Advertising A Competing Product With A Similar Name Does Not Disparage It Or Trigger A Duty To Defend Under An Insurance Policy’s Advertising Injury Coverage

Hartford Casualty Insurance Company v. Swift Distribution, Inc.
(Cal. Ct. of App., 2d Dist.), filed October 29, 2012 

KEY FACTS

Swift Distribution, Inc., dba Ultimate Support Systems, Inc., advertised its product the “Ulti-Cart,” which resembled the “Multi-Cart” sold by Gary-Michael Dahl.  Although the names were similar, Ultimate’s advertisement did not identify Dahl’s cart expressly and did not disparage Dahl’s cart.

Dahl sued Ultimate for patent and trademark infringement, unfair competition, and misleading advertising.

Ultimate was insured under a Hartford Casualty liability insurance policy.  The policy covered “advertising injury,” defined as injury arising out of publication of material that disparaged a person’s or organization’s goods, products, or services.  Ultimate tendered the defense of the Dahl action to Hartford.  Hartford refused to defend Ultimate.

In the ensuing coverage litigation, the trial court granted a summary judgment in Hartford’s favor based on its determination that the Dahl action did not seek covered damages.

HOLDING & REASONING

The Court of Appeal affirmed.  It held that because the advertisement did not identify Dahl’s product, and contained no matter derogatory to Dahl’s title to its property, its quality, or its business, no disparagement occurred. Therefore, it held there was no potential for an award of covered damages and Hartford had no duty to defend.

The court reasoned that the policy covered product disparagement, which is “an injurious falsehood directed at the organization or products, goods, or services of another . . . .”  Disparagement, or injurious falsehood, may consist of publication of matter derogatory to plaintiff’s title to his property, its quality, or his business.  Tortious product disparagement involves publication to third parties of a false statement that injures the plaintiff by derogating the quality of goods or services.

According to the court, “the injurious falsehood must specifically refer to the derogated property, business, goods, product, or services either by express mention or reference by reasonable implication.”  However, “Dahl’s complaint, application for a temporary restraining order, and responses to Ultimate’s discovery [did] not allege that Ultimate’s advertisements specifically referred to Dahl by express mention.”

The court rejected Ultimate’s argument that Dahl’s complaint alleged that Ultimate’s use of “Ulti-Cart” (similar to Dahl’s “Multi-Cart”) referred to Dahl and Dahl’s product by reasonable implication.  The court also determined that although Dahl’s complaint alleged that similarity of the names misled the public into believing that Ultimate’s products were the same as Dahl’s, were approved by Dahl, or were affiliated with Dahl’s “Multi-Cart” products, there was still no disparagement of “Multi-Cart.”

The court stated:

Disparagement involves “an injurious falsehood directed at the organization or products, goods, or services of another….” The injurious falsehood or disparagement may consist of matter derogatory to the plaintiff’s title to his property, its quality, or to his business in general.  The advertisements for the “Ulti-Cart” did not include any of these derogations.  Ultimate’s advertisements referred only to its own product, the Ulti-Cart, and did not refer to or disparage Dahl’s Multi-Cart.  Dahl’s complaint alleged that by using a product name (Ulti-Cart) that was very similar to Dahl’s Multi-Cart product, Ultimate deceived the public that Ultimate was the originator, designer, or authorized manufacturer and distributor of its infringing products.  This, however, was not disparagement.  Because Dahl did not allege that Ultimate’s publication disparaged Dahl’s organization, products, goods, or services, Dahl was precluded from recovery on a disparagement theory.

The court chose not to follow the holding in the recent case of Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc., 207 Cal.App.4th 969 (2012).  It noted that Ultimate’s advertisement did not refer to Dahl’s product as did the advertisement in the Charlotte Russe case.  It also said it disagreed with the conclusion reached in that case that advertising a product that was “on sale” implied it was of poor quality.

ANALYSIS

Inasmuch as Ultimate’s advertisement did not reference Dahl’s product, directly or by implication, the court’s decision makes sense.  However, it would appear that if Ultimate had used the exact name of Dahl’s product, for its own allegedly inferior product, the court would have reached a different result.

This case seems to depart from some of the reasoning of Charelotte Russe and Atlantic Mut. Ins. Co. v. J. Lambe, Inc., 100 Cal.App.4th 1017 (2002).  It will be interesting to see how courts resolve future cases involving similar issues.