When self-promotion is other-disparagement

Tosoh SET v. Hartford Fire Ins. Co., 2007 WL 1242172 (Cal. App. 1 Dist.)

It seems that today’s advertising injury policies often exclude coverage for injuries caused by false statements about the insured’s own product, limiting coverage for false advertising to the traditional categories of product disparagement or trade libel. However, the standard rule that a policy is construed in favor of the insured, combined with the rule that a duty to defend arises when the complaint in the underlying case alleges facts that could trigger coverage, can blunt the force of this exclusion substantially.

In this case, Tosoh was sued by a competitor, essentially for reverse passing off. The court concluded that the insurer’s duty to defend “was triggered by an allegation that Tosoh falsely claimed it alone had developed the detailed specifications and tolerances required for certain replacement component parts used in semiconductor manufacturing equipment, a statement that disparaged its competitors' products and services by implying they were measurably inferior.” The implication of inferiority was enough – which means that affirmative claims of superiority may trigger coverage even without mentioning competitors.

Tosoh’s competitor Applied Materials develops and sells semiconductor fabrication equipment, and replacement component parts, to companies that use the equipment to make computer chips. Applied doesn’t make most of the component parts; rather, third-party vendors make the parts based on Applied’s specifications, under contractual obligations to keep the information confidential. According to Applied’s complaint, one such third-party vendor made component parts using Applied’s confidential information, then sold them to Tosoh. Along with trade secret and other state tort claims, Applied alleged false advertising under the Lanham Act. Among other things, Tosoh advertised that it was the “only company to develop all the detailed specifications and tolerances needed to perform true, comprehensive parts and inspections;” and that it could handle “any kit component redesign a customer might wish, calling upon our extensive design capabilities and knowledge and knowledge base of detailed kit specifications.”

Tosoh sought coverage from Hartford, its insurer, which Hartford denied. Its policies define advertising injury, in relevant part as “Oral or written publication of material in your ‘advertisement’ that slanders or libels a person or disparages a person's or organization's goods, products or services....” The policies define “advertising” as information disseminated via radio, TV, billboard, magazine, newspaper, or “[a]ny other publication that is given widespread public distribution,” but specifically exclude packaging and labeling.

Hartford argued that the underlying complaint didn’t contend that the disparaging statement appeared in an “advertisement,” and the parties operate in such a limited market that it is unlikely that any statements received widespread distribution. (If Tosoh doesn’t “advertise,” why did Hartford sell it advertising injury coverage?) The court was unimpressed, because the complaint’s generic allegation about “advertising” raises the potential for coverage, and that’s enough to trigger the duty to defend. “Tosoh need only show that the underlying claim may fall within the policy coverage; Hartford must prove that it cannot.” Despite the admittedly small market for the parties’ products, “it is at least conceivable the allegedly disparaging comments appeared in a trade magazine or other publication with widespread distribution.”

Hartford also argued that the statements at issue were self-promoting puffery, not disparagement. The court rejected Hartford’s argument that an underlying complaint must specifically target statements about a competitor’s goods or services. First, the cases are reasonably consistent in holding that a competitor need not be named to be disparaged for purposes of the duty to defend unless the policy specifically requires this. That being the case, if a statement implicitly disparages an unnamed competitor, the same rule applies. And the statement of superiority did implicitly criticize all competitors. (Comment: this chain of reasoning makes the most sense in a very small market like this one, though I can see it applying across the board, under the theory that the insurance companies can always rewrite the policy if they want to narrow coverage.) Here, the claims were factual, falsifiable assertions, not puffery – they referred to “detailed specifications and tolerances.” Tosoh’s claim to be the only company to have such specifications and tolerances necessarily implied that Applied didn’t have them; Applied’s complaint stressed that precise dimensions and tolerances are crucial to producing acceptable component parts. Thus, there was a clear disparaging implication, and Hartford had a duty to defend.