Advertising Liability – CA Sup. Ct.: Advertising Liability Limited To Misleading Statements That Clearly Mention And Derogate Another’s Product

The California Supreme Court found that Hartford was not obligated to provide a defense or indemnity to its policyholder for alleged implicit disparagement of a competitor’s products under its advertising liability coverage.

Hartford issued a CGL policy to Ultimate Support Systems (Ultimate) that covered “personal and advertising injury” including claims arising from “[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.” Ultimate was sued in federal district court by Dahl. The suit included allegations of patent and trademark infringement, false designation of origin, and damage to business, reputation, and goodwill. Hartford denied coverage on the ground that the suit did not allege that Ultimate had disparaged Dahl or its product. The Court of Appeals ruled that Hartford had no duty to defend and expressly disagreed with the reasoning in another case, Travelers Prop. Cas. Co. of America v. Charlotte Russe Holding, Inc. 207 Cal. App. 4th 969, 144 Cal. Rptr. 3d 12 (2012). The Supreme Court granted review to clarify the scope of a commercial general liability insurer’s duty to defend an insured against a claim alleging disparagement.

The California Supreme Court held “that a claim of disparagement requires a plaintiff to show a false or misleading statement that (1) specifically refers to the plaintiff’s product or business and (2) clearly derogates that product or business. Each requirement must be satisfied by express mention or by clear implication.” The Supreme Court of California then ruled that the advertising liability coverage was not triggered because the alleged disparaging statements were not specific enough to disparage Dahl’s product and are “most reasonably understood as generic assertions of [Ultimate’s] own excellence.” Thus, the court affirmed the judgment of the Court of Appeal. “Because Dahl’s suit contains no allegation that Ultimate clearly derogated the Multi–Cart, we find no claim of disparagement triggering Hartford’s duty to defend.” The policyholder had also argued that the complaint alleged the use of a similar sounding name for the products which allegedly misled consumers that the policyholder’s product was affiliated, thereby constituting some level of disparagement. The Supreme Court found that even if there was a mimicry in design, product confusion (even rising to the level of a falsehood as to the maker) was not a basis for a claim of disparagement.

In finding that mere “puffery” without expressly  mentioning and derogating the plaintiff’s product either expressly or by “clear implication” does not trigger advertising liability coverage, the court resolved conflicting state appellate court opinions and established a  bright line threshold for coverage for claims related to advertising materials that promote and potentially denigrate a competitor’s product or service. In so doing, the Supreme Court rejected the Charlotte Russe ruling that found coverage for a clothing store’s underpricing of a supplier’s goods on the basis that it could be interpreted as implied disparagement of those products.  This ruling was not followed by the appellate court in the present matter, reasoning that sellers cut prices for a variety of reasons and thus does not constitute an insurable instance of disparagement. Hartford Cas. Ins. Co. v. Swift Distribution Inc., No. S207172 (Cal.  June 12, 2014).

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