livelihood, operate a business, and otherwise compete in the marketplace is essential to any free enterprise system. Competition creates incentives for businesses to earn customer loyalty by offering quality goods at reasonable prices. At the same time, competition can also inflict harm. The freedom to compete gives businesses the right to lure customers away from each other. When one business entices enough customers away from competitors, those rival businesses may be forced to shut down or move.

The law of unfair competition will not penalize a business merely for being successful in the marketplace. Nor will the law impose liability simply because a business is aggressively marketing its product. The law assumes, however, that for every dollar earned by one business, a dollar will be lost by a competitor. Accordingly, the law prohibits a business from unfairly profiting at a competitor's expense. What constitutes unfair competition varies according to the Cause of Action asserted in each case. These include actions for the infringement of Patents, Trademarks, and copyrights; actions for the wrongful appropriation of Trade Dress, trade names, trade secrets, and service marks; and actions for the publication of defamatory, false, and misleading representations.

Interference with Business Relations

No business can compete effectively without establishing good relationships with its employees and customers. In some instances parties execute a formal written contract to memorialize the terms of their relationship. In other instances business relations are based on an oral agreement. Most often, however, business relations are conducted informally with no contract or agreement at all. Grocery shoppers, for example, typically have no contractual relationship with the supermarkets they patronize.

Business relations are often formalized by written contracts. Merchant and patron, employer and employee, labor and management, wholesaler and retailer, and manufacturer and distributor all frequently reduce their relationships to contractual terms. These contractual relationships create an expectation of mutual performance—that each party will perform its part under the contract's terms. Protection of these relationships from outside interference facilitates performance and helps stabilize commercial undertakings. Interference with contractual relations upsets expectations, destabilizes commercial affairs, and increases the costs of doing business by involving competitors in petty squabbles or litigation.

Virtually any contract, whether written or oral, qualifies for protection from unreasonable interference. Noncompetition contracts are a recurrent source of litigation in this area of law. These contracts commonly arise in professional employment settings where an employer requires a skilled employee to sign an agreement promising not to go to work for a competitor in the same geographic market. Such agreements are generally enforceable unless they operate to deprive an employee of the right to meaningfully pursue a livelihood. An employee who chooses to violate a noncompetition contract is guilty of breach of contract, and the business that lured the employee away may be held liable for interfering with an existing contractual relationship in violation of the law of unfair competition.

Informal trade relations that have not been reduced to contractual terms are also protected from outside interference. The law of unfair competition prohibits businesses from intentionally inflicting injury upon a competitor's informal business relations through improper means or for an improper purpose. Improper means include the use of violence, Undue Influence, and coercion to threaten competitors or intimidate customers. For example, it is illegal for a business to blockade the entryway to a competitor's shop or impede the delivery of supplies with a show of force. The mere refusal to deal with a competitor, however, is not considered an improper means of competition, even if the refusal is motivated by spite.

Any malicious or monopolistic practice aimed at injuring a competitor may constitute an improper purpose of competition. Monopolistic behavior includes any agreement between two or more people that has as its purpose the exclusion or reduction of competition in a given market. The sherman anti-trust act of 1890 (15 U.S.C.A. §§ 1 et seq.) makes such behavior illegal by forbidding the formation of contracts, combinations, and conspiracies in restraint of trade. Corporate Mergers and Acquisitions that suppress competition are prohibited by the Clayton Act of 1914, as amended by the Robinson-Patman Act of 1936 (15 U.S.C.A. §§ 12 et seq.).The Clayton Act also regulates the use of predatory pricing, tying agreements, and exclusive dealing agreements. Predatory pricing is the use of below-market prices to inflict pecuniary injury on competitors. A tying agreement is an agreement in which a vendor agrees to sell a particular good on the condition that the vendee buy an additional or "tied" product. Exclusive dealing agreements require vendees to satisfy all of their needs for a particular good exclusively through a designated vendor. Although none of these practices is considered inherently illegal, any of them may be deemed improper if it manifests a tendency to appreciably restrain competition, substantially increase prices, or significantly reduce output.

Trade Name, Trademark, Service Mark, and Trade Dress Infringement

Before a business can establish commercial relations with its customers, it must create an identity for itself, as well as for its goods and services. Economic competition is based on the premise that consumers can distinguish between products offered in the marketplace. Competition is made difficult when rival products become indistinguishable or interchangeable. Part of a business's identity is the good will it has established with consumers, while part of a product's identity is the reputation it has earned for quality and value. As a result, businesses spend tremendous amounts of resources to identify their goods, distinguish their services, and cultivate good will.

The four principal devices businesses use to distinguish themselves are trade names, trademarks, service marks, and trade dress. Trade names are used to identify corporations, part-nerships, sole proprietorships, and other business entities. A Trade Name may be the actual name of a business that is registered with the government, or it may be an assumed name under which a business operates and holds itself out to the public. For example, a husband and wife might register their business under the name "Sam and Betty's Bar and Grill," while doing business as "The Corner Tavern." Both names are considered trade names under the law of unfair competition.

