Category Archives: Trade Libel

NO COVERAGE FOR CYBER COMMENTS POSTED UNDER FALSE NAMES


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People post comments on the Internet.  Sometimes, people troll, and trolling can turn extreme when people use an Internet persona or a false identity, believing in the Internet’s anonymity.  Sometimes, comments on the Internet create legal liability.

In Sletten & Brettin v. Continental Cas. Co., slip op., No. 13-2918 (8th Cir., Mar. 19, 2015), a dental practice found out the hard way that defamatory comments made on the Internet can be traced, can create legal liability, and can be excluded from insurance.

In that case, St. Croix Valley Dental, PLLC, sued the dental practice Sletten & Brettin (“S&B”) after Brettin posted defamatory comments about St. Croix’s practice while posing as St. Croix patients.  Specifically, the lawsuit alleged that Brettin used (hijacked?) his neighbor’s wireless network to post false, negative reviews about St. Croix.  Three times, Brettin allegedly posed as a patient of St. Croix and criticized one of its dentists:

For example, one review using the screen name “Hockey Mom” claimed that the reviewer’s son required oral surgery after his braces were removed at St. Croix Valley Dental and warned potential patients, “[b]uyer beware.”

Id. at 2.  Ouch.  St. Croix asserted causes of action against S&B for defamation and libel, civil conspiracy, and unfair competition.

S&B tendered a defense to its insurer.  The insurer denied coverage on the ground that S&B was not an insured.  In the ensuing coverage litigation, the trial court granted the insurer’s motion to dismiss, but not on the issue of whether S&B was an insured.  Instead, the trial court determined that that there was no coverage for the lawsuit because the insurance policy excluded coverage for acts done with the intent to injure.  Id. at 3.  S&B appealed and the Eighth Circuit affirmed.

The insurance policy covered “all amounts, up to the limit of liability, which you become legally obligated to pay as a result of injury or damage . . . . The injury or damage must be caused by an occurrence.”  Id. at 5.  The term “injury” was defined to include “oral or written publication of material that . . . slanders or libels an entity or disparages an entity’s goods, products or services.”  Id.

“Occurrence” was defined as “an accident, including continuous or repeated exposure to conditions which: A. results in injury and/or damage; and B. was not expected nor intended by you.”  Id.  “Accident” was not defined.  Id.  The policy also contained an exclusion for “injury or damage you expected or intended, or which a reasonable person could have expected.”  Id. 

On appeal, S&B argued that the policy was ambiguous because it purported to cover several claims based on intentional acts, but then excluded coverage for them by including an intent-to-injure exclusion.  Id.  The Eighth Circuit disagreed, concluding that the policy excluded coverage for acts that were intended to injure, but covered intentional acts where the resultant injury was not intended or expected:

… the policy here grants coverage for accidents through its definition of occurrence.  And the exclusion precludes coverage for intent-to-injure acts. Thus, the two provisions here are opposite sides of the same coin, and we read them together as providing coverage for intentional acts but excluding coverage for acts committed with the intent to injure.  Accordingly, the insurance policy here provides coverage for defamation in general, an intentional act, but excludes coverage for defamation committed with the intent to injure.

Id. at 6.

The Court further noted that its conclusion that an intent-to-injure exclusion was enforceable for defamation coverage was buttressed by a prior Eighth Circuit decision that held a knowledge-of-falsity exclusion excluded coverage for a defamation claim.  Id. at 7-8.

The Court also rejected S&B’s argument that the exclusion for intentional injury rendered the policy’s coverage for intentional acts like defamation illusory.  The Court reasoned that an intent to injure “is not a required element for defamation claims against private individuals under Minnesota law,” and that “defamation is often committed without an intent to injure.”  Id. at 8.

Finally, examining the allegations of the complaint, the Court agreed that there was no duty to defend because the lawsuit alleged that S&B intended to injure the plaintiff:

[T]he St. Croix lawsuit clearly alleges that S&B and Brettin both acted with the intent to injure.  Brettin allegedly used his neighbor’s wireless network to post false and negative reviews of [St. Croix dentist] Wolff and St. Croix Valley Dental.  As to S&B, the complaint specifically alleges that “Brettin was acting on behalf of and with the knowledge and consent of the other Defendants and for their benefit.”  S&B was one of the named “other Defendants” in the complaint.  All three claims, defamation and libel, civil conspiracy, and unfair competition, arose out of the same alleged facts.  And all three claims specifically alleged that the defendants acted with the intent to injure Wolff and St. Croix Valley Dental’s reputation.  [Emphasis added.]

