Numărul 2 / 2006
UNFAIR COMPETITION IN UNITED STATES
Şerban S. VĂCĂRELU
Summary:
INTRODUCTION
A. Unfair competition and commercial freedom
B. Unfair competition, commercial morality and culture
PART I. On the different forms and elements of unfair competition
A. The historical development of the unfair competition laws
B. Forms and elements of unfair competition
1. Trademark protection
1.1 Geographical Indications
The case INAO v. Vintners
2. Deceptive marketing
2.1 Passing off or palming off
2.2 False Advertising
2.3 Product disparagement
3. Publicity rights
4. Other forms of unfair competition
4.1 Misappropriation
4.2 Intentional interference with contractual relations
5. State unfair competition statutes
5.1 Uniform Deceptive Trade Practices Act
5.2 Unfair Trade Practices and Consumer Protections Act
The case Electrolux v. Val-Worth
PART II. Liability and Remedies
A. Liability: rationale, conditions and implementation
1. Rationale
2. Implementation
B. Remedies
INTRODUCTION
A. Unfair competition and commercial freedom
Freedom of expression enjoys a strong protection under the First Amendment of the United States Constitution.1 The First Amendment is arguably the most important part of the United States Constitution in promoting and protecting fundamental individual freedoms. For a long time, courts have not recognized First Amendment protection to commercial speech.2 In the mid 70's however, the U.S. Supreme Court announced in a series of cases that some degree of protection under the First Amendment is available to speech that is purely commercial in nature.3 The First Amendment prohibits state and governmental regulations of speech based on the content of the communicated message. Restrictions imposed on commercial speech are subject to an intermediate degree of scrutiny.4 While the First Amendment protects the dissemination of information to the public, it does not protect advertising that is false, deceptive or misleading.5
The basic underlying policy of the American economy is the principle of free competition.6 Freedom to compete is a fundamental premise of an open market economy. Competition creates incentives to offer quality products at reasonable prices and foster the general welfare by promoting the efficient allocation of economic resources.7 The essence of competition is to liberate the buyer from monopoly power by providing access to an alternative source of a product.8 Competition is regarded as a freedom not a privilege.9 However, free competition also requires fair competition. To preserve this freedom it is necessary to prevent the use of unfair methods of competition that hinder rather than promote the efficient operation of business. 10 In this context, the U. S. economy is generally described as a regulated economy.11 Free competition is desired and encouraged. However, a certain degree of governmental regulation is necessary to prevent unfair competition and monopoly power.
B. Unfair competition, commercial morality and culture
The concept of commercial morality is vague and rather difficult to define in the United States marketplace. The very idea is based on principles of honesty, good faith and fair play. As the American law does set a minimum level of "fairness" in competition,12 it follows that there is a general duty of morality in the course of business.
For similar reasons, it is difficult to define the concept of "unfair competition" in the context of the American legal system.13 The laws in this area contain a general prohibition against unfair methods of competition and unfair trade practices, but do not define what such methods or practices may be. Courts are left to decide on a case by case basis. The U.S. Congress has explicitly considered and rejected the idea that it reduce the ambiguity of the phrase "unfair methods of competition" by tying the concept of unfairness to a common-law or statutory standard or by enumerating particular practices.14 The explanation is probably best described in a report of the U.S. House of Representatives that reads, in pertinent part:
It is impossible to frame definitions which embrace all unfair practices. There is no limit to human inventiveness in this field. Even if all known unfair practices were specifically defined and prohibited, it would be at once necessary to begin over again. If Congress were to adopt the method of definition, it would undertake an endless task.15
Courts have found unfair competition to include trademark infringement, dilution, passing off, false advertising, product disparagement, "bait and switch" selling practices, theft of trade secrets, infringement of the rights of publicity, selling bellow the price, as well as other undefined commercial practices that were deemed to be "unfair." It is generally accepted that unfair competition is a commercial tort.16
However, there is little consensus for a legal definition of unfair competition. Courts and commentators that have attempted to define the concept of unfair competition resorted to vague and rather unhelpful definitions. Some have described unfair competition "to signify an undefined set of commercial practices that, for purposes of economic efficiency, the law holds as liable where no other legal remedy exists."17 Others stated "the tort of unfair competition is simply a remedy for economic loss that is incurred from an underlying violation of a tort or a breach of contract"18 or "unfair competition is a generic name for several related torts involving improper interference with business prospects."19 Finally, others have warned against using an abstract legal definition that has little to do with reality or specific disputes, rejecting the very idea of a definition by explaining that the term is fluid and constantly modified by lawyers and judges.20
It appears that the term "unfair competition" itself raises a semantic confusion. Some practices that have been noted to be "unfair competition" arise from a non-competitive context. For this reason, many prefer the use of the alternative term of "unfair trade practices" recognizing that illegal practices are not limited to cases where the parties are in actual competition.21
The laws of unfair competition encompass a vast area that is not likely to be delimited within well-defined boundaries. The concept is in constant development through judicial decisions, as courts continue to evaluate competitive practices under generalized standards of fairness and social utility.22 Perhaps, this very aspect represents the greatest advantage of the laws of unfair competition in United States: the flexibility to react and adapt rapidly to an increasingly complex business environment.
