What You Need to Know About U.S. Law - Punishing the Dishonest Competitor

The article below is the first in a series regarding "What You Need to Know About U.S. Law." Attorneys from a variety of practice groups at Pierce Atwood will author similar articles in the coming months to educate our overseas colleagues on U.S. law. Please feel free to contact the authors directly if you wish to comment on this article or suggest topics for future installments in this series.

Competition is the heart of the efficient marketplace.  Information is the lifeblood of competition.  But what can you do if a competitor has tainted the marketplace with false or misleading information?   In the United States, the federal Lanham Act provides a wronged competitor powerful legal remedies to combat and punish the dishonest competitor. 

Even in the cutthroat world of free market competition there are rules and a competitor should and will face serious consequences if it breaks those rules by: (i) making false claims concerning the attributes and qualities of its products or its competitor’s products; (ii) making specific claims as to the scientific or medical benefits of  their product without the scientific basis to make those claims; or (iii) misleading consumers as to the affiliation, origin, approval, or sponsorship of their product.  In the United States a specific federal law, the Lanham Act, gives a competitor a legal claim for injunctive relief and damages against a competitor who has violated these rules of the marketplace in order to deceive consumers.

Section 43(a) of the Lanham Act (15 U.S.C. § 1125) provides in pertinent part:  (1) Any person who, on or in connection with any goods[1] 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.

“To prove a false advertising claim under the Lanham Act, a plaintiff must demonstrate [among other things] that . . . the defendant made a false or misleading description of fact or representation of fact in a commercial advertisement about his own or another’s product . . .”[2]  Under this test, “a representation must (a) constitute commercial speech (b) made with the intent of influencing potential customers to purchase the speaker’s goods or services (c) by a speaker who is a competitor of the plaintiff in some line of trade or commerce and (d) disseminated to the consuming public in such a way as to constitute ‘advertising’ or ‘promotion’”.[3]  Scientific claims about a product for which the defendant lacks scientific evidence to substantiate the claims also constitutes false advertising under the Lanham Act.

 Even though Section 43(a) was passed as a consumer protection statute, United States courts are receptive to allowing commercial plaintiffs to obtain an injunction even where the likelihood of pecuniary injury to the plaintiff may be slight.  Thus under Section 43(a), Congressional policy appears to encourage commercial companies to act as the fabled “vicarious avenger” of consumer rights.  An injunction protects both consumers and the commercial plaintiff from continuing acts of false advertising.[4]    “[O]nly a slight likelihood of injury need be shown to warrant injunctive relief when the defendant’s representations are literally false”.[5]  As the United States Court of Appeals for the First Circuit has observed, “the public interest purposes of the Lanham Act . . . requires a liberal interpretation of the irreparable injury factor.”[6]    Accordingly, once a plaintiff is able to demonstrate a likelihood of success, it is reasonable to conclude that harm has or will be done.[7]  Stated another way, “the irreparable injury requirement is satisfied once it is shown that the defendant is wrongfully trading on the plaintiff’s reputation.”[8]  Therefore, to the extent the plaintiff can establish that the defendant has made and continues to make false and misleading statements about its products or about the plaintiff’s products then the plaintiff can seek – and most likely obtain – a binding injunction ordering the defendant to cease and desist from continuing its unlawful behavior.

In addition to injunctive relief, a plaintiff who successfully establishes a Lanham Act violation “shall be entitled . . . to recover . . . defendants profits and any damages sustained by the plaintiff”[9].  The Plaintiff is also entitled to seek damages equal to its lost profits, loss of market share and loss of goodwill which was directly or proximately caused by the defendant’s false or misleading statements.

In order to develop a good faith basis for bringing a Lanham Act claim, the plaintiff should endeavor to collect: (i) the defendant’s marketing materials, including any product comparisons concerning the plaintiff’s products; (ii) customer statements documenting false or baseless product claims made by the defendant; and (iii) any evidence of consumer deception or confusion brought about by the defendant’s false and misleading marketing of its products and/or statements concerning the plaintiff’s products.

In the United States, the Lanham Act provides a powerful tool to stop the flow of and to correct false information in the marketplace.  In addition, the Lanham Act provides a means to recapture profits lost or to compel the disgorgement of profits gained through false and deceptive advertising.