Implicit Disparagement Claim Ruling In Trade Dress Infringement Lawsuit Clarifies That Purported Conflict In California Law May Be Less Than Meets The Eye

In Michael Taylor Designs, Inc. v. Travelers Prop. Cas. Co. of Am., 761 F. Supp. 2d 904 (N.D. Cal. 2011), the district court determined that potential coverage arose in a trade dress infringement lawsuit where customers were steered to allegedly inferior, synthetic furniture products in a purported “bait and switch” scheme evidencing implicit disparagement. 

In affirming the district court, the Ninth Circuit concluded that implicit disparagement liability arises wherever a false implication can be inferred from the fact allegations.  Michael Taylor Designs, Inc. v. Travelers Property Cas. Co. of America, No. 11-16052, 2012 WL 5385598 (9th Cir. (Cal.) Nov, 5, 2012) pet. for reh. denied (Nov. 27, 2012), citing Travelers Prop. Cas. Co. of Am. v. Charlotte Russe Holding, Inc., 207 Cal. App. 4th 969, 144 Cal. Rptr. 3d 12 (2012), reh’g denied (July 31, 2012) rev’w denied (Sept. 21, 2012). Charlotte Russe, in turn, relied upon authority consistent with the Ninth Circuit’s decision in Hudson Ins. Co. v. Colony Ins. Co., 624 F.3d 1264, 1269-70 (9th Cir. (Cal.) 2010) that “the absence of an element of a properly pleaded cause of action is of no moment in determining [the] duty to defend.” 

In their November 19, 2012, Petition for Rehearing, Travelers asked the Ninth Circuit Panel in Michael Taylor to address the impact of the Court of Appeals ruling in Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 210 Cal. App. 4th 915, 148 Cal. Rptr. 3d 679, 689 (2012).  Travelers’ Petition for Rehearing ignored the fact that this same decision was cited by Travelers’ counsel (Horovitz & Levy) in its 28(j) letter that preceded the Panel’s November 5, 2012 ruling, affirming the district court.  Travelers’ rehearing petition failed to advise the panel of Michael Taylor’s response to the 28(j) letter which called attention to Swift Express’ distinction of Michael Taylor, stating:

Rosequist’s complaint created a possibility of a covered claim for disparagement by alleging that defendant advertised Rosequist’s products, did not sell Rosequist’s products, and “steered” customers to imitation products. The term “steered” implied further statements by defendant’s personnel that the imitation products were the Rosequist furniture shown in defendant’s promotional materials.

The Swift Panel rejected arguments for disparagement coverage asserting that coverage under the “disparagement” offense “must specifically refer to the derogated property, business, goods, product, or services either by express mention or reference by reasonable implication.”  Swift, 148 Cal. Rptr. 3d at 685.  According to the Swift court, disparagement by implication did not arise because there was no specific reference to the competitor’s product, no false comparisons to the product and no false claims of ownership over proprietary or unique technology related to the product.  Rather, false statements were made solely about Swift’s product. 

Many commentators have championed Swift, claiming it necessarily undercuts the Charlotte Russe panel’s analysis.  But its analysis avoids addressing whether any false implication could be inferred from statements about Swift’s product which potentially demeaned the claimant’s product. The Swift Panel did not explain why a claim for “disparagement” could not be inferred when Swift’s statements were viewed from the perspective of the claimants and in light of the potential for amendment of the pleading where the “disparagement” offense was not confined to any singular business tort, such as trade libel.

Critically, Swift did not address many of the legal underpinnings of Charlotte Russe’s analysis as it: (1) failed to evaluate the potential for coverage where the pleadings may be amended to state a covered claim (Scottsdale Ins. Co. v. MV Transp., 36 Cal. 4th 643, 654 (Cal. 2005)); (2) assumed that proof of the elements for product disparagement defines the complete scope of coverage for the “disparagement” offense; and (3) relied upon a faulty “all elements” rule rejected by a number of state appellate court decisions.  See Career Systems Dev. Corp. v. Am. Home Assurance Co., No. C10-2679 B2, 2011 WL 4344578, at *2 (N.D. Cal. Sept. 14, 2011) (“Pursuant to Scottsdale and Barnett, it was also not necessary for [Claimants] . . . to trigger defendant’s duty to defend.”).

Subsequent decisions that rely upon the Charlotte Russe/Swift dichotomy should be careful to note Swift’s incomplete analysis and factor into their analysis the Ninth Circuit’s rejections of Travelers’ Petition for Rehearing in Michael Taylor Designs, Inc. v. Travelers Property Cas. Co. of America, No. 11-16052, 2012 WL 5385598 (9th Cir. (Cal.) Nov, 5, 2012) pet. for reh. denied (Nov. 27, 2012).

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