Insurance Coverage for False Advertising Claims

Advertising Injury Coverage Under CGL Policies

The advertising injury coverage is designed to protect policyholders against suits based on advertisements. The coverage (like all commercial policies) is written on standard forms drafted by an insurance industry sponsored entity called Insurance Services Offices (“ISO”). The advertising injury coverage was added to CGL policies in the 1970s. The 1973, 1986, 1998, and 2001 versions of the ISO forms differ substantially in their definition of advertising injury, and therefore coverage for false advertising claims can vary depending on the form used. Some insurers continue to use older versions of the ISO forms, and others modify the ISO definition of advertising injury through exclusions or endorsements.

Coverage for false advertising claims under a CGL policy arises when the policyholder can establish three elements: 1) an advertising activity by the named insured; 2) allegations that fit into one of the covered “offenses” enumerated in the policy; and 3) an injury that arises out of one of those offenses which was committed during the policy period and in the course of the advertising activity. New Hampshire Ins. Co. v. R.L. Chaides Constr. Co., 847 F. Supp. 1452, 1455 (N.D. Cal. 1994). There is substantial case law as to what constitutes advertising, and courts have differed in their interpretation of that term. Many courts have held that soliciting an individual prospect qualifies as advertising, and it can be argued that virtually any commercial activity qualifies as advertising. See, e.g., John Deere Ins. Co. v. Shamrock Indus. Inc., 696 F. Supp. 434, 439-40 (D. Minn. 1988) (“three letters [sent] to a potential buyer” constituted advertising); American States Ins. Co. v. Canyon Creek, 786 F. Supp. 821, 828 (N.D.Cal.1991) (“even one-on-one oral representations have been found to constitute advertising”). The second requirement for advertising injury coverage, “offenses enumerated in the policy,” turns on the allegations of the underlying complaint and the enumerated offenses defined in the CGL policy. An overview of the case law requiring insurance companies to provide coverage for false advertising claims is discussed in the subsequent section. The third element, or the “causation requirement,” is the connection between “advertising activities” and “advertising injury” that needs to be established before the insured can be covered for advertising injury. Bank of the West v. Superior Court of Contra Costa County, 2 Cal. 4th 1254, 1274-75 (1992).

Advertising Offense: False Advertising

Depending on the version and wording of the policy form used, courts have often found allegations of false advertising fit into one or more of the enumerated offenses of “disparagement,” “misappropriation of advertising idea,” and “infringing upon another's slogan.”

Coverage for Misappropriation of Advertising Idea

In American Simmental, the court found coverage under misappropriation of an advertising idea for a lawsuit alleging that a seller of bulls falsely designated its bulls as “fullblood” Simmentals, when in fact the bulls' bloodlines were partly Angus, making them less desirable for breeding purposes. Am. Simmental Ass'n v. Coregis Ins. Co., 282 F.3d 582, 585 (8th Cir. 2002). The underlying plaintiff, who alleged that its own bulls were true, fullblood Simmentals, claimed that the policyholder's exaggeration of a desirable trait with respect to its bulls diluted the value of the “fullblood” Simmental designation for those that were truly fullblood. Id. The American Simmental court found that emphasizing the fullblood Simmental trait was an “advertising idea” that the policyholder was alleged to have misappropriated, and was entitled to coverage for misappropriation of another's advertising idea. Id. at 587-88. Under the same reasoning, in Granutec, Inc. v. St. Paul Fire and Marine Ins. Co., No. 5:96-CV-489-BO(2), 1998 U.S. Dist. LEXIS 3527, at *9-10 (E.D.N.C. Jan. 16, 1998), the court found allegations that the policyholder changed its product's packaging “color scheme from red/orange to red/yellow ' to simulate the likeness of the Tylenol Gelcap product,” in order to “create confusion among consumers thereby enabling it to exploit the reputation and popularity of Tylenol” qualified as “misappropriation of advertising ideas.” Many other courts have also found that false advertising allegations trigger coverage for “misappropriation.” See, e.g., Cincinnati Ins. Co. v. Pestco, Inc., 374 F. Supp. 2d 451, 456-59 (W.D. Pa. 2004) (finding coverage for “misappropriation” when the policyholder was accused of designing and marketing its air freshener in cans that were nearly identical to those used by the plaintiff, and utilizing “confusingly similar” names and label); Atlapac Trading Co., Inc. v. Am. Motorists Ins. Co., No. CV 97-0781, 1997 U.S. Dist. LEXIS 21943 (C.D. Cal. 1997) (finding coverage for “misappropriation” when the policyholder was accused of “falsely labeling and marketing its olive oil products as 'pure olive oil' when instead they were blends of other oils.”); Native Am. Arts, Inc. v. Hartford Cas. Ins. Co., 435 F.3d 729, 733 (7th Cir. 2006).

