California Supreme Court Clarifies Disparagement For "Advertising Injury" Coverage Requires Derogation of Specific Competitor, Products or Services

California Supreme Court Clarifies Disparagement For "Advertising Injury" Coverage Requires Derogation of Specific Competitor, Products or Services

June 2014 Special Issue


In Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 2014 WL 2609753 (filed June 12, 2014), the California Supreme Court clarified and limited the scope of an insurer’s duty to defend an insured against claims of possible disparagement. The Supreme Court held there is no duty to defend under the “advertising injury” provision in a liability insurance policy, where an insured’s allegedly offending advertisement does not identify and disparage the claimant’s business or product either by express mention or clear implication. 

In Swift Distribution, Dahl manufactured and sold the “Multi-Cart,” a collapsible cart used for moving movie and sound equipment. Dahl sued the insured, Swift Distribution dba Ultimate Support Systems, Inc. (“Ultimate”), for patent and trademark infringement and misleading advertising arising from Ultimate’s sale of the “Ulti-Cart.” Dahl alleged that Ultimate’s false and misleading advertisements and use of a nearly identical mark were likely to cause “consumer confusion.” Ultimate tendered the defense to its liability insurer, Hartford Casualty Insurance Company (“Hartford”), asserting that the allegations of the complaint were sufficient to allege a disparagement claim potentially covered under the “personal and advertising injury” coverage section of the liability policy. Hartford’s policy defined “personal and advertising injury” to include “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.”

The Court in Swift Distribution concluded there was no potential for coverage and, therefore, Hartford owed no duty to defend. The Court determined that Dahl’s claim did not satisfy the “personal and advertising injury” definition because Ultimate’s advertisement for the Ulti-Cart did not refer to the Multi-Cart and contained no derogatory statements about the Multi-Cart.

In reaching this conclusion, the Court explained that, for purposes of commercial liability insurance coverage, disparagement means “a knowingly false or misleading publication that derogates another's property or business and results in special damages.” The Court stated that the alleged false or misleading statement must have “a degree of specificity that distinguishes direct criticism of a competitor's product or business from other statements extolling the virtues or superiority of the defendant's product or business.” The Court further explained that, in order to satisfy this specificity requirement, there must be “a false or misleading statement that (1) specifically refers to the plaintiff's product or business and (2) clearly derogates that product or business. Each requirement must be satisfied by express mention or by clear implication.”

In so holding, the Supreme Court expressly disapproved the appellate court decision, Travelers Property Cas. Co. of America v. Charlotte Russe Holding, Inc., 207 Cal.App.4th 969 (2012), in which the appellate court held the claimant potentially alleged an “advertising injury,” even though the insured did not publish any disparaging comments about the claimant or its product. In Charlotte Russe, the insured retailer allegedly breached its distribution contract with a clothing manufacturer by deeply discounting prices on the manufacturer’s products, which allegedly suggested to consumers that the products were of inferior quality. That Court determined that the allegations could reasonably be interpreted to allege that the insured disparaged the manufacturer’s products. That Court thus held that the insured’s liability insurer had a duty to defend.

The Supreme Court in Swift Distribution rejected Charlotte Russe, reasoning that the allegations of the underlying complaint did not satisfy the requisite degree of specificity required to allege disparagement. The Supreme 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. Disparagement by ‘reasonable implication’ [citation] requires more than a statement that may conceivably or plausibly be construed as derogatory to a specific product or business. A ‘reasonable implication’ in this context means a clear or necessary inference. Charlotte Russe's prices did not carry an implication clear enough to derogate [the clothing manufacturer’s] product for purposes of a disparagement claim.”

The Supreme Court’s decision is significant because it resolved a conflict in California regarding whether coverage for “advertising injury” requires allegations of disparagement specifically directed at another’s goods, products or services. The Court’s decision made clear that it does. Insurers can now rely upon the two-part specificity test outlined in Swift Distribution when evaluating whether there is a potentially covered disparagement claim within the meaning of the “advertising injury” provisions of commercial liability policies.

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