Disparagement By Implication: Does an Insurer Owe a Duty to Defend?

General commercial liability policies often require an insurer to provide a defense for its insured against a claim that the insured's advertisements disparaged another company's products. An open issue is to what extent an insurer owes a duty to defend based on allegations of disparagement by implication. This situation arises most often when a competitor's product is not mentioned by name in the insured's advertising, but a negative reference is implied.

Two conflicting California appellate court decisions issued this year highlight the difficulty of determining when an insurer owes a duty to defend disparagement by implication claims. This article discusses the two divergent California decisions, as well as fact patterns that courts have generally agreed are (and are not) implied disparagement claims triggering an insurer's duty to defend.

Courts Disagree Whether Steep Price Reduction Constitutes Disparagement

In Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc., 207 Cal. App. 4th 969 (2012), a retailer offered a clothing manufacturer's products for sale at severely discounted prices. The clothing manufacturer asserted claims in various lawsuits against the retailer alleging that the sale of the manufacturer's premium brand clothing at severe discounts suggested to consumers that the clothes were of inferior quality. The clothing manufacturer's expert opined as follows:

Decreasing the price of certain premium or luxury goods (like People's Liberation brand products) decreases consumers' preference for buying them because they are no longer perceived as exclusive/high status products. ' [A] retailer's price reduction disparages the product's 'worth' ' in terms of reputation, panache, and other modalities of chic ' in the eyes of both the market, at large, and potential purchasers, in specific.

The retailer tendered the underlying lawsuits to Travelers for a defense. The retailer's liability policies provided coverage for claims alleging injury out of oral, written or electronic publication of material that disparages a person's or organization's goods, products or services, provided that a claim is made or suit is brought by the person or organization whose goods, products or services have allegedly been disparaged. Travelers declined to defend or indemnify the retailer on the ground that “the reduction of a product's price is not ' a disparagement of that product.”

Travelers filed a declaratory relief action, seeking a determination that it owed no duty to defend or indemnify the retailer. The trial court granted Travelers' summary judgment motion. The critical question on appeal was whether the clothing manufacturer's claims against the retailer constituted allegations that the retailer disparaged the manufacturer's goods within the meaning of the retailer's coverage under Travelers' policies.

The appellate court began its analysis by stating that, under California law, a liability insurer's duty to defend is broader than its duty to indemnify. A liability insurer's duty to defend arises when a suit against its insured seeks damages that are potentially within the policy's coverage. As such, an insurer may owe a duty to defend even if a trier of fact might ultimately determine that the policy does not entitle the insured to indemnity for the claims against it.

With respect to the fact pattern at issue, the appellate court stated that “[t]he underlying claims may trigger a duty to defend if the conduct for which the policies provide coverage is charged by implication, as well as by direct accusation.” The appellate court then held that Travelers was obligated to provide the retailer with a defense because it could not “rule out the possibility that [the manufacturer's] pleadings could be understood to charge that the dramatic discounts at which the People's Liberation products were being sold communicated to potential customers the implication ' false, according to [the manufacturer] ' that the products were not (or that the [retailer] did not believe them to be) premium, high-end goods.”

In Hartford Casualty Insurance Co. v. Swift Distribution, Inc., 2012 WL 5306248 (Cal. Ct. App. Oct. 29, 2012), a different division of the same appellate court disagreed with the Charlotte Russe court's reasoning. In Swift Distribution, the underlying plaintiff (Dahl), who manufactured and sold the “Multi-Cart” equipment transporter, sued the insured (Ultimate) for patent and trademark infringement, unfair competition, dilution of a famous mark and misleading advertising, arising from Ultimate's sale of a similar product, the “Ulti-Cart.” Dahl alleged, among other things, that Ultimate marketed a knock-off of Dahl's Multi-Cart, and by dropping the “M” from Multi-Cart, adopted a nearly identical name for its cart that created a likelihood of confusion with Dahl's Multi-Cart trademark. Dahl also alleged that Ultimate's use of a near-identical mark was detrimental to Dahl's trade reputation and goodwill.

Ultimate made demands upon Hartford for a defense with respect to the underlying action. The Hartford policy provided coverage for injury arising out of oral, written or electronic publication of material that disparages a person's or organization's goods, products or services. Hartford took the position that it had no obligation to defend or indemnify Ultimate because, in its advertisements for the Ulti-Cart, Ultimate did not name the Multi-Cart, Dahl or any other products other than the Ulti-Cart. Hartford later filed a complaint for declaratory relief, and the trial court granted Hartford's summary judgment motion, holding that Hartford had no duty to defend or indemnify Ultimate ' a ruling which the appellate court affirmed.

In reaching its decision, the Swift Distribution appellate court discussed at length the same appellate court's earlier decision in Charlotte Russe. After distinguishing Charlotte Russe on its facts because Ultimate's advertisements referred only to its own product and not to Dahl's product, the Swift Distribution appellate court stated that it disagreed with the theory of disparagement recognized in Charlotte Russe. Specifically, the appellate court held that it failed to see how a retailer's reduction in price of a clothing manufacturer's product ' even a steep reduction in price ' constitutes disparagement, which involves “an injurious falsehood directed at the organization or products, goods, or services of another.” Noting that sellers reduce prices for a variety of entirely legitimate reasons, such as competition and surplus inventory, the appellate court held that “reducing the price of goods, without more, cannot constitute a disparagement.” The appellate court highlighted the difference between allegedly causing injury to a product's reputation and actually disparaging that product: “[a] price reduction may allegedly be injurious to the brand or its high-end, high-quality reputation, but it is not false and is thus not disparagement.”