Coverage for Disparagement

In Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co., 545 N.E.2d 1156, 1159 (Mass. 1989), disparaging material was not defined in the policy, and the insurer contended that the “language refers to the torts of product disparagement and disparagement of property.” The court disagreed with the insurer, and held that “[d]isparage means, among other things, 'to lower in rank and estimation by actions or words,' or 'to speak slightingly of.'” Id. Accordingly, the court held that the underlying claimant's assertion that Boston Symphony's “breach of contract somehow spoke slightingly about her and damaged her reputation ' was 'reasonably susceptible' of stating a claim that would fall within the zone of covered injuries.” Id. at 1158-59. Likewise, in E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F.Supp.2d 1244, 1253-54 (N.D. Cal. 2008), the court found coverage for disparagement because the plaintiff alleged that the policyholder made “false claims about the superiority of its own products,” that the policyholder and the underlying plaintiff were “direct competitors,” and that the underlying plaintiff's “market share, sales, and reputation were damaged” as a result of the policyholder's alleged false statements.

Insurers sometimes attempt to create an unwritten requirement in their policies that the plaintiff in the underlying action must plead a tort such as libel or slander in order to qualify for coverage under “disparagement.” In Boston Symphony, the insurer elected not to define the word “disparage,” and then tried to argue for a more exacting definition of this undefined term. 545 N.E.2d at 1159. The court held that “[d]isparage means, among other things, 'to lower in rank and estimation by actions or words,' or 'to speak slightingly of,'” and refused to accept the insurer's interpretation that the “language refers to the torts of product disparagement and disparagement of property.” Id. A number of other courts have followed Boston Symphony and rejected insurers' efforts to draw a bright-line rule predicating coverage on whether the underlying complaint has pled the elements of the tort of disparagement. See, e.g., City of Cape May v. St. Paul Fire & Marine Ins. Co., 524 A.2d 882, 883-86 (N.J. Super. Ct. 1987) (refusing to limit “coverage to conventional common-law defamation actions, i.e., libel and slander, alone. The insuring agreement promised more. ' If the insurer intended to cover only libel, slander, and invasion of privacy, it should have stopped there”).

Insurers sometimes deny coverage because they argue that the allegations against the policyholder do not allege that the defendant's advertising even mentions the plaintiff or the plaintiff's products. A number of courts have rejected efforts by insurers' to graft an unwritten requirement onto its policies by predicating coverage for false advertising on whether or not a competitor's products are mentioned by name. See, e.g., Acme United Corp. v. St. Paul Fire & Marine Ins. Co., 214 Fed. Appx. 596, 599-600 (7th Cir. 2007) (insurer had a duty to defend under the disparagement prong of advertising injury coverage where policyholder overstated certain aspects of its own products, but did not mention underlying plaintiff by name); Pennfield Oil Co. v. Am. Feed Indus. Ins. Co. Risk Retention Group, Inc., No. 8:05 CV315, 2007 WL 1290138 (D. Neb. March 12, 2007); Liberty Mutual Ins. Co. v. OSI Indus., Inc., 831 N.E.2d 192, 199 (Ind. App. 2005).

