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Hartford Casualty Insurance Company v. Swift Distribution, Inc.

(Underlying Claims for Patent and Trademark Infringement Failed to Allege Disparagement Triggering Personal and Advertising Injury Coverage Under General Liability Policy)

In Hartford Cas. Ins. Co. v. Swift Distribution, Inc., 59 Cal.4th 277 (June 12, 2014), the California Supreme Court affirmed the Court of Appeal’s decision in favor of Hartford Casualty Insurance Company (“Hartford”) in connection with an underlying coverage dispute arising out of the tender of defense of a lawsuit alleging patent and trademark infringement against Hardford’s insured, Swift Distribution, Inc. doing business as Ultimate Support Systems (“Ultimate”). Ultimate sold a product called the “Ulti-Cart,” a multi-use cart marketed to help musicians load and transport their equipment.

On January 26, 2010, George-Michael Dahl (“Dahl”) filed a lawsuit against Ultimate for patent and trademark infringement based on Dahl’s manufacture of a product referred to as the “Multi-Cart.” The Dahl complaint alleged that Ultimate impermissibly manufactured, marketed and sold the Ulti-Cart and thereby infringed on Dahl’s patents and trademarks and diluted the Multi-Cart trademark. Ultimate tendered the Dahl lawsuit to Hartford for defense, contending that it alleged potential personal and advertising injury coverage based on the offense of “injury arising out of 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.” Essentially, Ultimate argued that the Dahl action involved a claim of disparagement covered by the Hartford’s policies’ definition of “personal and advertising injury.”

Hartford rejected Ultimate’s argument and declined its tender of defense of the Dahl lawsuit. Subsequently, Hartford filed a complaint for declaratory relief seeking an adjudication that it had no duty to defend or indemnify Ultimate in the Dahl action. Thereafter, Hartford and Ultimate filed cross-motions for summary judgment addressing the argument that the Dahl action alleged potential disparagement as defined in the definition of “personal and advertising injury” in the Hartford policy. The trial court agreed with Hartford and entered summary judgment finding that it was not obligated to defend Ultimate against the Dahl lawsuit. The Court of Appeal affirmed the trial court’s entry of summary judgment in favor of Hartford.

In finding in favor of Hartford, the Supreme Court reasoned as follows:

The issue in this case is whether the Dahl action against Ultimate included a claim of disparagement covered by the Hartford policy. According to section 629 of the Restatement Second of Torts (1977), "statement is disparaging if it is understood to cast doubt upon the quality of another's land, chattels or intangible things, or upon the existence or extent of his property in them, and ¶ (a) the publisher intends the statement to cast the doubt, or ¶ (b) the recipient’s understanding of it as casting the doubt was reasonable." The term "disparagement" in the context of an insurance policy, in light of its proximity to the terms "libel" and "slander," suggests it may be understood as a common law tort: Whereas defamation, which includes libel and slander, concerns damage to the reputation of a person or business, disparagement concerns damage to the reputation of products, goods, or services. (See Total Call, supra, 181 Cal.App.4th at p. 169.) Yet the torts of disparagement and defamation "'protect different interests and have entirely different origins in history.'" (Polygram Records, Inc. v. Superior Court (1985) 170 Cal.App.3d 543, 548549.)

. . .

Disparagement emerged from the common law tort doctrine of slander of title. In Burkett v. Griffith (1891) 90 Cal. 532, the court described slander of title as an action "against one who falsely and maliciously disparages the title of another to property, whether real or personal, and thereby causes him some special pecuniary loss or damage. In order to maintain the action, it is necessary to establish that the words spoken were false, and were maliciously spoken by the defendant, and also that the plaintiff has sustained some special pecuniary damage as the direct and natural result of their having been so spoken." (Id. at p. 537; see Hill v. Allan (1968) 259 Cal.App.2d 470, 489 ["Disparagement or slander of title is a publication made without a privilege or justification of matter that is untrue and is disparaging to another's property in land, chattels or intangible things under such circumstances as would lead a reasonable man to foresee that the conduct . . . results in pecuniary loss from the impairment of vendability thus caused."]; The Law of Commercial Disparagement: Business Defamation's Impotent Ally (1953) 63 Yale L.J. 65, 75.) The doctrine expanded to include statements disparaging the quality of property rather than simply its ownership, a form of disparagement commonly referred to as trade libel. (See Erlich v. Etner (1964) 224 Cal.App.2d 69 (Erlich).) Eventually, disparagement came to encompass a broader theory of economic or commercial injury caused by a false, derogatory statement. (See Prosser & Keeton, Torts (5th ed. 1984 & 1988 supp.) § 128, pp. 962963; Trade Libel: Theory and Practice Under the Common Law, the Lanham Act, and the First Amendment (1999) 89 Trademark Rep. 826, 827.)

