Unfair Competition and Misappropriation Claims in Texas

The short answer, expanded

Business owners use unfair competition to mean any conduct by a competitor that feels wrong: copying a product, poaching staff, undercutting prices after seeing a bid, trading on a reputation someone else built. Texas law uses the phrase more narrowly. Unfair competition is the general category, and a lawsuit has to identify the specific tort or statutory violation underneath it. A petition that pleads unfair competition and nothing else, without an independent illegal act, is subject to dismissal.

That is not bad news for a business with a real grievance. It means the task is to match the facts to the right branch, and most genuinely unfair conduct does fit one. This article walks through the branches, what each requires, and where the Texas trade secret statute has taken over.

The umbrella rule: an independent illegal act is required

Texas courts describe unfair competition as the umbrella for all statutory and nonstatutory causes of action arising out of business conduct that is contrary to honest practice in industrial or commercial matters. The consistent requirement is that the conduct be independently actionable: the defendant must have done something that is itself a tort, a breach of a duty or a statutory violation. Competing hard, hiring a rival's employees who are free to leave, matching prices or selling a similar product are not torts, and labeling them unfair competition does not make them one.

The branches that supply the independent act in business cases are, in rough order of frequency: passing off and trade name infringement, common law misappropriation, trade secret misappropriation, false advertising and business disparagement, and tortious interference. The Deceptive Trade Practices Act sits alongside with its own rules.

Passing off: trading on your name or appearance

Passing off, sometimes called palming off, is representing one's goods or services as those of another. It is the common law root of trademark law, and in Texas it protects unregistered trade names, marks and the distinctive appearance of products and packaging, known as trade dress, where the imitation is likely to confuse customers about source. The elements track trademark infringement: the plaintiff has a protectable name or dress that identifies its goods to customers, and the defendant's use is likely to cause confusion.

The same conduct supports a federal claim under section 43(a) of the Lanham Act, 15 U.S.C. § 1125(a)(1)(A), for false designation of origin, which carries the remedies of injunction, profits and damages. Texas courts generally analyze the state and federal claims together. A Texas registration under chapter 16 of the Business and Commerce Code adds the statutory claim in section 16.102 with the remedies in section 16.104. The basics are in trademark infringement basics.

Common law misappropriation: free-riding on what you built

Texas recognizes a tort of misappropriation that does not depend on confusion or on secrecy. It protects a product, in the broad sense, that the plaintiff created through extensive time, labor, skill and money, against a competitor who takes it and uses it in competition with the plaintiff, gaining a special advantage because it was not burdened with the expense of creating it. The elements as Texas courts of appeals have stated them are:

1. the creation of the plaintiff's product through extensive time, labor, skill and money;
2. the defendant's use of that product in competition with the plaintiff, thereby gaining a special advantage in that competition, a free ride, because the defendant is burdened with little or none of the expense incurred by the plaintiff; and
3. commercial damage to the plaintiff.

The classic application is the wholesale copying of a compiled work or recording that the defendant then sells against its creator. The tort has limits. Where the product is protected by copyright or patent, federal law preempts a state claim that merely restates infringement, so misappropriation reaches what federal law does not: uncopyrightable compilations, data, formats and investments of effort that do not qualify as original expression. And where the taken material is a trade secret, the statute discussed next controls.

What the Texas Uniform Trade Secrets Act took over

Since September 1, 2013, chapter 134A of the Civil Practice and Remedies Code has been the Texas law of trade secret misappropriation. Section 134A.007(a) says the chapter displaces conflicting tort, restitutionary and other Texas law providing civil remedies for misappropriation of a trade secret. Section 134A.007(b) preserves contractual remedies, civil remedies not based on misappropriation of a trade secret, and criminal remedies.

The practical rule is this. If the thing taken is a trade secret, or is alleged to be one, the claim is under the Act, and common law unfair competition, misappropriation, conversion and unjust enrichment pleaded over the same taking are displaced. If the thing taken is not a trade secret, because it is not secret or was not guarded, the common law claims may still have room, so long as they rest on facts beyond the taking of confidential information. Courts examine whether the common law claim would survive if the information were not secret; if the whole wrong is the taking of secret information, the statute governs. How the Act works is set out in the Texas Uniform Trade Secrets Act, explained.

False advertising and business disparagement

A competitor who lies about its own products or about yours commits a different kind of unfair competition. The federal claim is false advertising under section 43(a)(1)(B) of the Lanham Act, for misrepresenting the nature, characteristics, qualities or geographic origin of goods or services in commercial advertising. The Texas claim for lies about your business is business disparagement, which requires that the defendant published false and disparaging information about the plaintiff's economic interests, with malice, without privilege, causing special damages in the form of specific lost business. Both are treated in a competitor is making false claims about its products or mine.

Tortious interference and the DTPA

Inducing a customer to break a contract with you, or using independently wrongful means to drive off a prospective customer, is tortious interference, a tort with its own elements and defenses that has its own article in this library. It is often pleaded alongside unfair competition when a competitor's campaign combines imitation with poaching.

The Deceptive Trade Practices Act, chapter 17 of the Business and Commerce Code, lists specific false, misleading or deceptive acts, including passing off and misrepresenting the source or sponsorship of goods, and gives a private claim to consumers. A business can be a consumer under the Act only if it sought or acquired goods or services and meets the Act's asset limits, so a competitor who was deceived about nothing it bought generally cannot use it. When a business can sue is explained in can a business sue under the Texas DTPA.

Which court, and which remedies

A pure Texas unfair competition case is filed in state district court, in Dallas County for most Dallas businesses. When a Lanham Act claim is included, the case can go to federal court, and 28 U.S.C. § 1338(b) gives the federal court jurisdiction over an unfair competition claim joined with a substantial and related trademark or copyright claim. Remedies depend on the branch: injunction and damages for passing off and misappropriation, with exemplary damages under chapter 41 of the Civil Practice and Remedies Code where malice or fraud is proved; profits, treble damages and fees under the Lanham Act and the Texas Trademark Act; and the statutory measures under TUTSA for trade secrets.

Example

Suppose a Dallas company spends two years and considerable money compiling a database of commercial property maintenance contracts in North Texas, with expiration dates and decision-makers, and sells access to vendors by subscription. A former subscriber copies the database, cancels, and begins selling the same data at half the price under its own name. The data is factual and largely uncopyrightable, so a copyright claim is weak. If the company kept the database behind logins with subscriber agreements forbidding redistribution, it is a trade secret, and the claim is under TUTSA, which displaces common law misappropriation for that taking, plus breach of the subscriber agreement. If the company had published the database openly on its website, the trade secret claim fails for want of secrecy, and common law misappropriation becomes the claim: the free ride on two years of compilation effort, used in direct competition, causing lost subscriptions. The facts about secrecy, not the label, decide which branch applies.

How to think about your own situation

• Name the specific act. Copying your name or look is passing off. Taking guarded information is trade secret misappropriation. Copying an unguarded compilation is common law misappropriation. Lies are false advertising or disparagement. Poaching contracted customers is interference.
• Check for displacement and preemption. If the material is secret, TUTSA governs; if it is copyrightable, federal law may preempt the state claim.
• Match the remedy to the harm. Injunctions stop continuing conduct; profits and damages need proof of sales or loss.
• Preserve the evidence of creation: the time, cost and records behind what was copied, and the evidence of the copying itself.

Tina Wysk represents Dallas businesses asserting and defending unfair competition, trade secret and trademark claims in state and federal court; the practice is described at intellectual property disputes.