A Tale of Two Cases: What a Difference A Forum Makes

It is the rare set of cases that so graphically illustrates the different analytical approaches that Luna Gourmet Coffee & Tea Co.[1] and Sprint Lumber[2] follow, where the applicable law of the forum is of less import than the presumption of one court that false, frivolous, and groundless claims did not entitle the insured to defense if the court can deduce why the insured has not been sued for potentially covered claims, based on the court’s understanding of what facts would suffice to create a colorable claim for relief.

                In Aurafin, the court explained that, where the insurer contends that the lawsuit does not state a viable claim for relief, its role is not to use that question about the viability of the claim to refuse a defense, but rather to align its interest with those of the policyholder and defend a suit to remove what it asserts are scurrilous claims.[3] There is, however, a question of whether the mere label of a cause of action that would implicate coverage suffices. The court is correct that more is required, but fact allegations which may not be sufficient to implicate coverage are different from an assessment that the facts are unlikely to establish proof of liability under the tort that is at issue underscoring the offense that is covered in coverage (B). The Luna case follows this narrow pathway.

                By contrast, reaching a favorable resolution and applying Missouri law, the Sprint Lumber case broadly construes terminology in the policy to secure defense benefits to the policyholder by looking at the “Potentiality Doctrine” as it is properly envisioned to apply.

Luna Court Misapplies Legal Standard for Successful Underlying Suit to Denial of Defense

The court determined that Travelers did not owe Luna a defense for the putative class action suits against the defendants for their use of the name “Kona” in connection with coffee distribution, which precipitated a lawsuit based on the diminished the value of “Kona coffee” as a commodity, leading consumers to conclude that it was “nothing special.”[4]

The court found no potential coverage for either express or implicit disparagement in the fact allegations in the class action suits reasoning that:

Boyer’s alleged false statement that its products containing Kona coffee which allegedly impugns or is derogatory to coffee from the Kona District, which then allegedly Kona farmers’ products or goods because they are made from Kona coffee is too remote to constitute disparagement within the meaning of the Policies or the element of the claim under Colorado or Washington law. In other words, the Court finds that the implied disparagement Defendants rely upon does not fall within the Disparagement Offenses at issue here.”[5]

The court agreed that allegations of “deceptive labeling and marketing” as against manufacturers of the products, or of selling “fraudulently labeled” products as against the sellers of the products, might constitute an “advertisement” within the meaning of the policy.[6] But the court found that the elements of the tort of disparagement were not met because no false statements or misrepresentation about the Kona plaintiffs in their products was derogatory.[7] The court presumed that the elements of a trade libel under applicable Washington law must include malice and special damages.[8] Applying Washington law ignores the fact that the policy does define its disparagement coverage to any enumerated tort, in contrast to the policy’s express inclusion of coverage for “libel” or “slander” in the same policy provision. This analytic approach also ignores the fact that the term “disparagement” in the policy is not limited by its terms to a particular form of trade libel or product disparagement or other form of injurious falsehood.[9]

The court determined that “the disparaging communication is one that must pertain directly to a particular individual or product’s identity can be ascertained from the text (and context) of the publication.[10] The court determined that the cited cases were distinguishable, concluding that Travelers was correct in deciding that disparagement by implication was not actionable under Washington law and that no potential coverage arose under that offense as no claims for express disparagement were asserted.[11]

Sprint Lumber Court Reads Duty to Defend More Broadly

The suit filed against the Sprint Lumber Parties alleged violation of the Missouri Uniform Trade Secrets Act as well as claims for tortious interference and by amendment antitrust violations. The trial court found that a duty to defend arose and the appellate court affirmed that ruling.[12]

In a key portion of its analysis the court observed:

Five days after it filed its second amended petition… Porters alleged, “The extent and timing of the Former Employees’ departure—along with the coordinated bolstering of Sprint Lumber and undercutting of Porters by its manager and key salespeople—magnifies the reputational and goodwill injury to Porters.” It further alleged that the Sprint Lumber Parties wrongfully interfered with business expectancies by “[c]hallenging Porters’s ability to carry on its operation without the Former Employees” and “[c]onveying false information regarding the circumstances of the Former Employees departure in a way the casts negatively on Porter’s” to Porters’s customers.[13]

