Second Circuit Errs in Disparagement Analysis
By David A. Gauntlett*
Introduction
In a pair of recent decisions,[1] two Second Circuit panels affirmed district court rulings concluding there was no potential coverage under offense “d” of standard Commercial General Liability (“CGL”) policies. Both panels erred by failing to understand that the “potential coverage” standard that triggers an insurer’s duty to defend does not require perfect pleading and overlooked the significance of explicit statutory claims in the underlying complaints.
Both Courts Focused on Lack of Specificity in Allegations
In Tzumi Innovations, the panel relied almost entirely on the district court’s analysis, stating it determined there was no potential coverage “[s]ubstantially for the reasons stated by the District Court.”[2] The only comment that arguably constitutes independent analysis was the conclusory statement that “did not include any assertions that reflected on competitor products.”[3] This overlooks the explicit claim in the underlying complaint that Tzumi “[d]isparag[ed] the goods, services, or business of another by false or misleading representation of fact.”[4]
The court also failed to address any of the multiple cases analyzed at length in both appellate briefing and in the district court explaining how advertisements claiming a certain quality that the product lacks, like those of Tzumi Innovations that claimed Tzumi’s cleaning products had EPA certifications, reflect negatively on products that do possess that quality.[5]
In Tzumi Electronics, the court determined that the underlying complaint’s explicit claims pursuant to “Cal. Civ. Code § 1750, et seq.” This statutory citation refers to California’s Consumer Legal Remedies Act (“CLRA”). The statutory scheme includes Cal. Civ. Code § 1770(a)(8), which prohibits “[d]isparaging the goods, services, or business of another by false or misleading representation of fact.” Critically, California courts have routinely cited the statutes in the same manner as the underlying plaintiffs where the claims at issue includes § 1770(a)(8).[6]
The Second Circuit ignored this precedent from California courts, as well as a settlement agreement resolving the underlying claims that stated liability arose from “Tzumi's implicit disparagement of its competitors [that] has a tendency to acquire for Tzumi more market share in the portable power bank market.”[7]
No Specific Competitor Need Be Named for Offense “d” Coverage
Contrary to the panels’ presumption that offense “d” coverage for “disparagement” requires a specific competitor be targeted, this would only be true if coverage were limited to the specific tort of “product disparagement,” which requires a specific competitor be targeted as an element of the tort.[8] Not so. CGL policies’ “personal and advertising injury” coverage is based on enumerated offenses, not specific torts, as evidenced by multiple cases finding potential coverage despite a lack of a “product disparagement” cause of action.
“The statements … that the Apollo Show would no longer be in existence, or that its production would be substantially limited … [are] reasonably understood to cast doubt upon the existence or extent of [the Apollo’s] property in ... intangible things[.]” Western Int’l Syndication Corp. v. Gulf Ins. Co., 222 F. App’x 589, 592 (9th Cir. (Cal.) 2007) (no explicit false statement that claimant Apollo lacked broadcast rights to the Apollo Show).
“The underlying complaint also alleges specific examples of comparisons which suggest that Vector's product is superior to the ‘leading brand.’” Vector Prods. v. Hartford Fire Ins. Co., 397 F.3d 1316, 1318 (11th Cir. 2005) (no explicit false statements that the leading brand was inferior to the insured).
“Continental alleged that Lamb had falsely stated to Continental’s customers that Continental’s products were burdened with a prior legal right and their purchase of such products would subject them to litigation.” Atlantic Mut. Ins. Co. v. J. Lamb, Inc., 100 Cal. App. 4th 1017, 1034–35 (2002) (no explicit statement to claimant customers that claimant was the source of products that were infringing patent owner Lamb’s rights).
New York State and Federal Courts Have Diverged
Both Tzumi panels (explicitly in Tzumi Innovations, implicitly in Tzumi Electronics through its citation to Tzumi Innovations) relied on Elite Brands, Inc. v. Pa. Gen. Ins. Co.,[9] which created an inappropriate standard for determining whether underlying allegations constitute potential claims for disparagement. In Elite Brands, the court determined that disparagement liability under New York law requires “specific assertions of unfavorable facts reflecting upon the rival product.” Subsequent federal courts, like both Tzumi panels, have misinterpreted this “specific assertions” standard to mean that the allegedly disparaging statements must explicitly address competitors.
