Can a False Advertising, Patent or Trademark Infringement Claim Be Viewed as a Claim for "Implied Disparagement" that Triggers a Duty To Defend?
Seeking to expand coverage or to avert an IP exclusion, some policyholders have recast claims for unfair competition, patent or trademark infringement as “implied disparagement” claims in order to trigger a duty to defend under the “personal and advertising injury” coverage. They have met with mixed success. For example, falsely advertising one's own product does not constitute disparagement of another's product, particularly where the competitor is neither mentioned by name or implication.
Indeed, some courts have held that the disparagement offense is only triggered if the offending advertisement specifically refers to the competitor’s product. See Elite Brands, Inc. v. Pennsylvania Gen. Ins. Co., 164 Fed. Appx. 60 (2d Cir. 2006), affirming No. 02-CV-5623, 2004 WL 1945732 (S.D.N.Y. Sept. 2, 2004). However, the lines can be blurred if the insured’s advertising actually mentions the name of its competitor directly or by implication. See, e.g., E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co., 590 F.Supp.2d 1244 (2008). In that case, E.piphany released a public statement that it "offer[ed] the only full footprint CRM suite natively built on a service oriented J2EE architecture." The claimant, a competitor that offered a similar product, alleged that such representations were false and "have caused E.piphany to gain, and Sigma to lose, profits, market share, reputation, and goodwill." The court held that the allegations demonstrated "a claim for disparagement by `clear implication'" Id. at 1253 (citing Blatty,42 Cal.3d at 1044 n. 1, 232 Cal. Rptr. 542, 728 P.2d 1177). Thus, the insurer owed a duty to defend.
Notably, in circumstances where the advertisement addresses only the quality of the insured’s own product, coverage may be precluded by the “quality of goods” or “non-conformity” or “failure to conform” exclusion. See Total Call Int’l, Inc. v. Peerless Ins. Co., 181 Cal. App. 4th 161 (2010); Skylink Technologies, Inc. v. Assurance Co., 400 F.3d 982, 984-85 (7th Cir. 2005) (claim "relied entirely on the allegation that the seller's devices `[did] not live up to the promise'" in the advertisement); New Hampshire Ins. Co. v. Power-O-Peat, Inc., 907 F.2d 58, 58-59 (8th Cir. 1990) (insured's own advertising mislabeled its own products); R.C. Bigelow, Inc. v. Liberty Mut. Ins. Co., 287 F.3d 242, 246 (2d Cir.2002)(although the complaint included claims of false advertising, “these claims did not trigger a duty to defend under the advertising injury provision because they concerned allegedly false claims about Bigelow's products, and such false claims about the insured products are explicitly excluded by the policy."); Harleysville Mut. Ins. Co. v. Buzz Off Insect Shield, L.L.C., 364 N.C. 1, 692 S.E.2d 605 (2010) (the only falsity found in defendants' advertisements resulted from the failure of defendants' own products to be of their advertised quality and nature, placing the falsity of those advertisements squarely within the policies' Failure to Conform exclusion).
The implied disparagement theory was expanded in Travelers Property Cas. Co. of America v. Charlotte Russe Holding, Inc. 207 Cal.App.4th 969 (2012), to provide defense coverage to the exclusive retailer for certain apparel, who was sued by the apparel manufacturer, claiming that the insured breached its contract and damaged the People's Liberation brand and trademark by marking down prices for the apparel. The manufacturer alleged that the insured’s advertising suggested to consumers that People's Liberation products were of inferior quality. The Court found that the allegations in the complaint could reasonably be interpreted to allege that the retailer disparaged the People's Liberation brand. Thus, the claim potentially fell within the disparagement offense in the “personal and advertising injury” coverage and triggered a duty to defend.
The court in Burgett, Inc. v. American Zurich Ins. Co., 830 F.Supp.2d 953 (2011),found that a trademark infringement claim not only created the potential for a disparagement by implication claim, but also held that the trademark exclusion did not preclude coverage. In that case, the claimant sued the insured, Burgett, for falsely representing to another company, Samick, that it had valid and enforceable rights to the "SOHMER" trademark, which the claimant alleged that it owned. The complaint alleged that by entering into a licensing agreement with and accepting compensation from Samick, and by holding itself out to Samick and the world as rightful owner of the SOHMER trademark, Burgett induced and was contributorily liable for Samick's acts of trademark infringement and unfair competition. Zurich declined to defend Burgett, asserting that the claims did not fall within the personal and advertising injury coverage or was otherwise precluded by the trademark exclusion. The court found that Burgett’s representation that it was the only holder of the SOHMER trademark (which implied that Burgett's right to use the SOHMER trademark was superior to that of the claimant), represented that the claimant did not have the rights to the SOHMER trademark, and created a likelihood of confusion or misunderstanding about the source, sponsorship, or approval of the claimant’s goods. Thus, the complaint alleged sufficient facts to establish the potential for coverage of its claim of disparagement by implication. Moreover, the court found that although the underlying complaint does not explicitly state a claim for disparagement, the complaint could be amended to state a claim for the same. Thus, it held the trademark exclusion did not apply to bar coverage.
Not all courts agree with the expansive view of "implied disparagement" expressed by the Charlotte Russe and Burgett courts. In Hartford Cas. Ins. Co. v. Swift Distribution, Inc., ___ Cal.App.4th ___, 2012 Cal.App.LEXIS 1131 (2012), the California Second District Court of Appeal refused to find that a trademark and patent infringement action brought against the insured by a competitor constituted “disparagement” and triggered a duty to defend. The complaint alleged that the claimant owned a patent to a "convertible transport cart," which was used to move music, sound, and video equipment quickly and easily. The insured allegedly manufactured, marketed, and sold a similarly named product which infringed the claimant’s patents and trademarks. The court observed that the insured’s advertisements referred only to its own product and did not refer to or disparage the claimant’s product. The court also noted that while the complaint alleged that by using a product name that was very similar to the claimant’s product, the insured was alleged to have deceived the public that the insured was the originator, designer, or authorized manufacturer and distributor of its infringing products. The court held such allegations did not constitute disparagement.
The 7th Circuit Court of Appeals in Prolink Holdings Corp. v. Federal Ins. Co., __F.3d ____ (7th Cir. Aug. 2012), No. 11-3566, also held that a complaint which alleged infringement of patent, slander of title and unfair competition did not potentially allege a claim for implicit defamation or disparagement of the claimant, as the representations made by the insured concerned only its own rights to the patent and never identified the claimant or accused the claimant of any wrongdoing. Accord Novell, Inc. v. Vigilant Ins. Co., 421 F. App'x 872, 875-76 (10th Cir. 2011) (unpublished) (applying Utah law, it was "too great a stretch" to find an implicit defamation claim in what was "merely an ownership dispute concerning copyrights").