In circumstances that fall outside the established areas of trademarks, deceptive marketing, trade secrets and publicity rights, it is impossible to prescribe a test for determining which methods or commercial practices will constitute unfair competition.23 As a general matter, if the means of competition are otherwise unlawful (for example acts of violence), they will also constitute unfair methods of competition.24 In other cases, courts are generally reluctant to interfere with the competitive process.25 Freedom to compete is the general rule in American economy and restrictions are imposed only by exception. An act or practice is likely to be considered unfair only if it substantially interferes with the ability of others to compete or otherwise is in conflict with accepted principles of public policy recognized by statute or at common law.26
PART I
On the different forms and elements of unfair competition
A. The historical development of the unfair competition laws
Originally, the laws of unfair competition evolved from the common law tort of fraud and deceit.27 Unfair competition came to be known in United States as the equivalent of the common law prohibition against "passing off" (or "palming off") which imposed liability on a seller who diverted trade from another by fraudulently misrepresenting that his product was manufactured by the other.28 Passing off one's goods as the goods of another was regarded as a tort that was often accomplished through the use of confusingly similar trade symbols, labels, packaging or advertising materials.29
In this context, unfair competition was regarded as a separate area of the law that complemented the protection afforded by the laws of trademarks.30 At early common law, traditional trademark protection was limited to marks that were inherently distinctive, also called "technical" trademarks.31
Accordingly, marks that were descriptive, geographically descriptive and personal names were not "technical" trademarks and therefore, could not be protected under the laws of trademark infringement.32 Such non-inherently distinctive designations could nevertheless enjoy protection as "trade names" under the laws of unfair competition whenever they had come through use, to be associated in the public mind with the goods of a particular seller.33 Thus, in the beginning the term "unfair competition" was used to denote the protection afforded to common law "trade names"34 and other devices (such as labeling, packaging, physical appearance) that could identify the source of the goods.
The distinction between the laws of trademark and unfair competition was also reflected in the theories over the nature of the rights involved and the elements required for their protection. The purpose of the prohibition against passing off was to protect the consumers from fraud and deceit, to prevent unjust enrichment and to enforce honesty and fairness in the marketplace.35 An action to recover damages for passing off was regarded as a complaint of fraud or "an action for deceit" and therefore, proof of intent to deceive the consumers was an essential element in an action for unfair competition.36 In the mid-19th century, protection for technical trademarks was afforded without requiring proof of an intent to deceive.37 Trademark rights came to be regarded as akin to property rights and therefore, a presumption of fraud operated in cases of imitation of an inherently distinctive mark.38
In time, the laws of trademark expanded to protect all distinctive marks. Thus, descriptive marks that have acquired a significance in identifying the source of the product became protected under the law of trademarks along with inherently distinctive marks. As a result, the distinction between unfair competition and trademark protection lost its original significance as the rules governing the protection of trademarks and trade names became essentially identical.39 In this context, unfair competition was often referred to denote the protection afforded to unregistered trademarks.
Gradually, unfair competition evolved into another dimension. As trademark rights were regarded as "quasi-property rights"40 the inquiry in cases of trademark infringement and unfair competition shifted from the analysis of the fraudulent conduct of passing off to a consideration of the nature of the right involved.41 Liability was determined by an evaluation of the consequences on the consumers, regardless of the subjective intent of the imitator.42 Accordingly, likelihood of consumer confusion became the test for both trademark infringement and unfair competition. The emphasis on the consumer protection broadened the area of unfair competition beyond its limitation to cases of confusion as to source of the products. In time, courts and commentators expanded the concept of unfair competition beyond passing off to include a wide variety of practices such as false advertising,43 product disparagement44, misappropriation45, theft of trade secrets,46 infringement of the right of publicity,47 as well as other undefined commercial practices that for different reasons were deemed to be "unfair." Thus, the laws of trademarks became to be regarded merely as "a part of the broader law of unfair competition."48
B. Forms and elements of unfair competition
There is no comprehensive official list of what may constitute unfair competition. As already pointed out, courts have found unfair competition to encompass infringement of the trademarks, false advertising, product disparagement, misappropriation of intangible business trade value, theft of trade secrets, infringement of the rights of publicity. Other examples of unfair competition include: trademark dilution; the appropriation of distinctive literary and entertainer characterizations; "bait and switch" selling tactics; "palming off" goods by unauthorized substitution of one brand for the brand ordered; filing a groundless lawsuit or administrative challenge as an aggressive competitive weapon; sending cease and desist letters charging patent infringement before a patent has been granted; an unreasonable rejection of goods shipped under contract; physically obstructing entrance to a competitor's place of business and harassing its customers.49
The Uniform Deceptive Trade Practices Act that has been adopted only in several states50 is perhaps the only official act that enumerates specific practices that are associated with unfair competition. The listed practices are: (1) passing off goods or services as those of another; (2) causing likelihood of confusion or misunderstanding as to the source or approval of goods or services, or an affiliation with or certification by someone else; (3) using deceptive representations or designations of the geographic source of the goods or service; (4) representing that goods or services have sponsorship, approval, characteristics, ingredients, uses or benefits that they don't have, or that a person has some sponsorship, approval or connections that he or she does not; (5) representing that the goods are original or new when they are not; (6) representing that goods or services are of a particular standard, quality or grade, or of a particular style or model, when they are not; (7) disparaging the goods, services or business of someone else by false or misleading representations; (8) advertising goods or services with no intent to sell them as advertised or that supplies needed to meet reasonable demand (unless the advertisement discloses a supply limitation); (9) making false or misleading statements of fact concerning the reasons for or the existence of price reduction; (10) engaging in any other conduct which similarly creates a likelihood of confusion or of misunderstanding. It may be easily observed that most of these practice are mere variations of false advertising and passing off.
In the following, we will provide an analysis of the main areas of the law that are incorporated in the general field of unfair competition.51
1. Trademark protection
Trademarks are protected in United States under federal and state laws. The rules are very similar among all fifty states and both federal and state statutes are essentially codifying the common law principles of trademark protection. The statutes generally provide a mechanism for the registration of trademarks.52 With few distinctions, unregistered marks enjoy protection under the same principles as registered trademarks.
