A split of authority is brewing the California Court of Appeal regarding the scope of an insurer’s duty to defend an insured against claims of product disparagement under the “advertising injury” provisions of a commercial general liability policy.  Many liability policies provide coverage for “advertising injury,” which is often defined as “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.”  Two recent decisions from the Second Appellate District of the California Court of Appeal appear to conflict on the scope of an insurer’s duty to defend against claims of product disparagement under this standard wording.

In July, Division One of the Second Appellate District published its decision in Travelers Property Casualty Co. of America v. Charlotte Russe Holdings (2012) 207 Cal.App.4th 969.  In Charlotte Russe, the insured, a clothing retailer, had allegedly “disparaged” the clothing of a premium brand by marking down the retail price of the goods in a “fire sale.”  As a result of the pricing reduction, the clothing manufacturer sued the retailer for fraud, breach of contract and restitution because the lower prices “will also certainly result in significant and irreparable damage to and diminution of the People's Liberation Brand and trademark.”  The insurer denied coverage, and litigation ensued.  The Charlotte Russe court held that a duty to defend was triggered because the act of reducing the prices created an allegedly false negative implication that the brand’s clothing was of a lesser value. 

In contrast, earlier this week, Justice Croskey’s Division Three of the Second Appellate District held that an insurer has no duty to defend under the “advertising injury” provisions of a policy where the insured’s advertising did not mention or refer to the third-party or its products.  Hartford Casualty Insurance Company v. Swift Distribution, Inc., Case No. B234234 (slip. op., October 29, 2012).  There, a manufacturer of a collapsible cart (the Multi-Cart) sued the insured who manufactured and advertised a similar product with a similar name (the Ulti-Cart) for, among other claims, trademark dilution and infringement, false advertising and unfair competition.  At the heart of the dispute was whether the insured’s advertisements of its own product “disparaged” the competitor’s product.  The court held that disparagement means “an injurious falsehood directed at the organization or products, goods, or services of another.”  Because the advertisements at issue did not, in fact, mention the competitor or its product, the insured did not “disparage” the competitor, and therefore, the “advertising injury” provisions of the policy did not give rise to a duty to defend. 

In reaching its conclusion, the Swift court rejected the Charlotte Russe court’s theory of disparagement by implication as having “no objectively reasonable basis.”  Swift reasoned that that although the price reduction may be “injurious to the brand or its high-end, high quality reputation, … it is not false and is thus not disparagement.”  The Swift court also questioned whether the insured’s price reduction in Charlotte Russe constituted a “publication … that specifically refers to the [underlying] plaintiff.”  In short, the Swift court refused to impose a duty to defend based on a disparagement by implication theory where the advertisements at issue did not mention the competitor’s products. 

Although the facts of these two cases are significantly different, the two decisions present a conflicting view of what constitutes product disparagement under the “advertising injury” provisions of a liability policy.  The Charlotte Russe court broadly defined product disparagement to include any acts that merely carry an allegedly false negative implication concerning another’s products.  In contrast, the Swift court established a bright-line rule that a product disparagement claim must include an express, false publication directed at the product allegedly being disparaged. 

The deadline for filing a petition for review to the California Supreme Court in the Swift case has not yet passed so there is a chance (albeit a small one given the Supreme Court’s acceptance rate) that this apparent split of authority may be resolved soon.