Not a Lexis+ subscriber? Try it out for free.
LexisNexis® CLE On-Demand features premium content from partners like American Law Institute Continuing Legal Education and Pozner & Dodd. Choose from a broad listing of topics suited for law firms, corporate legal departments, and government entities. Individual courses and subscriptions available.
By Joshua A. Mooney
[Editor’s Note: My colleague Josh Mooney is an expert on all things cyber, privacy and personal-advertising injury coverage. If you read his newsletter, The Coverage Inkwell, you know that. If you don’t, check out the newsletter here - thecoverageinkwell.com. For this reason I asked Josh to tackle the write-up of Swift Distribution. rjm] Hartford Casualty Insurance Company v. Swift Distribution, Inc., 326 P.3d 253 (Cal. 2014), [enhanced version available to lexis.com subscribers], is worthy of designation as one of the year’s ten most significant coverage decisions for two reasons: (1) it scales back implied disparagement claims for purposes of the duty to defend under Coverage B “personal and advertising injury,” and (2) it ends the brief period in California law where a retailer’s markdown of a product’s prices could imply disparagement of the product and trigger an insurer’s duty to defend. The importance of this second point is hugely significant. Discounting by retailers, and often-times deeply so, is how a lot of retail works these days. If every time a retailer decided to mark down a manufacturer’s product it was disparaging the product, the resulting coverage obligations for litigation between retailers and manufacturers would resemble a 4 A.M. stampede at Walmart on the day after Thanksgiving. By recognizing that price cutting and retail markdowns are not instances of trade disparagement, but, rather, routine commercial behavior, the California Supreme Court shut the door on what could have looked liked a coverage door buster. Swift Distribution involved an underlying, quintessential and modern “passing off” case. The plaintiff Gary-Michael Dahl manufactured and sold the “Multi–Cart,” a cart that could be manipulated into various configurations to move music, sound, and video equipment quickly and easily. The product apparently was a popular one, and the insured, Swift Distribution d/b/a Ultimate Support Systems began selling an alleged knock-off cart it called – wait for it – the “Ulti-Cart.” Not surprisingly, Dahl sued Swift Distribution, asserting patent and trademark infringement, unfair competition, dilution of a famous mark, and false advertising. In his complaint, Dahl asserted that Swift Distribution’s false and misleading advertisements and use of a “nearly identical mark” were likely to cause consumer confusion or mistake, or to deceive the public “as to the affiliation, connection, or association” of the two parties. The complaint attached Swift Distribution’s advertisements. Importantly, the advertisements did not name the Multi-Cart or any other product. Swift Distribution tendered its defense under Coverage B of its general liability policy, which defined “personal and advertising injury” in part as injury arising out of “[o]ral, written or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services.” Swift Distribution asserted that the underlying action stated a claim for disparagement, thereby implicating coverage. The insurer disagreed and denied coverage, stating there was no disparagement absent a specific statement about a competitor’s goods. Coverage litigation ensued. The trial court held that the insurer had no duty to defend. The California Court of Appeal affirmed. In doing so, the appellate court condemned (okay, that’s my word) an earlier decision rendered by a separate panel that summer, in the case Travelers Property & Casualty Company v. Charlotte Russe Holding, Inc. In Charlotte Russe, the court had held that a lawsuit over the price markdown of name brand clothing apparel alleged trade libel for purposes of implicating the duty to defend. Swift Distribution appealed the case to the Supreme Court of California, which affirmed and took the opportunity to clarify the meaning of commercial disparagement and abrogate the controversial Charlotte Russe decision. Noting that disparagement emerged from the common law tort for slander of title, the Supreme Court of California explained that the tort had expanded to include statements disparaging the quality of property rather than simply its ownership, a form of disparagement commonly referred to as trade libel, and also came to encompass a broader theory of economic or commercial injury caused by a false, derogatory statement. This expansion, in turn, had created confusion among courts: “Confusion surrounds the tort of ‘commercial disparagement’ because not only is its content blurred and uncertain, so also is its very name. The tort has received various labels, such as ‘commercial disparagement,’ ‘injurious falsehood,’ ‘product disparagement,’ ‘trade libel,’ ‘disparagement of property,’ and ‘slander of goods.’ These shifting names have led counsel and the courts into confusion, thinking that they were dealing with different bodies of law. In fact, all these labels denominate the same basic legal claim.” Disparagement, the Court concluded, is often included as “a specific example of the more general principle of injurious falsehood.” For purposes of insurance coverage, disparagement has come “to mean a knowingly false or misleading publication that derogates another’s property or business and results in special damages.” Working within the confines of that understanding, the Court then concluded that, when determining whether a disparagement claim has been alleged for purposes of the duty to defend, courts must require that the purported disparaging comments “have a degree of specificity that distinguishes direct criticism of a competitor’s product or business from other statements extolling the virtues or superiority of the defendant’s product or business.” The Court explained: “A false or misleading statement (1) must specifically refer to the plaintiff’s product or business, and (2) must clearly derogate that product or business. Each requirement must be satisfied by express mention or by clear implication.”
