Insurance Law Alert: California Supreme Court Limits Advertising Injury Coverage for Disparagement

In Hartford Casualty Ins. v. Swift Distribution (No. S207172, filed 6/12/14), the California Supreme Court affirmed a 2012 appeals court holding that there is no advertising injury coverage on a theory of trade disparagement if the competitor’s advertisements do not expressly refer to the plaintiff’s product and do not disparage the plaintiff’s product or business. In doing so, the Supreme Court expressly disapproved Travelers Property Casualty Company of America v. Charlotte Russe Holding, Inc. (2012) 207 Cal.App.4th 969 (“Charlotte Russe“), which held that coverage could be triggered for “implied disparagement” by allegations that a retailer’s heavy discounts on a manufacturer’s premium apparel suggest to consumers that the manufacturer’s products are of inferior quality.

In Hartford v. Swift the plaintiff, Dahl, held a patent for the “Multi-Cart,” a collapsible cart that could be manipulated into different configurations. When Dahl’s competitor Ultimate began marketing the “Ulti-Cart,” Dahl sued alleging that Ultimate impermissibly manufactured, marketed, and sold the Ulti-Cart, which infringed patents and trademarks for Multi-Cart and diluted Dahl’s trademark. Dahl alleged patent and trademark infringement, unfair competition, dilution of a famous mark, and misleading advertising arising from Ultimate’s sale of Ulti-Carts. However, the advertisements for Ulti-Cart did not name the Multi-Cart, Dahl, or any other products beside the Ulti-Cart.

Hartford’s policy defined personal and advertising injury as “injury … arising out of … oral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.”

In 2012, the appeals court in Hartford v. Swift held that there was no coverage or potential for coverage, saying that even if the use of “Ulti-Cart” could reasonably imply a reference to “Multi-Cart,” Ultimate’s advertisement contained no disparagement of Multi-Cart, because disparagement involves “an injurious falsehood directed at the organization or products, goods, or services of another….” (Citing Atlantic Mutual Ins. Co. v. J. Lamb, Inc. (2002) 100 Cal.App.4th 1017.) Moreover, the injurious falsehood must specifically refer to the derogated property, business, goods, product, or services either by express mention or reference by reasonable implication. (Citing Total Call v. Peerless Ins. Co. (2010) 181 Cal.App.4th 161.)

The appeals court distinguished Charlotte Russe, saying: “We fail to see how a reduction in price-even a steep reduction in price-constitutes disparagement. Sellers reduce prices because of competition from other sellers, surplus inventory, the necessity to reduce stock because of the loss of a lease, changing store location, or going out of business, and because of many other legitimate business reasons. Reducing the price of goods, without more, cannot constitute a disparagement; a price reduction is not ‘an injurious falsehood directed at the organization or products, goods, or services of another.'”

The Supreme Court agreed, resolving the split in authority by adopting the narrower interpretation: “There is no question that Charlotte Russe’s discounted prices on People Liberation’s clothing specifically referred to People Liberation’s product. But a mere reduction of price may suggest any number of business motivations; it does not clearly indicate that the seller believes the product is of poor quality. Disparagement by ‘reasonable implication’ [] requires more than a statement that may conceivably or plausibly be construed as derogatory to a specific product or business. A ‘reasonable implication’ in this context means a clear or necessary inference. Charlotte Russe’s prices did not carry an implication clear enough to derogate People Liberation’s product for purposes of a disparagement claim.”

The Supreme Court also added to the analysis, identifying a variety of competitive business conduct that does not amount to covered disparagement. Thus, the Court said that there is no coverage for disparagement simply because one party tries to sell another’s goods or products as its own. (Citing Aetna Casualty and Surety Co., Inc. v. Centennial Ins. Co. (9th Cir. 1988) 838 F.2d 346). Similarly, a party’s attempt to copy or infringe on the intellectual property of another’s product does not, without more, constitute covered disparagement: “It does not follow that because an entity imitated the design of a product, it is, therefore, disparaging it. In point of fact, it’s quite the opposite – as has been oft said: imitation is the highest form of flattery.” (Quoting Homedics, Inc. v. Valley Forge Insurance Company (9th Cir. 2003) 315 F.3d 1135.)

Nor, according to the Court, does unfair competition trigger coverage for disparagement merely because the competitor sells a similar product: “A false or misleading statement that causes consumer confusion, but does not expressly assert or clearly imply the inferiority of the underlying plaintiff’s product, does not constitute disparagement. Because the alleged likeness of the two products did not derogate the Multi-Cart, we reject Ultimate’s theory of disparagement based on consumer confusion over the product name and design.”

The Hartford v. Swift Court also went on to say that positive statements about the defendant’s own products could not imply disparagement: “Were we to adopt Ultimate’s theory of disparagement, almost any advertisement extolling the superior quality of a company or its products would be fodder for litigation.”

The Supreme Court stated that its decision was intended to clarify and limit the scope of an insurer’s duty to defend a policyholder against a possible claim of disparagement, as that term is used in a commercial general liability policy. Thus, the Court held that because the allegedly offending advertisement did not identify Dahl’s product, and contained no matter derogatory to Dahl’s title to its property, its quality, or its business, no disparagement occurred. As a result, there was no potential for coverage, and no duty to defend.

This document is intended to provide you with general information about insurance law developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

June 13, 2014