California Issues Long-Awaited Decision in Hartford v. Swift, Finding No Coverage For Claims of "Implied" Disparagement

June 12, 2014

  On June 12, 2014, the California Supreme Court issued its decision in Hartford Casualty Ins. Co. v. Swift Distribution, Inc., affirming the Court of Appeal's ruling that Hartford's CGL policy did not potentially cover claims made against its insured for "implied" disparagement, i.e., where the insured's advertising material does not directly disparage a competitor's products but can be implied to do so.  This is an important decision because as the Court itself concluded, "[o]ur holding clarifies and limits the scope of an insurer's duty to defend a policyholder against a possible claim of disparagement, as that term is used in a commercial general liability policy."

  By way of background, CGL policies, such as the one issued by Hartford to Swift, typically include coverage for "personal and advertising injury" under Coverage B.  One of the offenses that defines "personal and advertising injury" is publication of material that disparages another's goods, products or services, or in the case of the Hartford policy, "oral, 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."  While potential coverage under that offense is apparent when the insured is sued for making express statements that disparage another's goods, products or services, courts have wrestled with claims based on so-called "implied" disparagement – publications which do not include express disparaging statements, but rather might be interpreted that way by someone reading or viewing the material.  Is that enough to trigger a duty to defend based on the disparagement offense?

  Courts around the country have reached different result in these types of claims, with the majority holding that absent a definite and express derogatory statement, there is no potential for coverage.  However, in Travelers Property Casualty Co. v. Charlotte Russe Holding, Inc. (2012) 207 Cal.App.4th 969 ("Charlotte Russe") a California Court of Appeal held that a CGL insurer had a duty to defend its insured against an "implied" disparagement claim based on the insured selling garments at drastically lowered prices, holding that the price reductions implicated that the garments were of inferior quality.  A different Court of Appeal, however, reached an apparently opposition conclusion in Hartford v. Swift, thereby setting the stage for the California Supreme Court to resolve the conflict.

  The facts in Swift were relatively simple:  The insured, Swift, manufactured, sold and advertised a product called the "Ulti-Cart" – a metal cart that can be folded in different configurations for transporting materials.  It was sued in federal court by a competitor, Dahl, which also manufactured, sold and advertised a folding cart called "Mult-Cart".  The Dahl complaint contained a variety of causes of action based on the alleged similarity of the products, including unfair competition and misleading advertising.  At issue for the purposes of this decision was Swift's advertising of its product, advertising which did not mention Dahl's product or contain any negative references to that product – it simply promoted the positive aspects of its own product.

  Swift tendered the Dahl action to its CGL carrier, Hartford, asserting that Dahl's claims against it could be interpreted as constituting disparagement by implication, thereby triggering a duty to defend under the Hartford policy.  Hartford denied coverage and filed a complaint for declaratory relief.  The trial court granted Hartford's motion for summary judgment and the Court of Appeal for the Second Appellate District affirmed, holding that there was no duty to defend because "Dahl alleged no claim for injurious false statement or disparagement that was potentially within the scope of the Hartford policy coverage for advertising injury."  The California Supreme Court granted review "to clarify the principles governing the scope of a commercial general liability's duty to defend an insured against a claim alleging disparagement."

  The Court affirmed the Court of Appeal's decision, holding that a claim of disparagement requires a plaintiff to show a false or misleading statement that (1) specifically refers to the plaintiff's product or business and (2) clearly derogates that product or business – "[e]ach requirement must be satisfied by express mention or by clear implication."  Those elements were held not to be present in Swift's advertising of its UIti-Cart in that the advertisements did not make a false or misleading statement that necessarily referred to and derogated Dahl's product.  Rather, the ads simply conveyed the positive aspects of its own product.  The Court held that "[w]ere we to adopt Ultimate's theory of disparagement, almost any advertisement extolling the superior quality of a company or its products would be fodder for litigation."  Most importantly, the Court expressly disapproved of the decision reached in Charlotte Russe.

  Clearly, the Supreme Court's decision in Swift serves to clarify the standards that must be met in order for a claim of "implied disparagement" to trigger a duty to defend under a CGL policy.  The heightened scrutiny given to such claims and the disapproval of decisions such as Charlotte Russe will help guide insurers in the future that are confronted with similar claims.  That said, it must be mentioned that the Court recognized other situations in which a defense might be triggered, even absent an express reference to another's product.  For examples, "bait and switch" tactics might suffice, as might false claims of ownership of intellectual property rights or clear implications of another product's inferiority.  Thus, these claims must still be looked at on a case-by-case basis, but the Court's decision in Swift provides insurers with much-needed clarity.