Any company can be harmed by unfair competition. Fighting back against the unfair competition will boost your company's success and credibility, whether you're an existing competitor in your market or a new entry into a local, national, or foreign marketplace. Find A Business Lawyer to help you with this complicated issue.

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According to California law, unfair competition is the practice of a misleading or deceptive company that causes monetary harm to various entities or customers who may be rivals in terms of sales and demand. It encompasses a wide range of legal issues, including actions by a single competitor or a group of competitors that can cause harm to one another on the field, as well as criminal offenses and business losses.

In this case, our California Corporate Attorneys will provide you with simple but effective strategies for dealing with these rivals and demonstrating to them that unfair competition never wins.

The government and state laws and court rulings under customary law regulate unfair competition laws. According to Article 1, Section 8, Clause 3 of the United States Constitution, known as the "Business Clause," this area establishes Congress' authority over unfair competition. Furthermore, a number of states have their own version of the Uniform Trade Secrets Act, which defines and protects share privileged information. The law effectively protects any information that allows a company to make a focused profit in a related industry. Speak with a Los Angeles Business Lawyer or solicitor if you need assistance understanding California's unfair competition laws.

History of California UCL

California's first unfair competition law, Cal. Civ. Code Sec. 3369 was passed in 1872. It "addressed only the provision of civil remedies in cases of prosecution, seizure, and criminal violation for business violations." The law was amended in 1933 to make it illegal for "any individual" to engage in "unfair competition." However, this amendment did not provide consumer rights under the UCL.

Consumers, not only business rivals, were granted the right to sue under the UCL in 1935.

In American Philatelic Soc. v. Claibourne, the California Supreme Court explained the law, arguing that "unfair competition rules" should protect the public from "fraud and deception." The UCL applied "equitable relief to cases outside the limits of purely market rivalry," according to a California appellate court in 1962. The UCL was transferred to the California Business and Professions Code 17200 in 1977 by the legislature. Proposition 64, passed by California voters in 2004, restricted UCL standing to people who have lost money or property as a result of unfair business practices.

Unfair Competition Practices

Many businesses participate in deceptive and unfair market practices that are classified as unfair competition. The Unfair Competition Act of California prohibits businesses from engaging in illegal, unfair, or deceptive business practices. Here are some examples of unfair competition:

1. Predatory Pricing

Your rivals may purposefully underprice products in order to undercut your profits, or they may 'bait and switch,' offering consumers an introductory price on goods or services in order to 'steal,' then later inflating the price to benefit.

Effects in the Short-Term

Predatory pricing helps consumers in the short term, but it hurts all businesses in the industry in the long run. In the short term, predatory pricing generates a buyer's market, where buyers can "pick around" and typically get better deals.
Profitability falls for businesses as rivals deliberately attempt to undercut one another's costs and divert traffic to their own. The business that survives the price war and stays in the market will benefit from increased market share in the long run, but it is unlikely to be able to create a monopoly in the industry.

Effects in the Long Run

Following the expulsion of rivals, the remaining firm is able to increase rates and recoup lost sales. Price appreciation works best on inelastic products because a customer's ability to pay decreases as prices rise. Customers struggle in the long run as a result of higher costs, while the now near-monopoly firm reaps the benefits of price inflation.

Predatory Pricing: Is It Legal?

In several nations, predatory pricing is considered unethical and anti-competitive. Those who participate in predatory pricing, for example, face a monetary penalty in Canada. Allegations of fraud can be difficult to prove because companies can argue they were simply trying to be successful in their prices rather than attempting to push out their competitors.

Consider one of our prescreened California Lawyers in your Cal Bar Attorney Search.

2. Unfair Pressure

Your competitors can put pressure on your business partners to stop doing business with you, refuse you the goods and services you need to run your business or inflate your base costs.

3. Deceptive Advertising

Your competitors can falsely advertise their products or services to discredit yours or attract more customers than direct advertising would typically attract.

In a diverse, competitive international marketplace, advertising is an essential tool that is becoming increasingly important for survival. False advertising occurs when a company makes false or misleading claims about its own products or services or about the products or services of a competitor. False advertising not only hurts customers but also hurts honest rivals. Federal and state laws protect statements about the price, quality, or essence of a product or service that are inaccurate, misleading, deceptive, or untrue.

The Unfair Competition Law (UCL) in California was enacted to protect competitors and customers from unfair market practices, such as false advertising. According to the Lanham Act, false advertising is described as "any advertising or promotion that misrepresents the nature, features, qualities, or geographic origin of products, services, or commercial activities," according to the Lanham Act. An injured party wins under the Lanham Act if it can show that the advertising is either misleading or likely to deceive or confuse customers.

