The basics of advertising-injury coverage

The basic concepts of this somewhat obscure and often mystifying area of insurance law

2014 August

The entire area of “insurance law” is sufficiently extensive and complex that many lawyers tend to view it as its own separate specialty. But even within that specialty, coverage for “advertising injury” tends to be regarded as a subspecialty, and many lawyers who are generally conversant with general principles of insurance coverage and the various types of policy forms tend to shy away from anything related to advertising-injury coverage. Plaintiffs’ lawyers – particularly ones who are interested in pursuing business-related or intellectual-property litigation – would be well served to understand this type of coverage. This article highlights some of the key concepts related to advertising-injury coverage.

What is covered?

Since 1998, the standard “ISO” form for comprehensive general liability (CGL) policies provides a single coverage for “personal and advertising injury.” (Croskey, et al., California Practice Guide – Insurance Litigation (Rutter 2014 ed.) § 7:1001.4 (“Insurance Litigation”). The insuring agreement for that coverage is referred to as “Coverage B” and reads:

We will pay those sums that the insured becomes legally obligated to pay as damages because of ‘personal and advertising injury’ to which this insurance applies. We will have the right and duty to defend any ‘suit’ seeking those damages . . . This insurance applies to ‘personal and advertising injury’ caused by an offense arising out of your business but only if the offense was committed in the ‘coverage territory’ during the policy period.” (Insurance Litigation, § 7:1002.)

These two paragraphs do not even tell us exactly what “personal and advertising injury” is (we have to consult the policy’s definitions for that), but they already convey a fair amount of information about various conditions that must be met in order for coverage to exist. These include the following:

• The coverage only applies to sums that “the insured” becomes legally obligated to pay, “as damages.” We know from this that only someone or some entity fitting within the policy’s definition of an “insured” is entitled to coverage; that there is no coverage unless the insured has become legally obligated to pay (i.e., voluntary payments won’t count) and what must be paid is “damages.” Do not assume that just because someone wants the insured to pay money that the money counts as “damages.” For example, a defendant who is ordered to pay back money that it had wrongfully acquired may be hit with a sizeable judgment, but the judgment won’t be considered to constitute “damages” for the purposes of this insurance coverage. “It is well established that one may not insure against the risk of being ordered to return money or property that has been wrongfully acquired. Such orders do not award “damages” as that term is used in insurance policies. (Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1266.)• There is a duty to defend in cases that trigger personal and advertising-injury coverage, but only “suits.” (So administrative hearings that do not qualify as “suits” won’t count. (Compare Foster-Gardner, Inc. v. National Union Fire Ins. Co. (1998) 18 Cal.4th 857, 878, [Order from Cal.EPA under California “Superfund” law notifying insured that it must remediate pollution is not a “suit” that triggers CGL coverage] with Ameron Intern. Corp. v. Insurance Co. of State of Pennsylvania (2010) 50 Cal.4th 1370, 1374, [holding that adjudicative proceeding before U.S. Dept. of the Interior Board of Contract Appeals qualifies as a “suit”].)• The personal and advertising injury must be caused by an “offense” (another defined term), must arise “out of your business,” must be committed in the “coverage territory” (another defined term), and must occur “during the policy period.” Whew! And we have not even gotten to the complicated stuff yet.

So, under the current CGL standard form, “personal and advertising injury” is defined as “injury, including consequential ‘bodily injury,’ arising out of one or more of the following offenses:

• false arrest, detention or imprisonment;• malicious prosecution;• wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling or premises that a person occupies, committed by or on behalf of its owner, landlord or lessor;• oral or written publication, in any manner, of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services;• oral or written publication, in any manner, of material that violates a person’s right of privacy;• use of another’s advertising idea in your ‘advertisement’; or• infringing upon another’s copyright, trade dress or slogan in your ‘advertisement.’ (Insurance Litigation, § 7:1013.)

