Disparate No Longer: California Supreme Court Resolves Split in Approach to Product Disparagement Coverage

Over the past 10 years, there has been an increase in lawsuits between business competitors, with claims that one business is unfairly gaining a competitive advantage over the other. These cases, involving allegations of infringement of intellectual property rights, trade libel, false advertising and similar business torts, have spawned disputes over the scope of insurance coverage for such claims. One prominent and recent example is the coverage afforded under CGL policies for the enumerated offense of “disparagement.” In particular, must the allegedly offending company specifically disparage the claimant in its advertisements, or can it be done implicitly in order for the claim to be covered?

Addressing a recent split between lower-level courts, the California Supreme Court ruled that liability insurers need only defend product disparagement claims when there are allegations that the derogatory statement expressly mentions or clearly implicates the claimant’s product or business. Hartford Cas. Ins. Co. v. Swift Distribution, Inc. (Cal. S207172 June 12, 2014). In that case, Gary-Michael Dahl sued Swift in California federal court alleging that Swift’s manufacture and false and misleading advertisements of a multiuse cart called “Ulti-Cart,” designed to help musicians load and transport equipment, infringed on his patents and trademarks, diluted his trademark, and damaged his reputation and goodwill. The advertisements, however, did not specifically reference Dahl’s product, called “Multi Cart.”

Hartford, which issued a CGL policy to Swift, denied coverage, contending that the policy’s definition of “personal and advertising injury” – which included the disparagement of a person’s or organization’s goods, products or services – was not satisfied due to the absence of a specific statement allegedly disparaging the competitor’s goods. The Supreme Court agreed with Hartford, holding that while Swift’s similar product name and design may create confusion in the marketplace, it did not derogate Dahl’s product. The Court also rejected Swift’s contention that its catalog’s use of advertising puffery such as “superior” and “unique,” without mention of a competing product, constituted disparagement by reasonable implication for coverage purposes.

In upholding Hartford’s position, the high court in Swift disapproved of a conflicting appellate decision, Travelers Property Cas. Co. of America v. Charlotte Russe Holding, Inc. (207 Cal.App.4th 969 (2012). In that case, the appeals court held that allegations that the insured retailer’s reduction in price of the manufacturer’s premium apparel implied that the apparel was of inferior quality. The Supreme Court noted that the reduction in prices did not carry an implication clear enough to derogate the manufacturer’s product for purposes of a disparagement claim. The Court remarked that disparagement by “reasonable implication” requires more than a statement that may conceivably or plausibly be construed as derogatory to a specific product or business; there must be a clear or necessary inference.

Other courts in states such as Illinois, Texas and North Carolina have recently grappled with the issue of whether advertisements that may unfairly tout the superiority of a product in the marketplace without specifically targeting a competitor could give rise to a claim for commercial disparagement that falls within the scope of a CGL policy’s coverage. Given California courts’ reputation as bellwethers for insurance law issues, other jurisdictions are likely to look to the Swift decision for guidance in resolving these coverage disputes, particularly those where the jurisprudence is not as developed.

Topics:  Commercial General Liability Policies, Disparagement, Trademark Litigation, Trademarks

Published In: Business Torts Updates, Insurance Updates

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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