The Lanham Act53 defines a trademark to include "any word, name, symbol, or device, or any combination thereof -
(1) used by a person, or
(2) which a person has a bona fide intention to use in commerce and applies to register on the principal register established by this chapter,
to identify and distinguish his or her goods, including a unique product, from those manufactured or sold by others and to indicate the source of the goods, even if that source is unknown."54
In general, entitlement to trademark protection depends on mainly two requirements: the mark must be distinctive and must be used in commerce in relation with goods or services. In evaluating the distinctiveness of a mark courts have held that a mark can be distinctive in one of two way: it is either inherently distinctive or has become distinctive by acquiring secondary meaning.55 A mark is inherently distinctive if its intrinsic nature serves to identify a particular source of the goods and services.56 Where the mark is not sufficiently distinctive of itself, proof of secondary meaning is required to qualify for protection.57 Secondary meaning is acquired when in the minds of the consumers the primary significance of the product feature is to identify the source of the product rather than the product itself.58
For marks made of words and other similar symbols, a potential trademark may be classified in four distinct categories as generic, descriptive, suggestive and arbitrary or fanciful.59 A generic term is the name of a particular genus or class of which an individual article or service is but a member.60 It has become the natural way to refer to that type of products.61 For example beer. Sometimes a formerly distinctive designation may become generic, such as aspirin62 or cellophane.63 Generic terms may never be entitled to trademark protection. A descriptive term describes an article or a service by identifying one of its characteristics or qualities.64 For example "Fish-Fri" as applied to corn flour used to fry fish and other seafood.65 Descriptive marks are not ordinarily entitled to trademark protection, but they may become protectable after they acquired "secondary meaning" in the minds of the consuming public.66 The doctrine of secondary meaning recognizes that words with an ordinary and primary meaning of their own may, after a quantum of use in connection with a product, come to be known by the public as specifically designating that particular product.67 Proof of secondary meaning may be satisfied by use of both direct evidence (such as consumer surveys) and/or circumstantial evidence (relevant factors are amount and manner of advertising, volume of sales, and length and manner of use).68 Suggestive terms suggest, rather than describe characteristics of the goods or services.69 Unlike descriptive terms, they require consumers to exercise some degree of imagination in order to draw a conclusion, as to the nature of goods and services.70 For example "Coppertone"used in relation with sun tanning products.71 Finally, arbitrary or fanciful terms bear no relationship whatsoever to the products or services to which they are applied.72 Examples of such marks are "Ivory" as applied to soap, "Alaska" for bananas, "Exxon" for petroleum products. Suggestive, arbitrary and fanciful marks are considered to be inherently distinctive and they are protected without proof of secondary meaning.
In determining whether a trade dress73 and other non-verbal symbols are inherently distinctive, the test is whether the design, shape or combination of elements is so unique, unusual or unexpected in this market that one can assume without proof that it will automatically be perceived by customers as an indicator of origin.74 Most courts use the so-called Seabrook test to inquire whether the design or shape is "common" or basic, whether it is unique or unusual in a particular field and whether it is a mere refinement of a commonly-adopted and well-known form of ornamentation for a particular class of goods viewed by the public as a dress or ornamentation for the goods.75
These general rules of assessing distinctiveness are applied to any type of word, symbol or device capable of identifying goods or services. With the exception of a few statutory exclusions,76 there is no limit to what may constitute a valid mark. Thus, a trademark may consist of words, letters, symbols, graphic designs, pictures, combination of colors, particular shapes (Coca-Cola bottle), sounds (NBC chimes, MGM's "lion roar") and even a fragrance77 (plumeria blossom on a sewing thread). An assessment of whether a mark is distinctive is based on the use of the mark in relation with the nature of the goods or services. The same mark may be generic, descriptive or inherently distinctive when used in connection with different products. Thus, the word "apple"or a picture of an apple is a generic or descriptive mark when used in connection with apples, but it is considered arbitrary when used in connection with computers. As a particularity, personal names marks and marks consisting of a single color will always require secondary meaning in order to qualify for protection.78 Geographic marks are subject to certain variations from the general rules.79 In addition, a particular design of a product is protectable only if it has acquired secondary meaning and it is non-functional.80 However, other forms of trade dress are capable of being inherently distinctive and therefore, they are protectable without proof of secondary meaning, provided that
the features are non functional.81 A design or a feature of a product is deemed to be functional when it affords benefits in the manufacturing, marketing or use of the goods and services that are important to effective competition by others and that are not practically available through the use of alternative designs.82 In general, a functional design is one that is costly to do without.83
The second condition of "use in commerce" requires an actual use of the mark in the ordinary course of business or trade and not merely for the purpose of reserving the rights in the mark.84 As an exception, the use of a mark primarily for establishing trademarks rights would be deemed sufficient to support a federal registration, if the circumstances indicate an intent to use the mark in commerce within a reasonable time.85 The commencement of use has important consequences on the protection. Inherently distinctive marks are protected as soon as the mark is used in commerce. For descriptive marks, protection is afforded only after a quantum of use necessary to establish secondary meaning. Proof of substantially exclusive and continuous use of a mark represents a prima facie proof that the mark has become distinctive.86 In cases of conflicting marks, protection is established by the priority in use.87 Unregistered marks are generally protected only in the geographical areas where the product bearing the mark is sold or advertised.88 Protection is also afforded in other areas where the marks have established a certain reputation or if the infringer is in bad faith.89 Marks that are federally registered enjoy a nationwide protection regardless of the area of use.90 After registration, if the mark has been in continuous use for five consecutive years, the mark becomes incontestable and cannot be challenged as being merely descriptive.91 State registration generally confers protection only within the geographical area of the state, precluding subsequent intrastate use of a confusingly similar mark.92 The rules regarding trademark registration and protection generally apply in the same manner to service marks,93 collective marks94 and certification marks.95 Trademarks and certification marks are mutually exclusive.96
The standard for trademark infringement is the likelihood of consumers confusion.97 In general, the courts consider the following factors to determine whether the use of a mark causes a likelihood of confusion: (1) Strength of the marks in question (2) Degree of similarity between the marks (3) Proximity of the goods and/or services in the market place (4) Quality of the defendant's goods and/or services (5) Likelihood that the prior owner will "bridge the gap" in the marketplace (6) Actual confusion between the marks (7) Good faith of the defendant (8) Sophistication of the buyers of the respective goods and/or services.98 A decision on the likelihood of confusion must consider all the factors that are applicable in the overall market context in which the designation is used.99 There is no mechanistic formula that can set forth in advance all the factors that may contribute to the particular marketing context of the use.100 Any other relevant factors (such as intent) may also be considered.101 The test of likelihood of confusion is not limited to confusion as to the source of the products; rather, it encompasses any type of confusion including confusion as to the sponsorship, affiliation, connection or approval.102
Trademarks rights protect the "owner"103 of a mark against passing off, counterfeiting104 and dilution.105 Some forms of trademark infringement overlap with other areas of unfair competition such as deceptive marketing or infringement of the rights of publicity.
