Comparative ads trigger advertising injury coverage

Harleysville Mutual Ins. Co. v. Buzz Off Insect Shield, L.L.C., -- S.E.2d --, 2008 WL 1945784 (N.C. App.)

In early 2005, S.C. Johnson sued Buzz Off, a seller of insect-repellent clothing, in federal court, alleging trademark infringement, false advertising, and related claims. IGT, a second defendant, was added to the case after some procedural maneuvers. In 2006, Harleysville sought a declaratory judgment in state court that insurance policies it issued to IGT didn’t provide any coverage in the underlying suit, or in the alternative that Erie, a different insurance company, was on the hook for defense and damages costs. IGT, unsurprisingly, cross- and counterclaimed for a declaration that one or both of the insurance companies had a duty to defend and for a finding of bad faith breach of the duty to defend, while Erie made the same arguments about Harleysville that Harleysville had made about it.

An insurer’s duty to defend is broader than its duty to pay damages; the duty to defend is measured by the facts alleged in the pleadings. The drafting of the complaint isn’t key; the question is whether the facts alleged disclose a possibility that the insured is liable for something covered by the policy. Doubts are resolved in favor of insureds.

Here, IGT was insured for advertising injury. Advertising injury was defined to include publication of “material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services” and infringement of another’s copyright, trade dress or slogan in an ad.

S.C. Johnson’s complaint alleged that Buzz Off and IGT made false claims through Buzz Off’s website and the websites of its partners. One such claim specifically named S.C. Johnson’s OFF! Deep Woods product; the rest was directed to all skin-applied insect repellants, a market in which S.C. Johnson leads.

The court found that these allegations were sufficient to create a possibility that IGT was liable for a covered act, triggering a duty to defend. False negative comparisons would come within the disparagement provision.

The dissent found that S.C. Johnson’s allegations fell within a quality/performance exception, which stated that coverage didn’t apply to advertising injury “arising out of the failure of goods, products or services to conform with any statement of quality or performance made in your ‘advertisement’.” However, the crux of S.C. Johnson’s claim was that IGT’s ads disparaged S.C. Johnson’s products, not that IGT’s goods failed to conform with IGT’s statements of quality or performance.

The dissent, by contrast, focused on the positive claims that S.C. Johnson alleged were false. S.C. Johnson mainly targeted Buzz Off’s claims for its own “Insect Repellent Apparel.” Buzz Off claimed that its clothing reduced or eliminated the need to apply insect repellent and that its clothing was superior to topical insect repellents, in part because of the “hassle” of applying “messy” insect repellents. S.C. Johnson also attacked Buzz Off’s claim that the insect-repellant properties of its clothing lasted through 25 washes, and that those properties came from “a version of a natural insecticide.”

The false comparisons at issue, the dissent concluded, were allegedly false and misleading because they overvalued Buzz Off’s products, not because they undervalued S.C. Johnson’s. While the dissent has a point, to me this just highlights the odd way advertising injury policies are worded—false comparative advertising has pretty much the same effects whether the claim is “X is better than Y” or “Y is worse than X.” In any event, the dissent concluded, the claims at issue fell into the failure to perform exception. Even if some of the Buzz Off statements (possibly those regarding DEET, a component of S.C. Johnson’s products) could be interpreted as disparaging, that wasn’t what S.C. Johnson complained about.

That reasoning is in a bit of tension with the idea that the plaintiff’s pleading shouldn’t entirely control if the alleged facts disclose the possibility of coverage, but the dissent did note that complaints often include background information to give context to a dispute, and categorized the ads here as mere background, to the extent that they contained negative implications about S.C. Johnson products.

Because the positive claims about Buzz Off are so tightly intertwined with the negative statements/implications about S.C. Johnson, I think this is foreground rather than background, and thus that the majority has the better of the argument. The exclusion for failure to meet advertised quality should apply to absolute claims; relative claims inherently put competitors’ goodwill at risk. As other Lanham Act cases have pointed out, a consumer who is disappointed with a product sold by a comparative claim may conclude that all the products in the relevant category are bad—after all, if the best one didn’t work, what chance have the others? This conclusion—that comparative ads should be treated as potentially harming the plaintiff, not just as potentially helping the defendant—resolves the “better than”/“worse than” disparity mentioned above, and comports with the cases cited by the dissent, some of which rejected insurance coverage when the advertiser’s claims were all positive and noncomparative.