Determining Unfair Competition

April 14, 2021

A company partnership’s breakdown can put the ownership, control, and survival of a business at risk. When business relationships are threatened, one partner or another may exit the current company.…

A company partnership’s breakdown can put the ownership, control, and survival of a business at risk. When business relationships are threatened, one partner or another may exit the current company. And in many instances, they go on to form a new company. Unfortunately, it often operates in the same sphere as the former business, resulting in instances of ‘unfair competition.’ Understanding unfair competition – including what it looks like and how to mitigate it – is essential for both partners after a dissolution of a partnership.

What is Unfair Competition?

Unfair competition defines circumstances in which one business takes away revenue streams from another. When small businesses suffer from unfair competition, it can be devastating and lead to the business’s closure. Unfair competition often occurs through false information or advertising that draws consumers from one business to the other.

While any company can engage in unfair competition, it is more likely with former partnerships. When a partnership is dissolved, both partners still retain intimate knowledge of the product, service, operations, and other trade-related information. Using this information in a way that violates unfair competition laws can be easy for partners after they exit a business.

Unfair competition isn’t only ethically wrong; it is a legal violation of the Sherman Act. These actions may also violate applicable state laws that govern unfair competition. The Sherman Act outlaws “every contract, combination, or conspiracy in restraint of trade” and any “monopolization, attempted monopolization, or conspiracy or combination to monopolize.” Penalties for violating the Sherman Act can be up to $100 million for a corporation and $1 million for an individual. The monetary fine can be accompanied by up to 10 years in prison, depending upon the severity of the violation. For these reasons, it is beneficial to both former partners not to engage in unfair competition. While it may seem like an easy way to build up a customer base, the legal violation could quickly sink any entrepreneurial efforts.

Types of Unfair Competition

The term ‘unfair competition’ encompasses a wide range of activities that may be legal violations. The most common types of unfair competition include:

Trademark Infringement: Trademark infringement involves using another’s trademarked property without permission. With former partners, if a product or brand is trademarked, the exiting partner would not be able to use it legally without permission from the former company. They cannot put any information covered by the trademark in advertising, labels, or any information.

Trade Name/Dress Violation: The new product, service, and advertising cannot copy the name, physical appearance and/or packaging of a known brand. Copying these details would be considered an attempt to fool a customer into buying the alternative and constitute unfair competition.

Misuse of Trade Secrets: Trade secrets often involve stealing a competitor’s secret proprietary product information or business processes. This type of violation is common with dissolved partnerships since both partners still have great knowledge about the business practices. Inadvertent violations occur because partners believe that since they retain the knowledge, they can still use it.

Below-Cost Selling: Companies may often price a product below the competitor’s price point or market rate. This practice may result in a short-term loss, but if they can sustain the practice long enough to put a competitor out of business, they can ensure sustained profits. This practice, though, is a violation of unfair competition laws.

Spreading Rumors: When a partnership dissolves, there may be hard feelings. This sentiment can lead one or both parties to speak badly about the other in the media or public forums. If the information is not true, it is not only a violation of unfair competition laws; the party spreading the rumor may be subject to a defamation lawsuit.

False Advertising: Making false or misleading claims about a product to promote it is also a violation of unfair competition. You cannot make unproven claims without violating the laws.

Unauthorized Substitution: Unauthorized substitution occurs when a seller replaces one brand for another without authorization. When a lower-cost product is substituted, it may also be a violation of false advertising or false representation of goods or services. The bottom line is that consumers are tricked into paying for one product and receiving another.

Bait-and-Switch Advertising: Bait-and-switch strategies also fool the customer into purchasing something, only to be switched with another item. For instance, a business may advertise a special on one item but find it is not available when customers arrive. The business will often have a similar product that costs slightly more, which customers frequently purchase.

Disagreements between former partners are common. But both parties are better protected when they avoid unfair competition. Engaging in any illegal practices may threaten both of their current endeavors.