Coverage for Infringing upon Another's Slogan

In a Touch of Class Imps., Ltd. v. Aetna Cas. and Sur. Co., 901 F. Supp. 175, 176 (S.D.N.Y. 1995), the insured was sued by another company that also used “Touch of Class” in the name of its business. Touch of Class sought coverage, and argued that its use of the name “A Touch of Class Imports” constituted a “slogan” under the definition of Advertising Injury contained in the policy. Id. The court held that a slogan is “any word or combination of words that acts as an attention-getting device,” and thus found that “A Touch of Class” constitutes a slogan because the insured used its name as an “attention-getting device for its jewelry.” Id. at 177. Numerous courts have defined “slogan” in substantially the same way as the court did in A Touch of Class, and required insurers to defend cases where a party is alleging that a business competitor is infringing on its right by using a comparable word or group of words. See, e.g., P.J. Noyes Co. v. Am. Motorists Ins. Co., 855 F. Supp. 492, 493, 494-95 (D.N.H. 1994); Ross v. Briggs & Morgan, 520 N.W.2d 432, 436 (Minn. App. 1994), rev'd on other grounds, 540 N.W.2d 843 (Minn. 1995).

As demonstrated above, several scenarios exist where, depending on the policy language and the allegations of the underlying claims, false advertising claims are covered under advertising injury. Advertising injury coverage for false advertising may also be available under the enumerated offense of infringing upon another's copyright and trade dress. Therefore, defendants in false advertising cases have a persuasive argument for insurance coverage, and virtually every such case should be tendered to insurers.

Insurance Policy Exclusions: Do Any Apply?

CGL policies typically contain several exclusions for advertising injury. These exclusions appear all-encompassing on the surface, but the insurer bears the burden of proving that the exclusion applies, and they are generally interpreted narrowly by the courts. Some exclusions that are asserted by insurers in false advertising cases are discussed below.

The Nonconformity Exclusion

The “nonconformity” exclusion precludes coverage for the “wrong description of the price or authenticity of any goods or services, or the failure of any goods or services to conform with the standards of quality or performance.” As explained below, in most cases, neither the authenticity nor the conformance clause eliminates coverage for false advertising.

“Authenticity” in the context of the nonconformity exclusion refers to the origin of the goods, and not their quality or content. See Flodine v. State Farm Ins. Co., No. 99 C 7466, 2001 WL 204786, at *12 (N.D. Ill. March 1, 2001) (“Though ' designations of authenticity can be indicators of quality (in the sense of excellence) to consumers, they are primarily concerned with identifying the source or origin of goods, not how well the goods will perform.). The “authenticity” component of the nonconformity exclusion does not apply because most false advertising complaints are bereft of allegations regarding the origin of defendant's products.

Exclusion for “quality or performance” has been interpreted to bar “coverage for claims arising from the failure of the insured's products to perform as well as advertised.” Flodine, 2001 WL 204786, at *12. But, most false advertising cases are not about product performance; rather, the complaints allege that defendant's advertising and marketing take advantage of marketing efforts undertaken by another company or are misleading. Courts have consistently held that when a policyholder's advertising is alleged to exploit the identity, goodwill or marketing efforts of a competitor, but there is no allegation that the product itself is substandard or non-performing, then the exclusionary language for “quality or performance” does not apply. See, e.g., Edwards Theater Co. v. United Nat'l Ins. Co., 126 Fed. Appx. 831 (9th Cir. 2005) (nonconformity exclusion did not apply where policyholder was accused of a “pattern of deceptive advertising” harming the underlying plaintiff's reputation and goodwill, but the quality of the goods sold by the policyholder were irrelevant to the claim); Pennfield Oil, 2007 WL 1290138, at *8 (refusing to apply nonconformity exclusion, where policyholder allegedly falsely advertised that its product had FDA approval, which implicitly disparaged competitor and caused competitor to lose profits and goodwill, but there was no allegation that the policyholder's product itself failed to “conform with its advertised quality or performance”); E.piphany, 590 F. Supp. 2d at 1248 n.5; DecisionOne Corp. v. ITT Hartford Ins. Group, 942 F. Supp. 1038, 1042-43 (E.D. Pa. 1996); Elcom Techs., Inc. v. Hartford Ins. Co. of the Midwest, 991 F. Supp. 1294, 1298 (D. Utah 1997).