Id. at 10.

What This Case Means:  People can do some dumb things on the Internet because it purports to promise a faceless medium that can preserve anonymity.  Can steps taken by a person to create or preserve anonymity serve as an indication of an intent to injure?  Yes.  Certainly, the Eighth Circuit was swayed by Brettin’s apparent hijacking of his neighbor’s network to post comments under false identities as an indication of an intent to injure St. Croix.  That intent implicated an intentional injury exclusion and excluded coverage his practice later sought.

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Product Disparagement and The Duty To Defend: Swift Distribution Affirmed; Charlotte Russe Disapproved


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June 13, 2014.  In the November 2, 2012 issue of The Coverage Inkwell, I discussed the California Court of Appeal decision in Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 148 Cal. Rptr. 3d 679 (Cal. Ct. App. 2012), noting its importance because (1) it provided a reminder as to why claims of “passing off” should not constitute trade libel to implicate coverage under general liability policies, and (2) its sharp criticism of Travelers Prop. & Cas. Co. v. Charlotte Russe Holding, Inc., 144 Cal. Rptr. 3d 12 (Cal. Ct. App. 2012).  Charlotte Russe had held that allegations of placing fashionable apparel in a markdown display constituted trade disparagement to implicate a duty to defend.

Yesterday, the Supreme Court of California affirmed Swift Distribution and scaled back product disparagement claims for implicating a duty to defend under Coverage B of general liability policies.  Hartford Cas. Ins. Co. v. Swift Distribution, Inc., — P.3d –, 2014 WL 2609753 (Cal. June 12, 2014).  The decision also disapproves Charlotte Russe and should call into doubt other decisions that broadly construe trade libel and product disparagement to implicate a duty to defend in product knock-off and passing-off litigation.

In essence, the underlying action was a “passing off” case.  The plaintiff Gary-Michael Dahl (“Dahl”) manufactured and sold the “Multi–Cart,” a cart that could be manipulated into various configurations to move music, sound, and video equipment quickly and easily.  The insured, Swift Distribution d/b/a Ultimate Support Systems (collectively, “Ultimate”) began selling an alleged knock-off, the “Ulti-Cart.”  Dahl commenced a lawsuit against Swift Distribution for patent and trademark infringement, unfair competition, dilution of a famous mark, and false advertising.  Dahl asserted that Ultimate’s false and misleading advertisements and use of a “nearly identical mark” were likely to cause consumer confusion or mistake, or to deceive the public “as to the affiliation, connection, or association” of the two parties.  Id. at *1.  The complaint attached Ultimate’s advertisements, which did not name the Multi-Cart or any other product.

Ultimate tendered its defense under its general liability policy, which provided coverage for “personal and advertising injury,” defined in part as “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.”  Id. at *2.

Ultimate argued that the underlying action involved a claim of disparagement.  Id.  The insurer disagreed and denied coverage, explaining that that there could be no disparagement absent a specific statement about a competitor’s goods.  Id.  Coverage litigation ensued.  The trial court held that the insurer had no duty to defend and the California Court of Appeal affirmed.  The Supreme Court of California also affirmed.  In doing so, it clarified the meaning of commercial disparagement, including product disparagement and trade libel.  Id. at *3.

Noting that disparagement emerged from the common law tort for slander of title, the Court explained that the tort had expanded to include statements disparaging the quality of property rather than simply its ownership, a form of disparagement commonly referred to as trade libel, and also came to encompass a broader theory of economic or commercial injury caused by a false, derogatory statement.  Id. at *5.  This expansion, in turn, created confusion.

“Confusion surrounds the tort of ‘commercial disparagement’ because not only is its content blurred and uncertain, so also is its very name. The tort has received various labels, such as ‘commercial disparagement,’ ‘injurious falsehood,’ ‘product disparagement,’ ‘trade libel,’ ‘disparagement of property,’ and ‘slander of goods.’ These shifting names have led counsel and the courts into confusion, thinking that they were dealing with different bodies of law.  In fact, all these labels denominate the same basic legal claim.”

