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April 2013

California Supreme Court to Review Duty to Defend in Product Disparagement Case

On Feb. 13, the California Supreme Court agreed to review the California Court of Appeal’s decision in Hartford Casualty Ins. Co. v. Swift Distribution, Inc., previously published at 210 Cal.App.4th 915. As we previously reported, the Court of Appeal affirmed a trial court order granting the insurer summary judgment. The Court of Appeal held the insurer had no duty to defend the insured against claims for product disparagement because the insured’s advertisement did not expressly mention the competitor’s products or refer to the competitor by implication.

Gary-Michael Dahl, who manufactured and sold the “Multi-Cart,” sued Swift Distribution (Ultimate) for patent and trademark infringement, unfair competition, dilution of a famous mark, and misleading advertising arising from Ultimate’s sale of its product, the “Ulti-Cart.” Dahl attached advertisements for the Ulti-Cart to his complaint. The advertisements did not refer to the Multi-Cart or 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.

In its Oct. 29, 2012, opinion, the Court of Appeal framed the issues as whether the “advertising injury” provision of the Hartford policy required Hartford to provide a defense for Ultimate against a claim that Ultimate’s advertisements disparaged Dahl’s product (the Multi-Cart). The Hartford policy’s “personal and advertising injury” provision provided coverage for product disparagement, which is an injurious falsehood directed at the products of another. Under California law, the injurious falsehood in advertising must refer to the derogated product by express mention or reference it by reasonable implication. The Court of Appeal found Dahl’s complaint alleged neither.

The Court of Appeal found that Ultimate’s advertisements did not expressly mention the Multi-Cart. It further found that, even if Ultimate’s use of the name “Ulti-Cart” could reasonably have been construed to refer to “Multi-Cart,” the advertisement still contained no disparagement of “Multi-Cart.” The Court of Appeal also noted that any deception in the advertisement that led the public to believe that Ultimate was the originator, designer, or authorized manufacturer and distributor of the “Multi-Cart” was not in and of itself disparagement. Consequently, the Court of Appeal found Dahl alleged no claim for injurious false statement or disparagement that was potentially within the scope of the Hartford policy’s coverage for advertising injury.

The California Supreme Court granted review of the Court of Appeal’s order. In light of the California Supreme Court’s grant of review, the Swift Distribution decision is no longer available for use as legal authority.

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