Despite its criticism of Charlotte Russe's theory of disparagement, the Swift Distribution court acknowledged that, although disparagement requires a specific reference to the derogated product, such reference may be conveyed by “reasonable implication” rather than “express mention.” Thus, while Swift Distribution generally accepted the possibility that claims of disparagement by implication could trigger an insurer's duty to defend, it strongly rebuffed Charlotte Russe's theory of what an advertisement could reasonably be considered to imply about a product.

The conflict between Charlotte Russe and Swift Distribution reveals the slippery line between an advertisement that harms a product's reputation without actually saying anything derogatory about that product, and an advertisement that causes harm because it contains, by reasonable implication, derogatory matter. While determining what an advertisement “reasonably implies” may be difficult, courts in California and elsewhere have reached some areas of consensus regarding what allegations are, and are not, implied product disparagement triggering an insurer's duty to defend.

Imitation of Another's Product Does Not Constitute Disparagement

In Swift Distribution, Dahl alleged that even though Ultimate's advertisements only referred to Ultimate's product, the Ulti-Cart, Ultimate was attempting to falsely imply an affiliation with Dahl's product, the Multi-Cart. The California appellate court did not consider Dahl's claim of alleged wrongful imitation of the Multi-Cart to be synonymous with disparagement of the Multi-Cart. Other courts have generally reached the same conclusion, holding that allegations of imitation alone are not claims of disparagement triggering an insurer's duty to defend.

For example, in Jarrow Formulas, Inc. v. Steadfast Insurance Co., 2011 WL 1399805 (C.D. Cal. Apr. 12, 2011), Bio Minerals (“BM”), the manufacturer of “BioSil,” a silicon compound intended for use as a food supplement, sued Jarrow Formulas (“Jarrow”) for false descriptions and representations, breach of contract, trade dress infringement, federal unfair competition and false designation of origin and interference with economic relationship. Jarrow, which at one time had been licensed to sell BioSil in the United States, had begun advertising, promoting and selling its own version of a liquid silicon product for human consumption called “JarroSil.” BM alleged that Jarrow misrepresented the nature, characteristics and qualities of JarroSil in order to confuse and deceive consumers into believing JarroSil is affiliated with BioSil. Jarrow's insurance policy provided coverage for “advertising injury” arising from “[o]ral or written publication, in any manner, of material that ' disparages a person's or organization's goods, products or services ' ”
The court determined that Jarrow's alleged false advertisements did not state a product disparagement claim because Jarrow “neither boasted of its superiority over other brands of bioavailable silicon, nor referred to BM or BioSil by name.”

Similarly, in Bullpen Distribution, Inc. v. Sentinel Insurance Co., Ltd., 2012 WL 1980910 (N.D. Cal. June 1, 2012), A.Y. International (“AYI”) sued a newly formed company, Bullpen Distribution, Inc. (“Bullpen”), its president John Brill and another individual for misappropriation of trade secrets, breach of fiduciary duty, intentional interference with prospective economic advantage, conversion, untrue and misleading advertising, unfair competition and other causes of action. The two individual defendants were former AYI employees. The complaint alleged that Bullpen's website made false and misleading statements by which AYI's former employees sought to take credit for AYI's business practices as if they were their own, including touting relationships that AYI (not Bullpen) had built with vendors and customers over 15 years. Bullpen and its president tendered AYI's complaint to their insurer for defense. The policy provided coverage for “[o]ral, written or electronic publication of material that ' disparages a person's or organization's goods, products or services.” The court held that the insurer had no duty to defend Bullpen and its president in the underlying action because their allegedly false advertising did not refer to AYI or its products or services or represent or imply that Bullpen: 1) was the only producer of certain products or services; 2) offered services superior to those of its competitors; or 3) “promoted its inferior products as its competitors' superior products.” In light of the above, the court ruled that Bullpen and its president did not meet their burden of showing that there was a potential for coverage under the policy.

As Jarrow and Bullpen demonstrate, imitating another's product or claiming an affiliation with another's accomplishments and reputation are, on their own, insufficient to constitute disparagement. However, Michael Taylor Designs, Inc. v. Travelers Property and Casualty Co. of America, 761 F. Supp. 2d 904 (N.D. Cal. 2011), demonstrates how certain additional allegations may transform imitation into disparagement triggering an insurer's duty to defend.

In Michael Taylor, a furniture manufacturer sued Michael Taylor Designs (“MTD”) for breach of contract and violation of the Lanham Act. The furniture manufacturer's complaint alleged that MTD distributed promotional materials containing photographs of the manufacturer's furniture, but displayed cheap, synthetic knock-offs of the manufacturer's products in its showroom, which misled and confused customers about the origin of those products and diluted and tarnished the manufacturer's trade dress. MTD sued its insurer seeking a declaration that the insurer had a duty to defend the trade dress infringement claim in the original complaint. The court held that the manufacturer's complaint created a possibility of a covered claim for disparagement by alleging that MTD advertised the manufacturer's products, but “steered” customers to inferior imitation products. “The term 'steered' fairly implied some further statements, presumably oral, were being made by [the insured's] personnel to convey the information that the imitation products were the [plaintiff's] furniture depicted in the brochures.”

