California Supreme Court Clarifies an Insurer’s Duty to Defend in Disparagement Cases
Tuesday, September 23, 2014

Advertising injury liability coverage offered under commercial general liability (“CGL”) policies is aimed at protecting companies against claims, often brought by competitors, alleging harm by purportedly derogatory statements in the policyholder’s advertisements.  The statements, however, need not be expressly disparaging. Suits alleging that an ad implies the inferiority of a competitor’s product may trigger coverage.  In a recent case, Hartford Casualty Ins. Co. v. Swift Distribution, Inc., California’s highest court clarified that statements must “clearly or necessarily” imply a derogatory comparison to trigger an insurer’s duty to defend.  Although the decision purports to limit the breadth of coverage available for advertising injury liability, it nevertheless reaffirms that insurers cannot escape their duty to defend against a disparagement claim when the underlying lawsuit is grounded upon something other than blatantly derisive promotional materials.

The coverage dispute in Hartford involved similar musical equipment carts manufactured by two different companies, Ultimate Support Systems and Gary-Michael Dahl.  Dahl claimed that Ultimate had infringed on its patents and diluted its trademarks through false and misleading advertisements.  Ultimate asked Hartford to pay its defense costs in the suit, claiming that Hartford’s CGL policy covered disparagement claims like the one asserted by Dahl.  Hartford, however, denied coverage, arguing that Dahl’s complaint did not specifically allege that Ultimate had disparaged Dahl’s product. 

Hartford filed suit against Ultimate and persuaded the trial court that it did not owe a defense or indemnity under the policy.  Ultimate appealed the decision, but California’s Second District Court of Appeal affirmed, concluding that Dahl’s suit did not allege either an express or implied disparagement claim given Ultimate’s advertisements said nothing about Dahl’s product. 

The appellate court’s decision was surprising given that a few months earlier a different division of the same court applied a more lenient standard in determining that an insurer was required to defend against a disparagement claim.  In the earlier case, Travelers Property Casualty Co. v. Charlotte Russe Holding, Inc., clothes manufacturer Versatile sued Charlotte Russe for allegedly damaging its brand and trademark by selling Versatile’s premium-brand line of clothing at heavily discounted prices.  Even though Charlotte Russe’s promotional materials did not expressly disparage Versatile’s clothes, the Second District Court of Appeal decided that Versatile’s suit nevertheless asserted a disparagement claim, thus triggering Traveler’s CGL policy, because the deep discounts implied that Versatile’s clothes were not luxury goods. 

After the Second District issued its decision in Hartford, the California Supreme Court granted review, it said, to clarify the principles governing the scope of a CGL insurer’s duty to defend an insured against a disparagement claim.

Ultimate argued that statements in its product catalog, which was referenced in Dahl’s complaint, were alleged to have impliedly disparaged Dahl’s product and triggered Hartford’s duty to defend.  The catalog boasted about the “superiority” and “unparalleled innovation and quality” of Ultimate’s products and customer service and that it had “patents pending.” According to Ultimate, Dahl’s lawsuit was based upon these statements which implied that Dahl’s products were inferior and that Dahl did not have proprietary rights to its products. 

The California Supreme Court was unpersuaded.  The statements, it concluded, did not necessarily imply a derogatory comparison nor were they specific enough to challenge Dahl’s proprietary rights.  The term “superior” for example, might refer merely to the excellence of Ultimate’s products or be the type of exaggeration that consumer product manufacturers routinely pitch.  “Disparagement by reasonable implication,” it held, requires more than a statement that only conceivably or plausibly may be construed as derogatory.  The statement must either clearly or necessarily refer to, and derogate, a competitor’s product to trigger defense coverage.  The Court also noted its disapproval of the Charlotte Russe decision.

 

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