. . .

We now consider whether the Court of Appeal was correct to conclude that the Dahl action did not allege disparagement within the meaning of the Hartford policy. In other words, did the facts and pleadings known or reasonably inferable by Hartford show a potential claim for express or implied disparagement? Ultimate appears to advance two separate theories of disparagement. The first focuses on Dahi's claim that the similarity of the Ulti-Cart's design and product name to the Multi-Cart's design and product name led consumers to confuse the Ulti-Cart with the Multi-Cart. The second contends that Ultimate's advertisements included false statements of superiority that implied the inferiority of the Multi-Cart. We address each theory in turn.

A.

The Court of Appeal concluded that [e]ven if the use of 'Ulti-Cart' could reasonably imply a reference to 'Multi-Cart,' . . Ultimate's advertisement contained no disparagement of 'Multi-Cart.'" We conclude that the Court of Appeal was correct. Consumer confusion resulting from the similarity of the Ulti-Cart to the Multi-Cart may support a claim of patent or trademark infringement or unfair competition in certain circumstances, but it does not by itself support a claim of disparagement. Even if the Ulti-Cart was named and designed to mimic the Multi-Cart, that fact does not derogate or malign the Multi-Cart in any way.

There is no coverage for disparagement simply because one party tries to sell another's goods or products as its own. In Aetna, supra, 838 F.2d 346, for example, the complaint alleged that the policyholder had engaged in unfair competition by advertising a competitor's animal tags as its own. (Id. at p. 349.) The Ninth Circuit concluded that the underlying action failed to allege any publication "which directly cast aspersions" on the underlying plaintiffs product or business. (Id. at p. 351, citing Nichols, supra, 169 Cal.App.3d at p. 774.) Thus, the court found no duty to defend against a claim of disparagement where the gravamen of the claim was that the policyholder had "'palmed off" the competitor's products as its own. (Aetna, at p. 351.)

Similarly, a party's attempt to copy or infringe on the intellectual property of another's product does not, without more, constitute disparagement. In Homedics, Inc. v. Valley Forge Insurance Company (9th Cir. 2003) 315 F.3d 1135, the Ninth Circuit considered whether a claim of patent infringement constituted disparagement triggering a duty to defend under California law. The underlying suit involved a claim by a company, Nikken, alleging that a competitor, Homedics, had infringed its patent on a therapeutic magnetic device used in alternative medical procedures. (Id. at p. 1137.) Finding no duty to defend, the court reasoned: "It does not follow that because an entity imitated the design of a product, it is, therefore, disparaging it. In point of fact, it's quite the opposite --- as has been oft said: imitation is the highest form of flattery." (Id. at p. 1142.) Homedics also noted with approval the Court of Appeal's statement in Maxconn, Inc. v. Truck Ins. Exchange (1999) 74 Cal.App.4th 1267 that "[t]he absence of any express reference to patent infringement in the policy, would lead a reasonable layperson to the conclusion that patent infringement is not covered." (Id. at p. 1276.)

. . .

