A Competitor Is Making False Claims About Its Products or Mine

The short answer, expanded

Advertising law gives competitors, not just consumers, a claim when a rival lies in the market. The federal Lanham Act makes false or misleading statements of fact in commercial advertising actionable by a business that loses sales or reputation because of them, and it is the claim most false advertising cases between competitors are built on. Texas adds business disparagement for false statements about your company, and the Deceptive Trade Practices Act in the narrower situations where a business qualifies as a consumer.

The questions that decide these cases are the same in every forum. Was it a statement of fact or a boast? Was it false on its face or merely misleading? Was it advertising or a one-off remark? And can you tie your lost sales to it?

The federal claim: section 43(a)(1)(B) of the Lanham Act

Under 15 U.S.C. § 1125(a)(1)(B), a person who, 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 is liable in a civil action to anyone who believes they are or are likely to be damaged by it. The statute covers lies about the advertiser's own product and lies about yours.

Federal courts have organized the claim into elements the plaintiff must prove:

1. the defendant made a false or misleading statement of fact about a product or service in commercial advertising or promotion;
2. the statement actually deceived, or had the tendency to deceive, a substantial segment of its audience;
3. the deception was material, meaning likely to influence purchasing decisions;
4. the product or service is in interstate commerce; and
5. the plaintiff has been or is likely to be injured as a result, through lost sales or damage to goodwill.

The first element carries most of the weight, and it splits into two paths.

Literally false, misleading, or puffery

A statement is literally false when it is false on its face, either in words or by necessary implication: a claim that a product is certified when it is not, a chart showing test results that were never obtained, a statement that a competitor's product fails a standard it passes. When a statement is literally false, courts presume that consumers were deceived and the plaintiff need not offer survey evidence.

A statement that is literally true or ambiguous but conveys a false impression is misleading. For that category the plaintiff must prove that consumers were actually deceived, almost always with a consumer survey or similar evidence, which adds cost and risk. Claims that something is proven or that tests show a result, called establishment claims, are judged by whether the tests actually support what the ad says they do.

Puffery is neither. A general, exaggerated or subjective claim of superiority that no reasonable buyer would take as a measurable statement of fact, such as the best coffee in Dallas or unbeatable service, is not actionable, because there is nothing to prove false. The line between a specific measurable claim and puffery is drawn case by case, and it is the first fight in nearly every false advertising case. A claim of better performance becomes actionable once it is tied to a number, a comparison or a test.

Who can sue: the Lexmark test

Not every business hurt by a false ad can sue under the Lanham Act. In Lexmark International, Inc. v. Static Control Components, Inc. (2014) the Supreme Court held that a plaintiff must fall within the zone of interests the statute protects, which means alleging an injury to a commercial interest in reputation or sales, and must show that the injury was proximately caused by the deception, which ordinarily means economic or reputational injury flowing directly from consumers withholding trade from the plaintiff because of the ad. Consumers deceived by the ad cannot sue under this provision. Direct competitors almost always qualify; businesses further down the chain qualify when the lie directly diverted their trade.

What counts as commercial advertising or promotion

The statute reaches commercial advertising or promotion, not every statement a competitor makes. Courts generally require commercial speech, by a competitor, made to influence consumers to buy its goods or services, and disseminated sufficiently to the relevant purchasing public to constitute advertising within the industry. A website, a brochure, a trade show presentation, a paid social media campaign and a sales deck used across a sales force qualify. A single disparaging remark to one customer usually does not, although it may support the Texas claims below. In a small market with few buyers, a handful of targeted communications can be enough.

Remedies under the Lanham Act

The remedies are the same as in a trademark case. Section 1116 allows an injunction, with a rebuttable presumption of irreparable harm for a plaintiff who shows a likelihood of success, so a court can order the ad withdrawn and corrective statements made while the case proceeds. Section 1117(a) allows recovery of the defendant's profits from the false campaign, the plaintiff's damages including the cost of corrective advertising, and costs, with the court able to increase damages up to three times and to award attorney's fees in exceptional cases. How these are calculated is covered in remedies in a trademark case under the Lanham Act.

The Texas claims

Business disparagement. When the lie is about your company rather than the competitor's own product, Texas law supplies business disparagement. The plaintiff must prove that the defendant published disparaging words about the plaintiff's economic interests, that the words were false, that the defendant acted with malice, meaning it knew the statement was false or acted with reckless disregard of its truth or with ill will or intent to interfere, that the publication was without privilege, and that the plaintiff suffered special damages in the form of specific lost sales or business. The special damages requirement is strict: a general decline in revenue is not enough without evidence tying identifiable lost business to the statement. Where the false statement is about the owner personally, defamation is the parallel claim; the online version is treated in a former employee is disparaging my company online.

The Deceptive Trade Practices Act. Chapter 17 of the Business and Commerce Code lists false advertising among its prohibited acts, but its private right of action belongs to consumers, and a business is a consumer only when it sought or acquired goods or services and meets the Act's size limits. A competitor who bought nothing from the advertiser generally cannot sue under it. The circumstances in which a business can are explained in can a business sue under the Texas DTPA.

Unfair competition and interference. False statements that induce customers to abandon contracts with you can support tortious interference, and false comparative claims are one of the recognized branches of unfair competition under Texas law, described in unfair competition and misappropriation claims in Texas.

Where the case is filed

A Lanham Act false advertising claim can be filed in federal court without regard to the amount in controversy, and for a Dallas business that is the Northern District of Texas, with the Texas claims attached. The same federal claim may be brought in Texas state court, and a defendant sued there can usually remove it. Business disparagement standing alone is a state court case. Because false advertising cases often need injunctions quickly and survey experts later, the choice of court tends to follow the remedy the plaintiff needs first.

Example

Suppose a Dallas commercial roofing contractor finds that a competitor's website and paid search ads state that the competitor is the only contractor in North Texas certified by a named manufacturer for a particular roofing system, and that competitors' installations of that system void the manufacturer's warranty. The contractor holds the same certification, and the warranty statement is false. Both statements are literally false statements of fact in commercial advertising, so deception is presumed. Two property managers tell the contractor they chose the competitor because of the warranty claim. The contractor sues in federal court under section 43(a) with a Texas business disparagement claim, obtains a preliminary injunction requiring the statements to be removed, and pursues the competitor's profits on the diverted projects and its own lost margin on the two identified jobs, which also satisfy the special damages requirement for disparagement. Had the competitor's ads said only that it was the region's most trusted installer, the case would have been puffery and there would have been no claim.

What to gather now

• Dated captures of every ad, page, post and sales document containing the statement, and how widely each was distributed.
• Proof of falsity: the certification, the test data, the warranty terms, whatever shows the statement wrong on its face.
• Evidence of deception and materiality: customers who repeated the claim, lost bids where it was cited, inquiries asking whether it was true.
• Your own sales data for the affected products or services, before and after the campaign.
• A check of your own advertising, because a false advertising suit invites a counterclaim over any overstated claim of your own.

Tina Wysk represents Dallas businesses in false advertising, disparagement and unfair competition disputes in federal and state court; the practice is described at intellectual property disputes.