1.1 Geographical Indications
Geographic marks are subject to certain variations from the general rules of trademark protection. As one court has noted "geographic terms are merely a specific kind of potential trademark, subject to characterization of having a particular kind of descriptiveness or misdescriptiveness."106 Thus, protection for the use of a geographical indication is dependent on the type of use, of whether it is generic, descriptive or arbitrary.107 Section 2 of the Lanham Act prohibits the registration of marks that are deceptive and marks that are primarily geographically descriptive or primarily geographically deceptively misdescriptive when used in connection with the goods of the applicant.108 A geographical name is not considered to be primarily geographical descriptive or misdescriptive if the geographic meaning is "minor, or obscure or unconnected with the goods."109 Where the geographical name is clearly unlikely to denominate the source of the goods the mark is deemed to be arbitrary. For example "Dutch" as applied to paint or "Alaska" for bananas.110 To distinguish between descriptive use and arbitrary use courts often employ the so-called "public association" or "noted for" test. As one court explained: "[i]n determining whether or not a geographical term is primarily geographically descriptive of a product, of primary consideration is whether or not there is an association in the public mind of a product with the particular geographical area, as for example perfumes and wines with France, potatoes with Idaho, rum with Puerto Rico, and beef with Argentina."111 A mark may be deemed misdescriptive even if the place is not well-known, provided that at least a small group of consumers is likely to believe that a product comes from the named area.112 If a mark is considered to be primarily geographical descriptive, the mark may still be registered as a trademark upon showing proof of secondary meaning.113 However, geographically descriptive marks may be registered as certification marks without such a requirement.114 Marks that are primarily geographical deceptively misdescriptive must have become distinctive before December 8,1993 in order to qualify for registration.115 Deceptive marks cannot be registered at any time even if they have become distinctive. Because of the duplicate use of the term "deceptive" distinguishing between the deceptive marks and marks that primarily geographical deceptively misdescriptive can be confusing.116 A mark will be deceptive if there is an intent to deceive.117 The mark will also be found deceptive and not primarily geographically deceptively misdescriptive if the misdescription "materially affects the decision to purchase the goods."118
Geographical denominations for wine and spirits are subject to a detailed regulatory scheme set forth by the Bureau of Alcohol, Tobacco and Firearms (hereinafter BATF) whose broad powers derives from the Federal Alcohol Administration Act (hereinafter FAAA) of 1935.119 BATF enacted a series of rules regarding labeling and advertising of wine. Geographical denominations are divided in three categories: generic, semi-generic and non-generic.120 Generic names are regarded as having lost their original geographic significance and therefore, they are unprotected. Examples of such generic designations are Vermouth and Sake.121 Semi-generic designations can be used to designate wines of a different origin than that indicated by the geographical name provided that the true origin of the wine is disclosed.122 Non-generic designations may be used only to designate wines of the origin indicated by such name.123 However, a non-generic name is not deemed to be distinctive. In order to find distinctive character, the name must be known to the consumer and to the trade as the designation of a specific wine of a particular place or region, distinguishable from all other wines.124
In Institut National Des Appellations D'Origine v. Vintners International Co. Inc., 958 F.2d 1574 (Fed. Cir. 1992), Vintners applied to register "CHABLIS WITH A TWIST" as a trademark for a "citrus flavored wine." INAO opposed the application asserting that the mark was geographically deceptive and primarily geographically deceptively misdescriptive. INAO pointed out "Chablis" was a name of "geographic significance" that refers to Chablis, France and argued that the term "Chablis" when used in connection with a non-French wine creates a misleading goods-place association in the minds of the consumers that was "material" to the purchaser. The Court found that the mark was neither primarily geographically deceptively misdescriptive, nor deceptive, because INAO failed to provide evidence that the relevant portion of the American consumers of wine and wine products, would perceive the mark to indicate that the product came from the Chablis region of France or that the alleged geographic misrepresentation would be a material factor in the decision of consumers to purchase the product. The court reasoned that merely because the term "Chablis" may have some geographic significance does not make that geographic significance the "primary" significance of that term or of the mark CHABLIS WITH A TWIST as a whole and it does not establish how the term is understood by American consumers of wine.
2. Deceptive marketing
Deceptive marketing is a form of unfair competition. There are three categories of deceptive marketing: passing off, false advertising and product disparagement. Some forms of deceptive marketing such as passing off overlap with the protection afforded by the law of trademarks. The Lanham Act now provides remedies for deceptive marketing under Section 43(a) which provides:
Any person who, on or in connection with any goods or services, or any container for goods, uses in commerce any word, term, name, symbol, or device, or any combination thereof, or any false designation of origin, false or misleading description of fact, or false or misleading representation of fact, which-
(A) is likely to cause confusion, or to cause mistake, or to deceive as to the affiliation, connection, or association of such person with another person, or as to the origin, sponsorship, or approval of his or her goods, services, or commercial activities by another person, or
(B) in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities,
shall be liable in a civil action by any person who believes that he or she is or is likely to be damaged by such act.
The protection against deceptive marketing is supplemented by various state laws.