The following are some examples of common false advertising:

Failure to disclose
Advertisement founded on insufficient and/or faulty study
Negative publicity for a product
False endorsements, comparative ads, or false testimonials
Offers for "free" goods, rebates, or prizes that aren't true

4. Bait-and-Switch Techniques

Bait-and-switch strategies are another example of a direct-to-consumer unfair competition practice. Let's say a high-demand commodity is advertised at a very low price. Shoppers rush into the store to buy the item, only to be informed that it is no longer accessible. However, for a few bucks more, the shopper may get a similar model—and unsuspecting customers would frequently do so.

Bait and switch are illegal in some states, mainly when the advertised item was never available, to begin with.

5. Below-Cost Selling

When a business offers a product or service to customers at less than the retail rate, this is known as below-cost pricing. A retailer may charge customers less for an item than it charged for it, resulting in a loss. Another business may sell one or more of its services at a price that makes it practically impossible to profit.

This form of situation is often temporary, and it is used to take business away from rivals who are unable or unable to compete. The reward will come later when the business that sells below cost expands its market share.

6. Selling Counterfeit Goods

It is extremely difficult to hold someone responsible for purchasing counterfeit items, particularly if the person did not realize or could not tell that the item was fake. However, each state has its own laws regarding the purchasing of counterfeit products, so the regulations can differ from jurisdiction to jurisdiction.

Selling, manufacturing, and/or distributing counterfeit products, on the other hand, is illegal. In fact, there are a number of federal and state laws that make dealing in counterfeit products illegal.

The following is a list of some of the laws that make it illegal to sell counterfeit products, including:

The Stop Counterfeiting of Manufactured Goods Act prohibits adding brand name labels or logos to generic items and the presentation of low-quality items as brand-name products.
The Trademark Counterfeiting Act of 1984 makes it illegal to sell products bearing another company's trademark without the company's permission.
The Anticounterfeiting Consumer Protection Act makes trading in counterfeit products and/or services a criminal offense. The act explicitly targets copyrighted merchandise, such as motion pictures and computer programs, for counterfeiting.

Furthermore, the counterfeiting industry is a dynamic and well-organized operation. It usually entails the transportation of illicit goods through state and international boundaries. As a result, people prosecuted for selling counterfeit products are often charged with a variety of crimes related to the transactions, including conspiracy and smuggling.

What are Counterfeit Goods, and how do you spot them?

Counterfeit products are those that have been tampered with to make them appear to come from a legitimate source. Contrary to popular belief, counterfeit products are not necessarily associated with low-cost or low-quality goods. In certain cases, counterfeit products are manufactured of good materials and appear to be identical to the original, but the person or business selling them is not legally permitted to do so.

Counterfeiting products entail the illegal usage of names, logos, trademarks, and, in certain cases, patent designs. These marks and other markings are applied to generic products, which are then passed off and sold as genuine articles.
Counterfeit handbags, jewelry, watches, perfumes, and electronics are some of the most popular examples of counterfeit products. Athletic shoes, especially from brands like Nike and Adidas, are the most often confiscated counterfeit products. Counterfeit goods have also been found in valuable artworks, primarily paintings, though they are generally referred to as "forgeries."

Furthermore, counterfeit goods are often referred to as "rip-offs," "fakes," or "knock-off" products. While some products, such as CDs, DVDs, and video games, may be counterfeit, they are more commonly referred to as "pirated goods."

The key distinction between counterfeit and pirated products is that counterfeit merchandise attempts to trick its buyers, while pirated merchandise buyers are typically aware that the items are not from legitimate sources.

What Are Some of the Legal Consequences of Selling Fake Goods?

If you are found selling, distributing, or making counterfeit products, you may face serious legal consequences. Anti-counterfeiting regulations, for example, will result in penalties such as:

A prison term of 5 to 20 years is possible.
Depending on the facts of the case, fines can be imposed.

As previously stated, states can impose their own penalties on those who break counterfeiting laws. Regardless of state legislation, the general statute of limitations for filing a lawsuit is five years, but it can be extended to eight years if there are terrorism-related links. If the counterfeit products are linked to terrorism, the penalties for a convicted defendant would be more severe.

Anti-counterfeiting laws also allow authorities to seize counterfeit merchandise, proceeds from related sales, and any property or equipment used in connection with the illegal item's delivery. As a result, law enforcement can seize any vehicles used to transport the goods, as well as any machinery used to manufacture them.

