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United States Competition Law with respect to Unfair Trade Practices

Bachelorarbeit 2010 32 Seiten


Table of Contents


1. Sources of the law of unfair trade practices and historical development
1.1. Common law sources
1.2. Statutory, Constitutional and Treaty Sources

2. Improper Business Methods
2.1. Consumer protection issues
2.1.1. Deception and Consumer Protection
2.1.2. Special issues regarding deceptive practices and false advertising
2.2. Unfair business practices
2.2.1. Unfair trade practices in general
2.2.2. Special issues regarding unfair practices
2.2.3. Excursus: Industrial Espionage and Betrayal of Trade Secrets

3. Law enforcement
3.1. Federal Law Enforcement
3.1.1. The Federal Trade Commission
3.1.2. Private Actions under the Lanham Act
3.2. State Law Enforcement

4. Closing and Acknowledgements

5. Bibliography


According to Black’s Law dictionary1, competition is the struggle for commercial advantage. The efforts taken of companies to achieve the respective commercial advantages can be - especially in a free market economy - ample. Let's illustrate this fact by the following examples:

Suppose that a automobile manufacturer, incensed by a car magazine’s constant ridicule of its cars, launches a rival magazine with a similar name and layout, copies the other paper's stories, lures away the employees, advertisers and subscribers of the other magazine by offering them higher wages and lower advertising and subscribing rates and finally succeeds in running its critical opponent out of business. Has the automobile manufacturer engaged in any unfair trade practices for which the owners of the car magazine may seek legal remedy? Or has the manufacturer acted in a permissible way to the magazine’s attack? Furthermore, could the magazine be said to have engaged in an unfair trade practice by permanently ridiculing the cars and its manufacturer2 ?

How can a merger between two or more businesses which are on the same market level and which manufacture similar products in the same geographic region influence consumers? What if two competitors agree in the artificial setting of prices at a certain level, contrary to the workings of the free market?

Do consumers have legal remedies against companies who engage in false advertising or who distribute faulty and dangerous goods?

The body of law which deals with these subjects is known as competition law, which can broadly be divided into Consumer Protection Law and unfair trade practices on the one hand and antitrust-law on the other hand. The bachelor thesis at hand takes the reader to a journey through competition law with a special insight into Unfair Trade Practices. After the study of the bachelor thesis the respective reader should be able to generally orientate him- or herself in this highly practice-oriented field of law.

1. Sources of the law of unfairtrade practices and historical development

1.1. Common law sources

The law of unfair trade practices is of common-law (i.e., judicial) and statutory origin. The common law of unfair trade practices - sometimes known as commercial tort law or the common law of unfair competition - gives businesses a private judicial remedy for various types of interference with trade relations. The common law of unfair trade practices developed step by step. Early English common law only dealt with maintaining the physical security of persons and property and did not protect trade or other relations as such or provide remedies for purely pecuniary harm. Parties to a trade relation could only claim protection from direct physical injuries and threats of same to their persons or direct trespasses to their property. In the fundamental Schoolmaster's Case example, two schoolmasters were held to have no cause of action for nuisance when a third schoolmaster opened a new school in competition with the plaintiffs and apparently attracted students at the expense of plaintiffs by cutting fees3.

Gradually there emerged a body of tort law which protected parties to trade and other profitable relations from economically injurious interference by third parties. This body of tort law can be divided into that which developed in order to protect profitable relations generally and that which developed in order to protect trade relations as such4.

Contractual interests were first protected by simple expanding the scope of protection afforded persons and property. The first step in that expansion was the law of nuisance, which protected persons and property from direct and indirect physical interference causing only pecuniary harm. Just as the law of torts protected persons and property from direct and indirect physical interference, it also protected them from various forms of injurious speech. In addition to protecting persons from threats and verbal harassment, the courts also provided remedies for deception and falsehood. The courts early developed two distinct forms of protection against such misconduct: they protected persons who were deceived to their physical or economic detriment and they protected persons who were likely to suffer economic harm as a result of defamatory or disparaging statements made to others. Furthermore in the twentieth century, American courts for the first time recognized the tort of invasion of privacy. Included under that heading are both intrusive invasions of privacy (such as eavesdropping, wiretapping and other forms of covert surveillance) and invasions by publication of certain injurious or privileged information, including the unauthorized use of another's name or likeness for a commercial purpose5.

