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 products. Id. 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.