The few cases where the court found that the exclusion for “quality or performance” applied highlight the distinction between allegedly misleading and harmful advertising, as opposed to a low quality or non-performing product. In Harleysville Mutual Ins. Co. v. Buzz Off Insect Shield, LLC, No. 272A08, 2010 WL 1492136, at *18 (N.C. Sup. Ct. April 25, 2010), the court found that the exclusion applied because the underlying complaint alleged that the policyholders' explicit and affirmative statements about its own products were demonstrably false. Again, in Staff Pro, Inc. v. National Union Fire Ins. Co., No. B183167, 2006 WL 1828022, at *7 (Cal. App. Ct. July 5, 2006), the court found that the exclusion applied where a security guard service advertised that its guards were licensed and were well trained but, in fact, they were not licensed and were barely trained at all.

The Antitrust Exclusion

Insurers often attempt to lift phrases like “unfair competition” and “deceptive trade practices” from “Antitrust Exclusion” or “Price Fixing” exclusions to contend that these phrases exclude coverage for false advertising claims. These phrases are not defined anywhere in the policies, and in the absence of a definition, these phrases have a well-established connotation in the antitrust context that refers to the regulation of anticompetitive practices under the Federal Trade Commission Act and not false advertising under the Lanham Act.

In Beyer v. Heritage Realty, Inc., 251 F.3d 1155, 1157 (7th Cir. 2001), the insurer asserted that the “Price Fixing” exclusion precluded coverage for violation of the Real Estate Settlement Procedures Act, because the violation was a “deceptive trade practice,” a term which was embedded in the “Price Fixing” exclusion. The “Price Fixing” exclusion precluded coverage for “loss that results from any violation of any state or federal antitrust, price fixing, restraint of trade or deceptive trade practice law, rule or regulation ' .” Id. at 1157. The Seventh Circuit, however, found that the exclusion did not bar coverage because the broader reading of “deceptive trade practices” was inappropriate when “embedded in a clause dealing with antitrust issues.” Id. at 1158. A number of other courts have similarly limited the antitrust exclusion to antitrust claims. See, e.g., Integra Telecom, Inc. v. Twin City Fire Insurance Company, No. 08-906-AA, 2010 WL 1753210 (D. Or. April 29, 2010) (refusing to apply the exclusion in the broad manner advocated by the insurer because it was ambiguous as to whether or not the phrase “unfair trade practices” is limited to the antitrust context or may be read more expansively to exclude any claim that can be described as “unfair trade practice”); Continental Casualty Co. v.. Multiservice Corp., No. 06-2256-CM, 2009 WL 1788422 (D. Kan. June 23, 2009) (limiting the antitrust exclusion to antitrust claims, and refusing to apply it to tortious interference claim, even though insurer argued that the tortious interference claim arose from the same alleged conduct as the antitrust claim).

Richard Milone is a partner and Mahmood Ahmad is an associate in Kelley Drye & Warren LLP's Litigation and Insurance Recovery practice group, which represents commercial policyholders in disputes with insurers. They can be contacted at [email protected] and [email protected].

Section 43(a) of the Lanham Act, a federal trademark statute, establishes a cause of action for false advertising and provides that any person who “uses in commerce any ' false or misleading description of fact, or false or misleading representation of fact, which in commercial advertising or promotion, misrepresents the nature, characteristics, qualities, or geographic origin of his or her or another person's goods, services, or commercial activities” shall be liable to any person who believes that he or she is or is likely to be damaged by such act. See 15 U.S.C. ' 1125(a). A plaintiff who prevails on a Lanham Act false advertising claim can obtain relief that may deal a mortal blow to the defendant's product or product lines ' the court can issue an injunction barring the challenged advertisements, it can order corrective advertising or even a product recall if the false advertising is on the product's packaging and labeling. Additional remedies under the Lanham Act include damages, attorneys' fees, and any equitable remedy that the court determines would fairly compensate the plaintiff. Not only can the verdict in a false advertising suit have devastating consequences in terms of injunctions and monetary damages, the litigation process itself is so costly that it can be equally onerous.

