In Hartford Casualty Insurance Company v. Swift Distribution, Inc., __ P.3d ___, 2014 WL 2609753 (Cal. June 12, 2014), the California Supreme Court, applying California law, affirmed the Court of Appeal’s summary judgment order holding that a commercial general liability insurer that issued a policy covering personal and advertising injury had no duty to defend its policyholder in a lawsuit seeking damages associated with patent and trademark infringement, where the underlying suit did not allege a claim of disparagement. In so holding, the Court clarified the elements of a disparagement claim under California law, resolving an issue that was previously unsettled in the lower courts.
The policy issued by the insurer covered “personal and advertising injury,” which was defined to include 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.” Id. at *2. The policyholder, the manufacturer of a product called the “Ulti-Cart,” was sued in federal district court by the manufacturer of a similar product called the “Multi-Cart.” The suit included allegations of patent and trademark infringement, false designation of origin, damage to business, reputation, and goodwill. Id. at *1. According to the complaint, the policyholder impermissibly manufactured, marketed, and sold the Ulti-Cart, and thereby infringed the plaintiff’s patents and trademarks and diluted the Multi-Cart trademark. The plaintiff asserted that the policyholder’s false and misleading advertisements and use of a “nearly identical mark” were likely to cause consumer confusion or mistake, or to deceive the public “as to the affiliation, connection, or association” of the two parties. Id. When the policyholder tendered defense of the suit, the insurer denied coverage on the ground that the suit did not allege that the policyholder had disparaged the other manufacturer or its product, explaining that there could be no disparagement without a specific statement about the competitor’s goods. Id. at *2.
The insurer subsequently filed a complaint seeking a declaratory judgment that it had no duty to defend or indemnify the policyholder in the suit at issue. Id. The Superior Court granted the insurer’s motion for summary judgment and the Court of Appeal affirmed, holding that the insurer had no duty to defend because the underlying complaint did “not allege that [the policyholder’s] advertisements specifically referred to [the plaintiff] by express mention” and that the plaintiff “did not allege that [the policyholder’s] publication disparaged [the plaintiff’s] organization, products, goods, or services” by reasonable implication. Id. The California Supreme Court granted review to clarify the principles governing the scope of a commercial general liability insurer’s duty to defend an insured against a claim alleging disparagement.
The 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. Id. at *1. The Court noted that each requirement must be satisfied by express mention or by clear implication. Id. Because the underlying suit contained no allegation that the policyholder clearly derogated the Multi-Cart, the Court found no claim of disparagement triggering the insurer’s duty to defend. Id.
The Court noted that the requirements of derogation and specific reference may be satisfied by implication. For example, the Court explained that “a publication that claims a superior feature of a business or product as distinct from all competitors, such as a claim to be the “only” producer of a certain kind of software or the “only” owner of a trademark, may be found to clearly or necessarily disparage another party even without express mention.” Id. at *10.
The Court declared that the specific reference requirement “limits the right of action for injurious falsehood, granting it to those who are the direct object of criticism and denying it to those who merely complain of nonspecific statements that they believe cause them some hurt. This limitation serves the important objective of forestalling ‘vexatious lawsuits’ over perceived slights that do not specifically derogate or refer to a competitor’s business or product.” Id. at *9 (internal citations omitted).
In reaching its holding, the Court analyzed several key cases that guided its reasoning regarding the requirements for a disparagement claim. First, the Court discussed its decision in Blatty v. New York Times Co., 728 P.2d 1177 (Cal. 1986), where it held under the First Amendment that all injurious falsehoods “must specifically refer to, or be ‘of and concerning,’ the plaintiff in some way.” Id. at *7. The Court then discussed the decision in Total Call Int’l, Inc. v. Peerless Ins. Co., 181 Cal. App. 4th 161, 104 Cal. Rptr. 3d 319 (2010), in which the California Court of Appeal applied the specific reference requirement set forth in Blatty to a purely commercial dispute involving allegations of product disparagement. There, the court explained that to sufficiently allege disparagement, “a plaintiff must allege that the statement at issue either expressly mentions him or refers to him by reasonable implication.” Id. at *8 (internal citations omitted). The issue in Total Call was whether an insurer owed a duty to defend against a suit by two competitors alleging that Total Call sold prepaid telephone cards that did not provide the number of minutes advertised. Id. The court denied coverage, finding that Total Call’s advertisements did not specifically refer to the plaintiffs in the underlying action expressly or by reasonable implication. The court reasoned that although Total Call’s advertisements falsely communicated the number of minutes customers would receive, they did not imply that the competitors’ cards cost more or less than Total Call’s cards. Id.
