Keep Competitors from Clowning with Your Business: Passing Off & Other Tools

September 7, 2015

Ronald McDonald with horns

Perhaps as a result of the employment market or general economic conditions, we’ve seen a noticeable rise in recent times of commercial wars between small businesses, with varying circumstances. In one case, for example, a competitor with a long-standing relationship with our client set up shop across the road, using the same branding, right down to the signage font, and an almost identical name, to sell almost analogous products. As the client was a wholesaler, and the competitor set up a retail shop, the potential fall-out for our client was huge. In another case, we saw several new market entrants virtually copy a client’s business plan and service offering word for word, and undercut them on price. To add insult to injury, most of the new entrants heavily criticised our client’s to anyone who would listen, telling blatant lies about their skills, capabilities and services, right before plugging themselves and stealing the customers. 

These scenarios surely aren’t new to the business world, and in some industries, can be commonplace. However, their effect, and the options open to businesses to combat them, can vary widely. Sometimes, dealing with such a matter will be simple, such as where the competitor is infringing upon a registered trademark, or where there has been a clear breach of a statute or legislation designed to protect the business. In most cases though, startups will save money on “non-essentials” such as intellectual property registration and protection, and murky facts and circumstances may fall outside the scope of the relevant legislation. In addition, with the rise of internet and digital marketing, search engine optimisation and so on, sometimes the business name or tagline is incapable of such protection, for example because it is descriptive (such as “pie shop”), and / or because it includes the name of an actual place (i.e. “Sydney Pie Shop”). Further, some business assets just aren’t possible to protect, such as a way of doing things and providing services that falls short of qualifying for a patent. In saying that, for some, there may still be some hope. We thought we’d throw a few facts out there to help any small business struggling with similar issues… 

At common law, there are several actions available to those that find themselves in similar situations. The most relevant of these for present purposes is passing off. Such an action may be available or useful where a competitor, for example:

– Represents to others that their goods are associated with yours, including that they were actually made by you;
– Uses your business name to lead others to believe they are associated with your business; or
– Uses descriptive material similar or identical to yours, including slogans or visual images. 

The list goes on. However, if this has occurred, in some circumstances, your business could be entitled to an injunction (for example to prohibit the competitor from using the name, phrase, branding and so forth), an account of profits from the competitor and / or various different types of damages (including exemplary damages in some cases). In order to make out a successful case, you would have to prove the following:
1. The competitor made a false representation;
2. That representation was calculated to deceive the public or a substantial section of it (such as your customers); and
3. That the representation causes damage to your business, or is at least likely to.

Obviously, running such a case would be a little more detailed and involved, but the above is a useful general summary.

Further, in some cases, an action may be available for interference with contractual relations, for example in the case of the competitor slagging others off. In order to make out a successful action in this regard, you would have to prove that:
a. There was a valid existing contract in place between you and the customer;
b. The competitor knew of that contract;
c. The competitor actually intended to interfere with the performance of that contract, for example by inducing the customer away from performance of their obligations under it, and into a new contract with the competitor instead;
d. The interference is wrongful or unlawful (for example, the consequent action taken by the customer results in a breach of contract);
e. The interference actually results in interference with performance under the contract; and
f. You actually suffered loss / damage as a result.

In a successful case, again, an injunction and / or various types of damages may be awarded.

Further, when there is more than one person involved, other causes of action may be open. Take the case of a disgruntled ex-business partner who starts up with a competitor, and engages in conduct similar to that described above. An action for civil conspiracy may be open where there is an agreement between two or more persons to injure another’s business interests, and actual damage results from their conduct in furtherance of that agreement. You can begin to image the kind of scenarios this might apply to. 

Finally, there is always defamation and / or injurious falsehood… 

The only drawback with these tools is that they require litigation in Court, which costs money, which can be a valuable resource a small to medium enterprise just can’t afford to part with at the time. Further, there are limitation periods within which a claim must be brought. Also, bear in mind that there are defences to each of these claims, and each case will turn on the particular facts, so litigation is not without its risks. In saying that, remember that the competitor may have even less funds and may be faced with even further risks, so a well-written demand may do the job. Alternatively, if litigation is required, a cost benefit analysis may actually show that saving the brand and competitive advantage at the time would more than pay for itself down the track (subject of course to the strengths of each particular case). Ultimately, how and when these tools are used is a commercial matter for the business or individual, but knowing they are there will hopefully help some of you. 

As always, please feel free to contact us to discuss any related issues.


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