Finally, counterfeit product producers and distributors could face a civil claim in civil court by the corporation whose trademark or design patent was infringed.

Noncompete Clauses

Have you been asked to sign a noncompete (also known as a covenant not to compete) agreement? Many employers require new hires to sign this form of contract, which states that they will not start a competing company or work for a rival for a specified period of time after their employment agreement ends.

It's understandable that companies need workers to sign noncompete agreements. These agreements restrict the competition that an employer will face from others who have a thorough understanding of how the company operates and are in a strong position to entice consumers, clients, and other employees away.

On the other hand, noncompete agreements enable employers to exert power over their former employees' behavior long after they have left the business, which is incompatible with our country's long-standing principles of free enterprise and the right to make a living. As a result, noncompete arrangements are illegal in some nations. And states that accept these agreements may not impose a noncompete that lasts too long, encompasses too much territory, or otherwise restricts an employee's ability to leave his or her chosen career.

Are Noncompete Agreements Legal in Your State?

Noncompete clauses are not implemented at all in a few nations. Noncompete agreements are unenforceable in North Dakota and Oklahoma, for example. Noncompete agreements are unenforceable in California, but an employer that wants workers to sign them may be sued, even if the employer never attempts to implement the agreement. Employees do not know that these arrangements cannot be implemented, according to California. The employer indirectly scares workers into thinking they will be sued for competing by forcing them to sign them anyway, even if the employer cannot enforce the contract. Employers who partake in this action can be sued for unfair competition if they achieve an unfair advantage over companies who obey the law.

If your state prohibits employers from requiring workers to sign noncompete agreements, you can inform your employer right away – and refuse to sign the agreement.

Noncompete agreements must be fair.

Even if a state accepts noncompete agreements, one that imposes too many conditions on an employee might not be enforced. Noncompete agreements must be fair in scope since they restrict an employee's potential options. If a noncompete is restricted in the following ways, it is more likely to be enforced:

Time.

The shorter the arrangement, the more likely it is to be found fair by a judge. While there is no hard and fast law, deals that last a year or two are more likely to be honored than those that last much longer.

Locality.

If the noncompete only extends to a small geographic area where the competition will seriously harm the employer's company, a court is more likely to find it fair. The size of a fair area will be determined by the industry.

What counts as competition.

Employers have a better chance of winning in court if they forbid an employee from working for a select group of direct rivals or from starting a new company in the same sector as the employer.

Since a noncompete arrangement restricts the ability to make a living, you should only be required to sign one if the employer's company requires it. High-level workers, for example, who can learn the employer's trade secrets and the ins and outs of how the business operates, will cause a lot of harm if they leave to start their own company. Low-level workers who perform basic administrative duties, customer service, or production, for example, will most likely not affect the organization if they left. A Corporate Attorney can help you with unique details.

Noncompete agreements are legally binding contracts.

A noncompete agreement is an arrangement that requires you to give up a right that you would otherwise have. In return for this pledge, you should get something.

In general, courts have ruled that work is adequate compensation for signing a noncompete agreement. This means that an employer can condition a job offer on the signing of a noncompete agreement. If you already have a job, however, you can ask your boss for something extra in return for signing away your rights, such as a promotion or a raise.

Noncompetition Agreements: Why Are They Usually Unenforceable?

Noncompetition agreements are difficult to enforce in California because, according to California Business and Professions Code section 16600, "any contract under which someone is restrained from engaging in any lawful occupation, trade, or business of any kind is to that degree void." While not all noncompete agreements are void as a matter of law, a court will invalidate a noncompete agreement unless it is carefully drafted under one of the exceptions offered by Section 16600. The protection of a company's confidential knowledge and trade secrets is one such exception.

When not expressly tailored to the limited security of a company's actual "trade secrets" (which, by their very nature, should not be disclosed to any employee), California courts have ruled them to be forbidden by the state's public policy, which favors business competition and, as a result, the right to seek any lawful jobs. If an employer and employee sign an employment agreement that includes a noncompete clause, the courts are likely to rule that the clause is invalid and unenforceable.

Only limitations on one's employment are deemed unenforceable.

These clauses safeguard and promote a type of on-the-job training program. The limitations on employee mobility imposed by these clauses may cause problems for proponents of free markets.

Competition is an important component of a thriving, competitive free market. That is one of the economic pillars of our country. This is reflected in the labor market as well. Noncompete agreements limit competition in a variety of ways. Looking at the problem from a different perspective, free trade ideology is rooted in employers' right to write private, enforceable contracts, even ones that bind their employees to confidentiality, thereby preserving the corporation or company's long-term interests.

