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.
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