Note here that some of the obvious “personal injury” offenses are intentional torts – like malicious prosecution and false arrest. In California, the statutory exclusion for willful misconduct in Insurance Code section 533 will preclude indemnification for these torts, even if the policy promises coverage. But that section does not prevent an insurer from defending a claim that falls within section 533. (See, e.g. Downey Venture v. LMI Ins. Co. (1998) 66 Cal.App.4th 478, 507, [insurer required to defend malicious prosecution claim against its insured, notwithstanding section 533].)

Also note that these kinds of intentional torts cannot be considered “accidents.” But the personal and advertising injury coverage in a CGL policy is not triggered by an “occurrence” or an “accident;” it is triggered by the offense. By contrast, the liability in homeowner’s and umbrella policies often includes similar personal-injury coverage, but such policies are typically “occurrence” based.

For the purposes of “advertising injury” coverage, the key provisions or “offenses” are the ones for disparagement of a person or organization’s goods, products or services, for the use of another’s advertising idea in your advertisement, and for infringing on someone else’s copyright, trade dress, or slogan in your advertisement. These are the provisions that seem to generate the most claims and therefore the most judicial decisions.

What is disparagement?

When businesses make references to their competitors, they often do so in a way that is not perceived as kind, or accurate. Litigation ensues. This litigation frequently brings the “disparagement” component of personal and advertising injury into play. Some California courts had construed the concept of “disparagement” very broadly. But the California Supreme Court’s recent decision in Hartford Cas. Ins. Co. v. Swift Distribution, Inc. (2014) 59 Cal.4th 277, has narrowed the coverage.

In Swift Distribution, the Court explained that, “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. . . . Yet the torts of disparagement and defamation protect different interests and have entirely different origins in history.” (Id. 172 Cal.Rptr.3d at p. 660, internal quotation marks and citations omitted.)

The Court explained that part of the confusion about what constitutes disparagement results from its name: “The tort has received various labels, such as ‘commercial disparagement,’ ‘injurious falsehood,’ ‘product disparagement,’ ‘trade libel,’ ‘disparagement of property,’ and ‘slander of goods.’ These shifting names have led counsel and the courts into confusion, thinking that they were dealing with different bodies of law. In fact, all these labels denominate the same basic legal claim.” (Swift Distribution, 172 Cal.Rptr.3d at 661, citing 5 McCarthy on Trademarks and Unfair Competition (4th ed.) § 27:100.)

Disparagement emerged from the common-law tort doctrine of slander of title. (Id. at p. 661.) It then expanded to encompass not just statements disparaging the state of a property owner’s title in property, goods, or chattels, but also to statements disparaging the quality of the property, goods or chattels themselves. (Ibid.)

Surveying the cases, the Swift Distribution Court explained that, “disparagement, for purposes of commercial liability insurance coverage, [has been construed to mean] a knowingly false or misleading publication that derogates another’s property or business and results in special damages.” (Id. 172 Cal.Rptr.3d at p. 653.)

That seems fairly straightforward. So try it out on a hypothetical factual scenario: Versatile sells an apparel brand called “People’s Liberation,” which includes jeans and knits. It’s sold as a premium, “high-end” brand, distributed solely through fine department stores and boutiques. One of the retail distributors, Charlotte Russe, started heavily discounting its stock of People’s Liberation clothes at “close-out” prices. Versatile sues Charlotte Russe, alleging that it violated its distribution agreement, and that by selling the brand at severe discounts will result in irreparable harm to the brand. Charlotte Russe tenders the suit to its CGL carrier, based on the coverage for disparagement. Is there coverage?

This is not really a true hypothetical; it’s drawn from a real case, Travelers Property Casualty Company of America v. Charlotte Russe Holding, Inc. (2012) 207 Cal.App.4th 969, 973. The Court of Appeal held that Charlotte Russe had made out a claim for disparagement, at least one that was sufficient to trigger the duty to defend Versatile’s lawsuit. The court explained, “we cannot rule out the possibility that Versatile’s pleadings could be understood to charge that the dramatic discounts at which the People’s Liberation products were being sold communicated to potential customers the implication – false, according to Versatile – that the products were not (or that the Charlotte Russe parties did not believe them to be) premium, high-end goods. Arguably, a trade libel claim might survive under these theories.” (Id. at p. 980.)