2.1 Passing off or palming off
The term "passing off" is capable of having different meanings. Used broadly, the term denotes misrepresentations likely to deceive or mislead the consumers with respect to the source of the products.125 As one commentator noted, "passing off" and its synonym "palming off" have been used to refer to three distinct situations: unauthorized substitution of one brand of goods when another brand is ordered, trademark infringement with intent to deceive and trademark infringement where there is no fraudulent intent, but there is a likelihood of consumer confusion.126 Nowadays, passing off is generally used to describe only the first situation, the unauthorized substitution.127
Passing off occurs when a producer misrepresents his own goods or services as someone else's.128 Examples of such misrepresentations are advertising a product by using a picture of a product that belongs to a competitor,129 or using the product of a competitor as a sample to sell a different product.130 It is also possible to have an opposite misrepresentation. Thus, reverse passing off occurs when the producer misrepresents the goods or services of another as his own.131 Common examples of reverse passing off are replacing the trademark of the producer of the goods with the seller's trademark,132 affixing a mark over the trademark of the producer,133 or substituting the name of an actor in a movie with the name of another actor.134
In this context, passing off is regarded to be a type of deceptive marketing and a form of unfair competition.135 When passing off is accomplished by an unauthorized use of a trademark, it also constitutes a form of trademark infringement.136 Both passing off and reverse passing off are actionable under Section 43 of the Lanham Act. As a particularity, in cases of reverse passing off, it is required that the misrepresentation is likely to cause a commercial detriment of the other.137 Thus, a seller who uses the product of another to construct a new product and subsequently affixes its own mark is generally not liable.138
2.2 False Advertising
False advertising is a false or misleading representation made by a person regarding his own product. When the representation refers to the product of another, it is called product disparagement.139
In general, to establish a false advertising claim under Section 43(a) of the Lanham Act, a plaintiff must prove the following elements: 1) the defendant has made a false or misleading representation or description; 2) the false or misleading representation has actually deceived or has the capacity to deceive a substantial portion of the intended audience; 3) the deception is material in that it is likely to influence purchasing decisions; 4) there is a likelihood of injury to plaintiff, such as declining sales or loss of goodwill; and 5) the goods traveled in interstate commerce.140
There are two types of false advertising: advertisements that are literally false (false on its face or explicitly false) and advertisements that are literally true, but are likely to mislead and confuse consumers (impliedly false).141 If a statement is literally false, a plaintiff does not need to demonstrate actual customer deception.142 However, if the advertisement is only implicitly false, a plaintiff must present evidence to show that the advertisement conveys a misleading message to the viewing public.143
There is no technical requirement with regard to the form of the representation.144 The misrepresentation may be a statement (verbal or written), conveyed through visual images, inferred from a certain conduct or even by an omission.145
The representation may regard either the geographical origin of the product, or the nature, characteristics or qualities of the goods and services.146 The classic examples of geographic misrepresentations are labels that falsely indicate that the product originates from a certain geographical area, for example a wine produced in a different region.147 Another example is altering a label of the product by discarding or covering up a designation of origin, such as "Made in Taiwan."148 Particular rules regarding the protection of geographical indications are detailed in a separate chapter.149 Examples of false representation as to the nature, characteristics or qualities of a product are: a claim that a product contains 50 % of cashmere fiber, when in fact contained less;150 a claim that a product has been medically or clinically tested and found safe or that a product is a cosmetic not a drug.151
A representation must necessarily be a representation of fact.152 Statements of opinion are seen as "puffing" or "sales talk" and are not actionable as false advertising.153 For example the phrase "America's favorite pasta"used on the packaging of pasta products was regarded as mere puffing.154 Generally, there are two forms of "puffing" or "puffery": an exaggerated, blustering and boasting statement upon which no reasonable buyer would be justified in relying; or a general claim of superiority over comparable products that is so vague that it can be understood as nothing more than a mere expression of opinion.155 In determining whether a statement is of fact or of opinion, the statement must be considered in the overall context in which it appears.156 Thus, it has been held that the slogan "Better Ingredients, Better Pizza" was a statement of opinion standing alone; however, when utilized together with other advertising that compared the actual ingredients, it becomes a statement of fact because it conveys quantifiable and misleading facts that the product was better because of objective elements (i.e. because the producer is using "fresh-pack" tomatoes, fresh dough, and filtered water).157
Comparative advertising is permitted and even encouraged in United States. In general, the principles of false advertising apply in the same manner to comparative advertising. Until late 60's, comparative advertising was limited by industry practices and self-regulatory codes.158 Product comparisons were made in terms of "Brand X" or "a leading brand" when referring to a product of a competitor.159 After informal negotiations between the Federal Trade Commission and media companies (such as NBC, ABC and CBS), the advertising industry adopted policies permitting advertisers to name the competitors and their products when making advertising claims.160 A FTC statement of policy of 1979 has substantially encouraged the spread of comparative advertising:
The Federal Trade Commission has determined that it would be of benefit to advertisers, advertising agencies, broadcasters, and self-regulation entities to restate its current policy concerning comparative advertising. Commission policy in the area of comparative advertising encourages the naming of, or reference to competitors, but requires clarity, and, if necessary, disclosure to avoid deception of the consumer. Additionally, the use of truthful comparative advertising should not be restrained by broadcasters or self-regulation entities.161
2.3 Product disparagement
In 1988, Section 43(a) of the Lanham Act was amended to prohibit false or misleading representations of fact that refer not only to a person's own goods, services, or commercial activities, but also to the product of another. The federal statute seems to treat false advertising and product disparagement in the same manner.
However, at common law, product disparagement was treated quite different than false advertising. Product disparagement as a tort has received various labels such as "injurious falsehood", "slander of goods", "trade libel"or "commercial disparagement."162 Traditional rules for imposing liability in cases of product disparagement were derived by analogies to the laws of personal defamation.163 Due to constitutional considerations, the statutory and common law actions for product disparagement were more restrictive than the actions for false advertising.164
Product disparagement is referred in the Restatement (Second) of Torts § 634 as "injurious falsehood" and it is defined:
One who publishes a false statement harmful to the interests of another is subject to liability for pecuniary loss resulting to the other if
(a) he intends for publication of the statement to result in harm to interests of the other having a pecuniary value, or either recognizes or should recognize that it is likely to do so, and
(b) he knows that the statement is false or acts in reckless disregard of its truth or falsity.