An often-ignored component in the cost matrix for the defense of these claims is the availability of insurance coverage. Insurers generally contend that no coverage exists because their policies do not cover business risks such as “false advertising,” and even if the possibility of coverage exists, one or more of the policy exclusions eviscerates coverage. All too often companies accept the insurer's position at face value and fail to explore coverage further. This is a costly mistake, as courts have often found coverage for these types of claims.

The only way to know whether a given false advertising claim is covered is to examine it closely in connection with the policy and the case law that has developed in the relevant jurisdiction, and then determine whether there is coverage. This article provides an overview of case law holding that insurance companies are obligated to provide coverage for false advertising claims, particularly under the advertising injury section of a CGL policy. In doing so, the article discusses the general framework for advertising injury coverage under CGL policies and the inapplicability of certain exclusions sometimes asserted by insurers to deny coverage.

Advertising Injury Coverage Under CGL Policies

The advertising injury coverage is designed to protect policyholders against suits based on advertisements. The coverage (like all commercial policies) is written on standard forms drafted by an insurance industry sponsored entity called Insurance Services Offices (“ISO”). The advertising injury coverage was added to CGL policies in the 1970s. The 1973, 1986, 1998, and 2001 versions of the ISO forms differ substantially in their definition of advertising injury, and therefore coverage for false advertising claims can vary depending on the form used. Some insurers continue to use older versions of the ISO forms, and others modify the ISO definition of advertising injury through exclusions or endorsements.

Coverage for false advertising claims under a CGL policy arises when the policyholder can establish three elements: 1) an advertising activity by the named insured; 2) allegations that fit into one of the covered “offenses” enumerated in the policy; and 3) an injury that arises out of one of those offenses which was committed during the policy period and in the course of the advertising activity. New Hampshire Ins. Co. v. R.L. Chaides Constr. Co. , 847 F. Supp. 1452, 1455 (N.D. Cal. 1994). There is substantial case law as to what constitutes advertising, and courts have differed in their interpretation of that term. Many courts have held that soliciting an individual prospect qualifies as advertising, and it can be argued that virtually any commercial activity qualifies as advertising. See, e.g., John Deere Ins. Co. v. Shamrock Indus. Inc. , 696 F. Supp. 434, 439-40 (D. Minn. 1988) (“three letters [sent] to a potential buyer” constituted advertising); American States Ins. Co. v. Canyon Creek , 786 F. Supp. 821, 828 (N.D.Cal.1991) (“even one-on-one oral representations have been found to constitute advertising”). The second requirement for advertising injury coverage, “offenses enumerated in the policy,” turns on the allegations of the underlying complaint and the enumerated offenses defined in the CGL policy. An overview of the case law requiring insurance companies to provide coverage for false advertising claims is discussed in the subsequent section. The third element, or the “causation requirement,” is the connection between “advertising activities” and “advertising injury” that needs to be established before the insured can be covered for advertising injury. Bank of the West v. Superior Court of Contra Costa County , 2 Cal. 4th 1254, 1274-75 (1992).

Advertising Offense: False Advertising

Depending on the version and wording of the policy form used, courts have often found allegations of false advertising fit into one or more of the enumerated offenses of “disparagement,” “misappropriation of advertising idea,” and “infringing upon another's slogan.”

