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November 2012

Hartford Cas. Ins. Co. v. Swift Distribution, Inc. ? No Coverage For Product Disparagement Under Policy's Personal And Advertising Injury Insuring Agreement Where The Underlying Complaint Fails To Allege That The Insured Referred To Competitor's Product In Its Advertisement

There Is No Product Disparagement If The Insured's Advertisement Fails To Expressly Mention The Competitor's Product And Further Fails To Refer To The Competition By Implication

(October 29, 2012) ___ Cal.App.4th ___; 12 C.D.O.S.12329

The California Court of Appeal, Second Appellate District, Division Three, affirmed summary judgment granted by the trial court in favor of the insurer.  The trial court concluded the insurer had no duty to defend the insured against claims for product disparagement arising from the insured’s advertisement and marketing of an allegedly infringing product.

Gary-Michael Dahl is allegedly the owner of a U.S. patent to a “convertible transport cart,” which he has manufactured and sold as the “Multi-Cart” since 1997.  The “Multi-Cart” is collapsible and can be manipulated into eight different configurations to move music, sound, and video equipment quickly and easily. 

Swift Distribution, Inc., dba Ultimate Support Systems, Inc. (“Ultimate”) manufactured, advertised, and offered for sale the “Ulti-Cart” which Dahl alleged infringes on his patent.  Dahl further alleged Ultimate infringed and diluted Dahl’s trademarks for the Multi-Cart. 

Dahl filed suit against Ultimate, alleging, among other things, unfair competition under the Lanham Act and misleading advertising.  Dahl also applied for a temporary restraining order.  In addition to allegations of patent and trademark infringement to support his claims, Dahl alleged that Ultimate advertised the Ulti-Cart with the intent to (1) mislead the public as to the origin and ownership of Dahl’s mark and (2) to mislead the public into believing that Ultimate’s products were the same as Dahl’s or that Ultimate owned or had manufacturing rights to the Multi-Cart.

Dahl attached to his complaint, advertisements for the Ulti-Cart.  The advertisements do not refer to the Multi-Cart nor do they mention any competitor’s products.

Ultimate tendered the Dahl complaint to its insurer, Hartford.  Hartford denied coverage and declined to defend.  Hartford then filed a declaratory relief action.  Hartford and Ultimate filed motions for summary judgment.  The trial court entered an order granting Hartford’s motion, concluding Hartford had no duty to defend or indemnify the Dahl action, and denying Ultimate’s motion.  Ultimate appealed.

The Court of Appeal focused on the policy’s coverage for product disparagement.  The Hartford policy covers “personal and advertising injury,” defined to include “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.” 

Under California law, the injurious falsehood in advertising “must specifically refer to the derogated property, business, goods, product, or services either by express mention or references by reasonable implication.”  [Citations omitted.]  The Court of Appeal found Dahl’s complaint alleged neither.

First, Ultimate’s advertisements do not expressly mention the Multi-Cart.  Second, even if Ultimate’s use of the name “Ulti-Cart,” which is similar to Dahl’s “Multi-Cart,” can reasonably be construed to refer to “Multi-Cart,” the advertisement still contained no disparagement of “Multi-Cart.”  The Court of Appeal further noted that any deception in the advertisement which led the public to belief that Ultimate was the originator, designer, or authorized manufacturer and distributor of the “Multi-Cart” is not in and of itself disparagement.  Consequently, Dahl alleged no claim for injurious false statement or disparagement that was potentially within the scope of the Hartford policy coverage for advertising injury.

The Court of Appeal also took the opportunity to criticize the holding and analysis in Travelers Property Cas. Co. of America v. Charlotte Russe Holding, Inc., which was handed down by a separate division (Division One) of the same appellate district.  Division One held that allegations the retailer damaged the “People’s Liberation” line of clothing brand and trademark by marking down its prices was potentially covered under the advertising injury provision of the retailer’s liability policy.  The reasoning was that the discounted prices suggested to consumers that People’s Liberation products were of inferior quality. 

The Court of Appeal here (Division Three) disagreed, noting that the reduction in price alone, and however steep, could not constitute disparagement.  “Reducing the price of goods, without more, cannot constitute disparagement.”  A price reduction is not an injurious falsehood. 

This Court further distinguished Charlotte Russe in that the Dahl action did not involve allegations of inferior quality implied by deeply discounted pricing.  The Court also distinguished other federal and out-of-state decisions relied upon by Ultimate because: (1) Ultimate’s advertisement did not falsely compare the Ulti-Cart to Dahl’s Multi-Cart (Acme United Corp. v. St. Paul Fire & Marine Ins. Co. (7th Cir. 2007) 214 Fed. Appx. 596); (2) Ultimate made no claims of ownership to Multi-Cart’s technology or trademark, or its right to manufacture the Multi-Cart (Liberty Mutl. Ins. Co. v. OSI Industries (2005) 831 N.E.2d 192 and Burgett, Inc. v. American Zurich Ins. Co. (E.D. Cal. 2011) 830 F.Supp.2d 953); (3) Ultimate’s advertisement did not suggest that its competitor’s technology was behind its own technology (E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co. (N.D. Cal. 2008) 590 F.Supp.2d 1244); and (4) Ultimate’s advertisement did not feature photos of Dahl’s Multi-Cart with the intent to mislead and confuse consumers and “steer” them into purchasing the Ulti-Cart, instead (Michael Taylor Designs, Inc. v. Travelers Prop. Cas. Co. of America (N.D. Cal. 2011) 761 F.Supp.2d 904).

Click here for the opinion.

This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts.

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com

Insurance

Lyndy Stewart
Christopher R. Wagner



Insurance

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