Insurance Law Client Alert: No Advertising Injury Coverage Where Allegedly Disparaging Advertisement Does Not Expressly Refer To Or Disparage The Plaintiff’s Product

In Hartford Casualty Ins. v. Swift Distribution (No. B234234, filed 10/29/12), a California court of appeal held that where a competitor’s advertisements did not expressly refer to the plaintiff’s product, and did not disparage the plaintiff’s product or business, there was no coverage or potential for coverage because of advertising injury, and no duty to defend.

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

Ultimate tendered the action to Hartford, under its personal and advertising injury coverage. Hartford’s policy defined personal and advertising injury as, among others, “injury . . . arising out of . . . [o]ral, 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[.]” Hartford denied coverage and filed an action for declaratory relief.

Dahl was claiming unfair competition under the Lanham Act (15 U.S.C. ยง 1125(a)), alleging that Ultimate advertised and offered for sale products that infringed two patents and the Multi-Cart mark owned by Dahl. The Dahl complaint alleged that Ultimate engaged in that advertising with intent to mislead the public as to the origin and ownership of rights in Dahl’s mark, and to mislead the public to believe that Ultimate’s products were the same as Dahl’s or were authorized by or related to Dahl. The Dahl complaint alleged that Ultimate’s advertising falsely made it appear that Ultimate designed, or was authorized to manufacture and sell, Ultimate’s infringing product (the “Ulti-Cart,” whose name and design was nearly identical to Dahl’s “Multi-Cart”), and that Ultimate owned or had manufacturing rights to the patent and trademark-protected Multi-Cart.

Dahl also alleged a claim for untrue and/or misleading advertising under California Business and Professions Code sections 17500 and 17505, that by falsely claiming to be the manufacturer, wholesaler, or importer, or to own or control the intellectual property for Multi-Cart and Dahl’s mark, Ultimate caused Dahl’s potential clients to contact Ultimate to buy its infringing product.

But the appeals court said 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 Hartford v. Swift court distinguished the recent decision in Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc. (2012) 207 Cal.App.4th 969, where a retailer’s steep discounting of the manufacturer’s product was deemed to impliedly disparage that product. The Hartford court pointed out that Ultimate’s advertisements referred only to its own product, and did not refer to, and therefore did not disparage, Dahl’s product.

The Hartford court also expressly disagreed with the Charlotte Russe case, saying that “[w]e 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.'”

Thus, the Hartford 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. Therefore, the Hartford policy did not provide a potential for coverage of Dahl’s claim for damages because of advertising injury, and Hartford did not owe Ultimate a duty to defend.

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October 30, 2012