The importance of this additional allegation is demonstrated by comparing Michael Taylor with Tower Insurance Co. of New York v. Capurro Enterprises Inc., 2012 WL 1109998 (N.D. Cal. April 2, 2012). There, Certa ProPainters (“Certa Pro”), a painting franchisor, sued Capurro Enterprises, Inc. and its president Nicholas Capurro, alleging federal and common law trademark claims, unfair competition, breach of contract, and unjust enrichment. Capurro ran a Certa Pro franchise until he terminated the franchise agreement. According to Certa Pro, Capurro then marketed his new painting business by referring to it as a “former Certa Pro franchisee,” using the e-mail address “[email protected],” and using a greeting for his business telephone that stated that his new business was “formerly known as Certa Pro Painters.” Capurro tendered Certa Pro's complaint to Tower Insurance Company of New York (“Tower”), which refused to provide a defense and filed an action for a declaratory judgment. The court held, on a motion for summary judgment, that the allegations in the complaint were not potentially covered disparagement allegations triggering Tower's duty to defend. The court distinguished Michael Taylor, stating that “there were no allegations suggesting Capurro would paint the house of a customer under the guise of a current Certa Pro painter and thereby damage the reputation of Certa Pro.”

In sum, while imitation alone is not disparagement, it can become disparagement if there is an allegation that the defendant went beyond imitation, and actually represented that its inferior products were those of the plaintiff, thereby damaging the reputation of plaintiff's products.

Puffery About One's Own Product Is Not Disparagement

Courts have also been clear that claims about the quality and characteristics of one's own product do not constitute product disparagement, even where those claims are allegedly false and thereby give the seller an advantage over its competitors.

For example, in Total Call International, Inc. v. Peerless Insurance Co., 181 Cal. App. 4th 161 (2010), TCI, a phone card provider, filed suit against its insurer for failing to defend TCI in an underlying action. In the underlying action, TCI was sued by a competitor who alleged that TCI undercut the phone card market by promising its consumers more minutes on TCI phone cards than they actually received. The competitor alleged that TCI's conduct took a significant share of the competitor's business, and destroyed the brand loyalty built up by the competitor. TCI's insurance company denied a defense, arguing that, among other things, the underlying allegations were outside the policy's coverage for advertising injury. The appellate court agreed because TCI's advertisements did not specifically reference its competitor's products.

In a similar case, Dollar Phone Corp. v. St. Paul Fire and Marine Insurance Co., 2012 WL 1077448 (E.D.N.Y. March 9, 2012), IDT sued, among others, Dollar Phone alleging that Dollar Phone had failed to provide customers with the number of minutes on calling cards promised by advertisements, and that by falsely promising more minutes per dollar than IDT, Dollar Phone implied that IDT's calling cards were overpriced. After Dollar Phone's insurer refused to defend the action, Dollar Phone filed suit against the insurer. On cross-motions for summary judgment, the magistrate judge found in favor of the insurer, and the magistrate's report was adopted in its entirety by the district court. The magistrate judge concluded that, under New York law, coverage for product disparagement in an insurance policy requires either a specific reference to a competitor's product or a claim that one's own product is superior to competitors' products. Since Dollar Phone's advertisements were alleged only to bolster Dollar Phone's own reputation, a consumer would have to see both Dollar Phone's and IDT's advertisements in order to conclude that Dollar Phone's cards were superior. Therefore, Dollar Phone's alleged advertisements could not constitute covered product disparagement under Dollar Phone's insurance policy, and the insurer had no duty to defend IDT's action.

As Total Call and Dollar Phone demonstrate, an insurer has no duty to defend allegations involving false advertising solely about the quality and characteristics of a company's own product, even where those advertising claims may be easily compared with a competitor's advertising claims, to the detriment of the competitor.

Claims of Superiority Can Constitute Disparagement

While claims solely about the quality of one's own product do not imply disparagement of other products, claims about the superior quality of one's product may be considered disparaging to competitors' products. Courts generally conclude that claiming that one product is superior directly implies that competitor products are inferior.

For example, in E.piphany, Inc. v. St. Paul Fire & Marine Insurance Co., 590 F. Supp. 2d 1244 (N.D. Cal. 2008), Sigma sued E.piphany, alleging that E.piphany falsely advertised that it was the “only” producer of “all Java” and “fully J2EE” software solutions when, in actuality, E.piphany's products were not “all Java” or “fully J2EE.” Sigma also alleged that it suffered pecuniary and reputational damage as a result of E.piphany's purported misrepresentations. E.piphany sued its insurer seeking a declaration that the insurer had a duty to defend. The court found that E.piphany's advertisements necessarily suggested that its competitors' software did not have the same capabilities: “The gravamen of the Underlying Complaint, therefore, is that [E.piphany] made false claims about the superiority of its own products, which clearly and necessarily implied the inferiority of Sigma's competing products, resulting in damages to Sigma.” Accordingly, the court held that the underlying complaint contained allegations of disparagement potentially covered by the insurer's policy and thus triggered the insurer's duty to defend.

