Cases Addressing Implicit Disparagement Reveal Coverage Opportunities in Intellectual Property Litigation

Three recent decisions, two published from the California Court of Appeals and one unpublished from the Ninth Circuit, address the boundaries of coverage for implicit disparagement claims under California law emphasizing both the limitations and opportunities for such claims.

For IP practitioners these cases highlight why a number of typically asserted IP claims may create coverage falling outside the scope of intellectual property exclusions, even when the labeled causes of action are expressly excluded from coverage.  It is standard for commercial general liability policies since 1986 to include coverage for “oral or written publication of material that disparages a person’s or organizations’ goods, products or services.”

Where coverage exists for claims for disparagement, the IP exclusion need not bar a defense.  Waller v. Truck Ins. Exchange Inc., 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].”) Distinct claims for implicit disparagement revealed by the facts alleged, could be the basis for an amended pleading. Burgett, Inc. v. Am. Zurich Ins. Co., 830 F. Supp. 2d 953, 960 (E.D. Cal. 2011) (“[A defense arises] where, under the facts alleged, reasonably inferable, or otherwise known, the complaint could fairly be amended to state a covered liability.”)

Affirming the district court, Michael Taylor Designs, Inc. v. Travelers Property Cas. Co. of Am., No. 11-16052, 2012 WL 5385598 (9th Cir. (Cal.) Nov. 5, 2012), concluded that potentially covered claims for implicit disparagement arose due to false implications that the public could deduce that statements were made on the showroom floor that “steered [customers] towards” alleged “cheap synthetic knockoffs” of the original wicker furniture promoted on a website.  Potential coverage for implicit disparagement arose even though there were no direct statements denigrating the claimant Rosequist’s goods.  The purported “bait and switch scheme” was allegedly orchestrated to induce potential customers via website displays to purchase furniture at the Michael Taylor showroom for furnishings not made of wicker but synthetic materials.

Travelers Prop. Cas. Co. of Am. v. Charlotte Russe Holding, Inc., 207 Cal. App. 4th 969, 981 (2012) reh’g denied (July 31, 2012), review denied (Sept. 26, 2012), addressed retailer Charlotte Russe’s use of hangtags and other visual displays to promote significantly discounted goods.  This activity allegedly falsely implicated that the claimant’s goods were not of high value even though there was no direct statement denigrating its products, where Charlotte Russe’s promotion labels emphasized only that the goods were sold at reduced prices.

Hartford Cas. Ins. Co. v. Swift Distribution, Inc., ___ Cal. Rptr. 3d ___, 2012 WL 5306248 (Oct. 29, 2012) analyzing trademark infringement claims premised on use of the name “Ulti-Cart” to mislead by implied reference to “Multi-Cart” where advertisements for Ulti-Cart only referred to that product, falsely implying the names were derived from the same source. The Court distinguished Michael Taylor but criticized Charlotte Russe, contending that a mere statement announcing goods at a lower price could not evidence disparagement. The Swift panel, however, failed to address the false implication that the claimant’s asserted potential customers could draw from this discounting activity.

Essentially the court drew distinctions between claims of blurring which were not covered as they alleged no more than palming off another’s goods as one’s own, and tarnishment where implicit statements denigrating another’s product could be inferred such as use of the phrase “superior to the ‘leading brand.’” Vector Products, Inc., v. Hartford Fire Ins. Co., 397 F.3d 1316, 1318 (11th Cir. (Fla.) 2005). 

Swift concluded that no potential coverage for claims of “implicit disparagement” arose despite citing a series of cases clarifying the expansive scope of “implicit disparagement” coverage under California law, which it distinguished. E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F. Supp. 2d 1244, 1252 (N.D. Cal. 2008) (Lanham Act, false advertising), Michael Taylor Designs, Inc. v. Travelers Prop. & Cas. Co. of Am., 761 F. Supp. 2d 904, 910 (N.D. Cal. 2011) (trade dress), and Burgett, Inc. v. Am. Zurich Ins. Co., 830 F. Supp. 2d 953, 957-58 (E.D. Cal. 2011) (trademark infringement). 

The Swift court characterized the facts narrowly.  Id. at *1 (“Because the advertisement did not identify Company B’s product, and contained no matter derogatory to Company B’s title to its property, its quality, or its business, no disparagement occurred.”) Its analysis failed to acknowledge three distinct bases for potential coverage in Charlotte Russe, which bolstered that court’s “implicit disparagement” coverage analysis. These included: (1) ignoring the potential for coverage where the pleadings may be amended to state a covered claim; see Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 (Cal. 2005); (2) the Swift court’s assumption that proof of the elements for product disparagement defines the complete scope of coverage for the “disparagement” offense; and (3) Charlotte Russe’s express rejection of the “all elements” rule, concluding that aspects of disparagement such as falsity need not be expressly alleged. Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1269-1270 (9th Cir. (Cal.) 2010) (“[T]he absence of an element of a properly pleaded cause of action is of no moment in determining [the] duty to defend.”)