It's difficult to say if noncompete clauses in the sense of a free market system do more harm than good without more research. However, there is evidence to support the idea that these provisions limit job mobility and compel workers to stay with their employers for longer than they would otherwise.

People who become enslaved to a single employer receive less than they would in other states or if they were not bound by noncompete agreements. Evidence also supports the idea that while noncompete agreements are in place, companies and corporations spend more on research and development.
Employees and employers who are bound by these provisions are often less likely to participate in training and self-development. This, combined with corporate conduct, means that the effect of noncompete clauses has a palpable and observable influence on state economies.
Restraints on job mobility, simply put, reduce a company's human capital expenditures. It should come as no surprise that noncompete clauses are seen as a barrier to creativity by others.

Businesses in California are responsible for keeping their workers from going to work for rivals or starting businesses that compete directly with the employer. As a result, many companies require their employees to sign employment contracts that include contractual, post-employment noncompete provisions that bind employees to confidentiality.

Employers are often ignorant or dismissive of the fact that such provisions are unenforceable in California. Many people believe that the state's agreements to limit any legislation that restricts mobility and competitiveness are a crucial part of the state's success.

To reiterate, noncompete agreements of any form are unethical and are not to be offered under California state law, with a few exceptions. Employees and independent contractors, in particular, are not bound by any noncompete clauses negotiated as a condition of jobs.

Noncompete clauses can be divided into three categories. The first is known as a true noncompete, and it refers to a situation in which workers are prohibited from working anywhere where they will be forced to disclose trade secrets of their former employers as a condition of employment at another company. Non-solicitation of customers restrictions and non-solicitation of staff restrictions are the others.
Noncompete arrangements that aim to prevent workers from finding gainful jobs in California are null and void. The prohibition, however, only extends to noncompete provisions that take effect after a person's employment ends.
For perfectly good and legal purposes, a corporation may prohibit workers from freelancing or moonlighting for other businesses while they are employed. This is particularly true if the moonlighting is for a direct competitor of the primary employer.

There are some good reasons for an organization to expect its staff to be loyal and "unit members." In reality, it is in the best interests of every company to hire workers and team members who are enthusiastic about working for them. A business's attempt to monopolize any employee's dedication to their own venture, especially when minimizing the risk of corporate espionage is concerned, is critical to their activity, according to California courts.

Many companies find that these policies are easy to discuss with potential hires and candidates when making job offers. In their employee handbooks, most businesses have provisions and prohibitions on moonlighting. Present workers will be reminded of this.

In the state of California, some courts have extended numerous provisions aimed at assisting out-of-state workers who choose to work in the state. Employers who use lawsuits to threaten noncompete provisions for anti-competitive reasons are violating state law and risk being held liable for running their companies outside of the terms of legally binding agreements with the state of California. In California's eyes, these are unethical business practices.

However, there are a few exceptions to these laws. When anyone buys a company, they can legally prohibit the seller from competing with it in the future. If a person buys a pizza parlor from another person, for example, the seller is not permitted to turn around and open another pizza parlor that would directly compete with the one he or she just sold if the buyer chooses to follow these legal restrictions.

This is a rare exception, but it is based on common sense and good corporate practices. California aims to enact policies that have a significant positive effect on the state's financial stability, considering its scale and significance to the US economy.

What, if any, Penalties Would a California Employer Face If a Non-Compete Clause Is Included in an Employment Contract?

Despite recognizing that noncompete arrangements are usually unenforceable, certain unwary employers have continued to include them in their California employment agreements in the hopes of discouraging workers from pursuing and accepting jobs with competitors. Employers should be mindful. However, that including such a clause can be prohibitively expensive.

Worse, California Labor Code 2699(f) allows an aggrieved employee to file a civil suit on behalf of himself and other current and former coworkers who were involved in the violation(s). When an employee files a claim, he or she is entitled to not only fair attorney's fees and expenses but also a quarter of any penalty levied. As a result, workers and their Corporate Lawyers have a strong incentive to investigate such cases, as well as to identify and prosecute any Labor Code violations.

When is a Noncompete Agreement legally binding?

In California, a covenant not to compete is generally unenforceable unless the noncompete agreement:

is solely for the purpose of avoiding the disclosure of trade secret information (the employee may compete but may not use company trade secrets such as a customer list)
is linked to the acquisition or selling of a company (with limitations)
is associated with the selling of all, or substantially all, of a shareholder's stock (with limitations)

It's a clause in a partnership arrangement that prevents withdrawing partners from participating in a certain geographic region for a specific period of time (again with limitations).

