Claim to be exclusive owner of TM rights triggers disparagement coverage in ins. policy

Burgett, Inc. v. American Zurich Ins. Co., 830 F. Supp. 953 (E.D. Cal. 2011)

This older case just showed up in Westlaw, and it’s a little unusual so I thought it was worth mentioning.  Zurich’s commercial liability policy covered advertising injury, which included “[o]ral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person's organizations's good, products or services.”  The policy excluded “‘personal and advertising’ injury arising out of the infringement of copyright, patent, trademark, trade secret or other intellectual property.” 

The underlying complaint by Persis alleged that Burgett made false statements to another company, Samick, about Burgett’s ownership of the SOHMER mark, which Persis alleged that it owned.  Burgett’s representations that it had valid and enforceable rights in the mark, entry into a licensing agreement with Samick, and “holding itself out to Samick and the world” as the rightful owner of the mark allegedly induced Samick’s infringement.  Persis thus alleged that Burgett was contributorily liable for Samick’s infringement.

Zurich refused to defend because the definition of personal/advertising injury hadn’t been met and because the trademark exclusion applied.  Burgett sued, arguing that the complaint alleged misstatements by Burgett about Persis’s legal rights to the SOHMER mark, thus potentially triggering defamation/disparagement coverage.

Doubts about whether there’s a duty to defend are resolved in the insured’s favor.  In California, the insurer must look at the facts alleged, not just the names given to the causes of action, and there’s a duty to defend where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability.  But there’s no duty to defend when the potential for liability is “tenuous and farfetched.”

Turning to the definition of defamation, defamation requires a statement “of and concerning” the plaintiff, meaning that Burgett first had to show that there were factual allegations that it made specific reference to Persis.  But the underlying complaint didn’t allege any such reference by Burgett.

How about disparagement?  Burgett had to show underlying allegations that Burgett made derogatory statements about Persis products, causing Persis pecuniary damages.  One element is specific reference to the plaintiff, but that can be either direct or indirect.  Here, the court found that the underlying complaint could potentially establish a claim for disparagement by implication, so Zurich shouldn’t have denied coverage.

The E.piphany case was instructive, since it involved a nearly identical policy provision.  The underlying plaintiff alleged that E.piphany’s claims to be the exclusive provider of a particular technology harmed it; the court found that this alleged disparagement by clear implication.  The N.D. Ill., where the underlying Persis action was pending, had held that a claim for disparagement by implication may lie where a competitor claims that its product is “more effective than or superior” to the alternatives.  Here, similarly, Burgett represented to Samick that it was the only holder of the SOHMER mark.  Persis alleged that Burgett made knowingly false representations that harmed Persis “by implying to the marketplace that Burgett had the superior right to use the SOHMER trademark,” and thus, by implication, represented that Persis did not have the rights.  Taken as a whole, these allegations created potential liability and triggered disparagement coverage.  The cases on which Zurich relied, by contrast, involved underlying claims that false advertising harmed the reputation and goodwill of the market for the parties’ product type generally, which fell outside a policy exclusion for failure to conform with advertised quality or performance.

Zurich argued that the trademark exclusion precluded coverage.  However, even if the precise causes of action alleged fell outside the policy coverage, the key was whether given the facts “alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability.”   Since the complaint could be amended to state a claim for disparagement, the trademark exclusion didn’t apply.

Under California law, Burgett was entitled to reasonable attorneys’ fees for Zurich’s breach of the duty to defend.