Courts Take Divergent Positions on "Disparagement" Under Advertising Injury Coverage

by Hinshaw & Culbertson LLP
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Within the last four months, two divisions of the California Court of Appeal’s Second Appellate District have taken different positions on the requirements for “disparage,” as that term is used in commercial liability insurance policies that provide coverage for “advertising injury.”

On June 21, 2012, Division One of the Second Appellate District decided Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc. In that case, Travelers issued a commercial liability policy that promised to defend Charlotte Russe, a retailer, against any suit that sought damages for advertising injury claims. The policy provided that it covered claims alleging injury arising out of the publication of material that disparages a person’s goods, products or services.

Charlotte Russe had a contract to become the exclusive sales outlet for Versatile’s “People’s Liberation” brand of apparel. Displays in Charlotte Russe stores announced the sale of People’s Liberation jeans at 70% to 85% price markdowns. Versatile sued Charlotte Russe, alleging that the retailer’s pricing practices would result in significant and irreparable damage to the People’s Liberation brand. Charlotte Russe asked Travelers to defend the lawsuit. Travelers refused. The insurer maintained that coverage was not available because reduction of the price of a product is not a disparagement of the product.

The trial court granted Travelers’ motion for summary judgment, but Division One reversed the trial court’s ruling. (While initially unpublished, the appellate court’s decision was certified for publication on July 13, 2012.) The decision concluded that an allegation of disparagement may be implied. The Division One court held that the key issue is not whether Versatile expressly alleged that Charlotte Russe disparaged Versatile’s products, but instead whether Charlotte Russe’s statements and conduct could be understood to disparage Versatile’s products.

The Second Appellate District’s Division Three took an opposite view in its October 29, 2012, decision in Hartford Casualty Insurance Co. v. Swift Distribution, Inc.,which also involved a claim for coverage under a policy’s advertising injury coverage. The Division Three court ruled that the insurer in that case had no duty to defend because the lawsuit against the insured did not allege that the insured published an injurious falsehood directed at the plaintiff’s products. The court expressed disagreement “with the theory of disparagement apparently recognized in Charlotte Russe.” The court explained,

Charlotte Russe held that this reduced pricing was enough to constitute disparagement, which triggered the duty to defend. We fail to see how a reduction in price—even a steep reduction in price—constitutes disparagement.”

In September, the California Supreme Court denied review of the Charlotte Russe decision; the time to seek review in the Hartford Casualty has not yet run.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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