California Supreme Court Issues Pro-Insurer Decision Regarding Implied Disparagement For Personal And Advertising Injury Liability Coverage Purposes

December 31, 2014

Insurers have received good news from the California Supreme Court on the PI/AI GL coverage front.

California insurers have been dogged by a decision referred to as Charlotte Russe (Travelers Property Casualty Company of America v. Charlotte Russe Holding, Inc. (2012) 207 Cal.App.4th 969), which held that a retailer who was sued for cutting the prices on clothes made by an apparel manufacturer and published the prices could obtain coverage under the Personal and Advertising Injury Liability Coverage afforded by its GL policy for disparagement since the price cutting implied that the clothing was not actually a high end product. Insureds used this case to argue that anything that had a negative effect on a competitor's image in the marketplace could be disparaging.

On June 12th, in Hartford Casualty Ins. Co. v. Swift Distribution, 2014 WL 2609753, the California Supreme Court said Charlotte Russe got it wrong. The Court held 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. Each requirement must be satisfied by express mention or by clear implication. In Swift, the complaint alleged that Swift wrongly manufactured, marketed, and sold its product so as to infringe plaintiff's patents and dilute plaintiff's trademark, and also claimed Swift used false and misleading advertisements and a nearly identical mark which were likely to cause consumer confusion. Attached to the complaint were Swift's advertisements, which did not name any product of the plaintiff. The California Supreme Court held that since the attached advertisements did not name plaintiff and did not expressly derogate the plaintiff's product, there could be no disparagement.

Importantly, in overruling Charlotte Russe, the Court further held that lowering a price, even a steep reduction, is not a disparagement and cannot trigger Personal and Advertising Injury Liability Coverage for disparagement. This is another case in which our courts look to the actual policy language and try to apply the language as written. Disparagement is a statement that is false or misleading, and lawyers for insureds cannot use unreasonable interpretations to create coverage. We have to be careful about claims that could exist for implied disparagement, such as: "Our product is the only one that works." This statement impliedly disparages another product, but Swift will help insurers enforce the underwriting intent of the defamation/disparagement language.