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Unfair Competition

A federal cause of action for unfair competition derives from 15 U.S.C. 1125(a), commonly known as section 43(a) of the Lanham Act. Different categories of federal unfair competition exist under the Lanham Act including passing off and false advertising. The Lanham Act's prohibition against passing off specifically prohibits a person from using a

"false or misleading description of fact, or false or misleading representation of fact" in commerce, which "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. . . ."

This provision provides a cause of action for unfair competition even though the plaintiff's goods are not the subject of federal registrations. This is particularly important where a plaintiff attempts to use a generic term as a source identifier. Since a generic term is not eligible for trademark protection, a plaintiff using a generic term will not be protected by trademark law; however, the court may enjoin an infringer from passing itself off as the plaintiff or from passing its product off as the plaintiff's.

The requirements for a passing off claim for federal unfair competition are: (1) an association of origin by the consumer between the mark and the first user, and (2) a likelihood of consumer confusion when the mark is applied to the second user's good. Unlike a common law cause of action for passing off which requires either fraud or a distinctive mark or tradename, a federal claim for passing off encompasses a broader area of unfair competition which may be generally described as a misappropriation of the skill, expenditures, and labor of another. Therefore, when most courts speak of "passing off" as a species of federal unfair competition they are referring to passing off without the element of fraud.

To establish a cause of action for false advertising under the Lanham Act, the plaintiff must show that the challenged statement is literally false or, even though the statement is not literally false, that it is likely to deceive or confuse customers. In addition to this first showing, the plaintiff must also show that the defendant's false or misleading representation was material in the sense that it would have some effect on the consumers who are making the purchasing decision. This requirement helps prevent frivolous claims by ensuring that the plaintiff's cause of action for federal false advertising is properly based on a likelihood of being damaged by the defendant's representations.

Misappropriation is a common law form of unfair competition created by courts. In a misappropriation claim, a defendant is accused of copying or appropriating a plaintiff's creation that is not protected by trademark, copyright or patent law. For a typical misappropriation claim to be successful, a plaintiff must prove three different factors: (1) that the plaintiff has made a substantial investment of time, effort, and money in creating the thing misappropriated, such that the court can characterize that "thing" as a kind of property right; (2) the defendant has appropriated the "thing" at little or no cost, such that the court can characterize the defendant's actions as "reaping where it has not sown;" and (3) the defendant's acts have injured the plaintiff, such as by a direct diversion of profits from the plaintiff to the defendant or a loss of royalties that the plaintiff charges to others to use the thing misappropriated.

Since the misappropriation cause of action is broadly tailored, plaintiffs commonly incorporate this cause of action into their infringement claims. This is particularly due to the fact that misappropriation claims are not restrictive in nature, unlike trademark infringement claims wherein courts are continuously adding restrictions. However, certain applications of a misappropriation cause of action fail in light of federal preemption challenges.

Passing off is the oldest of all the unfair competition theories. Basically, passing off occurs when a defendant is making a form of false representation that causes consumers to believe that the defendant's goods or services come from the plaintiff. To prove passing off a plaintiff must first show that a defendant is duplicating or simulating the plaintiff's distinctive mark. This mark must be inherently distinctive or have acquired secondary meaning for this cause of action to be supported. Secondly, the plaintiff must demonstrate that the duplication or simulation which is performed by the defendant's goods or services caused a likelihood of consumer confusion about the source of the goods or services of the plaintiff.

Additionally, in an action for unfair competition due to passing off, wrongful intent to confuse is not required. In fact, the only time wrongful intent may be required is if the plaintiff cannot prove that he or she has an inherently distinctive mark or that the mark has acquired secondary meaning.

Justice Story outlined the classic scenario a century and a half ago when he described a case of "unmitigated and designed infringement of the rights of the plaintiffs, for the purpose of defrauding the public and taking from the plaintiffs the fair earnings of their skill, labor and enterprise." Taylor, 23 F.Cas. at 744. The core protection of the Lanham Act remains faithful to this conception. See 15 U.S.C. 1114 (prohibiting unauthorized use in commerce of registered marks). Indeed, this area of the law is generally referred to as "unfair competition"--unfair because, by using a rival's mark, the infringer capitalizes on the investment of time, money and resources of his competitor; unfair also because, by doing so, he obtains the consumer's hard-earned dollar through something akin to fraud. See Paul Heald, Federal Intellectual Property Law and the Economics of Preemption, 76 Iowa L.Rev. 959, 1002-03 (1991).

In American Footwear Corp. v. General Footwear Co. Ltd., 609 F.2d 655, C.A.N.Y., 1979, the Second Court of Appeals stated:

Although at one time the law of unfair competition was limited to claims that one party had attempted to pass off his goods as those of another party, unfair competition is now held to encompass a broader range of unfair practices which may be generally described as a misappropriation of the skill, expenditures, and labor of another. Flexitized, Inc. v. National Flexitized Corp., 335 F.2d 774, 781 (2d Cir. 1964), Cert. denied, 380 U.S. 913, 85 S.Ct. 899, 13 L.Ed.2d 799 (1965); Ideal Toy Corp. v. Kenner Products Division of General Mills Fun Group, Inc., 443 F.Supp. 291, 305 (S.D.N.Y.1977). "(O)ne cannot sell his product by misappropriating the good will of another through misleading the public into thinking that it is 'sponsored' by or derived from something else." Ideal Toy Corp. v. Kenner Products Division of General Mills Fun Group, Inc., supra at 305. Yet, liability in this area for misimpression or misappropriation has been limited. For example, one can capitalize on a market or fad created by another provided that it is not accomplished by confusing the public into mistakenly purchasing the product in the belief that the product is the product of the competitor. Philip Morris, Inc. v. R. J. Reynolds Tobacco Co., 188 U.S.P.Q. 289 (S.D.N.Y.1975).
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