California Supreme Court to decide whether mere conduct can trigger liability insurance coverage for product disparagement or trade libel

May 16, 2013

Insurance LawStandard form commercial General Liability policies now include coverage for “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[.]” In recent years, courts have struggled with the question what must be alleged to trigger coverage for product disparagement or trade libel. Is mere conduct that casts the claimant’s product in a false light sufficient? Or must the underlying complaint allege a false and injurious statement? The California Supreme Court will have the opportunity to settle these questions in Hartford Casualty Insurance Co. v. Swift Distribution, Inc., 210 Cal.App. 4th 915, 148 Cal.Rptr. 3d 679 (2d Dist., Div. 3, Oct. 29, 2012), review granted, 294 P.3d 73 (Cal. 2013).

Swift Distribution involved a dispute between the manufacturers of competing convertible transport carts, which collapse into various configurations. The underlying plaintiff, Gary Dahl, manufactured a cart known as the “Multi-Cart,” while the insured, Swift Distribution, Inc., manufactured, advertised, and sold a similar product, known as the “Ulti-Cart.”

The insured’s advertisements did not name the Multi-Cart, Dahl, or any products other than the Ulti-Cart. Dahl’s complaint alleged only that the insured’s advertisements were designed to mislead the public into believing that the insured’s Ulti-Car was the same as Dahl’s Multi-Cart.  Dahl had no control over the nature and quality of the insured’s Ulti-Cart, and therefore asserted that any fault with the insured’s cart would tarnish Dahl’s name and reputation.

The California Court of Appeal in Swift Distribution affirmed the trial court’s ruling that the insured’s liability carrier had no duty to defend. The insured’s advertising did not constitute product disparagement, in the court’s view, because it did not refer to, let alone disparage, Dahl’s Multi-Cart, either expressly or by reasonable implication.

Muddled State of the Case Law

Several months before the Swift Distribution decision another California appellate court took a broader view of product disparagement coverage in Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc., 207 Cal.App.4th 969, 144 Cal.Rptr.3d 12 (2012) (Charlotte Russe). In Charlotte Russe, the manufacturer of “People’s Liberation” brand apparel sued the insured retailer. The manufacturer claimed that the insured damaged the People’s Liberation brand and trademark by marking down prices for the apparel. This advertising allegedly suggested to consumers that People’s Liberation products were of inferior quality. The Charlotte Russe court held that the allegations in the complaint could reasonably be interpreted to allege that the insured retailer disparaged the People’s Liberation brand within the meaning of the retailer’ liability policy.

The Swift Distribution court could have distinguished Charlotte Russe on its facts—because Dahl’s complaint did not allege that the insured’s advertising implied that the Multi-Cart was of poor quality. But the court went further and criticized the notion that a reduction in price—even a steep reduction in price—constitutes disparagement. The court pointed out that sellers reduce prices for a variety of reasons that have nothing to do with the quality or reputation of the product, including competition from other sellers, surplus inventory, the necessity to reduce stock because of the loss of a lease, changing store location, or going out of business.

Possible Outcomes in the Supreme Court

The California Supreme Court could affirm Swift Distribution, but leave room for coverage for product disparagement by implication claims. For example, an insured’s claim that the materials used in its products, or its manufacturing processes, are superior to those of competing products, may disparage those products by implication.  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. Stay tuned.