Trademarks consist of words, symbols, emblems, and other devices that are affixed to goods for the purpose of signifying their authenticity to the public. The circular emblem attached to the rear end of vehicles manufactured by Bavarian Motor Works (BMW) is a familiar example of a trademark designed to signify meticulous craftsmanship. Whereas trademarks are attached to goods through tags and labels, service marks are generally displayed through advertising. As their name suggests, service marks identify services rather than goods. Orkin pest control is a well-known example of a Service Mark.

Trade dress refers to a product's physical appearance, including its size, shape, texture, and design. Trade dress can also include the manner in which a product is packaged, wrapped, presented, or promoted. In certain circumstances particular color combinations may serve as a company's trade dress. For example, the trade dress of Chevron Chemical Company includes the red and yellow color scheme found on many of its agricultural products (Chevron Chemical Co. v. Voluntary Purchasing Groups, Inc., 659 F.2d 695 [5th Cir. 1981]).

To receive protection from infringement, trade names, trademarks, service marks, and trade dress must be distinctive. Generic language that is used to describe a business or its goods and services rarely qualifies for protection. For example, the law would not allow a certified public accountant to acquire the exclusive rights to market his business under the name "Accounting Services." Such a name does nothing to distinguish the services offered by one accountant from those offered by others in the same field. A court would be more inclined to confer protection upon a unique or unusual name like "Accurate Accounting and Actuarial Acumen."

When competitors share deceptively similar trade names, trademarks, service marks, or trade dress, a cause of action for infringement may exist. The law of unfair competition forbids competitors from confusing consumers through the use of identifying trade devices that are indistinguishable or difficult to distinguish. Actual confusion need not be demonstrated to establish a claim for infringement, so long as there is a likelihood that consumers will be confused by similar identifying trade devices. Greater latitude is given to businesses that share similar identifying trade devices in unrelated fields or in different geographic markets. For example, a court would be more likely to allow two businesses to share the name "Hot Handguns," where one business sells firearms downtown, and the other business runs a country western theater in the suburbs.Claims for infringement are cognizable under both state and federal law. At the federal level, infringement claims may be brought under the Lanham Trademark Act (15 U.S.C.A. §§ 1051 et seq.). At the state level, claims for infringement may be brought under analogous Intellectual Property statutes and miscellaneous common-law doctrines. Claims for infringement can be strengthened through registration. The first business to register a trademark or a service mark with the federal government is normally protected against any subsequent appropriation by a competitor. Although trade names may not be registered with the federal government, most states require businesses to register their trade names, usually with the Secretary of State, and provide protection for the first trade name registered. Trade dress typically receives legal protection by being distinctive and recognizable without any formal registration requirements at the state or federal level.

Theft of Trade Secrets and Infringement of Copyrights and Patents

The intangible assets of a business include not only its trade name and other identifying devices but also its inventions, creative works, and artistic efforts. Broadly defined as trade secrets, this body of commercial information may consist of any formula, pattern, process, program, tool, technique, mechanism or compound that provides a business with the opportunity to gain advantage over competitors. Although a Trade Secret is not patented or copyrighted, it is entrusted only to a select group of people. The law of unfair competition awards individuals and businesses a property right in any valuable trade information they discover and attempt to keep secret through reasonable steps.

The owner of a trade secret is entitled to its exclusive use and enjoyment. A trade secret is valuable not only because it enables a company to gain advantage over a competitor but also because it may be sold or licensed like any other property right. In contrast, commercial information that is revealed to the public, or at least to a competitor, retains limited commercial value. Consequently, courts vigilantly protect trade secrets from disclosure, appropriation, and theft. Businesses or opportunistic members of the general public may be held liable for any economic injuries that result from their theft of a trade secret. Employees may be held liable for disclosing their employer's trade secrets, even if the disclosure occurs after the employment relationship has ended.

Valuable business information that is disclosed to the public may still be protected from infringement by Copyright and patent law. Copyright law gives individuals and businesses the exclusive rights to any original works they create, including movies, books, musical scores, sound recordings, dramatic creations, and pantomimes. Patent law gives individuals and businesses the right to exclude all others from making, using, and selling specific types of inventions, such as mechanical devices, manufacturing processes, chemical formulas, and electrical equipment. Federal law grants these exclusive rights in exchange for full public dis-closure of an original work or invention. The inventor or author receives complete legal protection for her intellectual efforts, while the public obtains valuable information that can be used to make life easier, healthier, or more pleasant.

Like the law of trade secrets, patent and copyright law offers protection to individuals and businesses that have invested considerable resources in creating something useful or valuable and wish to exploit that investment commercially. Unlike trade secrets, which may be protected indefinitely, patents and copyrights are protected only for a finite period of time. Applications for copyrights are governed by the Copyrights Act (17 U.S.C.A. § 401), and patent applications are governed by the Patent Act (35 U.S.C.A. § 1).