Unlike false advertising, an action for product disparagement requires intent and a detailed proof of special damages that were directly caused by the disparaging statement.165 Because the wording of section 43(a) of the Lanham Act does not distinguish between false advertising and product disparagement, it is unclear of whether the common law elements of tort are incorporated into the federal statute. Even today, the issue remains unsettled.166
3. Publicity rights
The right of publicity has been developed as a derivation of the common law right of privacy.167 The right of privacy is protected by the vast majority of the states, specifically by statute,168 under common law,169 or under general principles of tort liability.170 Informally described as the right of an individual to be left alone,171 the right of privacy protects a person against four distinct types of invasion: appropriation of an individual's name or likeness for the use or the benefit of another, unreasonable intrusion upon plaintiff's physical solitude or seclusion, publicity placing another in a false light before the public and unreasonable disclosure of embarrassing private facts.172 It should be noted that the right of privacy discussed here protects an individual against a private action and in this context, it should be distinguished from the constitutional right of privacy against governmental intrusion as provided by the Fourth Amendment of the U.S. Constitution.173
The right of publicity emerged as an aspect of the right of privacy174 that protects an individual against the unauthorized commercial use of the person's name or likeness. The right of publicity developed into a separate and independent right from the right of privacy.175 It is generally recognized that the appropriation of a person's identity can result in injuries to both commercial and personal interests.176 Thus, the right of privacy is focused on personal interests, protecting against invasion upon individual's private self-esteem and dignity,177 while the right of publicity is concerned primarily with the commercial aspects of the appropriation. However, the difference between the two rights turns not upon the type of activity which constitutes the legal wrong;178 rather, the distinction relates to nature of the harm suffered by plaintiff.179 Privacy is seen as a personal and mental right, while publicity is a commercial and business right.180
The right of publicity has been defined as the right of every individual to control the commercial use of his or her identity.181 It protects the commercial value of person's identity against the unauthorized use of the person's name, likeness, or other indicia of identity for purposes of trade.182 In this context, an infringement of the right of publicity is seen as a tort and a form of unfair competition.183 Nowadays, it is protected in 28 states under common law, by statute or both.184 In other jurisdictions the existence of the right of publicity remains uncertain.185 Only natural persons may have rights of publicity. Some jurisdictions (New York) protect the right only as long as the person lives. Other states recognize post mortem rights either for a certain number of years from the death (in California 50 years)or until the right is lost by non-use (Tennessee).
The right of publicity is more often invoked in the context of a celebrity. However, it is generally recognized that even the identity of an unknown person has some commercial value.186 Whether a person is famous, notorious or anonymous is more relevant on the issue of damages.187
In general, the elements of a claim of the right of publicity are: (1) the defendant's use of the plaintiff's identity; (2) the appropriation of plaintiff's name or likeness to defendant's advantage, commercial or otherwise; (3) lack of consent; and (4) resulting injury.188 For an infringement of the right of publicity there is no need of falsity, confusion or deception.189 Liability is triggered when a minimum number of people identifies the person from the unauthorized commercial use.190 The number of people must not be "insignificant."191 In addition, the use must be primarily commercial and not protected by the First Amendment.
4. Other forms of unfair competition
4.1 Misappropriation
The doctrine of misappropriation has been applied by courts in limited cases to protect the intangible values of a business. In International News Service v. Associated Press, 248 U.S. 215 (1918), a news agency has copied information from a competitor's news reports that were not protected by copyright. Based on that information, the agency created new stories and sent them to its affiliated agencies for early publication. The United States Supreme Court held that the appropriation of news for use in direct competition was a form of unfair competition that may be actionable under a federal common law. The doctrine of misappropriation received little recognition in other cases and several courts have limited its application to the facts of International News Service.192 In fact, in subsequent decisions the U.S. Supreme Court limited the possible application of the doctrine by holding that federal law preempts state laws that provide protection in areas that come within the scope of federal patent and copyright laws.193 In other words, states cannot use the misappropriation doctrine to provide protection for works that do not meet the requirements of protection under the copyright or patents laws. A recent decision suggests that the decision of International News Service remains applicable only in certain circumstances, where:
(i) the plaintiff generates or collects information at some cost or expense
(ii) the value of the information is highly time-sensitive
(iii) the defendant's use of the information constitutes free-riding on the plaintiff's costly efforts to generate or collect it
(iv) the defendant's use of the information is in direct competition with a product or service offered by the plaintiff
(v) the ability of other parties to free-ride on the efforts of the plaintiff would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened.194
4.2 Intentional interference with contractual relations
At common law, a third party interference with contractual relations is considered a tort under certain circumstances. The Restatement Second of Torts § 766A provides:
One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person, by preventing the other from performing the contract or causing his performance to be more expensive or burdensome, is subject to liability to the other for the pecuniary loss resulting to him.
The tort of wrongful interference with contract has been recognized by the vast majority of the states.195 In essence, it is an intentional tort. Proof of intent or malice, and damages is required. When the interference with contract arises in circumstances of trade or commerce, the tort may be regarded as a form of unfair competition.
5. State unfair competition statutes
Nowadays, every state has adopted some form of specific legislation in the area of unfair competition.196 Some states have enacted legislation modeled after the Uniform Deceptive Trade Practices Act; others have enacted "little FTC" statutes based on the Unfair Trade Practices and Consumer Protection Act developed by the Federal Trade Commission.197
5.1 Uniform Deceptive Trade Practices Act
A handful of states198 have enacted statutes modeled after the Uniform Deceptive Trade Practices Act. The Uniform Act was promulgated by the National Conference of Commissioner on Uniform State Laws on 1964 and was subsequently revised in 1966. The Act provides a list of practices that are deemed to be deceptive.
According to the Section 2(a) of the Uniform Act, "a person engages in a deceptive trade practice when, in the course of his business, vocation, or occupation, he:
(1)Passes off goods or services as those of another
(2)Causes likelihood of confusion or misunderstanding as to the source or approval of goods or services; or an affiliation with or certification by someone else.
(3) Uses deceptive representations or designations of the geographic source of the goods or service.
(4)Represents that goods or services have sponsorship, approval, characteristics, ingredients, uses or benefits that they don't have, or that a person has some sponsorship, approval or connections that he or she does not.