Similarly, in Acme United Corp. v. St. Paul Fire & Marine Ins. Co., 214 Fed. Appx. 596 (7th Cir. 2007), Fiskars sued Acme, which tendered the lawsuit to its insurer. Acme subsequently sued the insurer after it denied a defense. Fiskars claimed that Acme falsely advertised that its scissors were bonded with titanium, making them superior to stainless steel scissors. The district court awarded summary judgment to the insurer. The Court of Appeals reversed, finding that, under Wisconsin law, Acme's claims amounted to disparagement and were therefore potentially covered under the insurer's advertising injury provision. Although the allegations did not specifically name Fiskars' products, the court considered it sufficient that Acme's advertisements were allegedly directed at Fiskars' products, creating a false comparison between Acme's superior titanium bonded scissors and Fiskars' allegedly inferior steel scissors.

Finally, in Knoll Pharmaceutical Co. v. Automobile Insurance Co. of Hartford, 152 F. Supp. 2d 1026 (N.D. Ill. 2001), a number of consumer and third-party payer lawsuits were filed against Knoll over the sale and marketing of Synthroid. The master complaints in the two consolidated actions alleged that Knoll and its predecessor had marketed Synthroid as superior to other drugs by claiming that there were no bio-equivalent competing products. Knoll's insurers denied a defense and filed an action for a declaratory judgment. On cross-motions for judgment on the pleadings, the court held that the insurers had a duty to defend Knoll because the policies covered injuries arising out of disparagement of another's person or products. Knoll's alleged advertisements amounted to disparagement when they claimed Synthroid was superior to other drugs.

Claiming a Right to Sell a Product Is Not Disparagement Unless the Seller Claims That the Right Is Exclusive

Another area of agreement exists regarding alleged claims of a right to manufacture or sell a product, which are not considered disparaging. In AgraKey Solutions, LLC v. Mid-Continent Casualty Co., 2012 WL 893162 (D. Idaho March 14, 2012), AgraKey and its founder, John Reitsma, tendered defense of an arbitration action brought by BioMagic to their insurer. The insurer denied a defense, and AgraKey and Reitsma filed suit against the insurer. In the arbitration, BioMagic claimed that it had granted a license to AgraKey to manufacture and sell BioMagic's proprietary bio-stimulant for agricultural applications, but that AgraKey had sold the product outside of agricultural applications, and then continued to sell it after BioMagic had terminated the license. In granting summary judgment for the insurer, the court held that BioMagic's suit did not fall under the policy's coverage for disparagement. Although no Idaho court had accepted a disparagement-by-implication theory, the court predicted Idaho courts would recognize the theory. Nevertheless, the court determined that BioMagic's allegations that AgraKey had wrongly represented that it had the rights to BioMagic's product did not amount to disparagement.

While falsely claiming the right to sell a product is not in itself disparaging, claiming an exclusive right to a product can be disparaging because it implies that competitors do not have the right to manufacture or sell that product.

For example, in Burgett, Inc. v. American Zurich Insurance Co., 830 F. Supp. 2d 953 (E.D. Cal. 2011), Burgett entered into a licensing agreement with Samick so that Samick could advertise and sell pianos bearing the SOHMER trademark. Persis, which alleged that it owned the SOHMER trademark, sued Burgett for representing to Samick that it had valid and enforceable rights to the SOHMER trademark. Burgett's insurer, Zurich, declined to defend Burgett on the ground that, among other reasons, the underlying allegations did not assert a claim for disparagement. The court disagreed, holding that the underlying complaint made allegations that could potentially establish a claim for disparagement by implication. The Burgett court found that because Burgett represented to Samick that it was the only holder of the SOHMER trademark, it implied to the marketplace that Burgett had the superior right to use the SOHMER trademark, and thus, by implication, that Persis did not have the rights to the SOHMER trademark.

Similarly, in Liberty Mutual Insurance Co. v. OSI Industries, 831 N.E.2d 192 (Ind. App. Ct. 2005), Thermodyne, the developer and manufacturer of the “Thermodyne Oven,” sued OSI (a meat processor) and Beltec over the manufacture and use of Beltec's “Temperfect Oven.” OSI and Beltec brought suit against their insurer for failure to defend the lawsuit. After the trial court granted OSI's and Beltec's motion for summary judgment, the insurer appealed. The Indiana appellate court affirmed the trial court's ruling, holding that the insurer had a duty to defend because Thermodyne's
allegations amounted to disparagement covered under the relevant insurance policies. According to Thermodyne, both ovens utilized flat, solid aluminum plate shelving, but OSI and Beltec had claimed “absolute ownership” in that form of oven shelving. According to the court, the claim of absolute ownership amounted to disparagement because it created confusion as to which company had the right to the unique technology.

Conclusion

In certain circumstances, commercial liability policies covering claims of product disparagement may obligate insurers to defend the insured where the insured's allegedly disparaging statements do not expressly mention another's products, but imply disparagement of those products. A recent sharp disagreement in the California appellate court over the extent of coverage for implied disparagement highlights the potential for disagreement over this theory of insurance coverage. Nevertheless, in reviewing the case law, courts have reached some measure of agreement on what allegations of implied disparagement are sufficient (or insufficient) to trigger an insurer's duty to defend.

Chet A. Kronenberg, a member of this newsletter's Board of Editors, is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP. Colin H. Rolfs is a litigation associate in the Los Angeles office of the firm.