According to the Court, “[w]hat distinguishes a claim of disparagement is that an injurious falsehood has been directed specifically at the plaintiff’s business or product, derogating that business or product and thereby causing that plaintiff special damages.” (Emphasis in original). The specificity requirements limit the type of statements that may constitute disparagement, especially since advertisements and promotional materials often avoid express mention of competitors.” Examining the case before it, the court determined that the underlying allegations failed to assert product disparagement to implicate a duty to defend. “There is no coverage for disparagement simply because one party tries to sell another’s goods or products as its own.” “[A] party’s attempt to copy or infringe on the intellectual property of another’s product does not, without more, constitute disparagement.”
In fact, underlying allegations pertaining to the likeness of the products belied any assertion that the lawsuit alleged product disparagement, a defense California courts previously had rejected: “Dahl repeatedly asserted that the two products were “nearly identical, folding transport carts.” Indeed, Dahl’s claims relied heavily on the fact that the mark and design of the two products were nearly indistinguishable. 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. Because the alleged likeness of the two products did not derogate the Multi–Cart, we reject Swift Distribution’s theory of disparagement based on consumer confusion over the product name and design.”
Allegations that Swift Distribution claimed its Ulti-Cart was superior, without specific reference to Dahl’s Multi-Cart, simply were insufficient to constitute disparagement: “Were we to adopt Swift Distribution’s theory of disparagement, almost any advertisement extolling the superior quality of a company or its products would be fodder for litigation. Proliferation of such litigation would interfere with the free flow of commercial information.”
Finally, and critically, the California Supreme Court put a stop to the logic expressed in Charlotte Russe. In doing so, the Court was careful to preserve the doctrine of implied disparagement in instances, for example, where an insured falsely alleges that its product is the only such product available, or that its product is superior to all other products. Make no mistake, in those instances, the Swift Distribution Court believed that alleged derogatory statements possess requisite specificity and reference to a plaintiff’s product to implicate a duty to defend. However, the court concluded that the claim of disparagement recognized in Charlotte Russe lacked requisite specificity: “There is no question that Charlotte Russe’s discounted prices on People Liberation’s clothing specifically referred to People Liberation’s product. But a mere reduction of price may suggest any number of business motivations; it does not clearly indicate that the seller believes the product is of poor quality. . . . . Charlotte Russe’s prices did not carry an implication clear enough to derogate People Liberation’s product for purposes of a disparagement claim. We disapprove Charlotte Russe to the extent it is inconsistent with this opinion.” [Emphasis added.]
In other words, the Supreme Court of California, thankfully, recognized that price cutting and retail markdowns are not instances of trade disparagement. They are examples of routine commercial behavior. With Black Friday last week, Cyber Monday this week and a whole holiday season of deals upon us, Swift Distribution is a decision worthy of any insurer’s basket. Happy Shopping.
Coverage Opinions is a bi-weekly (or more frequently) electronic newsletter reporting or providing commentary on just-issued decisions from courts nationally addressing insurance coverage disputes. Coverage Opinions focuses on decisions that concern numerous issues under commercial general liability and professional liability insurance policies. For more information visit www.coverageopinions.info.
The views expressed herein are solely those of the author and not necessarily those of his firm or its clients. The information contained herein shall not be considered legal advice. You are advised to consult with an attorney concerning how any of the issues addressed herein may apply to your own situation. Coverage Opinions is gluten free but may contain peanut products.
Randy Maniloff is Counsel at White and Williams, LLP in Philadelphia. He previously served as a firm Partner for seven years and transitioned to a Counsel position to pursue certain writing projects including Coverage Opinions . Nonetheless he still maintains a full-time practice at the firm. Randy concentrates his practice in the representation of insurers in coverage disputes over primary and excess obligations under a host of policies, including commercial general liability and various professional liability policies, such as public official’s, law enforcement, educator’s, media, computer technology, architects and engineers, lawyers, real estate agents, community associations, environmental contractors, Indian tribes and several others. Randy has significant experience in coverage for environmental damage and toxic torts, liquor liability and construction defect, including additional insured and contractual indemnity issues. Randy is co-author of “General Liability Insurance Coverage - Key Issues In Every State” (Oxford University Press, 2nd Edition, 2012). For the past twelve years Randy has published a year-end article that addresses the ten most significant insurance coverage decisions of the year completed.
Read more from this issue of Coverage Opinions.
For more information about LexisNexis products and solutions connect with us through our corporate site