Whatever the merits of Michael Taylor's reasoning, the facts in this case do not include the kind of bait-and-switch tactics alleged in Michael Taylor. There is neither any specific allegation in the Dahl action nor any fact reasonably known to Hartford that clearly implies the inferiority of the Ulti-Cart to the Multi-Cart. It is true that Dahl, in a February 12, 2010 memorandum in support of a motion for a temporary restraining order, claimed that the Multi-Cart had become "widely recognized as an industry leading utility cart in the music performance industry" and that Ultimate was now marketing a "knock-off" of the Multi-Cart. Dahl also noted Ultimate's intent "to expand into worth of Chinese carts planned to be dumped in the United States with lower pricing." However, in claiming patent and trademark infringement, Dahl repeatedly asserted that the two products were "nearly identical, folding transport carts." Indeed, Dahl's claims relied heavily on the fact that the mark and design of the two products were nearly indistinguishable. A false or misleading statement that causes consumer confusion, but does not expressly assert or clearly imply the inferiority of the underlying plaintiffs product, does not constitute disparagement. Because the alleged likeness of the two products did not derogate the Multi-Cart, we reject Ultimate's theory of disparagement based on consumer confusion over the product name and design.

B.

Ultimate also contends that several phrases in its 2010 product catalog disparage the Multi-Cart by asserting the superiority of the Ulti-Cart. As Ultimate notes, the 2010 product catalog states that "Ultimate Support designs and builds innovative, superior products," that the company provides "unique support solutions that are crafted with unparalleled innovation and quality and accompanied by superior customer service," and that the Ulti-Cart has "patent-pending folding handles and levers." Ultimate suggests that these phrases imply that the Multi-Cart is inferior and that "patent-pending" suggests "that Dahl does not have proprietary rights to its product."

The Court of Appeal did not address these statements, instead noting that potential disparagement should be assessed by reference to the "allegations of the Dahl complaint, Dahl's application for a temporary restraining order, and Dahl's responses to interrogatories to the terms of the Hartford insurance policy." But, as discussed above, a duty to defend may be supported not only by the allegations in the complaint but also by facts alleged, reasonably inferable, or otherwise known to the insurer. Ultimate's new product catalog was produced by Dahl in the underlying action and referenced in his complaint. Thus, the contents of the catalog were reasonably known to Hartford and should be considered in determining whether the Dahl action set forth a possible claim of disparagement.

Even so, however, no disparagement claim is apparent. Ultimate contends that the phrase "patent-pending" when combined with words like "innovative,""unique,""superior," and "unparalleled" suggests the superiority of the Ulti-Cart and, by implication, the inferiority of the Multi-Cart. But these words considered in their context do not support Ultimate's contention. Although the phrase "patent-pending folding handles and levers" appears on the page of the catalog describing the Ulti-Cart, the words "innovative,""unique,""superior," and "unparalleled" appear on pages providing general descriptions of the company, and they are most reasonably understood as generic assertions of the company's excellence. For example, 'superior" does not necessarily imply a derogatory comparison; it may be used to describe something "[o]f great value or excellence; extraordinary" (American Heritage Dict. (4th ed. 2000) p. 1737) or "notably excellent of its kind: surpassingly good" (Webster's 3d New Internat. Dict. (2002) p. 2294). Similarly, "patent-pending" does not guarantee that a patent will be granted or that the product is of higher quality. Contrary to Ultimate's claims, these statements are not specific enough to call into question Dahl's proprietary rights in his product or to suggest that the Ulti-Cart has any unique feature that is an "'important differentiator' between competing products." (E.piphany, supra, 590 F.Supp.2d at p. 1253.) Rather, the phrases at issue appear to be more "akin to 'mere puffing,' which under long-standing law cannot support liability in tort." (Consumer Advocates v. Echostar Satellite Corp. (2003) 113 Cal.App.4th 1351, 1361, fn. 3.)

Were 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. Proliferation of such litigation would interfere with "the free flow of commercial information" (Va. Pharmacy Board v. Va. Consumer Council (1976) 425 U.S. 748, 765) and "the informational function of advertising" (Central Hudson, supra, 447 U.S. at p. 563), which are essential to informed choice in our free enterprise economy. In light of the important purposes of commercial speech, specificity requirements serve to narrow the range of publications in the marketplace that may rise to the level of a legally actionable injurious falsehood.

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