On May 13, 2014, in Millennium Laboratories, Inc. v. Darwin Select Insurance Company, Case No. 12- CV-2742 H (KSC), a California federal district court ruled that Darwin Select Insurance Company  breached its duty to defend Millennium in a pair of lawsuits in which two business rivals accused  Millennium of false advertising, finding that the underlying lawsuits sufficiently alleged covered  disparagement claims.  In so doing, the court reaffirmed the longstanding rule in California that a carrier’s  duty to defend is broad and requires the carrier to defend where there exists a mere “potential for  coverage” under the policy.  Here, the court determined that the underlying actions fell within the policy’s  coverage of claims based on disparagement of an organization’s goods, product or services, even though  the underlying parties did not allege a formal disparagement-related cause of action.

Background

Millennium Labs is a diagnostics laboratory that provides specialty testing services for various health care  providers.  Specifically, Millennium provides analysis of urine drug testing samples.  Darwin insured  Millennium under a general liability insurance policy, which provided coverage for “claims alleging  Personal or Advertising Injury caused by an offense that takes place during the policy period.”  “Personal  or Advertising Injury” is defined to include, “injury, other than bodily injury, arising out of … [o]ral or written  publication, in any manner, that slanders or libels a person or organization or disparages a person’s or  organization’s goods, product or services.”

Millennium tendered two lawsuits to Darwin seeking coverage under the GL policy: (1) a lawsuit brought  by one of Millennium’s competitors, Ameritox Ltd., which raised seven causes of action, including false  advertising, tortious interference and unfair competition, and (2) a countersuit brought in a lawsuit initiated  by Millennium against Calloway Labs, another competitor, wherein Calloway raised the following  counterclaims: interference with contractual relations, unjust enrichment and unfair and deceptive  practices in violation of a state statute.  Neither lawsuit contained a specific disparagement-related cause  of action.  Instead, the court focused on the following key factual allegations, which were alleged in both  lawsuits: “In [Millennium’s] 2012 Annual Meeting Millennium’s general counsel prepared a power point  presentation documenting its marketing strategy through litigation…. By literally showing  [Ameritox/Calloway] as a target in a firing range with gunshots heard in the background and then in a  body bag with toe tags [hanging from it] … Millennium’s general counsel stated that Millennium’s goal  was to see to it that [Ameritox/Calloway] was put out of business.”  Darwin responded to Millennium’s  tender by stating that neither lawsuit was covered under its policy “on the grounds that those actions did  not allege any instances of Personal or Advertising injury within the meaning of the policy.”

Court’s Ruling

In granting Millennium’s motion for summary judgment, United States District Judge Marilyn L. Huff  reaffirmed California’s broad duty to defend standard, including that “an insurer must defend its insured  against claims that create a potential for indemnity under the policy” and that “the precise causes of  action pled by the third party complaint may fall outside policy coverage does not excuse the duty to  defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could be fairly amended to state a covered liability.”  In applying this standard, the court determined that the  underlying third parties’ allegations, that Millennium engaged in a concerted effort to attack its competitors  through its marketing efforts by stating that its competitors engaged in “bad science” and harmed  patients, fell within the policy’s coverage of claims based on disparagement of an organizations’ goods,  product or services.  Therefore, the court ruled that Darwin owed Millennium a defense and the question  of whether Darwin may have engaged in bad faith conduct is a triable issue of fact for a jury to determine.

Implications

Most standard form GL policies typically do not afford coverage for claims alleging unfair competition and  false advertising.  Millennium significantly broadens the scope of coverage available under those policies  by extending the carrier’s duty to defend beyond straightforward defamation cases to now include cases  alleging unfair competition, false advertising and trademark infringement where the lawsuit contains  implied disparagement allegations. Millennium is one in a series of fairly recent decisions interpreting the  scope of coverage for “implied disparagement” claims under California law.  Indeed, the California  Supreme Court is expected to clarify the scope of insurance coverage for “implied disparagement” shortly  in Hartford Casualty Insurance Co. v. Swift Distribution Inc., Case Number S207172.

Millennium also serves as yet another reminder that insurance coverage does not depend solely on the  stated causes of action and that coverage may be available even for uncovered causes of action where  there also exist factual allegations that have the potential to support a covered claim.Companies should  review all complaints (and any counterclaims) carefully and consider all possible bases for liability when  assessing the potential for insurance coverage, as the carrier may still have a duty to defend a lawsuit  that only alleges uncovered causes of action if the allegations are sufficiently broad enough to create a  potential for covered liability.