(5) Represents that the goods are original or new when they are not.
(6) Represents that goods or services are of a particular standard, quality or grade, or of a particular style or model, when they are not.
(7) Disparages the goods, services or business of someone else by false or misleading representations.
(8) Advertises goods or services with no intent to sell them as advertised or that supplies needed to meet reasonable demand (unless the advertisement discloses a supply limitation).
(9) Makes false or misleading statements of fact concerning the reasons for or the existence of price reduction.
(10) Engages in any other conduct which similarly creates a likelihood of confusion or of misunderstanding."
As the prefatory note of the Act points out, the deceptive trade practices singled out by the Uniform Act can be roughly subdivided into conduct involving either misleading trade identification or false or deceptive advertising. A complainant need not prove competition between the parties or actual confusion or misunderstanding in order to prevail in an action under the enumerated practices.199 The action may be brought by any person likely to be damaged by a deceptive trade practice, including consumers and non-profit organizations.200
5.2 Unfair Trade Practices and Consumer Protections Act
In 1914, the U.S. Congress adopted the Federal Trade Commission Act that makes unlawful all unfair methods of competition and unfair or deceptive acts or practices and empowers the Commission to prevent persons, partnerships or corporations from using such unfair methods in the conduct of any trade or commerce.201 Acting under the powers of the act, the FTC has developed in 1967 the Unfair Trade Practices and Consumer Protection Act.
A large number of jurisdictions have adopted similar legislation.202 Like the FTC Act, the state statutes incorporate a general prohibition against all unfair methods of competition instead of enumerating examples of unlawful trade practices.203 The rationale was that it is impossible to foresee every possible unfair practice and an illustrative list would only limit the effectiveness of the act to other types of conduct.204 What constitutes an unfair trade practice is left to be determined by courts on a case by case basis.205
Louisiana is an example of a state that has adopted such legislation. Louisiana's Unfair Trade Practices and Consumer Protection Act empowers the Attorney General to make interpretative rules and regulations on trade practices, 206 to investigate claims207 and to bring action in civil courts against any person for unlawful trade practices.208 Individuals that suffers an "ascertainable loss" may also bring a private action to recover actual damages.209 The prescription for the action is one year from the time of the transaction or act which gave rise to this right of action.210
The classic example of unfair methods of competition prohibited under both types of state statutes is the so-called practice of "bait and switch." In Electrolux Corp. v. Val-Worth, Inc., 6 N.Y.2d 556, 190 N.Y.S.2d 977 (N.Y. 1959), defendant entered into an agreement with plaintiff to buy used "Electrolux" vacuum cleaners and selling them as "rebuild Electrolux." Defendant would disassemble the machines, clean and rebuild them, and, when necessary, supply new parts and accessories some of which were not manufactured by the plaintiff. Thereafter, defendant advertised in various television commercial the "rebuild Electrolux" vacuum cleaners at a very attractive price. The advertisement contained a telephone number where prospective purchasers could call and ask for a demonstration. However, whenever customers called, the salesmen attempted to sell them a different product that was not manufactured by the "Electrolux." The other product was usually more expensive and claimed to a be a better vacuum cleaner than the "Electrolux"or the "rebuild Electrolux" machines. The court found that the practice was a form of "parasitism" and constituted an unfair method of competition.
There are many other examples of unfair practices or methods of competition. Some states have supplemented their unfair competition statutes with specific prohibitions on advertising and sales. For example, Louisiana prohibits retailers from advertising that they sell merchandise at wholesale prices211 and prohibits both retailers and wholesalers to sell or offer to sell goods at less than the cost of the product with the intent or effect of inducing the purchase of other merchandise or of unfairly diverting trade from a competitor.212 Another statute prohibits persons and businesses from sending of unsolicited merchandise and provides that such merchandise will be considered an unconditional gift to the recipient.213 Also prohibited is the use of the designation "Doctor," "Dr.,"or the "honorary degree" in advertising, where the person does not have the requisite degree that entitles him or her of such recognition.214
Part II
Liability and Remedies
A. Liability: rationale, conditions and implementation
1. Rationale
Protection against unfair methods of competition serves many interests and has received different justifications: protecting and encouraging investments in good will, protecting the consumers from confusion, promoting good faith and fair play, enforcing honesty and fairness in the marketplace, preventing unjust enrichment, encouraging competition, and protecting against commercial immorality, fraud and deceit. Unfair competition is regarded as a commercial tort and therefore, it triggers civil liability.
The primary consideration in a case of unfair competition is the protection of consumers. For this reason, most forms of unfair competition like trademark infringement, passing off and false advertising use the standard of likelihood of consumer confusion and deception for imposition of liability. Proof of actual confusion is not required. Likelihood of confusion or deception may be proved by use of both direct and circumstantial evidence. Consumer's surveys are probably the best method of proof. With few exceptions, intent or malice is generally not required in most forms of unfair competition.215 In the case of infringement of the rights of publicity liability may be imposed based on simple negligence, without regard to intent and irrespective of whether there is a likelihood of public deception. In general, in an action of unfair competition a plaintiff must prove that (1) he is likely to suffer a prejudice (proof of actual prejudice is not required) (2) as a result of a violation of a right, or of an unlawful or unfair conduct (3) that was made for commercial purposes. The actual requirements differ from case to case based on the type of unfair competition asserted. There are two types of defenses that are generally available: the First Amendment and non-commercial use. The First Amendment protects truthful commercial speech, opinions, and certain uses for conveying newsworthy events and matters of public interest (such as educational, scientific or academic purposes). Some states have enacted certain accelerated procedures in issues involving the First Amendment with the purpose of providing the possibility of an immediate review of frivolous and meritless claims at a very early stage in the legal proceedings in order to avoid a long and unnecessary litigation on the merits.216 For example, in Louisiana a defendant may file a "special motion to strike" requiring plaintiff to show "a probability of success on the claim," under the penalty of having the action dismissed.217 A similar procedure is available in California.218
2. Implementation
Given the vast area of law that is unfair competition in United States, there are no preventive measures of general applicability. Various governmental and state agencies (such as the Federal Trade Commission, the Bureau of Alcohol, Tobacco and Firearms, the Food and Drug Administration, or the state Attorney General in Louisiana) have formulated detailed rules and regulations in specific areas of the economy to preclude violations of unfair competition. These regulatory schemes include requirements of labeling and disclaimers for certain type of products (such as tobacco, alcoholic beverages, pharmaceutical products etc.), licensing, certification and approval for selling certain goods and services, etc. Preventive measures are also accomplished through industry practices. For example, the media industry has imposed certain standards for advertising. Where the advertisement does not meet the standard, the agency will refuse to publish it. Preventive measures may also be taken by the parties themselves. Thus, after showing the elements of a prima facie case of unfair competition, a plaintiff may request the court to issue a temporary injunction until the trial is over, in order to diminish further damages. Another aspect of prevention is considered the likelihood of an award of damages. In many cases of unfair methods of competition and unfair trade practices, a plaintiff may recover triple damages and sometimes even punitive damages and attorney's fees. The mere possibility of such awards of treble damages is considered a powerful deterrent factor against unfair competition.