A noncompete arrangement is usually overbroad and therefore unenforceable. Despite this, California employers continue to require their employees to sign a noncompete agreement before starting work, sometimes at the termination of jobs and sometimes at a job where they have worked for a long time. Unfortunately, employers in California have been slow to understand the serious consequences of requiring workers to sign an unconstitutional provision. Find a Corporate Attorney to help you with more details.

How Does an Employer Prevent an Employee From Working For A Competitor Without a Non-Compete Clause?

While there is no absolute solution, a "code of conduct" would be a safer option for the employer. While a noncompete agreement is intended to prevent a former employee from working for a direct competitor, a code of conduct statement in an employee manual will outline the company's policies, including a prohibition against soliciting the company's customers and from using any of the company's trade secrets or other proprietary information (including customer lists) for a certain period of time.

What if an employer threatens to fire an employee if she or he does not sign a noncompete agreement?

An employer may refuse to hire someone who refuses to sign a contract and may threaten to fire someone who refuses to sign one in the middle of the job. If you work in California, however, you have the right to refuse to sign a noncompete agreement that is illegal. If an employer threatens or actually fires an employee for refusing to sign an illegal agreement, the employee's rights have been violated. A Corporate Attorney may be able to negotiate with the employer in certain situations, but if that fails, the employee may file a complaint.

Noncompete clauses in employment agreements (including termination and severance agreements) that limit an employee's right to solicit or accept business should be checked and amended by a California Corporate Attorney. Employers should also consider updating and replacing any noncompete provisions drafted to take advantage of the now-invalid "narrow restraint" exemption that was previously signed by their workers.

Unenforceability Exceptions

There are several exceptions to the unenforceability of noncompete provisions in California, as there are for other legal issues. First and foremost, if you buy a company, you can prevent the individual who sold it from competing with your company.

When the "goodwill of a business" is sold or the individual selling the company has disposed of their ownership interest, this exemption extends to both single owners and fractional owners, who are more generally known as shareholders.

A common-sense exemption is one that prevents the seller of a company from competing with the new owner. Essentially, this exception pertains to a company's worth. Several courts have ruled that an individual selling a business cannot choose to compete with their former company because it damages the buyer by lowering the value and goodwill of the business.

You should have language in the partnership or operating agreement that specifies partners or LLC members would not interfere with the business if they ever quit while forming a partnership or a multi-member limited liability company.

If LLC representatives and business partners wish to leave the corporation, courts have repeatedly ruled that they should agree not to compete with their former company. This arrangement will prohibit competition in a specific geographic region or for a specific time span. Noncompete agreements between business partners or LLC members may cover a variety of issues:

A partner or member has left the business.
The company has been dissolved.
The company is being sold.

The only time this exemption does not apply is if an employer has given an employee an equity interest for the express intent of preventing California's noncompete clause prohibition. To ensure that these exceptions are not used in bad faith, courts scrutinize non-competition arrangements between LLC members and business partners.

Exceptions to the Law

Noncompete provisions have traditionally been considered noncompete agreements by California courts, which means they are unenforceable. However, state and federal courts have upheld the Section 16600 trade secret exception, as well as the enforcement of non-solicitation agreements involving trade secrets.

Employers should prohibit former workers from trying to draw current clients away from the employer's business to the employee's new business, according to the courts. This law, however, only applies if the former employee is attracting these customers using trade secrets. Parties to a contract who wish to take advantage of these exceptions should make sure that the contract expressly specifies that their purpose is to maintain their company's goodwill.

Filipoint, LLC vs. Maas demonstrates that signing an employment agreement during the selling of a business does not guarantee that noncompete provisions will be enforced. A company employee sold his shares and accepted a stock purchase agreement in this case.

The employee was also forced to sign a three-year employment agreement before negotiating the stock purchase agreement, which became effective after the stock sale was completed. During the person's job, a three-year noncompete clause was included in the employment agreement. Finally, there was a noncompete provision that would apply until the person's job was terminated.

If You're Asked to Sign a Noncompetition Agreement

If you have any questions about a noncompete agreement you've been asked to sign, speak with an experienced Business Lawyer as soon as possible. If your state accepts noncompete agreements and the contract you're presented with seems to be minimal and fair, you can sign it. If, on the other hand, you're asked to sign a vague agreement that might severely limit your ability to make a living in the future, you can consult a Business Lawyer to see if the agreement is legal and what steps you should take to negotiate a more restrictive agreement with your employer.

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What Are Unfair Competition Practices in California Business Law?