General commercial liability policies often require an insurer to provide a defense for its insured against a claim that the insured's advertisements disparaged another company's products. An open issue is to what extent an insurer owes a duty to defend based on allegations of disparagement by implication. This situation arises most often when a competitor's product is not mentioned by name in the insured's advertising, but a negative reference is implied.

Two conflicting California appellate court decisions issued this year highlight the difficulty of determining when an insurer owes a duty to defend disparagement by implication claims. This article discusses the two divergent California decisions, as well as fact patterns that courts have generally agreed are (and are not) implied disparagement claims triggering an insurer's duty to defend.

Courts Disagree Whether Steep Price Reduction Constitutes Disparagement

In Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc. , 207 Cal. App. 4th 969 (2012), a retailer offered a clothing manufacturer's products for sale at severely discounted prices. The clothing manufacturer asserted claims in various lawsuits against the retailer alleging that the sale of the manufacturer's premium brand clothing at severe discounts suggested to consumers that the clothes were of inferior quality. The clothing manufacturer's expert opined as follows:

Decreasing the price of certain premium or luxury goods (like People's Liberation brand products) decreases consumers' preference for buying them because they are no longer perceived as exclusive/high status products. ' [A] retailer's price reduction disparages the product's 'worth' ' in terms of reputation, panache, and other modalities of chic ' in the eyes of both the market, at large, and potential purchasers, in specific.

The retailer tendered the underlying lawsuits to Travelers for a defense. The retailer's liability policies provided coverage for claims alleging injury out of oral, written or electronic publication of material that disparages a person's or organization's goods, products or services, provided that a claim is made or suit is brought by the person or organization whose goods, products or services have allegedly been disparaged. Travelers declined to defend or indemnify the retailer on the ground that “the reduction of a product's price is not ' a disparagement of that product.”

Travelers filed a declaratory relief action, seeking a determination that it owed no duty to defend or indemnify the retailer. The trial court granted Travelers' summary judgment motion. The critical question on appeal was whether the clothing manufacturer's claims against the retailer constituted allegations that the retailer disparaged the manufacturer's goods within the meaning of the retailer's coverage under Travelers' policies.

The appellate court began its analysis by stating that, under California law, a liability insurer's duty to defend is broader than its duty to indemnify. A liability insurer's duty to defend arises when a suit against its insured seeks damages that are potentially within the policy's coverage. As such, an insurer may owe a duty to defend even if a trier of fact might ultimately determine that the policy does not entitle the insured to indemnity for the claims against it.

With respect to the fact pattern at issue, the appellate court stated that “[t]he underlying claims may trigger a duty to defend if the conduct for which the policies provide coverage is charged by implication, as well as by direct accusation.” The appellate court then held that Travelers was obligated to provide the retailer with a defense because it could not “rule out the possibility that [the manufacturer's] pleadings could be understood to charge that the dramatic discounts at which the People's Liberation products were being sold communicated to potential customers the implication ' false, according to [the manufacturer] ' that the products were not (or that the [retailer] did not believe them to be) premium, high-end goods.”

In Hartford Casualty Insurance Co. v. Swift Distribution, Inc., 2012 WL 5306248 (Cal. Ct. App. Oct. 29, 2012), a different division of the same appellate court disagreed with the Charlotte Russe court's reasoning. In Swift Distribution, the underlying plaintiff (Dahl), who manufactured and sold the “Multi-Cart” equipment transporter, sued the insured (Ultimate) for patent and trademark infringement, unfair competition, dilution of a famous mark and misleading advertising, arising from Ultimate's sale of a similar product, the “Ulti-Cart.” Dahl alleged, among other things, that Ultimate marketed a knock-off of Dahl's Multi-Cart, and by dropping the “M” from Multi-Cart, adopted a nearly identical name for its cart that created a likelihood of confusion with Dahl's Multi-Cart trademark. Dahl also alleged that Ultimate's use of a near-identical mark was detrimental to Dahl's trade reputation and goodwill.

Ultimate made demands upon Hartford for a defense with respect to the underlying action. The Hartford policy provided coverage for injury arising out of oral, written or electronic publication of material that disparages a person's or organization's goods, products or services. Hartford took the position that it had no obligation to defend or indemnify Ultimate because, in its advertisements for the Ulti-Cart, Ultimate did not name the Multi-Cart, Dahl or any other products other than the Ulti-Cart. Hartford later filed a complaint for declaratory relief, and the trial court granted Hartford's summary judgment motion, holding that Hartford had no duty to defend or indemnify Ultimate ' a ruling which the appellate court affirmed.

In reaching its decision, the Swift Distribution appellate court discussed at length the same appellate court's earlier decision in Charlotte Russe. After distinguishing Charlotte Russe on its facts because Ultimate's advertisements referred only to its own product and not to Dahl's product, the Swift Distribution appellate court stated that it disagreed with the theory of disparagement recognized in Charlotte Russe. Specifically, the appellate court held that it failed to see how a retailer's reduction in price of a clothing manufacturer's product ' even a steep reduction in price ' constitutes disparagement, which involves “an injurious falsehood directed at the organization or products, goods, or services of another.” Noting that sellers reduce prices for a variety of entirely legitimate reasons, such as competition and surplus inventory, the appellate court held that “reducing the price of goods, without more, cannot constitute a disparagement.” The appellate court highlighted the difference between allegedly causing injury to a product's reputation and actually disparaging that product: “[a] price reduction may allegedly be injurious to the brand or its high-end, high-quality reputation, but it is not false and is thus not disparagement.”