The court determined that these allegations suffice to evidence potential claims of disparagement. It concluded that “Porters’s allegations raised the possibility that the Sprint Lumber Parties’ statements and conduct were disparaging to Porters, causing its customers to believe that it no longer possessed a favorable reputation or managerial skills.”[14]

Rejecting the case authority relied on by Union, the court noted:

The Missouri Supreme Court, however, specifically declined to follow Select Design in McCormack. It found that Select Design was “directly contrary” to its decision that coverage for the disparagement of another’s goods, products, or services does not turn on whether a specific cause of action such as defamation, libel, slander, or injurious falsehood is asserted against the insured.[15]

The court rejected that coverage exclusions for infringement of trade secrets or other intellectual property barred coverage for disparagement, noting:

Numerous cases have held that disparagement is outside the scope of an intellectual property exclusion like the one in the Union Policy. . . . Porters’s allegations did not show that the Sprint Lumber Parties’ conspiracy to breach the duty of loyalty and/or to tortiously interfere with Porters’s customer relationships by disparaging Porters unequivocally and without exception arose out of the infringement of Porters’s trade secrets or other intellectual property.[16]

Rejecting the applicability of the “access or disclosure of confidential information” exclusion, the court stated:

Even if… exclusions excluded coverage for Porters’s injuries arising out of misappropriation and access and disclosure of its confidential information and trade secrets, there was a possibility of coverage for its injuries arising out of the independent and distinct causes relating to the disparagement of its services not excluded under the Policy.”[17]

Conclusion

Careful attention to the forum in which the insurer issuing the policy is a citizen can enhance the prospects for a favorable recovery in a coverage dispute. Also, policyholders with multiple locations should choose the best-positioned one for a coverage battle. We can guide that analysis.

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* 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. He also serves as an expert witness on insurance coverage issues and represents policyholders and their counsel on a range of fee dispute issues with their insurers. Mr. Gauntlett can be reached at (949) 514-5662 or dag@gauntlettlaw.com. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.  

[1] Travelers Indemnity Co. of America v. Luna Gourmet Coffee & Tea Co. LLC, No. 19-cv 02039-RM-NYW, 2021 U.S. Dist. LEXIS 67409 (D. Colo. Apr. 7, 2021).

[2] Sprint Lumber, Inc. v. Union Ins. Co., W.D. 82930, 2021 Mo.  App. LEXIS 431 (Mo. Ct. App. W.D. Division One, April 6, 2021).

[3] “[Acknowledging that the] counterclaims alleged each element of libel, but that the facts did not support a libel claim as a matter of law, the district court applied the wrong legal standard and impermissibly considered the merits of the libel claim. The viability of the underlying claim against the insured does not affect an insurance company’s duty to defend. Rather, even when the underlying action is a sham, the insurer may terminate its duty to defend only by demurring or obtaining summary judgment on its insured’s behalf.” Aurafin-OroAmerica, LLC v. Federal Ins. Co., 188 Fed. App’x. 565 (9th Cir. (Cal) 2006)) (internal citations omitted).

[4] Luna at *27.

[5] Id. at *20-21.

[6] Id. at *17.

[7] Id. at *19.

[8] Id. at *18.

[9] See Winklevoss Consultants, Inc. v. Federal Ins. Co., 11 F. Supp. 2d 995, 1000 (N.D. Ill. 1998) (“[T]he policy offense of ‘disparagement’ is not synonymous with common law commercial disparagement. . . . The [complaint] still includes factual allegations that Winklevoss made false negative comparative statements about Lynchval’s goods, causing Lynchval to lose sales.  It does not matter that these allegations may not meet the technical requisites for stating a commercial disparagement claim”).

[10] Luna at *19.

[11] Id. at *20.

[12] Id. at *2, *61.

[13] Id. at *20­–21.

[14] Id.

[15] Id. at *24 (citing McCormack Baron Mgmt. Servs. Inc. v. American Guarantee & Liab. Ins. Co., 989 S.W.2d 168 at 171–72 (Mo. banc 1999)).

[16] Id. at *30- 31.

[17] Id. at *31.