California Supreme Court Halts Creeping Expansion of Advertising Injury

by Carlton Fields
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California Supreme Court Halts Creeping Expansion of Advertising Injury

Commercial general liability policies typically provide coverage for claims based on “personal and advertising injury.”  Increasingly, enterprising insureds have invoked this coverage in connection with a variety of legal theories arising out of the alleged use of advertising to engage in otherwise unfair business or competitive practices.  Two years ago, for example, in Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc., 207 Cal.App.4th 969 (2012), a clothing manufacturer sued its exclusive retail outlet for selling its clothes at heavy discounts; a California appellate court held that the claim fell within the retailer’s coverage for advertising injury involving “disparagement,” because the retailer had “published prices” that would falsely suggest the manufacturer’s clothing was not a premium good.

In Hartford Casualty Insurance Co. v. Swift Distribution Co., S207172 (Cal. June 12, 2014), the Supreme Court of California put the brakes on this trend and sought to clarify the distinction between libel or disparagement and other business torts.

The Swift Distribution Case

Swift Distribution, Inc., d/b/a Ultimate Support Systems, sold a product called the “Ulti-Cart,” which musicians can use to transport their equipment.  One of Swift’s competitors—Gary Michael Dahl—manufactured  a similar product, called the “Multi-Cart Ultimate,” and he sued Swift for patent and trademark infringement, false designation of origin, and damage to business reputation and goodwill.  Dahl’s complaint attached some of Swift’s advertisements and alleged that they were misleading; none of them referred to the Multi–Cart by name.

Swift was insured under a CGL policy issued by Hartford Casualty Insurance Company.  The policy covered claims based on “personal and advertising injury,” which included claims based on “[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.”  The term “disparages” was not defined.  The policy also contained an exclusion for advertising injury arising out of violations of intellectual property rights.

The Hartford denied coverage on the ground that the underlying claim was not one for “disparagement,” and that it actually fell within the intellectual property exclusion.  The insurer filed a declaratory judgment action, the trial court awarded it summary judgment, and an intermediate appellate court affirmed.

The Supreme Court Decision

On appeal to the California Supreme Court, Swift advanced two separate theories about why the underlying claim was based on “disparagement”: The first was based on Dahl’s claim that Swift, by using a design and product name that were similar to those of Dahl’s product, had led consumers to confuse the Ulti-Cart with the Multi-Cart.  The second was based on allegations that Swift’s advertisements, without naming any other product, included false statements of superiority, which implicitly asserted the inferiority of the Multi-Cart.

With respect to the “consumer confusion” theory, the Supreme Court held that “[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.”   Thus, even if it were somehow reasonable to imply a reference to Dahl’s Multi-Cart from Swift’s advertisement, the advertisement still did not “disparage” Dahl or its product, because there was no express assertion or clear implication of the inferiority of the Multi-Cart.   The Supreme Court further noted that while consumer confusion resulting from similarity might support a claim of patent infringement, trademark infringement or unfair competition, such confusion, without more, does not support a claim of “disparagement.”  In other words, one manufacturer might design and name its product to be a “knock off” of another, but such mimicry does not necessarily derogate or malign the original product.

The Supreme Court also rejected Swift’s “false statements of superiority” theory.  For an advertisement to disparage the product or service of another, the court explained, the insured’s allegedly false or misleading claim must “necessarily refer to and derogate a competitor’s product.”  The court stated that it is possible to satisfy this standard where, as in this case, the insured’s advertisement does not actually name another product—for example, where the insured claims “to be the ‘only’ producer of a certain kind of software or the ‘only’ owner of a trademark.  But in Dahl’s case against Swift, the court found that Swift’s generalized claim of superiority was “mere puffing” and was not specific enough to refer to Dahl’s products “necessarily.” Were it to hold otherwise, the Supreme Court warned, “almost any advertisement extolling the superior quality of a company or its products would be fodder for litigation.”

Finally, the court expressed its disapproval of the result in Charlotte Russe Holding.  The allegedly wrongful advertisements in that case—the ones that offered the manufacturer’s products at a deep discount—had the necessary specificity (that is, they “necessarily refer[red]” to the manufacturer’s product), but they did not “necessarily … derogate” that product.  The court explained:  “[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.”

Bottom Line

In California, at least, insurers have a duty to defend claims involving alleged “disparagement” only where the underlying complaint alleges (or the insurer is otherwise aware of) facts from which it is reasonable to infer that the insured made a false or misleading statement that specifically refer to the plaintiff’s product or business, and which also clearly derogates that product or business. This heightened level of scrutiny should offer a small degree of comfort to insurers considering such claims in the future.  Still, the Swift decision did not foreclose all implied disparagement claims, and indeed, recognized certain specific situations which could trigger the duty to defend, even in the absence of express statements referring to a competitor. It is clear, however, that amorphous generalized statements are not enough.

Image source: Lucas Cobb (Flickr)

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Carlton Fields
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