Coverage for Misappropriation of Advertising Idea

In American Simmental, the court found coverage under misappropriation of an advertising idea for a lawsuit alleging that a seller of bulls falsely designated its bulls as “fullblood” Simmentals, when in fact the bulls' bloodlines were partly Angus, making them less desirable for breeding purposes. Am. Simmental Ass'n v. Coregis Ins. Co. , 282 F.3d 582, 585 (8th Cir. 2002). The underlying plaintiff, who alleged that its own bulls were true, fullblood Simmentals, claimed that the policyholder's exaggeration of a desirable trait with respect to its bulls diluted the value of the “fullblood” Simmental designation for those that were truly fullblood. Id. The American Simmental court found that emphasizing the fullblood Simmental trait was an “advertising idea” that the policyholder was alleged to have misappropriated, and was entitled to coverage for misappropriation of another's advertising idea. Id. at 587-88. Under the same reasoning, in Granutec, Inc. v. St. Paul Fire and Marine Ins. Co., No. 5:96-CV-489-BO(2), 1998 U.S. Dist. LEXIS 3527, at *9-10 (E.D.N.C. Jan. 16, 1998), the court found allegations that the policyholder changed its product's packaging “color scheme from red/orange to red/yellow ' to simulate the likeness of the Tylenol Gelcap product,” in order to “create confusion among consumers thereby enabling it to exploit the reputation and popularity of Tylenol” qualified as “misappropriation of advertising ideas.” Many other courts have also found that false advertising allegations trigger coverage for “misappropriation.” See, e.g., Cincinnati Ins. Co. v. Pestco, Inc. , 374 F. Supp. 2d 451, 456-59 (W.D. Pa. 2004) (finding coverage for “misappropriation” when the policyholder was accused of designing and marketing its air freshener in cans that were nearly identical to those used by the plaintiff, and utilizing “confusingly similar” names and label); Atlapac Trading Co., Inc. v. Am. Motorists Ins. Co., No. CV 97-0781, 1997 U.S. Dist. LEXIS 21943 (C.D. Cal. 1997) (finding coverage for “misappropriation” when the policyholder was accused of “falsely labeling and marketing its olive oil products as 'pure olive oil' when instead they were blends of other oils.”); Native Am. Arts, Inc. v. Hartford Cas. Ins. Co. , 435 F.3d 729, 733 (7th Cir. 2006).

Coverage for Disparagement

In Boston Symphony Orchestra, Inc. v. Commercial Union Ins. Co. , 545 N.E.2d 1156, 1159 (Mass. 1989), disparaging material was not defined in the policy, and the insurer contended that the “language refers to the torts of product disparagement and disparagement of property.” The court disagreed with the insurer, and held that “[d]isparage means, among other things, 'to lower in rank and estimation by actions or words,' or 'to speak slightingly of.'” Id. Accordingly, the court held that the underlying claimant's assertion that Boston Symphony's “breach of contract somehow spoke slightingly about her and damaged her reputation ' was 'reasonably susceptible' of stating a claim that would fall within the zone of covered injuries.” Id. at 1158-59. Likewise, in E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co. , 590 F.Supp.2d 1244, 1253-54 (N.D. Cal. 2008), the court found coverage for disparagement because the plaintiff alleged that the policyholder made “false claims about the superiority of its own products,” that the policyholder and the underlying plaintiff were “direct competitors,” and that the underlying plaintiff's “market share, sales, and reputation were damaged” as a result of the policyholder's alleged false statements.

Insurers sometimes attempt to create an unwritten requirement in their policies that the plaintiff in the underlying action must plead a tort such as libel or slander in order to qualify for coverage under “disparagement.” In Boston Symphony, the insurer elected not to define the word “disparage,” and then tried to argue for a more exacting definition of this undefined term. 545 N.E.2d at 1159. The court held that “[d]isparage means, among other things, 'to lower in rank and estimation by actions or words,' or 'to speak slightingly of,'” and refused to accept the insurer's interpretation that the “language refers to the torts of product disparagement and disparagement of property.” Id. A number of other courts have followed Boston Symphony and rejected insurers' efforts to draw a bright-line rule predicating coverage on whether the underlying complaint has pled the elements of the tort of disparagement. See, e.g., City of Cape May v. St. Paul Fire & Marine Ins. Co. , 524 A.2d 882, 883-86 (N.J. Super. Ct. 1987) (refusing to limit “coverage to conventional common-law defamation actions, i.e. , libel and slander, alone. The insuring agreement promised more. ' If the insurer intended to cover only libel, slander, and invasion of privacy, it should have stopped there”).

