Second Circuit Takes Limited View of Implicit Disparagement under New York Law
/Second Circuit Takes Limited View of Implicit Disparagement under New York Law
By David A. Gauntlett*
Introduction
A Second Circuit panel including Judges Pierre Leval, Sarah Merriam, and Maria Kahn affirmed the district court’s denial of potential coverage in Tzumi Innovations, LLC v. Twin City Fire Ins. Co.[1] Their Summary Order adopted District Judge Abrams’ conclusion that “‘there is no possible factual or legal basis on which’ Twin City would be obligated to defend Tzumi under the ‘personal and advertising injury’ provision of the policy.”[2] Neither court analyzed whether claims under California Civil Code § 1770(a)(8) evidenced implicit disparagement by Tzumi of its competitors’ products so as to require a defense under offense “d” of the policy’s “personal and advertising injury” coverage.
New York State Courts Embrace Broad Coverage for Implicit
Nat. Organics, Inc.[3] supports a different approach for implied disparagement cases, holding that “[t]he statement that HON had been appointed the exclusive distributor of Nature's Plus products in the Nordic region could imply that NPN's inventory of Nature's Plus products was unauthorized[.]”[4] Even though no particular competitor was referenced, the assertion “could imply” a concrete fact that may negatively impact consumers’ opinions of those competing products because NPN was described as an unauthorized distributor.
The underlying pleadings in the Tzumi case asserted that Tzumi marketed its products with packaging and shelf placement intended to lead consumers to equate it with Lysol. More critically, the allegations included language mirroring Cal. Civ. Code § 1770(a)(8) asserting Tzumi was “[d]isparaging the goods . . . of another by . . . misleading representation of fact.” Given the fact that Lysol’s products, unlike Tzumi’s, were EPA-certified disinfectants, this statement of implied equivalence amounted to disparagement that indirectly injured consumers.[5] Like implying unauthorized inventory in Natural Organics, placement “in close proximity to EPA-registered disinfectants” precipitated consumers’ negative comparative inferences.
Twin City’s Counsel Promoted a Narrow Construction of Implicit Disparagement
At oral argument, Twin City’s counsel conceded that New York recognized implicit disparagement. He claimed, however, that this doctrine was limited to “the natural implication of the clear statements that have been said,”[6] citing Elite Brands, which pre-dated Natural Organics by seven years and did not address implicit disparagement claims.[7]
Elite Brands relied on Julie Research,[8] an earlier Appellate Division decision that required “specific assertions of unfavorable facts reflecting upon the rival product” to distinguish actionable disparagement from “puffery.”
Mere general statements of comparison, declaring that the defendant's goods are the best on the market, or are better than the plaintiff's, are privileged so long as they contain no specific assertions of unfavorable facts reflecting upon the rival product.[9]
Thus, the “specificity” requirement is aimed at the nature of the assertion, not the target of the statement. And, critically, it need only attack the “rival product.”[10] No explanation for Twin City’s departure from state coverage law was articulated or acknowledged.[11] If Twin City wished a more limited policy construction, its grant of coverage should have been more narrowly drafted, as a subsequent Appellate Division ruling made clear.[12]
The Second Circuit Explored a Narrow Hypothetical
At oral argument, Judge Merriam posited 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.’”[13] But while such a statement would evidence disparagement, analogous to the facts in Del Monte,[14] this is too high a bar. The misrepresentations of fact were Tzumi’s implications that competitors’ products had not been approved (unlike Tzumi) “as safe and effective on surfaces.” This asserted that any “anti-microbial product,” even if not a disinfectant, would be a preferred product.[15]
The claims under Cal. Civ. Code § 1770(a)(8) (which the panel’s Summary Order did not reach) would satisfy the “clear or necessary inference” test for implicit disparagement from Swift Distribution, Inc.[16] This California Supreme Court case, decided a year after Natural Organics, provided a rationale to establish potential coverage for implicit disparagement.[17]
The Rationale of Cases Nationwide Does Not Support Second Circuit’s Conclusion
Twin City did not address Seagate Technology where the court affirmed that the “underlying action allege[d] that Seagate falsely claims that its technology is equivalent to Convolve Inc.'s technology[.]” and required a defense for implicit disparagement.[18] It also claimed Vogue,[19] a post-Swift case analyzing whether misleading use of “organic” and “Organix” presented colorable claims under § 1770(a)(8), rejected potential coverage. Not so. That court only ruled on collateral estoppel based on a Summary Order by a Florida Court of Appeals decision, an issue it could not have reached absent an acknowledgment of potential coverage.[20]
Conclusion
The Second Circuit’s Tzumi panel avoided any coverage analysis of implicit disparagement claims under Cal. Civ. Code § 1770(a)(8) and adopted a restrictive interpretation of New York’s implicit disparagement standard used in Elite Brands inconsistent with the Appellate Division’s analysis in Natural Organics. The panel’s decision cannot, therefore, be deemed an authority for future cases facing similar issues as “a case ‘is precedent only as to those questions presented, considered and squarely decided[.]’”[21]
*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] Tzumi Innovations, LLC v. Twin City Fire Ins. Co., No. 23-1241-CV, 2024 WL 1338804 (2d Cir. (N.Y.) Mar. 29, 2024) (citing Elite Brands, Inc. v. Pennsylvania Gen. Ins. Co., 164 F. App'x 60, 62 (2d Cir. (N.Y.) 2006)) (summary order).
