Allegations That Implicitly Disparaged The Claimant’s Goods Created The Potential For Coverage
Travelers Property Casualty Company of America v. Charlotte Russe Holdings, Inc.
(Cal. Ct. of App., 2d Dist.), filed July 13, 2012
Versatile Entertainment, Inc. and its parent People’s Liberation, Inc. manufactured apparel, which included jeans and knits. Versatile identified the People’s Liberation brand as a “premium,” “high end” brand, claiming that it had invested millions of dollars developing the brand so that it became associated in the marketplace with high-end casual apparel, which was distributed exclusively through fine department stores and boutiques. Versatile contracted with Charlotte Russe Holdings to become the exclusive outlet for People’s Liberation clothing.
After Charlotte Russe sued Versatile, Versatile filed its own claims against Charlotte Russe. Versatile alleged that Charlotte Russe had promised to provide the investment and support necessary to promote the sale of People’s Liberation clothing at an appropriately high price point, but failed to do so. It also alleged that Charlotte Russe had actually advertised the clothing as being “on sale,” thereby inferring that it was not worthy of a high price point. Versatile sought declaratory relief and damages for its losses it claimed as a result of Charlotte Russe’s breaches, including damage to and diminution of the People’s Liberation Brand and trademark resulting from the “‘fire sale’ of People’s Liberation Branded goods at ‘close-out’ prices.”
Charlotte Russe was insured under two consecutive Travelers liability insurance policies. The policies included “personal injury” and “advertising injury” liability coverage and called for Travelers to defend Charlotte Russe against any suit seeking damages for “personal injury” and “advertising injury” claims.
The policies’ personal injury coverage applied to “‘[p]ersonal injury’ caused by an offense arising out of your business, excluding advertising . . . .” The advertising injury coverage applied to “‘[a]dvertising injury’ caused by an offense committed in the course of advertising your goods, products or services; . . .” The policies provided coverage for claims alleging injury arising out of “[o]ral, 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, provided that claim is made or ‘suit’ is brought by the person or organization that claims to have been slandered or libeled, or whose goods, products or services have allegedly been disparaged; . . .” The policies excluded “‘advertising injury’ arising out of a breach of contract.” There was no similar exclusion for a personal injury arising out of a breach of contract.
Charlotte Russe tendered the defense of Versatile’s claims to Travelers. Travelers denied coverage based on its assertion that there was no potential for an award of covered damages. Although Charlotte Russe took the position that Versatile’s claims involved disparagement within the policies’ terms, Travelers asserted that “coverage was not available under its Policies because ‘the reduction of a product’s price is not . . . a disparagement of that product.’”
In the ensuing coverage litigation, Travelers moved for summary judgment based on its assertion that there was no potential for an award of covered damages. It argued that Versatile’s claims did not amount to disparagement or trade libel because such claims required an allegation of the publication of a false statement and resulting loss of business, which Versatile did not claim.
The trial court agreed and granted Travelers’ motion.
HOLDING & REASONING
The Court of Appeal reversed. It framed the critical question as “whether Versatile’s claims against the Charlotte Russe parties constitute allegations that the Charlotte Russe parties disparaged its goods, within the meaning of the Charlotte Russe parties’ coverage under the Travelers’ policies.” In answer to this, it determined that “the allegations of the Versatile pleadings could be reasonably interpreted to allege that the Charlotte Russe parties disparaged the People’s Liberation brand and led potential purchasers to believe that it was not a “premium,” “high end” brand.
The court reiterated well-established rules as to an insurer’s duty to defend its insured. It specifically reminded that “[t]he duty does not depend on the labels given to the causes of action in the underlying claims against the insured; ‘instead it rests on whether the alleged facts or known extrinsic facts reveal a possibility that the claim may be covered by the policy.’”
Turning to Versatile’s claims, the court explained:
The Versatile pleadings charged in the underlying litigation that the Charlotte Russe parties had offered the People’s Liberation products for sale at severely discounted prices, resulting in “significant and irreparable damage to and diminution of the People’s Liberation Brand and trademark,” damaging its “marketability and saleability.” Travelers contends that these allegations of price discounts do not accuse the Charlotte Russe parties of either product disparagement or false statements, and therefore that they do not trigger the policies’ personal injury or advertising injury coverage.
The court rejected this contention saying: “In order to trigger personal injury coverage it is not essential that the underlying claims must be expressly phrased in terms of ‘disparagement’ or trade libel.” The question was not whether the underlying claims expressly alleged that Charlotte Russe disparaged Versatile’s products, but whether the allegations could be understood to do so.
Versatile’s allegations that by putting its clothing “on sale,” Charlotte Russe implied that its clothing was not premium, high-end goods was sufficient to constitute a claim for disparagement.
After finding that Versatile’s allegations were sufficient to constitute a claim for disparagement, the court noted:
Even if it were true that Versatile’s claim against the Charlotte Russe parties could not be viable without alleging all the elements of a trade libel cause of action, as Travelers argues and the trial court apparently concluded, the result here would be no different. The insurer’s duty to defend is not conditioned on the sufficiency of the underlying pleading’s allegations of a cause of action; that is an issue for which the policy entitled the Charlotte Russe parties to an insurer-funded defense.
And, it observed:
We find no suggestion in the language of the policy’s personal injury coverage that a prerequisite to establishing a potential for personal injury coverage for disparagement is that the accusations against its insured must include all the essential elements of the trade libel tort (whatever those requirements may be).
Travelers’ position that “personal injury” coverage requires allegations of all elements for trade libel has been accepted by other courts, at least to some extent. See, e.g., Liberty Bank of Montana v. The Travelers Indemnity Co., 870 F.2d 1504 (9th Cir. 1989).