Insurers sometimes deny coverage because they argue that the allegations against the policyholder do not allege that the defendant's advertising even mentions the plaintiff or the plaintiff's products. A number of courts have rejected efforts by insurers' to graft an unwritten requirement onto its policies by predicating coverage for false advertising on whether or not a competitor's products are mentioned by name. See, e.g., Acme United Corp. v. St. Paul Fire & Marine Ins. Co. , 214 Fed. Appx. 596, 599-600 (7th Cir. 2007) (insurer had a duty to defend under the disparagement prong of advertising injury coverage where policyholder overstated certain aspects of its own products, but did not mention underlying plaintiff by name); Pennfield Oil Co. v. Am. Feed Indus. Ins. Co. Risk Retention Group, Inc., No. 8:05 CV315, 2007 WL 1290138 (D. Neb. March 12, 2007); Liberty Mutual Ins. Co. v. OSI Indus., Inc. , 831 N.E.2d 192, 199 (Ind. App. 2005).

Coverage for Infringing upon Another's Slogan

In a Touch of Class Imps., Ltd. v. Aetna Cas. and Sur. Co. , 901 F. Supp. 175, 176 (S.D.N.Y. 1995), the insured was sued by another company that also used “Touch of Class” in the name of its business. Touch of Class sought coverage, and argued that its use of the name “A Touch of Class Imports” constituted a “slogan” under the definition of Advertising Injury contained in the policy. Id. The court held that a slogan is “any word or combination of words that acts as an attention-getting device,” and thus found that “A Touch of Class” constitutes a slogan because the insured used its name as an “attention-getting device for its jewelry.” Id. at 177. Numerous courts have defined “slogan” in substantially the same way as the court did in A Touch of Class, and required insurers to defend cases where a party is alleging that a business competitor is infringing on its right by using a comparable word or group of words. See, e.g., P.J. Noyes Co. v. Am. Motorists Ins. Co. , 855 F. Supp. 492, 493, 494-95 (D.N.H. 1994); Ross v. Briggs & Morgan , 520 N.W.2d 432, 436 (Minn. App. 1994), rev'd on other grounds , 540 N.W.2d 843 (Minn. 1995).

As demonstrated above, several scenarios exist where, depending on the policy language and the allegations of the underlying claims, false advertising claims are covered under advertising injury. Advertising injury coverage for false advertising may also be available under the enumerated offense of infringing upon another's copyright and trade dress. Therefore, defendants in false advertising cases have a persuasive argument for insurance coverage, and virtually every such case should be tendered to insurers.

Insurance Policy Exclusions: Do Any Apply?

CGL policies typically contain several exclusions for advertising injury. These exclusions appear all-encompassing on the surface, but the insurer bears the burden of proving that the exclusion applies, and they are generally interpreted narrowly by the courts. Some exclusions that are asserted by insurers in false advertising cases are discussed below.

The Nonconformity Exclusion

The “nonconformity” exclusion precludes coverage for the “wrong description of the price or authenticity of any goods or services, or the failure of any goods or services to conform with the standards of quality or performance.” As explained below, in most cases, neither the authenticity nor the conformance clause eliminates coverage for false advertising.

“Authenticity” in the context of the nonconformity exclusion refers to the origin of the goods, and not their quality or content. See Flodine v. State Farm Ins. Co. , No. 99 C 7466, 2001 WL 204786, at *12 (N.D. Ill. March 1, 2001) (“Though ' designations of authenticity can be indicators of quality (in the sense of excellence) to consumers, they are primarily concerned with identifying the source or origin of goods, not how well the goods will perform.). The “authenticity” component of the nonconformity exclusion does not apply because most false advertising complaints are bereft of allegations regarding the origin of defendant's products.