[2] Id. at *2 (“We conclude that [Tzumi’s] arguments are without merit . . . for the reasons stated by the District Court in its thorough and well-reasoned memorandum opinion and order[.]”)
[3] Nat. Organics, Inc. v. OneBeacon Am. Ins. Co., 959 N.Y.S.2d 204 (2013).
[4] Id. at 207.
[5] JAR Labs. LLC v. Great Am. E & S Ins. Co., 945 F. Supp. 2d 937, 944 (N.D. Ill. 2013) (“[A] statement equating a competitor's product with an allegedly inferior one is logically indistinguishable from, and no less disparaging than, a statement describing one's own product as ‘superior’ to the competitors.”)
[6] 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).
[7] Elite Brands, 164 F. App'x at 62.
[8] Julie Rsch. Lab'ys, Inc. v. Gen. Resistance, Inc., 25 A.D.2d 634, 634, 268 N.Y.S.2d 187, 189 (1966), aff'd, 19 N.Y.2d 906, 227 N.E.2d 892 (1967).
[9] Id. (emphasis added).
[10] See David A. Gauntlett, Coverage Based on Potential for Amendment of Underlying Pleadings, https://www.gauntlettlaw.com/news/ltstlvxs1vwlifa3rni6btlbkoqkap (Sep. 3, 2023).
[11] Lembcke v. United States, 181 F.2d 703, 707 (2d Cir. (N.Y.) 1950) (“In a diversity case the federal court must follow the decision of a state trial court, absent higher state authority . . . .”)
[12] Napoli, Kaiser & Bern, LLP v. Westport Ins. Corp., 295 F. Supp. 2d 335, 342 (S.D.N.Y. 2003) (“If Westport had wanted to exclude claims that are related to fee disputes, it could have done so. . . . See, e.g., Hugo Boss Fashions [Inc. v. Fed. Ins. Co., 252 F.3d 608, 615 (2d Cir. 2001)]”).
[13] 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).
[14] Del Monte Fresh Produce N.A., Inc. v. Transportation Ins. Co., No. CIV.A. 06 C 1658, 2006 WL 2331144, *5 (N.D. Ill. Aug. 8, 2006), aff'd, 500 F.3d 640 (7th Cir. 2007) (“Del Monte launched a campaign to declare its pineapples were sweeter than those of its competitors,” erroneously relying on their subsequently challenged status as patented goods.)
[15] 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.”)
[16] Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal. 4th 277, 295 (2014) (distinguishing three implicit disparagement cases successfully litigated by Gauntlett & Associates).
[17] Aaron Abadi v. American Airlines, Inc., et al., No. 23-CV-4033 (LJL), 2024 WL 1346437, at *49 (S.D.N.Y. Mar. 29, 2024) (citing Swift as consistent with New York law on scope of actionable disparagement claims).
[18] Nat'l Union Fire Ins. Co. v. Seagate Tech., Inc., 466 F. App'x 653, 655 (9th Cir. (Cal.) 2012).
[19] Hartford Cas. Ins. Co. v. Vogue Int'l, LLC, No. A150921, 2018 Cal. App. Unpub. LEXIS 3467, *21–23 (May 21, 2018).
[20] Waller v. Truck Ins. Exch., 11 Cal. 4th 1, 16 (1995) (“Before ‘even considering exclusions, a court must examine the coverage provisions to determine whether a claim falls within [the policy terms].’”); Allied Prop. & Cas. Ins. Co. v. Matthews, No. 16-cv-680 (DAB), 2018 U.S. Dist. LEXIS 52083, *18–19 (S.D.N.Y. Mar. 20, 2018) (concluding no conflict with Waller under New York law).
[21] Wellbilt Equip. Corp. v. Fireman, 719 N.Y.S.2d 213, 217 (App. Div. 2000) (quoting People v. Bourne, 139 A.D.2d 210, 216 (1988)).