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July 2012

Deep Product Discounts May Constitute Product Disparagement

In Travelers Property Casualty Company of America v. Charlotte Russe Holding, Inc., et al., Case No. B232771 (Cal. App. July 13, 2012), the Second Appellate District of the California Court of Appeal held that the elements of a trade libel claim need not be expressly pled in order to trigger coverage for product disparagement under the personal liability provision of a general commercial liability policy.

 In Travelers, plaintiff and respondent Travelers Property Casualty Company of America (“Travelers”), filed an action for declaratory relief, seeking a determination that there was no potential coverage, and therefore no duty to defend, for claims asserted by clothing distributor, Versatile Entertainment Inc. and its parent, People’s Liberation, Inc. (collectively, “Versatile”), against Travelers’ insureds, clothing retailer Charlotte Russe Holding, Inc. and other related companies and individuals (collectively, “Charlotte Russe”). 
 Underlying Allegations

In its suit against Charlotte Russe, Versatile alleged claims for fraud, breach of contract, and fraudulent and negligent misrepresentation, arising out of an alleged deal between the parties that Charlotte Russe would be the exclusive sales outlet for Versatile’s “People’s Liberation” brand of clothing.  Versatile characterized the People’s Liberation brand as “premium” and “high-end,” claiming that it had invested millions of dollars to develop the brand to be associated as “‘high-end casual apparel’” by consumers in the marketplace.  In connection with the sale of the People’s Liberation apparel, Versatile alleges that Charlotte Russe agreed to invest in and support the promotion of the “‘premium brand’” clothing to encourage Charlotte Russe’s customers to purchase the products at “‘higher price points’” at the Charlotte Russe stores. 

Notwithstanding this agreement, Versatile claimed that Charlotte Russe threatened and began a “‘fire sale’ of People’s Liberation Branded apparel at ‘close-out’ prices.’”  Specifically, Versatile alleged that Charlotte Russe publicly displayed “signs in store windows and on clothing racks announcing that People’s Liberation brand jeans were on sale,” and wrote “mark-downs on individual People’s Liberation clothing items.”  Versatile alleged that this deep discounting not only breached its agreement with Charlotte Russe, but it also would “‘certainly result in significant and irreparable damage to and diminution of the People’s Liberation Brand and trademark.’”  Moreover, the opinion of an apparel industry expert was proffered to show that Charlotte Russe’s promotion of “70-85 percent price markdowns of the People’s Liberation brand clothing” had a potentially “disparaging effect on the People’s Liberation Brand” because the discounting “suggests to the consumer that the product—particularly ‘premium, high-end or luxury goods such as the People’s Liberation Brand products’—is of inferior quality.”

 The Insurance Policies

 Charlotte Russe tendered the defense of the lawsuits filed by Versatile under its commercial general liability policies with Travelers.  Both policies provided for “broad ‘offense-based coverage’ for claims allegedly 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, provided that claim is made or ‘suit’ is brought by the person or organization that claims to have been slandered or libeled, or whose goods, products or services have been allegedly disparaged . . .”  Travelers denied coverage, claiming that “‘coverage was not available under its Policies because ‘the reduction of a price’s product is not . . . disparagement of that product.’” 

 The Court’s Decision

Travelers moved for summary judgment in the declaratory action, maintaining that it did not owe a duty to defend or indemnify Charlotte Russe because coverage under the policies was triggered only when the claims “amount to actionable claims of trade libel.”  Travelers further contended that Versatile’s allegations against Charlotte Russe “must be compared with the elements of the trade libel tort in order to properly assess the potential for coverage under the Travelers’ disparagement coverage” and as such, a “cause of action for trade libel or disparagement requires an allegation of the publication of a false statement and resulting loss of business,” neither of which Versatile alleged.  Therefore, Travelers maintained that Versatile’s allegations of price discounts did not amount to Charlotte Russe’s disparagement of or making false statements about the People’s Liberation Brand products. The trial court granted summary judgment.    

On review, the appellate court rejected Travelers’ argument and reversed the trial court’s grant of summary judgment.  Relying on La Jolla Beach & Tennis Club, Inc. v. Industrial Indemnity Co. (1994) 9 Cal.4th 27, 43 and Atlantic Mutual Ins. Co. v. J. Lamb, Inc. (2002) 100 Cal.App.4th 1017, 1034, the appellate court held that an insurer’s duty to defend “does not depend on the labels given to the causes of action in the underlying claims against the insured; ‘instead it rests of whether the alleged facts or known extrinsic facts reveal a possibility that the claim may be covered by the policy.”  Moreover, the appellate court noted that triggering coverage does not require that the underlying claims be “expressly phrased in terms of ‘disparagement’ or trade label”; rather, the claims “may trigger a duty to defend if the conduct for which the policies provide coverage is charged by implication, as well as by direct accusation.”    

Accordingly, the court concluded that Versatile’s allegations of deep discounting “could be reasonably interpreted to allege that Charlotte Russe . . . disparaged the People’s Liberation brand and led potential purchasers to believe that it was not a ‘premium,’ ‘high end’ brand.”  Furthermore, the court determined that “Versatile’s pleadings alleged that the People’s Liberation brand had been identified in the market as premium, high-end goods; and that Charlotte Russe had published prices for the goods implying that they were not.  It therefore pled that the implication carried by the Charlotte Russe parties’ pricing was false.  That is enough.”   

Practical Implications

The Travelers decision essentially enlarges an insurer’s duty to defend under its personal injury and advertising injury coverage provisions beyond claims that expressly allege elements of a trade libel or product disparagement claims.  Instead, where the elements can be implied from the allegations, the duty to defend may be triggered under the policy. 

 The Travelers decision also affects retailers, who should ensure that its discounting of goods does not contravene any agreements to maintain the products’ high end or premium appeal to consumers.      

Intellectual Property

Hazel Mae B. Pangan

Intellectual Property