Hartford Casualty Ins. Co. v. Swift Distribution, Inc., No. S207172, 2014 WL 2609753 (Cal. June 12, 2014)
The California Supreme Court here provides a relatively rare state court interpretation of the scope of an advertising-related insurance policy. Hartford insured Swift (here, Ultimate) for 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.” A third party, Dahl, sued Ultimate, alleging patent and trademark infringement, false designation of origin, and damage to business, reputation, and goodwill based on Ultimate’s sale of a media cart. Hartford denied coverage on the ground that the underlying suit didn’t allege disparagement.
The duty to defend is broad. It can be triggered by the allegations of the complaint, or where extrinsic facts known to the insurer (whether disputed or undisputed) suggest that the claim may be covered.
The court nonetheless held that a claim of disparagement “requires a plaintiff to show a false or misleading statement that (1) specifically refers to the plaintiff’s product or business and (2) clearly derogates that product or business. Each requirement must be satisfied by express mention or by clear implication.” These limits derive from the common law tort of disparagement, which has been shaped by First Amendment considerations even as applied to nonmedia defendants.
These specificity requirements “significantly limit the type of statements that may constitute disparagement, especially since advertisements and promotional materials often avoid express mention of competitors,” though the court noted that other courts “have found certain kinds of statements to specifically refer to and derogate a competitor’s product or business by clear implication.” This can occur when a false or misleading statement necessarily refers to and denigrates a competitor’s product. A total superiority or uniqueness claim may clearly or necessarily disparage another party without expressly mentioning them.
The underlying complaint here alleged infringement and dilution, and attached Ultimate’s ads, which didn’t name the Multi-Cart or any other competing product. Ultimate offered two theories of disparagement: the first focused on Dahl’s claim that the products’ similarity in design and product name led to confusion, while the second involved false statements of superiority that allegedly implied the inferiority of Dahl’s product.
Even if the use of Ultimate’s “Ulti-Cart” could reasonably imply reference to Dahl’s “Multi-Cart,” there was no disparagement. Consumer confusion does not by itself mean disparagement. Intentional mimicry, without more, doesn’t derogate or malign the subject of copying. Even assuming it’s true that confusing consumers into thinking that you offer a high-quality product and then offering them a cheap knock-off is derogatory to the trademark owner, because confused consumers will believe that the cheap knock-off represents the legitimate product’s actual quality, no such conduct was alleged here. Instead, Dahl repeatedly asserted that the two products were “nearly identical, folding transport carts.” “A false or misleading statement that causes consumer confusion, but does not expressly assert or clearly imply the inferiority of the underlying plaintiff’s product, does not constitute disparagement.”
Ultimate argued that its 2010 product catalog disparaged the Multi-Cart by asserting the superiority of the Ulti-Cart: “Ultimate Support designs and builds innovative, superior products,” provides “unique support solutions that are crafted with unparalleled innovation and quality and accompanied by superior customer service,” and the Ulti-Cart has “patent-pending folding handles and levers.” The catalog was referenced in the complaint and should be considered, but were insufficient. Except for the patent-pending statement, the statements were general descriptions of the company. And “superior” doesn’t necessarily imply a derogatory comparison; according to the dictionary, it may be used to describe something “[o]f great value or excellence; extraordinary” or “notably excellent of its kind: surpassingly good.” Nor does “patent-pending” guarantee that a patent will be granted or that the product is of higher quality. These statements weren’t specific enough to call into question Dahl’s proprietary rights in his product or to suggest that the Ulti-Cart had any important, unique feature. Instead, they were mere puffing. “Were we to adopt Ultimate’s theory of disparagement, almost any advertisement extolling the superior quality of a company or its products would be fodder for litigation.” That would be a free speech problem.