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Unfair Competition: Righting Wrongs

If you’re in business, chances are you’ve experienced unfair marketing tactics by one or more of your competitors.  Such tactics may include false or misleading advertising or representations concerning the nature or quality of the competitor’s products or services.  Or, they may consist of false or misleading statements about what you sell.

When faced with this kind of unfair competition, many business people respond simply by doing a slow burn.  But, there may be legal remedies!

Many of us recognize that when a business makes false or misleading representations concerning its products, customers of that business may have legal remedies, particularly if they are consumers.  Various states’ laws provide such remedies, through statutes, recognized common law causes of action, or both.  Less well recognized is that other businesses who compete with the offending business, and whose business is damaged by unfair competitive tactics, may have legal recourse as well.

One law that may supply such a remedy is the federal Lanham Act, 15 U.S.C. §1125(a). It states that any person who, in connection with any goods or services, uses in commerce any false or misleading description or representation of fact, which “in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or another person’s goods, services, or commercial activities,” shall be civilly liable to any person damaged by such conduct.

The U.S. Supreme Court recently had occasion to consider the scope and applicability of the Lanham Act in Lexmark Int’l, Inc. v. Static Control Components, Inc., 134 S.Ct. 1377 (2014).  There, in a unanimous decision, the Supreme Court characterized a “classic Lanham Act false-advertising claim” as one in which one competitor directly injures another by making false statements about his own goods, or the competitor’s goods, thus inducing customers to switch.

Lexmark involved litigation between a company that makes and sells printers as well as toner cartridges for those printers (Lexmark), and a remanufacturer of such cartridges (Static Control Components, Inc.).  Static Control was in the business of acquiring used Lexmark toner cartridges, refurbishing them, and selling them in competition with new and refurbished cartridges sold by Lexmark.

To encourage its customers to return empty cartridges to Lexmark rather than sell them to a remanufacturer, Lexmark introduced a “Prebate” program, which enabled customers to purchase new toner cartridges at a 20 percent discount if they agreed to return the cartridges to Lexmark once they were empty.  Lexmark communicated these terms to consumers through notices printed on the toner cartridge boxes, which also stated that the consumer’s opening the box would indicate assent to those terms.

Static Control asserted claims for unfair competition against Lexmark alleging, among other things, that Lexmark purposefully was misleading end-users to believe they are legally bound by the Prebate terms and required to return Prebate-labeled cartridges to Lexmark after a single use.  The Supreme Court held that such claims, if proven, could state a claim for violation of the Lanham Act.

Another illustrative recent case making similar use of the Lanham Act is a lawsuit brought by Nestle Purina Petcare Company against The Blue Buffalo Company Ltd., in federal court in St. Louis.  Both Purina and Blue Buffalo manufacture and sell pet food.  Both of them advertise their products as being all natural, and containing no chicken/poultry by-product meal.

Purina asserted Lanham Act claims against Blue Buffalo, claiming its representations that its products contained no chicken/poultry by-product meal were false, in that such by-product meal had been found in Blue Buffalo’s products.  After initially denying Purina’s claims, Blue Buffalo subsequently admitted that some of its products did contain by-product meal.  Blue Buffalo blamed a supplier for providing it with mislabeled product.

The potential recovery in the event of proof of a violation of §1125(a) consists of: “(1) defendant’s profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.”  15 U.S.C. §1117(a).  Note that to establish a Lanham Act claim, it is not necessary to show that the defendant acted with knowledge of the falsity or intent to defraud.  However, if those elements are proven, the possibility exists for recovering treble damages, i.e., a “sum above the amount found as actual damages, not exceeding three times such amount.”  Id.

Note also that the Lanham Act provides for the possibility of a prevailing party obtaining an award of its reasonable attorney’s fees.  Id.  However, under the statute, awards of attorney’s fees are not routinely made, but rather are limited to “exceptional cases.”  Id.  In general, the more it can be shown that a defendant’s conduct was intentional and outrageous, the greater the likelihood of obtaining an award of attorney’s fees.

There are additional legal theories that also can be utilized to assert claims arising out of unfair competition.  These include common law unfair competition, unjust enrichment, and claims under various state unfair competition statutes.

Success in Lanham Act and other analogous cases asserting claims for unfair competition generally turns, first, on the plaintiff mustering the facts and evidence to prove its claims.  Further, a successful plaintiff will have to build an adequate damages case, i.e., demonstrating on both a qualitative and quantitative basis the impact of the unfair competition.  Building such a damages case typically involved delving into detailed information concerning both the plaintiff’s and defendant’s sales, cost structure and profits, and working with economics and accounting experts to build a compelling damages case.

So, next time a competitor engages in unfair competition that damages your business, don’t just do a slow burn.  Call a lawyer!