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Texas Unfair Competition

©2015 Mark Courtois and Diane Davis

The doctrine of "unfair competition" has been around for a long time in Texas. See e.g. McCarley v. Welch, 170 S.W.2d 330, 332 (Tex. Civ. App.--Dallas 1943, no writ). Modern courts consider "unfair competition" as an umbrella category for all statutory and non-statutory causes of action arising out of business conduct which is contrary to honest practices in industrial or commercial matters. U.S. Sporting Prods., Inc. v. Johnny Stewart Game Calls, Inc., 865 S.W.2d 214, 217 (Tex. App.--Waco 1993, writ denied) (quoting Am. Heritage Life Ins. Co. v. Heritage Life Ins. Co., 494 F.2d 3, 14 (5th Cir. 1974)). "Unfair competition" includes several causes of action including: 1) passing off or palming off; 2) trade secret misappropriation, and 3) common law misappropriation. Id.; Conceal City, L.L.C. v. Looper Law Enforcement, LLC, 917 F.Supp.2d 611, 618 (N.D. Tex. 2013); see also Taylor Pub. Co. v. Jostens, Inc., 216 F.3d 465, 486 (5th Cir. 2000). The similarity in these claims is that all involve the taking and use of a trade secret. There is considerable overlap between these claims and federal claims that can be asserted under the Lanham Act. Most of these types of claims have traditionally been asserted under in federal court under federal law because of its more established case law history.  See Trademark Infringement in our Causes of Action listing.

1. Passing off or Palming off. "Passing off" occurs "when a producer misrepresents his own goods or services as someone else's." Dastar v. Twentieth Century Fox Film Corp., 539 U.S. 23, 28 n. 1, 123 S. Ct. 2041, 156 L. Ed. 2d 18 (2003). "Reverse passing off is the opposite: [t]he producer misrepresents someone else's goods or services as his own." Id. There is scant Texas case law on the elements of any common law claim of "passing off". But, passing off is actionable under the Lanham Act, see Trademark infringement.

2. Misappropriation of Trade Secrets. Misappropriation of trade secrets is a common-law tort cause of action. The elements are: (1) existence of a trade secret; (2) breach of a confidential relationship or improper discovery of a trade secret; (3) use of the trade secret; and (4) damages. Trilogy Software, Inc. v. Callidus Software, Inc., 143 S.W.3d 452, 463 (Tex. App. - Austin 2004, pet. denied). A "trade secret" may consist of any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors who do not know or use it. Id. (citing Hyde Corp. v. Huffines, 314 S.W.2d 763, 777(Tex. 1958)(quoting Restatement of Torts § 757)). It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for a machine or other device, or a list of customers. Id. A trade secret is a process or device for continuous use in the operation of the business. Generally it relates to the production of goods, as, for example, a machine or formula for the production of an article. Id. "Use" of a trade secret means commercial use, by which a person seeks to profit from the use of the secret. Id. at 464 (citing Atlantic Richfield Co. v. Misty Prods., Inc., 820 S.W.2d 414, 421 (Tex. App.--Houston [14th Dist.] 1991, writ denied).

3. Common Law Misappropriation. The elements of an unfair competition by common law misappropriation are: (1) the creation of plaintiff's product (i.e., the trade secret information) 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 (i.e., a "free ride") because defendant is burdened with little or none of the expense incurred by the plaintiff; and (3) commercial damage to the plaintiff. United States Sporting Prods., Inc, 865 S.W.2d at 214; see also Dresser-Rand Co. v. Virtual Automation, Inc., 361 F.3d 831, 839 (5th Cir. 2004). A claim for unfair competition by misappropriation and use does not require proof of secrecy. Thomason v. Collins & Aikman Floorcoverings, Inc., 2004 Tex. App. LEXIS 2823, No. 04-02-00870-CV, 2004 WL 624926, at *4 (Tex. App. -- San Antonio Mar. 31, 2004, pet. denied).