The Court also resolved a dispute between two Court of Appeal decisions regarding coverage for alleged disparagement. The Court discussed in detail the decision in Travelers Property Casualty Company of America v. Charlotte Russe Holding, Inc., 207 Cal. App. 4th 969, 144 Cal. Rptr. 3d 12 (2012), which the Court stated “appears to depart from the specificity requirements” set forth in the other cases. Id. at *10. In that case, an apparel manufacturer, People’s Liberation, filed an action for fraud, breach of contract, and restitution against a clothing store, Charlotte Russe, which was the exclusive retailer of the brand. The complaint alleged that Charlotte Russe’s heavy discounts on its premium apparel suggested to consumers that People’s Liberation products were of inferior quality. The court found these allegations sufficient to require the insurer to defend, reasoning that the underlying complaint “pled that the implication carried by the Charlotte Russe parties’ pricing was false.” Id.
The Court of Appeal in Hartford v. Swift had expressly disagreed with the decision in Charlotte Russe, reasoning: “We fail to see how a reduction in price—even a steep reduction in price—constitutes disparagement. Sellers reduce prices because of competition from other sellers, surplus inventory, the necessity to reduce stock because of the loss of a lease, changing store location, or going out of business, and because of many other legitimate business reasons. Reducing the price of goods, without more, cannot constitute a disparagement.” Hartford Cas. Ins. Co. v. Swift Dist., Inc., 210 Cal. App. 4th 915, 148 Cal. Rptr. 3d 679, 687 (2012).
The Supreme Court agreed with the Court of Appeal’s rejection of the Charlotte Russe holding. “There is no question that Charlotte Russe’s discounted prices on People Liberation’s clothing specifically referred to People Liberation’s product. But a mere reduction of price may suggest any number of business motivations; it does not clearly indicate that the seller believes the product is of poor quality. Disparagement by ‘reasonable implication’ requires more than a statement that may conceivably or plausibly be construed as derogatory to a specific product or business. A ‘reasonable implication’ in this context means a clear or necessary inference. Charlotte Russe’s prices did not carry an implication clear enough to derogate People Liberation’s product for purposes of a disparagement claim.” Id. at *10 (internal citations omitted). The Court expressly disapproved of Charlotte Russe to the extent it is inconsistent with the Court’s opinion. Id.
Applying the specific reference and derogation requirements to the case at bar, the Supreme Court analyzed whether the underlying complaint alleged a claim of disparagement and concluded it did not. First, the Court rejected the policyholder’s argument that the complaint alleged a claim for disparagement based on consumer confusion arising from the similarities in name and design between the Multi-Cart and the Ulti-Cart. The Court noted that the allegations in the complaint emphasized the nearly indistinguishable nature of the products, rather than alleging that the policyholder derogated the competitor’s product as inferior. “A false or misleading statement that causes consumer confusion, but does not expressly assert or clearly imply the inferiority of the underlying plaintiff's product, does not constitute disparagement. Because the alleged likeness of the two products did not derogate the Multi-Cart, we reject Ultimate’s theory of disparagement based on consumer confusion over the product name and design.” Id. at *12. Second, the Court rejected the policyholder’s claim that use of the term “patent-pending” in a catalog combined with terms like “innovative,” “unique,” “superior,” and “unparalleled” constitutes disparagement. Rather, the Court held these terms were not sufficiently specific to imply inferiority of the competing product, and were more akin to mere puffery, which cannot support liability in tort. Id. at *14. Finding no claim of disparagement in the underlying complaint, the Court concluded that the insurer had no duty to defend under the policy.
Hartford v. Swift is significant because it resolves inconsistent treatment of disparagement claims by lower California courts. By doing so, this decision clarifies the requirements for obtaining a defense under the personal or advertising injury provisions of a commercial general liability policy. Although the Court in Hartford v. Swift did not discuss decisions decided under the law of jurisdictions other than California, this decision may nonetheless provide guidance to parties drafting policy language, purchasing coverage, or resolving claims.