Understanding Unfair Competition Law in Texas

Unfair competition law in Texas You may have heard the term unfair competition used in business without knowing its precise meaning. Actually, no specific Texas law defines unfair competition.

There is a federal statute–the Federal Trade Commission Act–that broadly prohibits “unfair methods of competition” in interstate commerce.

But when applied by Texas courts, “unfair competition” is more of a catch-all term for various kinds of business-related torts.

A tort is a wrongful act that injures another. We usually think of torts in the context of personal injury cases–e.g., a driver who runs a red light and causes a car accident. A business tort may not involve any physical damage, but it does involve “conduct which is contrary to honest practices” and causes financial losses to the victim.

Texas generally recognizes the following types of business torts under the umbrella of unfair competition: passing off, misappropriation of trade secrets, and common law misappropriation.

Passing Off & Reverse Passing Off

The most basic type of unfair competition is when a company misrepresents its product as someone else’s. This is colloquially known as “passing off” of “palming off.” Perhaps more common is “reverse passing off,” i.e. when a company misrepresents someone else’s product as its own.

For example, in a famous 2003 case, the U.S. Supreme Court addressed a reverse passing off scenario: a production company purchased footage from an old documentary, then repackaged and sold it, without the original owner’s permission, as its own series.

More recently, a state appeals court in Dallas upheld a jury’s finding of unfair competition in a case where the defendant used a similar trade name to that of the plaintiff. Both companies are in the pool construction business. A local building inspector mistakenly identified one of the defendant’s pools as made by the plaintiff. The plaintiff successfully sued and recovered damages.

In these type of cases it does not matter if the defendant intended to deceive anyone. As the appeals court explained in the pool case, “A showing of actual or probable deception is sufficient.” In other words, if consumers actually confuse the defendant and plaintiff’s products, that be sufficient to prove unfair competition.

Misappropriation of Trade Secrets

In Texas, there is also a business tort for misappropriating another company’s trade secrets. A “trade secret” can include any kind of “pattern, device or compilation of information which is used in one’s business,” and which confers some sort of competitive advantage in the marketplace. Trade secrets usually relate to the manufacture of a specific product. Think of the “secret formula” for widely used commercial products like Coca-Cola or Kentucky Fried Chicken.

Many companies use confidentiality and non-disclosure agreements with their employees to prevent deliberate theft of trade secrets. But absent such agreements, a company may still rely on the tort of misappropriation to recover damages. Under Texas law, there are four elements a plaintiff must prove in a misappropriation case:

  1. The trade secret existed;
  2. The trade secret was revealed due to “improper discovery” or breach of a confidential relationship;
  3. The defendant used the trade secret; and
  4. The plaintiff suffered damages as a result.

Common Law Misappropriation

It is also possible to commit misappropriation that does not involve a “secret.” Common law misappropriation covers situations where a defendant misuses a plaintiff’s publicly available product. In a famous 1993 case from Austin, a defendant purchase a tape of animal sounds recorded by the plaintiff. The defendant then sold its own tape in direct competition with the plaintiff.

The plaintiff sued for common law misappropriation and won a jury verdict of nearly $700,000. A state appeals court affirmed the award. The court explained there are three elements of common law misappropriation in Texas:

  1. The plaintiff creates a product through his or her “extensive time, labor, skill and money”;
  2. The defendant “free rides” off the plaintiff’s work by using the product to engage in direct competition; and
  3. There is “commercial damage” to the plaintiff as a result.

It should be noted that in many cases, a company’s original literary and artistic works are protected by federal copyright law. But common law misappropriation covers products that are not protected by intellectual property law, such as the animal sounds at issue in the Austin case.

Do You Need Help From a Dallas Business Litigation Attorney?

This is only a brief overview of Texas laws governing unfair competition. If your company has been the victim of any dishonest or illegal conduct at the hands of a competitor or former employee, you should speak with an experienced Dallas unfair competition lawyer who can advise you of your options. Call Lindquist Woods Edwards LLP at 214-427-1018 to speak with one of our attorneys today.

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