The “personal and advertising injury” coverage applies to injury arising out of “oral or written publication of material that…disparages a person’s or organization’s goods, products or services.” The term “disparages” is not defined. Accordingly, it provides fertile ground for creative arguments by policyholders seeking to broaden the meaning to cover trademark infringement, false advertising and “passing off” claims. Recently, courts have rejected the invitation to broaden the definition to include any claim that involves merely a competitive injury or reputational harm. Rather, to qualify as “disparagement,” there must be publication of material to a third party that asserts or implies the inferiority of a competitor’s product or services.
For example, in Vitamin Health, Inc. v. Hartford Casualty Ins. Co., Dist. Court, Case No. 15-10071, (ED Mich., May 9, 2016), the insured was sued for false advertising. It argued that the allegations fell within the disparagement offense. The court held that disparagement is ordinarily defined as “to discredit or bring reproach upon by comparing with something inferior.” The Court found there can be no disparagement where the policyholder is alleged to have misrepresented the content of its own product, and not its competitor’s, even though such action may have caused consumer confusion or caused the competitor to lose sales.
In E.S.Y., Inc. v. Scottsdale Ins. Co., 139 F.Supp.3d 1341, 1353 (S.D. Fla. 2015), the insured, E.S.Y., was sued by an entity that made, marketed and sold garments and used multiple trademarks and copyrighted designs. The underlying complaint alleged that E.S.Y. “began using an identical or substantially similar mark (the “Liquid Energy Shield Mark) … in connection with their own competing garments” as well as using labels and hang tags “in such a manner that its use causes and is causing actual confusion in the marketplace, or is likely to cause such customer confusion, whereby consumers mistakenly assume that E.S.Y.’s products offered under the claimant’s Shield Mark are associated with or sponsored or approved by the claimant.
E.S.Y. argued that those allegations triggered the disparagement offense. The Court rejected that argument. It embraced the holding and rationale of the Seventh Circuit in Acme United Corp. v. St. Paul Fire & Marine Ins. Co., 214 Fed. Appx. 596 (7th Cir. 2007), where the court stated:
Disparage means “to discredit or bring reproach upon by comparing with something inferior.” Webster’s Third New International Dictionary (unabridged) 653 (1981); see also Black’s Law Dictionary 483 (7th ed.1999) (defining disparage as “[t]o dishonor (something or someone) by comparison” or “[t]o unjustly discredit or detract from the reputation of (another’s property, product, or business)”). Further, as we have noted in previous cases, “disparagement [could] result from false comparisons” between products in which the comparison dishonors the product being compared. See, e.g., Skylink Techs., Inc. v. Assurance Co. of Am., 400 F.3d 982, 985 (7th Cir.2005).
The E.S.Y. court determined that the crux of disparagement is a comparison suggesting another brand is inferior. It noted that in the complaint before it, while the Liquid Energy Shield Mark and E.S.Y.’s hang tags allegedly looked like those of the claimant, E.S.Y.’s conduct was not alleged to make any express comparison to the claimant. To the extent the visual similarity between the marks and tags could be construed as E.S.Y.’s implicit reference to the claimant, the court held that nothing about that reference was alleged to dishonor or denigrate the claimant. While the claimant may not have liked that E.S.Y. allegedly copied them, “imitation is not disparagement as there was no comparison suggesting [that the claimant’s] brand was inferior to [E.S.Y.s].”
Moreover, while the claimant alleged it suffered harm to its reputation by being associated with E.S.Y., the court found that allegation merely implied that the claimant believed its brand was superior to E.S.Y.’s. The court again reiterated that for disparagement to be alleged, “[E.S.Y.’s] alleged misconduct must have suggested [its] brand was superior to [the claimant’s].” Accordingly the court held that the disparagement offense was not implicated.
In Uretek (USA), Inc. v. Continental Cas. Co., 92 F. Supp. 3d 589, 592 (SD Tex. 2015 Civil Action No. 4:13-cv-3746), Uretek, the insured, was in the business of performing roadway repair and maintenance for various state and municipal agencies. Uretek sued a competitor for infringement of a patent on which Uretek held the exclusive license. That party counterclaimed, alleging that Uretek attempted to mislead competitors and contracting bodies as to the scope of the patent in order to discourage competitors from bidding on pavement-lifting projects and to coerce contracting bodies into believing that Uretek was their sole legal choice for service provider. The court held that, as alleged, those “false and misleading” statements concerned Uretek’s own services and patent and that deceptive statements regarding the scope of the patent cannot be construed as disparagement of the claimant’s services. In support, the court cited Nationwide Mut. Ins. Co. v. Gum Tree Prop. Mgmt., L.L.C., 597 Fed.Appx. 241, 246-47, No. 14-60302, 2015 WL 170244, at *5-6 (5th Cir. Jan. 14, 2015) (court refused to infer disparagement from allegation that one party “`induced … third parties not to enter into or continue their’ relationship” with another party because the complaint “never claimed that the inducement resulted from disparagement, as opposed to other strategies such as price cuts, personal service, or any other aspects of the services offered by the inducer”).
Whether the recent rulings demonstrate a trend or a flash in the pan remains to be seen. Several of the cases are up on appeal.