Beyond the protection with respect to contractual and advantageous relations generally, English and American courts also concerned themselves with the protection of trade relations specifically. At this time emerged what has come to be called the law of unfair competition. The term „unfair competition“ first came into use in a number of cases involving attempts by one merchant to palm off inferior goods as those of another more reputable merchant by making deceptive use of the other merchant's trademark. Although the earliest form of palming off consisted of the deceptive use of another merchant's trademark, the courts soon realized that palming off could be accomplished by other deceptive means as well, such as the deceptive substitution or alteration of goods requested by a customer. At this time, trademarks became a form of intangible property, protected by equity courts against infringement. Therefore, the tort of trademark infringement must be distinguished from the tort of palming off. From now on, palming off came to be associated primarily with the deceptive substitution or alteration of goods and the deceptive imitation of product and business features whose identifying function was more or less secondary to some other commercial function.

Moreover, in the case International News Service v. Associated Press (1918)6 the tort of misappropriation originated. In the respective case the court held that one news service engaged in unfair competition when it copied or paraphrased another service's uncopyrighted stories as they were published on the east coast of the United States and then used those stories to compete with the other service on the west coast. The court defined the tort of misappropriation as the diversion of profits from those who have earned them to those who have not. The injustice is simply the appropriation of the fruits of another's investment of money, time and intellectual effort7.

After extending the concept of unfair competition beyond trademark infringement and palming off to the tort of misappropriation, the courts ultimately came to apply the term as well to commercial cases of pecuniary interference constituting a private or public nuisance. The widely spread term of malicious competition was born. The classic example of malicious nuisance is to be found in cases prohibiting the construction of a fence, whose only purpose is to block another's light and air. The respective principle mainly had commercial applications in cases like Keeble v Hickeringill[8] (1706), Beardsley v. Kilmer[9] (1923) or Great Atlantic & Pacific Tea Co. v. Cream of WheatCo.[10] (1915).

To sum up, I'd like to draw the attention to the fact, that the today called unfair competition law historically emerged piecemeal in numerous different cases and reflected a sum of various torts. In contrast to those more or less ancient common-law developments, the law of unfair competition also got shaped by statutory, constitutional and treaty sources, which will be subject to the following chapter.

1.2. Statutory, Constitutional and Treaty Sources

The statutory law of unfair trade practices is part of the larger statutory and administrative law of trade regulation. It often has a close connection and at points even merges with the law of antitrust and consumer protection. The statutory law of unfair trade practices was a result of inadequacies in the common law of unfair competition. The common law, for example, proved totally unequal in the case of false advertising: the common law has been unable to provide an effective remedy for false advertising which does not identify its commercial victim, because such practices were often more a public than a private wrong. As a result, there were no remedies against unfair trade practices if the respective practices did not affect or harm specified consumers or other persons[11].

The power of Congress to regulate trade relations stems from two distinct constitutional sources. The Patent and Copyright Clause[12] is a constitutional provision which grants Congress the authority to promote the advancement of science and the arts by establishing a national system of copyrights. Therefore Congress is authorized to create intangible property rights[13].

Moreover the Congress has the power to invalidate state law which is in conflict with federal statutes and the Constitution. The supremacy clause[14] creates this respective principle which is called „preemption“. According to the supremacy clause, federal law can supersede any inconsistent state law or regulation. But not only the Congress is authorized to preempt state law: also courts (and ultimately the Supreme Court) have the power to decide whether state law (judge made or legislative) conflicts with the federal Constitution or other regulations15. Both the United States Congress and all of the fifty state governments of the United States have enacted laws concerning unfair trade practices16. In addition, a large Common Law of both federal case law and state case law exists17.

Coming back to federal statutory law, one of the most important Acts concerning unfair trade practices is the Lanham Act18. In general, this federal trademark statute which was enacted in 1946 provides for a system of trademark registration and protects trademark owners against the use of similar marks if any confusion might result or if the strength of a strong mark would be diluted19. Section 43(a)20 of the Act provides a statutory cause of action for that form of false advertising which the common law has failed to reach - namely false or misleading representations in commerce that do not amount to palming off or disparagement21. As the law of unfair trade practices is a cross-sectional matter, also other areas of law must be taken into account to fully understand the respective matter. Like the Lanham Act, antitrust laws may provide parties with remedies which are not available at common law. While the Sherman Antitrust Act22 originally prohibited direct or indirect interference with the freely competitive interstate production and distribution of goods, the Clayton Act23 extended the scope of application to price discrimination, tying arrangements and exclusive-dealing contracts. Other antitrust laws are the Federal Trade Commission Act24 and the Robinson-Patman Act25 .

