Wednesday, December 31, 2008

Allegedly false comparative ads trigger duty to defend against "disparagement"

E.piphany, Inc. v. St. Paul Fire & Marine Insurance Co., --- F.Supp.2d ----, 2008 WL 5396889 (N.D. Cal.)

E.piphany sued St. Paul alleging that it had a duty to defend E.piphany under the terms of E.piphany’s insurance policy. The underlying litigation involved false advertising claims against E.piphany by a competing software provider, Sigma.

The advertising injury policy at issue covered “disparagement.” The question was whether the underlying litigation alleged disparagement of Sigma’s products, when E.piphany basically just said nice stuff about itself and only disparaged Sigma’s products by implication. The underlying claim was that E.piphany falsely advertised its products as the “first” and “only” “all Java” and “fully J2EE” product suite (important characteristics) when they weren’t, and when other competitors’ products actually were.

The policy excluded injury caused by failure of E.piphany’s products to conform with advertised quality, but the court held that this wasn’t relevant. Sigma’s claims were based on comparative advertising; it’s irrelevant (at least to the duty to defend) whether E.piphany’s products did what E.piphany said. (It sure sounds like that was an important part of the underlying lawsuit—but the duty to defend is triggered when the allegations could support policy coverage, even if the plaintiff in the underlying case might ultimately win on something the policy doesn’t cover.)

Though state courts haven’t explicitly ruled on the issue, the case law suggests that disparagement by implication is actionable under California law. And other jurisdictions have found a duty to defend when superiority claims are allegedly false, even when the comparison didn’t name specific competitors. The necessary implication of superiority claims is to disparage competitors as inferior. Here, an allegedly false statement of being the “only” producer of “all Java” and “fully J2EE” software solutions was a prominent part of E.piphany’s ads. E.piphany claimed this was an “important differentiator” in the marketplace, giving it a lead of a couple of years on competitors. This disparaged the competition by implication. Thus, by refusing to defend in the underlying litigation, St. Paul breached its duty to defend.

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