California Supreme Court Addresses Coverage for Product Disparagement

In its recent decision in Hartford Casualty Insurance Company v. Swift Distribution, Inc., 2014 Cal. LEXIS 3765 (Cal. June 12, 2014), the California Supreme Court had occasion to consider the type of statements that qualify as “product disparagement” for the purpose of a general liability policy’s “personal and advertising injury” coverage.

Ultimate Support Systems (“Ultimate”) sold the Ulti-Cart, a multi-use cart. Gary-Michael Dahl (“Dahl”) sold the Multi-Cart, also a multi-use cart. Dahl sued Ultimate, claiming that “Ultimate impermissibly manufactured, marketed, and sold the Ulti-Cart, and thereby infringed on Dahl’s patents and trademarks and diluted the Multi-Cart trademark. Dahl asserted that Ultimate’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. Dahl also alleged unfair competition, misleading advertising, breach of contract, and claims based on the violation of two nondisclosure agreements. The complaint attached Ultimate’s advertisements, which did not name the Multi-Cart or any other product.”

Ultimate sought coverage for the Dahl lawsuit under its general liability policy issued by Hartford, which included “personal and advertising injury” coverage, defined in relevant part as that “‘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 policy did not define the term “disparages.” The Hartford sued for a declaration that it had no duty to defend or indemnify Ultimate in connection with the Dahl lawsuit, and obtained summary judgment in its favor. Ultimate appealed, and the Court of Appeal affirmed the summary judgment, finding that the Dahl lawsuit did not allege that Ultimate committed product disparagement. The California Supreme Court granted review.

The Supreme Court noted that cases have understood disparagement, for purposes of the personal and advertising injury offense, “to mean a knowingly false or misleading publication that derogates another’s property or business and results in special damages,” and that disparagement requires “the defendant’s false or misleading statement have a degree of specificity that distinguishes direct criticism of a competitor’s product or business from other statements extolling the virtues or superiority of the defendant’s product or business.” In particular, a false or misleading statement: (1) must specifically refer to the plaintiff’s product or business, and (2) must clearly derogate that product or business. “Each requirement must be satisfied by express mention or by clear implication.”

The Court found no disparagement was alleged by the Dahl lawsuit, as it made no specific allegation that clearly implied the inferiority of the Ulti-Cart to the Multi-Cart. The alleged likeness of the two products was not, in and of itself, disparagement. The Court also noted that claims of patent infringement, infringement of intellectual property, consumer confusion, imitation, and “palming off” do not malign a product and do not constitute disparagement. Ultimate argued that in its own catalog, “the phrase “patent-pending” when combined with words like “innovative,” “unique,” “superior,” and “unparalleled” suggests the superiority of the Ulti-Cart and, by implication, the inferiority of the Multi-Cart.” The court held that the statements were closer to puffery (extolling Ultimate’s virtues), and not specific enough “to call into question Dahl’s proprietary rights in his product” or to suggest that the Ulti-Cart had any unique feature the over any competing product.