Despite its criticism of Charlotte Russe's theory of disparagement, the Swift Distribution court acknowledged that, although disparagement requires a specific reference to the derogated product, such reference may be conveyed by “reasonable implication” rather than “express mention.” Thus, while Swift Distribution generally accepted the possibility that claims of disparagement by implication could trigger an insurer's duty to defend, it strongly rebuffed Charlotte Russe's theory of what an advertisement could reasonably be considered to imply about a product.

The conflict between Charlotte Russe and Swift Distribution reveals the slippery line between an advertisement that harms a product's reputation without actually saying anything derogatory about that product, and an advertisement that causes harm because it contains, by reasonable implication, derogatory matter. While determining what an advertisement “reasonably implies” may be difficult, courts in California and elsewhere have reached some areas of consensus regarding what allegations are, and are not, implied product disparagement triggering an insurer's duty to defend.

Imitation of Another's Product Does Not Constitute Disparagement

In Swift Distribution, Dahl alleged that even though Ultimate's advertisements only referred to Ultimate's product, the Ulti-Cart, Ultimate was attempting to falsely imply an affiliation with Dahl's product, the Multi-Cart. The California appellate court did not consider Dahl's claim of alleged wrongful imitation of the Multi-Cart to be synonymous with disparagement of the Multi-Cart. Other courts have generally reached the same conclusion, holding that allegations of imitation alone are not claims of disparagement triggering an insurer's duty to defend.

For example, in Jarrow Formulas, Inc. v. Steadfast Insurance Co., 2011 WL 1399805 (C.D. Cal. Apr. 12, 2011), Bio Minerals (“BM”), the manufacturer of “BioSil,” a silicon compound intended for use as a food supplement, sued Jarrow Formulas (“Jarrow”) for false descriptions and representations, breach of contract, trade dress infringement, federal unfair competition and false designation of origin and interference with economic relationship. Jarrow, which at one time had been licensed to sell BioSil in the United States, had begun advertising, promoting and selling its own version of a liquid silicon product for human consumption called “JarroSil.” BM alleged that Jarrow misrepresented the nature, characteristics and qualities of JarroSil in order to confuse and deceive consumers into believing JarroSil is affiliated with BioSil. Jarrow's insurance policy provided coverage for “advertising injury” arising from “[o]ral or written publication, in any manner, of material that ' disparages a person's or organization's goods, products or services ' ”
The court determined that Jarrow's alleged false advertisements did not state a product disparagement claim because Jarrow “neither boasted of its superiority over other brands of bioavailable silicon, nor referred to BM or BioSil by name.”

Similarly, in Bullpen Distribution, Inc. v. Sentinel Insurance Co., Ltd., 2012 WL 1980910 (N.D. Cal. June 1, 2012), A.Y. International (“AYI”) sued a newly formed company, Bullpen Distribution, Inc. (“Bullpen”), its president John Brill and another individual for misappropriation of trade secrets, breach of fiduciary duty, intentional interference with prospective economic advantage, conversion, untrue and misleading advertising, unfair competition and other causes of action. The two individual defendants were former AYI employees. The complaint alleged that Bullpen's website made false and misleading statements by which AYI's former employees sought to take credit for AYI's business practices as if they were their own, including touting relationships that AYI (not Bullpen) had built with vendors and customers over 15 years. Bullpen and its president tendered AYI's complaint to their insurer for defense. The policy provided coverage for “[o]ral, written or electronic publication of material that ' disparages a person's or organization's goods, products or services.” The court held that the insurer had no duty to defend Bullpen and its president in the underlying action because their allegedly false advertising did not refer to AYI or its products or services or represent or imply that Bullpen: 1) was the only producer of certain products or services; 2) offered services superior to those of its competitors; or 3) “promoted its inferior products as its competitors' superior products.” In light of the above, the court ruled that Bullpen and its president did not meet their burden of showing that there was a potential for coverage under the policy.

As Jarrow and Bullpen demonstrate, imitating another's product or claiming an affiliation with another's accomplishments and reputation are, on their own, insufficient to constitute disparagement. However, Michael Taylor Designs, Inc. v. Travelers Property and Casualty Co. of America , 761 F. Supp. 2d 904 (N.D. Cal. 2011), demonstrates how certain additional allegations may transform imitation into disparagement triggering an insurer's duty to defend.

In Michael Taylor, a furniture manufacturer sued Michael Taylor Designs (“MTD”) for breach of contract and violation of the Lanham Act. The furniture manufacturer's complaint alleged that MTD distributed promotional materials containing photographs of the manufacturer's furniture, but displayed cheap, synthetic knock-offs of the manufacturer's products in its showroom, which misled and confused customers about the origin of those products and diluted and tarnished the manufacturer's trade dress. MTD sued its insurer seeking a declaration that the insurer had a duty to defend the trade dress infringement claim in the original complaint. The court held that the manufacturer's complaint created a possibility of a covered claim for disparagement by alleging that MTD advertised the manufacturer's products, but “steered” customers to inferior imitation products. “The term 'steered' fairly implied some further statements, presumably oral, were being made by [the insured's] personnel to convey the information that the imitation products were the [plaintiff's] furniture depicted in the brochures.”

