Implicit Disparagement Insurance Coverage Survey

Implicit Disparagement Insurance Coverage Survey

By David A. Gauntlett*

Introduction

A standard provision in Commercial General Liability (“CGL”) policies provides coverage for “[o]ral or written publication, in any manner, of material that . . . disparages a person’s or organization’s goods, products or services.”[1] A growing number of states have embraced the doctrine of “implicit” (or “implied”) disparagement where inferences from statements about the quality of one’s own products imply negative comparative statements about a rival’s products. This blog examines the most prominent cases addressing the issue in the five most populous states.

California

The California Supreme Court articulated a clear standard for implicit disparagement claims in Hartford Cas. Ins. Co. v. Swift Distribution, Inc.:

[T]he related requirements of derogation and specific reference may be satisfied by implication where the suit alleges that the insured's false or misleading statement necessarily refers to and derogates a competitor's product. . . . Disparagement by “reasonable implication” [citations] requires more than a statement that may conceivably or plausibly be construed as derogatory to a specific product or business. A “reasonable implication” in this context means a clear or necessary inference. . . . A false or misleading statement that causes consumer confusion, but does not expressly assert or clearly imply the inferiority of the underlying plaintiff's product, does not constitute disparagement.[2]

Two qualifying examples cited by Swift suffice:

[Insured was accused of] falsely claiming to be “the ‘only’ producer of ‘all Java’ and ‘fully J2EE’ software solutions, which was an ‘important differentiator’ between competing products, even though some competitors offered products with these exact features.”[3]

[Underlying] suit alleg[ed] [the insured] had made a false claim to be “the only owner” of a particular trademark [4]

The Swift court determined there was no potential coverage because on the facts before it the insured’s product did not negatively reflect upon the rival’s.[5]

Texas

Texas courts seem hesitant to accept anything less than directly disparaging publications. In KLN Steel Prod. Co. v. CNA Ins. Companies,[6] for example, arguments about how the alleged publications would harm a competitor’s reputation were held inadequate. The court explained: “Although Hi–Tech's complaint states that KLN made misrepresentations about its bed and its source, those misrepresentations were about its own products, not those of Hi–Tech.”[7] Notably, this case predates Swift, so there was no opportunity to advocate for its standard. But strict Texas requirements for the tort of business disparagement,[8] which its courts may read into offense “d” could create challenges.

Florida

Two prominent federal court cases applying Florida law addressed implicit disparagement. Neither articulated a standard to apply in future cases. Nor have any state courts stepped in to fill the gap. In Vector Prod., Inc. v. Hartford Fire Ins. Co.,[9] the Eleventh Circuit determined that a competitor need not be expressly named where “comparisons . . . suggest that Vector’s product is superior to the ‘leading brand.’”[10]

The second case, E.S.Y., Inc. v. Scottsdale Ins. Co.,[11] also failed to explain the degree to which inferences may be made to determine potential coverage for disparagement. It did, however, apply the same reasoning as Swift, noting that imitation alone is not disparagement.[12] An unpublished decision two years after E.S.Y. directly cited Swift as “provid[ing] useful guidance” for evaluating potential coverage for implicit disparagement.[13]  

New York

The most recent state court decision concluded “[t]he statement that HON had been appointed the exclusive distributor . . . could imply that NPN's inventory of Nature's Plus products was unauthorized[.]”[14] Under its logic, this suggests implicit disparagement exists from any publication implying a concrete fact that might negatively impact consumers’ opinions of competing products. The court’s use of “could imply” suggests a broader scope than the “necessary inference” requirement of Swift, which a subsequent New York court determined was consistent with New York law.[15]

Federal courts in New York have not adopted the expansive views expressed by New York state courts.[16] Federal courts habitually cite Elite Brands,[17] a Second Circuit decision that quoted the “specific assertions” portion of Julie Research[18] and ignored the context.[19] The federal courts have thus taken the “specificity” requirement of Julie Research, originally aimed at the nature of the assertion, and used it to require that disparaging statements precisely target a particular competitor.[20]

Tzumi Innovations, LLC v. Twin City Fire Ins. Co.[21] exemplifies the federal courts’ mistakes. Insurer counsel conceded in its own briefing that Tzumi’s marketing included false and misleading statements that led customers to believe Tzumi’s sanitizing products were superior COVID killers.[22] In oral argument, Judge Merriam suggested that a successful claim by Tzumi would require “something like ‘we've invented a new proprietary disinfectant and it's the only one that kills COVID.’”[23] This far exceeds the bar set by Natural Organics, which focused on whether the statement would influence consumers. In Tzumi, it clearly did since the underlying action featured consumer plaintiffs.

Pennsylvania

In Vitamin Energy, LLC v. Evanston Ins. Co.,[24] the Third Circuit reversed in the policyholder’s favor applying Pennsylvania law where the pleadings included the following chart:

As the court noted, Vitamin Energy’s chart asserts a claim of superiority, which necessarily implies the inferiority of competitors.[25] Because the pleadings allege that suggestion is untrue, implicit disparagement arose. The vitamin and nutrition claims in the chart were “important differentiators” like the “all Java” and “fully J2EE” claims in E.piphany, so falsely asserting sole possession of those traits disparaged competitors, thus adopting a Swift-like test.

