"unfair competition" CGL insurance exclusion applies only to competitor claims, not consumer claims

Athena Cosmetics, Inc. v. Great American E&S Ins. Co.,  2025 WL 3304392, No. 2:24-cv-08010-AH-AGRx (C.D. Cal. Nov. 24, 2025)

Three underlying putative class actions targeted Athena’s sale of “lash enhancement serums from Athena that contained compounds found in prescription drugs and were known to cause adverse side effects to the face and eye area.” They alleged “false, misleading, unfair, and deceptive sale of beauty products without disclosing dangerous risks and side effects of the products’ key ingredient” and “unfair competition or unfair or deceptive acts or practices” in violation of various states’ consumer protection statutes. Although the underlying complaints alleged that the plaintiffs experienced “physical impact” on their face and eye area, they explicitly did “not seek to recover for physical injuries.”

Great American denied a duty of coverage to its insured, Athena, under a Commercial General Liability Policy stating that Great American “will pay those sums that [Athena] becomes legally obligated to pay as damages because of ‘bodily injury’ ... to which this insurance applies” and “will have the right and duty to defend [Athena] against any ‘suit’ seeking those damages.” The Policy defines “bodily injury” to mean “injury, sickness, or disease sustained by a person, including death of a person,” as well as “mental anguish, mental injury, or shock, if directly resulting from physical injury, sickness, or disease to that person.” There’s also an exclusion for any “Claim or Suit Alleging Infringement of Intellectual Property or Violation of Laws Concerning Unfair Competition or Similar Laws,” which excludes coverage for bodily injury or property damage “alleged in any claim or ‘suit’ that also alleges any: ... (2) violation of any statute, common law, or other laws or regulations” “concerning unfair competition, antitrust, restraint of trade, piracy, unfair trade practices, or any similar laws or regulations.”

Two questions: First, did the underlying lawsuits create a duty to defend, or did they not claim “bodily injury”? The court’s answer: there was a duty to defend given that the underlying complaints alleged such injury, even though they disclaimed recovery for damages for physical injury (presumably to allow a bigger class). An “insured is entitled to a defense if the underlying complaint alleges the insured’s liability for damages potentially covered under the policy, or if the complaint might be amended to give rise to a liability that would be covered under the policy.” In other words, under California law, “the insurer’s duty is not measured by the technical legal cause of action pleaded in the underlying third-party complaint, but rather by the potential for liability under the policy’s coverage as revealed by the facts alleged in the complaint or otherwise known to the insurer.” The insurer cannot “duck coverage simply because the complainants sought the tactical advantage of bringing their claims through a class action.” In addition, the complaint also alleged mental distress, which was covered under the policy’s broad definition of physical injury.

Second, was a noncompetitor consumer protection suit one for “unfair competition” or “unfair trade practices”? The court’s answer: no. The exclusion, which must be interpreted narrowly, was focused on competitor-type behavior, got its tenor from “antitrust,” “restraint of trade,” and “piracy.” Consumer protection claims brought by consumers weren’t excluded. Great American argued that nothing in the exclusion limits its application to disputes among business competitors. But Standard Fire Ins. Co. v. Peoples Church of Fresno, 985 F.2d 446 (9th Cir. 1993), interpreted “unfair competition” in the context of a CGL policy and described common law unfair competition as “synonymous with the act of ‘passing off’ one’s goods as those of another,” limiting the term to “the common law tort which includes competitive injury as an element,” at least where it was listed alongside of “libel, slander, defamation, violation of right of privacy, piracy, misappropriation of idea, and infringement of copyright, title or slogan.” And “piracy” was also in the policy here. Thus, none of the “similar laws or regulations” listed along with “unfair competition” in this policy referred to conduct directed at consumers.

The “objectively reasonable expectations of the insured” would not consider “unfair competition” to broadly exclude consumer fraud-related claims.