With respect to administrative law, important provisions can be found in the Code of Federal Regulations26. This is an annual collection of executive-agency regulations published in the daily Federal register, combined with previously issued regulations that are still in effect. Title 16 is headed „Commercial Practices“ and embodies regulations enacted by the Federal Trade Commission and the Consumer Product Safety Commission.

Much of the state statutory law27 is patterned after federal law or administrative trade regulations and thus gives federal policy a local application. However, state law also affects trade practices in ways unknown either to the common law or to federal statutory law. Two of the most prominent examples are states statutes protecting distinctive trademarks from „dilution“(i.e., non- deceptive imitation) and state sales-below-cost statutes. Anti-dilution statutes protect the advertising value of distinctive trade symbols by prohibiting other businesses from using the same or a similar mark even though it creates no confusion with respect to the goods and services but merely dilutes the impact of the original symbol. Sales-below-cost statutes aim to supplement the federal antitrust laws by prohibiting unfair pricing practices which can be qualified as antitrust violation28.

In addition to statutory law the United States belongs to the International Union for the Protection of Industrial Property (the „Paris Union“), which was established by the Paris Convention in 1883. This convention is a multilateral treaty which regulates the international protection of patents and trademarks and the prevention of unfair competition in international trade. All administrative power belongs to the WIPO - World Intellectual Property Organization, an agency formed in 1967 of the United Nations. The Organization’s headquarter is located in Geneva, Switzerland. By far the most important international agreement is the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). This treaty harmonizes the intellectual property laws of its member states. It was negotiated at the 1994 Uruguay Round of the General Agreement on Tariffs and Trade (GATT). More than 150 nations are parties to the agreement29.

Pursuant to those treaties, Congress has enacted a number of statutes which regulate international trade practices. This legislation can be divided into two parts: one part is concerned with regulating the import trade, the other part regulates export trade. Import trade regulations30

put foreign imports on an equal step with domestic enterprises, while protecting domestic enterprises from the unfair trade practices of importers. Export trade legislation31 is designed to protect domestic exporters from both foreign government discrimination and the unfair trade practices of other domestic exporters31 32.

2. ImproperBusiness Methods

The following chapter gives the reader an overview of improper business methods. The very diversity of sources of the law of unfair trade practices results in different objectives of this area of law. The law of unfair trade practices seeks to protect the trade relations of businesses from undue interference by other businesses, while at the same time protecting consumers from false advertising, scam or deceptive practices. Hence, the following two subchapters deal on the one hand with competition protection issues, but on the other hand with consumer protection affairs. Nevertheless, because of the diversified forms of appearance of unfair trade practices, an exact classification is difficult.

2.1. Consumer protectionissues

To give a few general remarks, exploiting consumers is a big business33. There are no official statistics documenting the size of the fraud industry, but the cost certainly runs into many billions. The last cost estimation of the Federal Trade Commission („FTC“) from 1999 with respect to the annual cost of mail fraud alone reached up to USD 40 billion. Telemarketing fraud has been estimated to cost consumers an additional USD 40 billion. In the post September-11th world, even terrorist organizations are accused of raising funds through consumer protection violations such as credit card fraud34. One of the most developed areas of law with respect to consumer protection is that of false advertising as part of deception in general. To fully understand these mechanisms, I would like to overview the term of„Deception“ and „Consumer Fraud“ in general.

2.1.1. Deception and ConsumerProtection

In 1983, the Federal Trade Commission (FTC) issued a deception policy statement35 which the FTC continues to apply.


1 Black's Law dictionary (9th ed. 2009).

2 A similar question was raised in Beardsley v. Kilmer, 236 N.Y. 80 (1923).

3 Charles R. McManis, Unfair Trade Practices in a Nutshell(3rd ed. 1993), 3.

4 Authors Note: The relation is similar to the general provisions regarding tort claims of the Austrian Code of Civil Law (ABGB) and the provisions of the Federal Act against Unfair Competition (UWG).

5 Charles R. McManis, Unfair Trade Practices in a Nutshell (3rd ed. 1993), 4 et seq.

6 InternationalNewsService v. AssociatedPress, 248 U.S. 215 (1918).

7 Charles R. McManis, Unfair Trade Practices in a Nutshell (3rd ed. 1993), 8.

8 In Keeble v. Hickeringill, 103 ER 1127 (1707), the commercial trapper of wild flow was held to have a cause of action against a person who discharged guns nearby. The court pointed out that the guns were discharged „maliciously“ - by which it apparently meant purely for the purpose of scaring away the wild fowl.

