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CGL Coverage for Commercial Disparagement Requires False or Misleading Statement About Specific Product

On June 12, the California Supreme Court held that an insurer did not owe a duty to defend claims of patent and trademark infringement under the disparagement offense of the “personal and advertising injury” coverage of a commercial general liability (CGL) policy. In Hartford Casualty Insurance Co. v. Swift Distribution, Inc., the Supreme Court agreed with the lower courts, finding there was no possibility of “disparagement” in the absence of a specific statement about the plaintiff’s product. The Supreme Court held there must be express mention or clear implication of a false or misleading statement referring to and derogating a competitor’s product for there to be a disparagement claim.

Hartford issued a CGL policy to Swift Distribution, doing business as Ultimate Support Systems. The policy’s “personal and advertising injury” coverage applied to claims arising from “[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.” Ultimate sold the Ulti-Cart, a multi-use cart marketed for the loading and transport of musicians’ equipment. Gary-Michael Dahl manufactured a similar transport cart called the Multi-Cart, which also was used to transport music, sound and video equipment. Dahl sued Ultimate for patent and trademark infringement, false designation of origin, and damage to business, reputation and goodwill. The complaint attached Ultimate’s advertisements, which did not name the Multi-Cart or any other product.

Ultimate tendered the suit to Hartford under the policy’s disparagement coverage. Hartford declined on the basis there could be no disparagement in the absence of a specific statement about the Multi-Cart. Hartford also asserted the policy’s exclusion for personal or advertising injuries arising out of violations of intellectual property rights.

Hartford filed a complaint for declaratory judgment alleging it had no duty to defend or indemnify Ultimate. While the coverage action was pending, the court in the underlying Dahl action granted Ultimate’s summary adjudication motion on the claims of patent infringement, and the matter settled.

Hartford and Ultimate each filed summary judgment motions and the trial court granted Hartford’s motion. Ultimate appealed and the Court of Appeal affirmed. The California Supreme Court granted review and affirmed the finding that no potential for a covered disparagement claim existed.

The Supreme Court held that a claim for disparagement must involve two distinct but related specificity requirements. There must be a false or misleading statement that (1) specifically refers to another party’s product or business, and (2) clearly derogates that product or business. The Supreme Court emphasized that each requirement must be satisfied by express mention or by clear implication. The Supreme Court disapproved the contrary holding in Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc. (2012) 207 Cal.App.4th 969 that found a reduction in price of a product could constitute disparagement of that product. Disparagement by “reasonable implication” required more than a statement that could conceivably be construed as derogatory to a product or business.

The Supreme Court found Ultimate’s advertisement contained no disparagement of Multi-Cart. While the similarity between the Ulti-Cart and the Multi-Cart could cause consumer confusion and might support a claim of patent or trademark infringement, it did not, by itself, support a claim of disparagement because there was no express assertion or clear implication of the inferiority of the Multi-Cart. The Supreme Court also held that phrases and words used in Ultimate’s advertising, such as “patent-pending,” “innovative,” “unique,” “superior” and “unparalleled,” did not support a claim for disparagement because those phrases and words were not specific enough and were more akin to “mere puffing,” which could not support tort liability.

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The opinion in Hartford Casualty Insurance Co. v. Swift Distribution, Inc. (June 12, 2014)____Cal.4th____; 14 C.D.O.S. 64023337 is not final. It may be modified on rehearing. This event would render the opinion unavailable for use as legal authority.

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