The importance of this additional allegation is demonstrated by comparing Michael Taylor with Tower Insurance Co. of New York v. Capurro Enterprises Inc., 2012 WL 1109998 (N.D. Cal. April 2, 2012). There, Certa ProPainters (“Certa Pro”), a painting franchisor, sued Capurro Enterprises, Inc. and its president Nicholas Capurro, alleging federal and common law trademark claims, unfair competition, breach of contract, and unjust enrichment. Capurro ran a Certa Pro franchise until he terminated the franchise agreement. According to Certa Pro, Capurro then marketed his new painting business by referring to it as a “former Certa Pro franchisee,” using the e-mail address “[email protected],” and using a greeting for his business telephone that stated that his new business was “formerly known as Certa Pro Painters.” Capurro tendered Certa Pro's complaint to Tower Insurance Company of New York (“Tower”), which refused to provide a defense and filed an action for a declaratory judgment. The court held, on a motion for summary judgment, that the allegations in the complaint were not potentially covered disparagement allegations triggering Tower's duty to defend. The court distinguished Michael Taylor, stating that “there were no allegations suggesting Capurro would paint the house of a customer under the guise of a current Certa Pro painter and thereby damage the reputation of Certa Pro.”

In sum, while imitation alone is not disparagement, it can become disparagement if there is an allegation that the defendant went beyond imitation, and actually represented that its inferior products were those of the plaintiff, thereby damaging the reputation of plaintiff's products.

Puffery About One's Own Product Is Not Disparagement

Courts have also been clear that claims about the quality and characteristics of one's own product do not constitute product disparagement, even where those claims are allegedly false and thereby give the seller an advantage over its competitors.

For example, in Total Call International, Inc. v. Peerless Insurance Co. , 181 Cal. App. 4th 161 (2010), TCI, a phone card provider, filed suit against its insurer for failing to defend TCI in an underlying action. In the underlying action, TCI was sued by a competitor who alleged that TCI undercut the phone card market by promising its consumers more minutes on TCI phone cards than they actually received. The competitor alleged that TCI's conduct took a significant share of the competitor's business, and destroyed the brand loyalty built up by the competitor. TCI's insurance company denied a defense, arguing that, among other things, the underlying allegations were outside the policy's coverage for advertising injury. The appellate court agreed because TCI's advertisements did not specifically reference its competitor's products.

In a similar case, Dollar Phone Corp. v. St. Paul Fire and Marine Insurance Co., 2012 WL 1077448 (E.D.N.Y. March 9, 2012), IDT sued, among others, Dollar Phone alleging that Dollar Phone had failed to provide customers with the number of minutes on calling cards promised by advertisements, and that by falsely promising more minutes per dollar than IDT, Dollar Phone implied that IDT's calling cards were overpriced. After Dollar Phone's insurer refused to defend the action, Dollar Phone filed suit against the insurer. On cross-motions for summary judgment, the magistrate judge found in favor of the insurer, and the magistrate's report was adopted in its entirety by the district court. The magistrate judge concluded that, under New York law, coverage for product disparagement in an insurance policy requires either a specific reference to a competitor's product or a claim that one's own product is superior to competitors' products. Since Dollar Phone's advertisements were alleged only to bolster Dollar Phone's own reputation, a consumer would have to see both Dollar Phone's and IDT's advertisements in order to conclude that Dollar Phone's cards were superior. Therefore, Dollar Phone's alleged advertisements could not constitute covered product disparagement under Dollar Phone's insurance policy, and the insurer had no duty to defend IDT's action.

As Total Call and Dollar Phone demonstrate, an insurer has no duty to defend allegations involving false advertising solely about the quality and characteristics of a company's own product, even where those advertising claims may be easily compared with a competitor's advertising claims, to the detriment of the competitor.

Claims of Superiority Can Constitute Disparagement

While claims solely about the quality of one's own product do not imply disparagement of other products, claims about the superior quality of one's product may be considered disparaging to competitors' products. Courts generally conclude that claiming that one product is superior directly implies that competitor products are inferior.

For example, in E.piphany, Inc. v. St. Paul Fire & Marine Insurance Co. , 590 F. Supp. 2d 1244 (N.D. Cal. 2008), Sigma sued E.piphany, alleging that E.piphany falsely advertised that it was the “only” producer of “all Java” and “fully J2EE” software solutions when, in actuality, E.piphany's products were not “all Java” or “fully J2EE.” Sigma also alleged that it suffered pecuniary and reputational damage as a result of E.piphany's purported misrepresentations. E.piphany sued its insurer seeking a declaration that the insurer had a duty to defend. The court found that E.piphany's advertisements necessarily suggested that its competitors' software did not have the same capabilities: “The gravamen of the Underlying Complaint, therefore, is that [E.piphany] made false claims about the superiority of its own products, which clearly and necessarily implied the inferiority of Sigma's competing products, resulting in damages to Sigma.” Accordingly, the court held that the underlying complaint contained allegations of disparagement potentially covered by the insurer's policy and thus triggered the insurer's duty to defend.