Id.  Disparagement, the Court concluded, is often included as “a specific example of the more general principle of injurious falsehood.”  Id.  For purposes of insurance coverage, disparagement has come “to mean a knowingly false or misleading publication that derogates another’s property or business and results in special damages.”  Id. at *6.

Working within the confines of this understanding, the Court concluded that when evaluating whether a claim of disparagement has been alleged for purposes of the duty to defend, courts require:

that the defendant’s false or misleading statement 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. . . . A false or misleading statement (1) must specifically refer to the plaintiff’s product or business, and (2) must clearly derogate that product or business.  Each requirement must be satisfied by express mention or by clear implication.

Id. at *7 (emphasis added).

According to the Court, “[w]hat distinguishes a claim of disparagement is that an injurious falsehood has been directed specifically at the plaintiff’s business or product, derogating that business or product and thereby causing that plaintiff special damages.”  Id. at *9 (emphasis in original).  The specificity requirements “limit the type of statements that may constitute disparagement, especially since advertisements and promotional materials often avoid express mention of competitors.”  Id.

Examining the case before it, the Court held that the allegations in the underlying Dahl action failed these specificity requirements to assert a product disparagement claim to implicate a duty to defend:

Consumer confusion resulting from the similarity of the Ulti–Cart to the Multi–Cart may support a claim of patent or trademark infringement or unfair competition in certain circumstances, but it does not by itself support a claim of disparagement. Even if the Ulti–Cart was named and designed to mimic the Multi–Cart, that fact does not derogate or malign the Multi–Cart in any way.

Id. at *11.  The Court held that “[t]here is no coverage for disparagement simply because one party tries to sell another’s goods or products as its own.”  Id.  Moreover, “a party’s attempt to copy or infringe on the intellectual property of another’s product does not, without more, constitute disparagement.”  Id.

In fact, underlying allegations pertaining to the likeness of the products belied any assertion that the lawsuit alleged product disparagement:

Dahl repeatedly asserted that the two products were “nearly identical, folding transport carts.”  Indeed, Dahl’s claims relied heavily on the fact that the mark and design of the two products were nearly indistinguishable.  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.  Because the alleged likeness of the two products did not derogate the Multi–Cart, we reject Ultimate’s theory of disparagement based on consumer confusion over the product name and design.

Id. at *12.

Allegations that Ultimate claimed its “Ulti-Cart” was superior, without specific reference to Dahl’s “Multi-Cart,” also were insufficient to constitute a disparagement claim.  Id. at *13.  The Court outright rejected Ultimate’s assertion otherwise:

Were we to adopt Ultimate’s theory of disparagement, almost any advertisement extolling the superior quality of a company or its products would be fodder for litigation. Proliferation of such litigation would interfere with “the free flow of commercial information.

Id. 

The Court’s disapproval of Charlotte Russe

Critically, the California Supreme Court also put a stop to the logic expressed in Charlotte Russe.

In its discussion, the Court was careful to preserve the doctrine of implied disparagement in instances, for example, where an insured falsely alleges that its product is the only such product available, or that its product is superior to all other productsId. at *9-10.  In those instances, the alleged derogatory statements possess the requisite specificity and reference to a plaintiff’s product.  Id.  The Court, however, concluded that the claim of disparagement recognized in Charlotte Russe departed from the requisite specificity requirements.

Rejecting the logic expressed by the California Court of Appeal in Charlotte Russe, and approving the sharp criticism levied against in by the Appeal Court in Swift Distribution, the California Supreme Court stated:

There is no question that Charlotte Russe’s discounted prices on People Liberation’s clothing specifically referred to People Liberation’s product.  But 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” [citations omitted] 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 People Liberation’s product for purposes of a disparagement claim. We disapprove Charlotte Russe to the extent it is inconsistent with this opinion.

Id. at *10.

What This Case Means.  To be clear, the doctrine of implied disparagement remains.  However, the Swift Distribution decision scales back the types of assertions that may implicate the duty to defend for product disparagement under general liability policies.  One may not simply fish for some purported disparagement to conjure up a duty to defend.  Instead, California courts will require a degree of specificity towards the plaintiff’s products in the purported derogatory remark in order to implicate coverage.

In addition, the next time you pass by huge markdowns for apparel, know that the Supreme Court of California, too, does not view that as disparagement.  Happy shopping.

Questions are welcome.

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