9 In Beardsley v. Kilmer, 236 NY 80 (1923) the court held that a patent medicine manufacturer's successful effort to run out of business a newspapers critical of its medicine not to be actionable.

10 In Great Atlantic & Pacific Tea Co. v. Cream ofWheat Co., 227 F. 46 (2d Cir. 1915) the simple refusal by one person or business to deal with another person or business has been held not to be actionable, even though the refusal is motivated solely by whim, caprice, prejudice or malice. The interest in individual freedom is deemed to outweigh the interest in preventing economic injury.

11 Charles R. McManis, Unfair Trade Practices in a Nutshell (3rd ed. 1993), 16et seq.

12 U.S. Const. art. I, § 8, cl. 8: „The Congress shall havepower (...) topromote the Progress of Science and useful Arts, by securingfor limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries“.

13 Charles R. McManis, Unfair Trade Practices in a Nutshell (3rd ed. 1993), 18.

14 U.S. Const. art. IV.

15 Charles R. McManis, 'Unfair Trade Practices in a Nutshell (3rd ed. 1993), 18.

16 Nadine C. Mandel, Unfair Trade Practices: Comparative Law Yearbook oflnternational Business (1997), 361.

17 It would go beyond the scope of this bachelor thesis to discuss all cases and acts, but for further information see § 301 ofthe Copyright Act, 17 U.S.C. §§ 101 et seq. Also courts invalidated state law, landmark cases are Brulotte vs. Thys Co., 379 U.S. 29 (1964), Sears, Roebuckand Co. v. Stiffel Co., 376 U.S. 225 (1964) and Compco Corp. v Day-brite Lighting, Inc., 376 U.S. 234 (1964) , Goldstein v California, 412 U.S. 546 (1973), Kewanee Oil Co. v Bicron Corp., 416 U.S. 470 (1974), Aronson v Quick Point Pencil Co., 440 U.S. 257 (1979), Bonito Boats v. Thunder CraftBoats, 489 U.S. 141 (1989)

18 15 U.S.C. §§ 1051 et seq.

19 Black's Law dictionary (9th ed. 2009).

20 § 43(a) of the Lanham Act has the title „False designations of origin; false description or representation“ and reads as follows: „(a)(1) 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-- 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 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 anyperson who believes that he orshe is or is likely to be damaged by such act“; 15 U.S.C., § 1125(a).

21 Charles R. McManis, Unfair Trade Practices in a Nutshell (3rd ed. 1993), 23.

22 15 U.S.C. §§ 1-7.

23 15 U.S.C. §§ 12-27.

24 15 U.S.C. §§ 41-58. The federal trade commission is an independent commission which is in charge oflaw enforcement.

25 15U.S.C.§13. The Robinson-Patman Act is an amendment to the Clayton Act and prohibits price discrimination.

26 The C.F.R. is available at

27 A list of state laws ofNew York is available at COMMONOUERY-LAWS.

28 Charles R. McManis, 'Unfair Trade Practices in a Nutshell (3rd ed. 1993), 27 et seq.

29 Black's Law dictionary (9th ed. 2009).

30 Relevant provisions can be found in the Trade Act of 2002, U.S.C. § 3803-3805, the Trade Agreements Act of 1979, 19 U.S.C. § 2501-2581, the Trade and Tariff Act of 1984 and the Omnibus Trade and Competitiveness Act of 1988.

31 Relevant provisions can be found in the Robinson-Patman Act, 15 U.S.C. § 13, the Webb-Pomerene Act, 15 U.S.C. §§61 et seq and the Foreign Corrupt Practices Act, 15 U.S.C. § 78dd-1 et seq.

32 Charles R. McManis, 'Unfair Trade Practices in a Nutshell (3rd ed. 1993), 28 et seq.

33 ABA Sectionof AntitrustLaw, ConsumerProtectionHandbook (2004), 1.

34 Don van Natta, Jr., Terrorists Blaze a New Money Trail, N.Y. TIMES, Sept. 27, 2003, 1.

35 See Federal Trade Commission Policy Statement on Deception, Appended to Cliffdale Associates, Inc., 103 FTC 110, 174 (1984), available at In general, apolicy statement describes the basic principles by which a government is guided in its management of public affairs. The FTC issued so called policy statements for various areas of advertising practices in order to guide advertisers and to enhance


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Johannes Kepler Universität Linz
2011 (Mai)
united states competition unfair trade practices



Titel: United States Competition Law with respect to Unfair Trade Practices