Conclusion

The cases above show that even in the most populous states (where one would expect the most litigation of these issues) concrete standards are difficult to find. Given this lack of authority, it is best to seek experienced coverage counsel to evaluate potential coverage for a pending lawsuit. They are best positioned to analyze the rationale of existing cases and apply it to new facts.

*David A. Gauntlett is a principal of Gauntlett & Associates and represents policyholders in insurance coverage disputes regarding intellectual property, antitrust, and business tort claims, as well as in the underlying actions. Mr. Gauntlett can be reached at (949) 553-1010 by voicemail or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.

[1] ISO Policy Form CG 00 01 12 07.

[2] Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal. 4th 277, 294, 295, 297 (2014); see also David P. Schack, Coverage for “Disparagement”: A Powerful Tool for Triggering the Duty to Defend in Business Disputes, https://btlaw.com/insights/blogs/policyholder-protection/2014/coverage-for-disparagement-a-powerful-tool-for-triggering-the-duty-to-defend-in-business-disputes (Dec. 18, 2014).

[3] E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F. Supp. 2d 1244. 1253 (N.D. Cal. 2008).

[4] Burgett, Inc. v. Am. Zurich Ins. Co., 830 F. Supp. 2d 953, 964 (E.D. Cal. 2011).

[5] Swift, 59 Cal. 4th at 296 (“Even if the Ulti–Cart was named and designed to mimic the Multi–Cart, that fact does not derogate or malign the Multi–Cart in any way.”)

[6] KLN Steel Prod. Co. v. CNA Ins. Companies, 278 S.W.3d 429, 438 (Tex. App. 2008).

[7] Id. at 439 (emphasis in original).

[8] Rimkus Consulting Grp., Inc. v. Cammarata, 688 F. Supp. 2d 598, 672 (S.D. Tex. 2010) (“The content and context of these emails show that the purpose of the challenged statements was to highlight the difference between U.S. Forensic and large forensic engineering firms in general, including but not limited to Rimkus.”)

[9] Vector Prod., Inc. v. Hartford Fire Ins. Co., 397 F.3d 1316 (11th Cir. (Fla.) 2005).

[10] Id. at 1318.

[11] E.S.Y., Inc. v. Scottsdale Ins. Co., 139 F. Supp. 3d 1341 (S.D. Fla. 2015).

[12] Id. at 1354.

[13] Scott, Blane, & Darren Recovery, LLC v. Auto-Owners Ins. Co., No. 8:15-CV-153-T-23MAP, 2017 WL 2311762, *3 (M.D. Fla. May 26, 2017), aff'd, 727 F. App'x 625 (11th Cir. 2018) (Concluding no potential coverage because statements were “generic assertions about the superiority of Anova's product” akin to puffery).

[14] Nat. Organics, Inc. v. OneBeacon Am. Ins. Co., 959 N.Y.S.2d 204, 207 (2013).

[15] Aaron Abadi v. American Airlines, Inc., et al., 23-CV-4033 (LJL), 2024 WL 1346437, *49 (S.D.N.Y. Mar. 29, 2024) (citing Swift as consistent with New York law for its articulation of disparagement standards).

[16] See David A. Gauntlett, Second Circuit Takes Limited View of Implicit Disparagement under New York Law, https://www.gauntlettlaw.com/news/second-circuit-takes-limited-view-of-implicit-disparagement-under-new-york-law (Apr. 4, 2024).

[17] Elite Brands, Inc. v. Pennsylvania Gen. Ins. Co., 164 F. App'x 60, 62 (2d Cir. (N.Y.) 2006).

[18] Julie Rsch. Lab'ys, Inc. v. Gen. Resistance, Inc., 268 N.Y.S.2d 187, 189 (1966), aff'd, 19 N.Y.2d 906 (1967) (Held that “specific assertions of unfavorable facts reflecting upon the rival product” distinguished actionable disparagement from “puffery.”)

[19] Id. (“‘The feeling has been that the practice of sellers to make consciously exaggerated claims for their own goods is so well known that purchasers attach little or no importance to such assertions, and they usually can do no serious harm.’”)

[20] See also Jarret A. Williams, Coverage: The Duty to Defend Implicit Claims, Vol. 19, No. 2 (March/April 2009).

[21] Tzumi Innovations, LLC v. Twin City Fire Ins. Co., No. 23-1241-CV, 2024 WL 1338804 (2d Cir. (N.Y.) Mar. 29, 2024).

[22] Twin City’s Reply [Dkt. 48, p. 10/37] (“Consumers, driven by concern about the coronavirus, stripped shelves bare of . . . products advertised as having antimicrobial properties. . . . Seeing an opportunity, Tzumi, a consumer goods supplier, began marketing its products—which include various wipes and sprays—as suitable for sanitizing surfaces.”)

[23] Jennifer Mandato, 2nd Circ. Pushes Co. For Case Law In Ad Injury Coverage Row, https://www.law360.com/articles/1817706/print?section=appellate (Mar. 27, 2024).

[24] Vitamin Energy, LLC v. Evanston Ins. Co., 22 F.4th 386 (3d Cir. (Pa.) 2022).

[25] Id. at 394 (“We cannot focus on the former and ignore the latter[.]”)