False Advertising, Trade Defamation, and Misappropriation of a Name or Likeness

A business that successfully protects its creative works from theft or infringement may still be harmed by False Advertising. Advertising need not be entirely false to be actionable under the law of unfair competition, so long as it is sufficiently inaccurate to mislead or deceive consumers in a manner that inflicts injury on a competitor. In general, businesses are prohibited from placing ads that either unfairly disparage the goods or services of a competitor or unfairly inflate the value of their own goods and services. False advertising deprives consumers of the opportunity to make intelligent comparisons between rival products. It also drives up costs for consumers who must spend additional resources in examining and sampling products.

Both federal and state laws regulate deceptive advertising. The Lanham Trademark Act regulates false advertising at the federal level. Many states have adopted the Uniform Deceptive Trade Practices Act, which prohibits three specific types of representations: (1) false representations that goods or services have certain characteristics, ingredients, uses, benefits, or quantities; (2) false representations that goods or services are new or original; and (3) false representations that goods or services are of a particular grade, standard, or quality. Advertisements that are only partially accurate may give rise to liability if they are likely to confuse prospective consumers. Ambiguous representations may require clarification to prevent the imposition of liability. For example, a business that accuses a competitor of being "untrustworthy" may be required to clarify that description with additional information if consumer confusion is likely to result.

Trade Defamation is a close relative of false advertising. The law of false advertising regulates inaccurate representations that tend to mislead or deceive the public. The law of trade defamation regulates communications that tend to lower the reputation of a business in the eyes of the community. Trade defamation is divided into two categories: Libel and Slander.

Trade libel generally refers to written communications that tend to bring a business into disrepute, whereas trade slander refers to defamatory oral communications. Before a business may be held liable under either category of trade defamation, the First Amendment requires proof that a defamatory statement was published with "actual malice," which the Supreme Court defines as any representation that is made with knowledge of its falsity or in reckless disregard of its truth (new york times v. sullivan, 376 U.S. 254, 84 S. Ct. 710, 11 L. Ed. 2d 686 [1964]). The actual malice standard places some burden on businesses to verify, prior to publication, the veracity of any attacks they level against competitors in print or electronic media.

It is also considered tortious for a business to use the name or likeness of a famous individual for commercial advantage. All individuals are vested with an exclusive property right in their identity. No person, business, or other entity may appropriate an individual's name or likeness without permission. Despite the existence of this common-law tort, businesses occasionally associate their products with popular celebrities without first obtaining consent. A business that falsely suggests that a celebrity has sponsored or endorsed one of its products will be held liable for money damages equal to the economic gain derived from the wrongful appropriation of the celebrity's likeness.

A Simpler Definition

The law of unfair competition includes several related doctrines. Nevertheless, some courts have attempted to simplify the law by defining unfair competition as any trade practice whose harm outweighs its benefits. The U.S. legal system is a cornerstone of the free enterprise system. But the freedom to compete does not imply the right to engage in predatory, monopolistic, fraudulent, deceptive, misleading, or unfair competition. On balance, competition becomes unfair when its effects on trade, consumers, and society as a whole are more detrimental than beneficial.

Further readings

American Law Institute. 1995. Restatement (Third) of Unfair Competition. New York: American Law Institute.

Goldstein, Paul, and Edmund W. Kitch. 2003. Unfair Competition, Trademark, Copyright, and Patent. New York: Foundation Press.

Reed, Chris. 1998. "Controlling World Wide Web Links: Property Rights, Access Rights and Unfair Competition." Indiana Journal of Global Legal Studies 6 (fall).

Sanders, Anselm Kamperman Sanders. 1997. Unfair Competition Law: The Protection of Intellectual and Industrial Creativity. New York: Oxford Univ. Press.

Shilling, Dana. 2002. Essentials of Trademarks and Unfair Competition. New York: John Wiley.


Antitrust Law; Lanham Act; Monopoly; Noncompete Agreement; Tying Arrangement.

West's Encyclopedia of American Law, edition 2. Copyright 2008 The Gale Group, Inc. All rights reserved.

unfair competition

n. wrongful, fraudulent and/or business methods to gain an unfair advantage over competitors, including: a) untrue or misleading advertising or promotion which misrepresent the nature, characteristics, qualities or geographic origin (such as where wine comes from), b) misleading customers by imitative trademark, name, or package, including trademark infringement, c) falsely disparaging another's product. Under federal statute (Lanham Act) and many state laws, unfair competition is the basis for a legal action (suit) for damages and/or an injunction to halt the deceptive practices against an unfair competitor if the practices tend to harm one's business. (See: trademark, infringement, fraud)

Copyright © 1981-2005 by Gerald N. Hill and Kathleen T. Hill. All Right reserved.