California Supreme Court Review of Insurance Case on Implied Disparagement Presents Opportunities for Coverage in Intellectual Property Litigation

In 2012 two published decisions from the California Court of Appeals and one unpublished decision from the Ninth Circuit shed new light on the contours of implicit disparagement coverage under California law.

The first such Court of Appeals decision, Charlotte Russe, clarified and reasserted the broad scope of implied disparagement coverage, a position the second Court of Appeals decision, Swift, distanced itself from.  Subsequent to both decisions, the Ninth Circuit in Michael Taylor opted for the coverage-friendly approach of Charlotte Russe over Swift.

Under an implicit disparagement theory, IP claims may trigger non-excluded potential coverage requiring a duty to defend, even when the labeled causes of action are expressly excluded.

Travelers Prop. Cas. Co. of Am. v. Charlotte Russe Holding, Inc.,
207 Cal. App. 4th 969, 981 (2d Dist. (Div. 1) June 21, 2012)

Charlotte Russe addressed a retailer’s use of clothing tags and signs to promote significantly discounted goods, which were alleged to false imply that the claimant’s goods were not of high value (even though there was no direct statement denigrating its products).

Hartford Cas. Ins. Co. v. Swift Distribution, Inc.,
210 Cal. App. 4th 915 (2d Dist. (Div. 3) Oct. 29, 2012)

Swift concerned trademark infringement claims premised on use of the name “Ulti-Cart,” which allegedly misled by implying a reference to the competing “Multi-Cart” even though advertisements only explicitly named the Ulti-Cart.  Under the dilution claim, the court drew a distinction between blurring, which was not covered as it alleged no more than palming off another’s goods as one’s own, and tarnishment, where implicit statements denigrating another’s product could be inferred.

Michael Taylor Designs, Inc. v. Travelers Prop. Cas. Co. of Am.,
No. 11-16052, 2012 WL 5385598 (9th Cir. (Cal.) Nov. 5, 2012)

The district court’s opinion in Michael Taylor was affirmed after Swift was decided and brought to the Ninth Circuit’s attention via 28(j) briefing.  Nevertheless the Ninth Circuit elected not to address Swift in its opinion, which was not surprising as Swift specifically distinguished itself from a series of implicit disparagement coverage cases including the Michael Taylor district court opinion.

Swift distinguished its facts from the Michael Taylor district court opinion, but criticized Charlotte RusseCharlotte Russe was more nuanced and relied upon coverage principles Swift did not take time to address.  These included:  (1) potential coverage existing where the pleadings may be amended to state a covered claim; (2) “disparagement” coverage not being limited to claims specifically for the tort of “trade libel”; and (3) California’s rejection of the “all elements” rule, concluding that aspects of disparagement such as falsity need not be expressly alleged.

The California Supreme Court denied the Petition for Review and Request for Depublication of Charlotte Russe on September 26, 2012, suggesting that it is valid law. In contrast, on February 13, 2013 the California Supreme Court granted review of Swift.  Thus, while review is pending it is no longer an impediment for intellectual property practitioners to seek coverage under Charlotte Russe and Michael Taylor.  Review also suggests that the Court is inclined to bring Swift in line with the other two cases and the longstanding principle that a defense is owed if a covered claim could “conceivably” be stated under the facts alleged.

Issues expected to be addressed in review of Swift are (1) whether a claimant’s goods, products, or services can be referenced by implication without being expressly named in the disparaging publication, and (2) whether a false affiliation with an inferior product or a reduction in price constitutes “disparagement” as used in a CGL policy’s definition of “personal and advertising injury.”

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