New York’s state courts have taken a much more liberal interpretation of disparagement liability. In Nat. Organics, Inc. v. OneBeacon Am. Ins. Co.,[10] the court concluded “[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[.]” 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 flaw of the federal courts’ interpretation is further supported by examining Julie Rsch. Lab'ys, Inc. v. Gen. Resistance, Inc.,[11] the original source of the “specific assertions” standard quoted by Elite Brands. In context, it is clear that the court enunciated that only as a means of distinguishing non-actionable “puffing”:
The defendant's advertisements, amounting to no more than a claim in general terms of superiority of its product over the products of competitors, constitute mere ‘puffing’ and are not actionable. ‘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. 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.[’][12]
The Julie Research court’s “specific assertions” requirement, serving as a counterpoint to the previously referenced “puffing,” addresses only the nature of the asserted fact, not the target of the statement. This was easily satisfied in both Tzumi Innovations (products asserted to possess EPA certifications they did not) and Tzumi Electronics (power bank devices advertised with greater charge capacity than they could actually deliver). In contrast to the “little or no importance” put on the statements Julie Research meant to protect, the plaintiffs in both Tzumi cases identified the relevant claims as deciding factors in their decisions to purchase Tzumi’s products over those of competitors.
The Second Circuit panels’ deviation from the standards established by state courts, particularly with no analysis explaining the basis for their deviation, is contrary to the rule that federal courts are meant to adhere to principles established by state courts when ruling on matters of state law.[13]
Conclusion
The Second Circuit’s Tzumi panels avoided any coverage analysis of implicit disparagement claims under Cal. Civ. Code § 1770(a)(8) (or other equivalent statutes) 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[.]’”[14]
*David A. Gauntlett is a principal of Gauntlett Law 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 Law 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); Tzumi Elecs. LLC v. Burlington Ins. Co., No. 24-342-CV, 2024 WL 5153955 (2d Cir. (N.Y.) Dec. 18, 2024).
[2] Tzumi Innovations, LLC, 2024 WL 1338804 at *2.
[3] Id.
[4] Tzumi Innovations Underlying Complaint, ¶ 122 (asserting liability under Mass. Gen. Laws Chapter 93A, § 2).
[5] See, e.g., Miller v. Ghirardelli Chocolate Co., No. C 12- 04936 LB, 2013 U.S. Dist. LEXIS 49733, *15–16 (N.D. Cal. Apr. 5, 2013) (misleading advertisements of “chocolate” qualified as disparagement under California statute mirroring the language of the Massachusetts statute at issue in Tzumi Innovations); Del Monte Fresh Produce N.A., Inc. v. Transportation Insurance Co., No. Civ.A. 06 C 1658, 2006 U.S. Dist. LEXIS 58986, *14 (N.D. Ill. Aug. 8, 2006), aff’d, 500 F.3d 640 (7th Cir. (Ill.) 2007) (negative comparative advertising denigrated competing pineapple producers whose fruit did not possess the patented characteristics).
[6] See, e.g., Cohen v. Copart, Inc., 2022 Cal. Super. LEXIS 53009, *8 (Aug. 25, 2022).
[7] Tzumi Elecs. LLC, 2024 WL 5153955 at *2.
[8] Dollar Phone Corp. v. St. Paul Fire & Marine Ins. Co., No. 09-cv-1640 (DLI)(VVP), 2012 U.S. Dist. LEXIS 45591, 24–25 (E.D.N.Y. March 9, 2012).
[9] Elite Brands, Inc. v. Pa. Gen. Ins. Co., 164 F. App'x 60, 62 (2d Cir. (N.Y.) 2006).
[10] Nat. Organics, Inc. v. OneBeacon Am. Ins. Co., 959 N.Y.S.2d 204, 207 (2013).
[11] 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).
[12] Id. (quoting Prosser, Torts (3rd ed.), p. 949).
[13] Erie R.R. v. Tompkins, 304 U.S. 64, 78 (1938) (“Except in matters governed by the Federal Constitution or by Acts of Congress, the law to be applied in any case is the law of the State.”)
[14] 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)).