On June 12, 2014, the California Supreme Court held in Hartford Casualty Insurance Company v. Swift Distribution, Inc.[1], that in order to trigger a duty to defend a disparagement claim under the "personal and advertising injury" coverage of a general liability policy, the plaintiff must show, by express mention or clear implication, that the insured made a false or misleading statement that specifically refers to, and clearly derogates, the plaintiff's products or business. The Court disapproved Travelers Property Casualty Company of America v. Charlotte Russe Holding, Inc. (2012) 207 Cal.App.4th 969, which departed from the specificity requirements in finding that publishing reduced prices on a specific clothing line constituted disparagement of that line.
In Swift, Gary Michael Dahl, who manufactures a convertible transport cart called the "Multi-Cart," sued Swift Distribution Systems dba Ultimate Support Systems, which sells a similar cart called the "Ulti-Cart." Dahl alleged patent and trademark infringement, false designation of origin, unfair competition, misleading advertising, several contract-based claims, and damage to business, reputation and goodwill. Copies of Ultimate's advertisements, which did not name the Multi-Cart, were attached to the complaint.
The insuring agreement of Ultimate's general liability policy with Hartford Casualty Insurance Company applied to "personal and advertising injury," which was defined to include "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." The term "disparages" was not defined.
Hartford declined Ultimate's tender of defense and indemnity, and filed a declaratory relief action on the grounds that there could be no disparagement without a specific statement about a competitor's goods. The superior court granted Hartford's motion for summary judgment, and the Court of Appeal affirmed. The Court of Appeal disagreed with the theory of disparagement recognized in Charlotte Russe, while acknowledging that Charlotte Russe was distinguishable on its facts. The California Supreme Court granted review, and concluded that the Court of Appeal had correctly decided the issue.
The term "disparagement" in an insurance policy concerns damage to the reputation of products, goods, or services. Disparagement emerged from the common law tort doctrine of slander of title and over time expanded to include trade libel, concerning false statements disparaging the quality of property. California courts have referred to the common law in defining disparagement in the context of commercial liability to mean "a knowingly false or misleading publication that derogates another's property or business and results in special damages." Disparagement requires "a false or misleading statement that: (1) must specifically refer to the plaintiff's product or business and (2) must clearly derogate that product or business." These elements "must be satisfied by express mention or by clear implication." The elements may be satisfied by reasonable implication where the suit alleges that the insured's false statement necessarily refers to and derogates a competitor's product, such as a false statement that the insured is the "only" owner or producer of a specific product.
Charlotte Russe departed from the specificity requirements by holding that a clothing store's publication of heavy price discounts on the People's Liberation brand of apparel constituted disparagement by implying that People's Liberation was not a premium brand. The Court of Appeal in Swift disagreed, reasoning that a price reduction is not an injurious falsehood. The Supreme Court concurred, specifically disapproving of Charlotte Russe. A reduction in price does not clearly indicate that the product is of poor quality, and Charlotte Russe's prices "did not carry an implication clear enough to derogate" the products for purposes of a disparagement claim.
The Dahl action did not potentially allege express or implied disparagement. The design and similarity of the Ulti-Cart and Multi-Cart may have caused confusion, but "there is no coverage for disparagement simply because one party tries to sell another's products as its own." Ultimate's statements in its catalog that it provides "superior service" are generic assertions of its excellence or are "mere puffing," which do not constitute disparagement. Due to the specificity requirements of a disparagement claim, not every advertisement that extols the superior quality of a company or its product involves disparagement. As such, Hartford had no duty to defend and indemnify Ultimate.
[1] Hartford Casualty Insurance Company v. Swift Distribution, Inc (2014) ___ Cal. 4th __ , 2014 Cal. Lexis 3765.