Claims of unfair competition are generally brought in the form of a civil action by private parties or by responsible governmental and state agencies (such as the Federal Trade Commission, or the state Attorney General in Louisiana). In general, the action will be brought by a direct competitor or other persons that are likely to suffer a commercial detriment. In some forms of unfair competition such as infringement of trademark or infringement of the rights of publicity the action may be brought by persons that have acquired rights of use through a licensing contract. In jurisdictions that recognize post mortem rights of publicity, the action may also be brought by successors. Consumers do not have standing and cannot bring an action of unfair competition under Lanham Act219 or under the Federal Trade Commission Act.220 In many states, such as Louisiana, they may bring a claim under state statutes of unfair competition.221
Claims of unfair competition based on federal law are brought in federal courts.222 Claims that arise solely under state laws are brought in state courts. Federal courts have jurisdiction to hear claims arising out of state law in certain cases. Thus, where a federal courts has original jurisdiction over a claim, it will also have supplemental jurisdiction over other related claims that arises from the same case or controversy.223 In cases where a federal court does not have original jurisdiction over any of the claims it may acquire jurisdiction based on the different citizenship of the parties.224 Under the Erie doctrine225 a federal court is required to apply the laws of the state and not federal common law. A decision from a federal district court is appealable to a federal court of appeal and subject to discretionary review by the United States Supreme Court. Decisions of state court are subject to review by at least one higher state court. In some states, such as Louisiana, a judgment of a district court is appealable to a court of appeal and is subject to discretionary review by the state Supreme Court. A decision of the state highest court is also subject to discretionary review by the United States Supreme Court if it affects rights protected under the federal constitution.
It is possible to introduce multiple actions simultaneously or one action based on multiple or alternate grounds. Thus, a person may raise on the same time claims for infringement of the rights of publicity, trademark infringement, invasion of privacy and defamation. Liability may be established independently for each claim. However, an award of damages will be assessed based on the types of injuries the aggrieved party has sustained to prevent double recovery for the same type of loss. For example, recovery in a claim of trademark infringement or false advertising under federal law will preclude recovery for the same injury based on a claim of trademark infringement under state law, or other unfair competition statute. Furthermore, a plaintiff is required to raise all claims arising from the same transaction or occurrence at the same time, otherwise he will be barred by the principles of res iudicata.
Where the parties have a pre-existing contractual relationship, sometimes it will not be possible to introduce a claim of unfair competition in courts. A frequent practice in the U.S. business environment is to insert arbitration clauses in various contracts that may affect even consumers in certain cases.226 Cases decided by arbitration are generally not appealable. United States favors the practice of arbitration in commercial cases.227
B. Remedies
An injunction of use against defendant is available in all cases of unfair competition. Monetary relief and other remedies are available under Lanham Act and under state laws depending largely on the type of unfair competition.
For actions of trademark infringement, intentional dilution, false advertising and product disparagement brought under 43 (a) of the Lanham Act, a plaintiff may recover the actual damages sustained or an estimation thereof, the profits of the defendant and costs of the action.228 The court has wide discretion in assessing such damages by reducing the amount or awarding up to three times the amount of actual damages sustained.229 However, such amounts shall constitute "compensation and not a penalty."230 In special circumstances, the court may also award attorney's fees to the prevailing party. Punitive damages are not available for actions brought under Lanham Act. Where dilution of a trademark is made without intent, plaintiff is entitled only to an injunction, with no monetary relief.231
In cases of counterfeiting, a court must award a plaintiff the bigger amount between three times of the plaintiff's profits or actual damages sustained, together with an award of attorney's fees.232 The court may also award at its discretion an annual interest rate on the judgment, retroactively from the time the action was filed.233 A plaintiff also has the possibility of electing statutory damages eliminating the need to account for damages sustained or to prove defendant's profits from the use. Statutory damages are generally in between $500 and $100,000 per counterfeiting mark for each type of goods or services sold, offered for sale or distributed.234 In aggravated cases a court may award up to $1,000,000 per counterfeiting mark for each type of goods or services sold, offered for sale or distributed.235 Counterfeiting may be punishable by criminal sanctions.
For actions of unfair competition brought under state law the spectrum of remedies is broader and depends on the form of unfair competition. Cost of the action and monetary relief in the form of special damages for actual loss is available in all cases. In a case of infringement of the right of publicity (or invasion of privacy), a plaintiff would generally recover as special damages the greater amount between the pecuniary loss sustained and the pecuniary gain of the defendant. Actual loss includes damages that are reasonably certain to occur. Plaintiff in this case may also recover general damages for loss of reputation, mental anguish and emotional distress. In some jurisdictions, punitive damages may also be available. In actions at common law, most states do not provide for an award of attorney's fees. However, attorney's fees may be recovered in actions brought under the state unfair competition statutes. Where the action is brought under a state unfair competition statute, treble damages are generally available.
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