New Guidance on Insurance Coverage for Product Disparagement Claims: Part II

November 21, 2014

Insurance LawMy last post discussed the California Supreme Court’s recent decision in Hartford Casualty Insurance Co. v. Swift Distribution, Inc., 59 Cal.4th 277, 326 P.3d 253, 172 Cal.Rptr.3d 653 (2014), which held that a CGL policy’s coverage for product disparagement is limited to allegations that the insured made a false or misleading statement that either expressly or by clear implication:

  1. specifically referred to the plaintiff’s product or business and
  2. clearly derogated that product or business.

The court’s opinion clarifies that mere conduct by the insured that casts the claimant’s product in a false light does not qualify as product disparagement. Thus, rulings such as Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc., 207 Cal.App.4th 969, 144 Cal.Rptr.3d 12  (2012), which found coverage for a clothing manufacturer’s claims that a retailer damaged the manufacturer’s brand and trademark by marking down prices for the manufacturer’s apparel, are no longer good law.

A question that courts will be asked to address after Swift Distribution is when an insured’s statements about the superiority of its products crosses the line from “mere puffing” to product disparagement by implication. The answer seems to lie in the degree of specificity in the insured’s claims. The California high court, for example, noted that an insured’s claim that it owns the intellectual property rights to an entire class of products may disparage competing products. Of course, if a broad assertion of intellectual property rights qualifies, so does claiming ownership of intellectual property rights or technology that actually belong to a competitor.  See, e.g., Liberty Mut. Ins. Co. v. OSI Industries, 831 N.E.2d 192 (Ind. App. 2005); Burgett, Inc. v. American Zurich Insurance Co., 830 F.Supp.2d 953 (E.D.Cal. 2011).

An insured also may disparage the products of competitors by falsely asserting that it is the only producer of a product with certain features or capabilities. E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F.Supp.2d 1244  (N.D.Cal.2008), illustrates this type of disparagement by implication. In E.piphany Inc., Sigma sued E.piphany, alleging that E.piphany falsely advertised its software products as “all Java” and “fully J2EE,” which gave its products an unfair and undeserved advantage over Sigma and other competitors which in fact did offer “all Java” and “fully J2EE” software. E.piphany sued its insurer seeking a declaration that the insurer had a duty to defend. E.piphany, Inc. found that Sigma’s complaint alleged that E.piphany falsely stated that it was the only producer of “all Java” “fully J2EE” software and that E.piphany suggested that its competitors’ technology was behind E.piphany’s technology. Thus the Sigma complaint alleged that E.piphany’s false claims about the superiority of its own products necessarily implied the inferiority of Sigma’s competing products. E.piphany Inc. held that the Sigma complaint contained disparagement allegations potentially covered by the insurer’s policy and thus triggered the insurer’s duty to defend.