Exclusion for “quality or performance” has been interpreted to bar “coverage for claims arising from the failure of the insured's products to perform as well as advertised.” Flodine, 2001 WL 204786, at *12. But, most false advertising cases are not about product performance; rather, the complaints allege that defendant's advertising and marketing take advantage of marketing efforts undertaken by another company or are misleading. Courts have consistently held that when a policyholder's advertising is alleged to exploit the identity, goodwill or marketing efforts of a competitor, but there is no allegation that the product itself is substandard or non-performing, then the exclusionary language for “quality or performance” does not apply. See, e.g., Edwards Theater Co. v. United Nat'l Ins. Co. , 126 Fed. Appx. 831 (9th Cir. 2005) (nonconformity exclusion did not apply where policyholder was accused of a “pattern of deceptive advertising” harming the underlying plaintiff's reputation and goodwill, but the quality of the goods sold by the policyholder were irrelevant to the claim); Pennfield Oil, 2007 WL 1290138, at *8 (refusing to apply nonconformity exclusion, where policyholder allegedly falsely advertised that its product had FDA approval, which implicitly disparaged competitor and caused competitor to lose profits and goodwill, but there was no allegation that the policyholder's product itself failed to “conform with its advertised quality or performance”); E.piphany, 590 F. Supp. 2d at 1248 n.5; DecisionOne Corp. v. ITT Hartford Ins. Group , 942 F. Supp. 1038, 1042-43 (E.D. Pa. 1996); Elcom Techs., Inc. v. Hartford Ins. Co. of the Midwest , 991 F. Supp. 1294, 1298 (D. Utah 1997).

The few cases where the court found that the exclusion for “quality or performance” applied highlight the distinction between allegedly misleading and harmful advertising, as opposed to a low quality or non-performing product. In Harleysville Mutual Ins. Co. v. Buzz Off Insect Shield, LLC, No. 272A08, 2010 WL 1492136, at *18 (N.C. Sup. Ct. April 25, 2010), the court found that the exclusion applied because the underlying complaint alleged that the policyholders' explicit and affirmative statements about its own products were demonstrably false. Again, in Staff Pro, Inc. v. National Union Fire Ins. Co., No. B183167, 2006 WL 1828022, at *7 (Cal. App. Ct. July 5, 2006), the court found that the exclusion applied where a security guard service advertised that its guards were licensed and were well trained but, in fact, they were not licensed and were barely trained at all.

The Antitrust Exclusion

Insurers often attempt to lift phrases like “unfair competition” and “deceptive trade practices” from “Antitrust Exclusion” or “Price Fixing” exclusions to contend that these phrases exclude coverage for false advertising claims. These phrases are not defined anywhere in the policies, and in the absence of a definition, these phrases have a well-established connotation in the antitrust context that refers to the regulation of anticompetitive practices under the Federal Trade Commission Act and not false advertising under the Lanham Act.

In Beyer v. Heritage Realty, Inc. , 251 F.3d 1155, 1157 (7th Cir. 2001), the insurer asserted that the “Price Fixing” exclusion precluded coverage for violation of the Real Estate Settlement Procedures Act, because the violation was a “deceptive trade practice,” a term which was embedded in the “Price Fixing” exclusion. The “Price Fixing” exclusion precluded coverage for “loss that results from any violation of any state or federal antitrust, price fixing, restraint of trade or deceptive trade practice law, rule or regulation ' .” Id. at 1157. The Seventh Circuit, however, found that the exclusion did not bar coverage because the broader reading of “deceptive trade practices” was inappropriate when “embedded in a clause dealing with antitrust issues.” Id. at 1158. A number of other courts have similarly limited the antitrust exclusion to antitrust claims. See, e.g., Integra Telecom, Inc. v. Twin City Fire Insurance Company, No. 08-906-AA, 2010 WL 1753210 (D. Or. April 29, 2010) (refusing to apply the exclusion in the broad manner advocated by the insurer because it was ambiguous as to whether or not the phrase “unfair trade practices” is limited to the antitrust context or may be read more expansively to exclude any claim that can be described as “unfair trade practice”); Continental Casualty Co. v.. Multiservice Corp., No. 06-2256-CM, 2009 WL 1788422 (D. Kan. June 23, 2009) (limiting the antitrust exclusion to antitrust claims, and refusing to apply it to tortious interference claim, even though insurer argued that the tortious interference claim arose from the same alleged conduct as the antitrust claim).

Richard Milone is a partner and Mahmood Ahmad is an associate in Kelley Drye & Warren LLP's Litigation and Insurance Recovery practice group, which represents commercial policyholders in disputes with insurers. They can be contacted at [email protected] and [email protected].