What Is Unfair Competition?

Definition & Examples of Unfair Competition

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Unfair competition is a term and a branch of intellectual property law that applies to dishonest or fraudulent rivalry in trade and commerce.

Learn more about the different types of unfair competition and how they work.

What Is Unfair Competition?

Unfair competition addresses circumstances where consumers have been misled, or deceptive trade practices, as well as practices designed to restrict or alter a company's revenue. In all cases, the activity can legally give rise to a tort action. That is, the wrongful act is such that the perpetrator can and should be held civilly liable in a court of law. Some forms of unfair competition are crimes, as well.

Unfair doesn't mean the same thing in every situation. It can have different connotations in various business settings and depending upon the nature of commerce. For example, unfair competition in a retail store setting can be a far different practice than what a pharmaceutical company might engage in.

Unfair competition laws are backed by the Commerce Clause of the U.S. Constitution. The Uniform Trade Secrets Act has also been adopted by numerous states to deal with misappropriation of trade secrets.

How Unfair Competition Works

Acts of unfair competition are generally characterized by deception, bad faith, fraud, or oppression—the competition is such that the victim is thwarted or prevented from successfully engaging in trade.

They're perceived as being against public policy because of their tendency to unduly hinder competition, and this affects the greater good of the public. Unfair competition laws have been established to protect consumers and businesses and to help prevent illegal merchandising.

For the most part, issues of unfair competition are addressed in state courts. A successful suit brought in state court might result in an order of monetary damages, an injunction against the guilty party continuing with such actions or both.

Federal law covers copyrights and trademarks, however, so cases involving these issues can and sometimes do find their way to federal court. Federal law prevails when federal and state laws conflict.

Unfair competition law does not simply protect businesses nor is it solely the domain of large corporations. Small business owners and individual consumers can be hurt as well, as in bait-and-switch cases and instances involving unauthorized substitution. The Federal Trade Commission has become involved in cases where consumers were harmed or lost money, such as in cases of false advertising.

Types of Unfair Competition 

Think of unfair competition as a large umbrella that covers a variety of actions. Some of them include:

Trademark Infringement

This involves one business using another's trademarked property without permission. An example of trademark infringement would be using the Coca-Cola trademark on a soda container manufactured by a competing beverage maker.

False Advertising

False advertising involves making claims that are misleading or untrue, such as a company making false claims about a drug's abilities to promote weight loss when such claims had never been proven.

Unauthorized Substitution

Unauthorized substitution is when a seller replaces one brand of goods with another without authorization. This could involve substituting a low-cost handbag for a designer handbag. It could also mean false advertising or false representation of products or services, such as exaggerating a software program’s spell-check capabilities. In either case, consumers are not getting what they thought they were paying for.

Bait-and-Switch Tactics 

Bait-and-switch tactics are another example of an unfair competition practice that directly affects consumers. Say that a product in high demand is advertised at a very reasonable price. Shoppers flock into the store to purchase the item only to be told that it's now sold out. But the shopper can purchase a similar model for just a few dollars more—and unsuspecting consumers will often do so.

Bait and switch is a crime in some states, particularly when the advertised item was never in stock in the first place.

Misappropriation of Trade Secrets

Misappropriation of trade secrets is another common instance of unfair competition, such as stealing a competitor’s proprietary formula. Consider an employee who is entrusted with or stumbles upon the exact recipe for KFC's chicken batter. They then rent a fast food restaurant establishment and begin selling chicken on their own using that same recipe. 

Some of these examples, such as making false claims about a drug's abilities, technically fall under the umbrella of unfair trade practices, which is a component of unfair competition law.

Below-Cost Selling 

Below-cost selling occurs when a company intentionally and willingly sells a product or service to consumers for less than the market rate. A retail seller might actually charge consumers less than what it paid for an item, taking a loss. Another company might sell one or more of its services at a rate that virtually ensures it cannot make money.

This type of situation is often temporary and is done with the intention of snagging business away from competitors who can't or who are unwilling to compete. The reward comes down the road when the company selling below cost increases its market share.

Dumping

Dumping is a similar concept. It involves selling products abroad for far less than what they would fetch in a local market. Why? Importing governments often offer several enticements including subsidies and cash incentives.

Rumor Mongering

Rumor mongering is exactly what it sounds like—maligning a competitor through written or oral communications, often placed strategically with the press and other outlets.

Key Takeaways

  • Unfair competition is a term that applies to dishonest or fraudulent rivalry in trade and commerce.
  • It also refers to a branch of intellectual property law.
  • Businesses performing acts of unfair competition can be held liable in court.
  • Types of unfair competition include trademark infringement, false advertising, unauthorized substitution, bait-and-switch tactics, misappropriation of trade secrets, below-cost selling, dumping, and rumor mongering.