Similarly, in Acme United Corp. v. St. Paul Fire & Marine Ins. Co. , 214 Fed. Appx. 596 (7th Cir. 2007), Fiskars sued Acme, which tendered the lawsuit to its insurer. Acme subsequently sued the insurer after it denied a defense. Fiskars claimed that Acme falsely advertised that its scissors were bonded with titanium, making them superior to stainless steel scissors. The district court awarded summary judgment to the insurer. The Court of Appeals reversed, finding that, under Wisconsin law, Acme's claims amounted to disparagement and were therefore potentially covered under the insurer's advertising injury provision. Although the allegations did not specifically name Fiskars' products, the court considered it sufficient that Acme's advertisements were allegedly directed at Fiskars' products, creating a false comparison between Acme's superior titanium bonded scissors and Fiskars' allegedly inferior steel scissors.

Finally, in Knoll Pharmaceutical Co. v. Automobile Insurance Co. of Hartford , 152 F. Supp. 2d 1026 (N.D. Ill. 2001), a number of consumer and third-party payer lawsuits were filed against Knoll over the sale and marketing of Synthroid. The master complaints in the two consolidated actions alleged that Knoll and its predecessor had marketed Synthroid as superior to other drugs by claiming that there were no bio-equivalent competing products. Knoll's insurers denied a defense and filed an action for a declaratory judgment. On cross-motions for judgment on the pleadings, the court held that the insurers had a duty to defend Knoll because the policies covered injuries arising out of disparagement of another's person or products. Knoll's alleged advertisements amounted to disparagement when they claimed Synthroid was superior to other drugs.

Claiming a Right to Sell a Product Is Not Disparagement Unless the Seller Claims That the Right Is Exclusive

Another area of agreement exists regarding alleged claims of a right to manufacture or sell a product, which are not considered disparaging. In AgraKey Solutions, LLC v. Mid-Continent Casualty Co., 2012 WL 893162 (D. Idaho March 14, 2012), AgraKey and its founder, John Reitsma, tendered defense of an arbitration action brought by BioMagic to their insurer. The insurer denied a defense, and AgraKey and Reitsma filed suit against the insurer. In the arbitration, BioMagic claimed that it had granted a license to AgraKey to manufacture and sell BioMagic's proprietary bio-stimulant for agricultural applications, but that AgraKey had sold the product outside of agricultural applications, and then continued to sell it after BioMagic had terminated the license. In granting summary judgment for the insurer, the court held that BioMagic's suit did not fall under the policy's coverage for disparagement. Although no Idaho court had accepted a disparagement-by-implication theory, the court predicted Idaho courts would recognize the theory. Nevertheless, the court determined that BioMagic's allegations that AgraKey had wrongly represented that it had the rights to BioMagic's product did not amount to disparagement.

While falsely claiming the right to sell a product is not in itself disparaging, claiming an exclusive right to a product can be disparaging because it implies that competitors do not have the right to manufacture or sell that product.

For example, in Burgett, Inc. v. American Zurich Insurance Co. , 830 F. Supp. 2d 953 (E.D. Cal. 2011), Burgett entered into a licensing agreement with Samick so that Samick could advertise and sell pianos bearing the SOHMER trademark. Persis, which alleged that it owned the SOHMER trademark, sued Burgett for representing to Samick that it had valid and enforceable rights to the SOHMER trademark. Burgett's insurer, Zurich, declined to defend Burgett on the ground that, among other reasons, the underlying allegations did not assert a claim for disparagement. The court disagreed, holding that the underlying complaint made allegations that could potentially establish a claim for disparagement by implication. The Burgett court found that because Burgett represented to Samick that it was the only holder of the SOHMER trademark, it implied to the marketplace that Burgett had the superior right to use the SOHMER trademark, and thus, by implication, that Persis did not have the rights to the SOHMER trademark.

Similarly, in Liberty Mutual Insurance Co. v. OSI Industries , 831 N.E.2d 192 (Ind. App. Ct. 2005), Thermodyne, the developer and manufacturer of the “Thermodyne Oven,” sued OSI (a meat processor) and Beltec over the manufacture and use of Beltec's “Temperfect Oven.” OSI and Beltec brought suit against their insurer for failure to defend the lawsuit. After the trial court granted OSI's and Beltec's motion for summary judgment, the insurer appealed. The Indiana appellate court affirmed the trial court's ruling, holding that the insurer had a duty to defend because Thermodyne's
allegations amounted to disparagement covered under the relevant insurance policies. According to Thermodyne, both ovens utilized flat, solid aluminum plate shelving, but OSI and Beltec had claimed “absolute ownership” in that form of oven shelving. According to the court, the claim of absolute ownership amounted to disparagement because it created confusion as to which company had the right to the unique technology.

Conclusion

In certain circumstances, commercial liability policies covering claims of product disparagement may obligate insurers to defend the insured where the insured's allegedly disparaging statements do not expressly mention another's products, but imply disparagement of those products. A recent sharp disagreement in the California appellate court over the extent of coverage for implied disparagement highlights the potential for disagreement over this theory of insurance coverage. Nevertheless, in reviewing the case law, courts have reached some measure of agreement on what allegations of implied disparagement are sufficient (or insufficient) to trigger an insurer's duty to defend.

Chet A. Kronenberg, a member of this newsletter's Board of Editors, is a litigation partner in the Los Angeles office of Simpson Thacher & Bartlett LLP. Colin H. Rolfs is a litigation associate in the Los Angeles office of the firm.