Other courts were critical of this approach. The Court of Appeal’s opinion in Swift Distribution, for example, bluntly stated that, “We fail to see how a reduction in price – even a steep reduction in price – constitutes disparagement. Sellers reduce prices because of competition from other sellers, surplus inventory, the necessity to reduce stock because of the loss of a lease, changing store location, or going out of business, and because of many other legitimate business reasons. Reducing the price of goods, without more, cannot constitute a disparagement; a price reduction is not an injurious falsehood directed at the organization or products, goods, or services of another.” (Hartford Cas. Ins. Co. v. Swift Distribution, Inc. (2012) 148 Cal.Rptr.3d 679, 687 review granted and opinion superseded sub nom. Hartford Cas. Ins. v. Swift Distribution, and aff’d, (2014) 59 Cal.4th 277.)

The Supreme Court in Swift Distribution agreed. “We agree with this reasoning. There is no question that Charlotte Russe’s discounted prices on People Liberation’s clothing specifically referred to People Liberation’s product. But a mere reduction of price may suggest any number of business motivations; it does not clearly indicate that the seller believes the product is of poor quality. (Id., 172 Cal.Rptr.3d at p. 666.)

In Swift Distribution, the insured, sold a product called the “Ulti-Cart,” a multi-use cart marketed to help musicians load and transport their equipment. The insured was sued by the maker of the “Multi-Cart.” a patented collapsible cart capable of being manipulated into multiple configurations and typically used to transport music, sound, and video equipment. The suit included allegations of patent and trademark infringement, false designation of origin, and damage to business, reputation, and goodwill. The case ultimately settled, but not before the maker of the Ulti-cart sued its CGL insurer for refusing to defend it. The insured claimed that the suit included claims that accused it of disparaging the Multi-Cart, triggering coverage under its CGL policy.

The insured offered two rationales to support its claim of coverage. First, it argued that the similarity in the two products’ names led consumers to confuse the Ulti-Cart with the Multi-Cart. Second, it contended that the maker of Multi-Cart claimed that its competitor’s advertising included false statements of superiority that implied that the Multi-Cart was inferior. The Court rejected both arguments.

It first noted that, “There is no coverage for disparagement simply because one party tries to sell another’s goods or products as its own.” (Id. 172 Cal.Rptr.3d at p. 667.) Similarly, a party’s attempt to copy or infringe on the intellectual property of another’s product does not, without more, constitute disparagement. (Ibid.) Likewise, “A false or misleading statement that causes consumer confusion, but does not expressly assert or clearly imply the inferiority of the underlying plaintiff’s product, does not constitute disparagement.” (Id. at 172 Cal.Rtpr.3d at p. 668.)

Next, the Court rejected the contention that if a competitor lauds its own product by referring to it as “innovative,” “unique,” “superior,” and “unparalleled,” it suggests the superiority of its product and, by implication, the inferiority of its competitor. The Court held that these statements should be most reasonably understood as “generic assertions of the company’s excellence” and were akin to “mere puffing” which cannot support a tort claim. (Id. at 172 Cal.Rtpr.3d at p. 669.)

Ultimately, Swift Distribution adopted the following test: “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.” (Id., 172 Cal.Rptr.3d at p. 657.)

The court-created causality requirement

If this area did not already seem complex enough, there are additional court-generated requirements for advertising-injury coverage that grow out of the policy language, but which do not expressly appear in the policy. For a court to find a covered “advertising injury” under California law, it must find that: (1) there is a causal connection between allegations in the plaintiff’s complaint against the insured and the insured’s advertising activities; and (2) the allegations in the complaint fit into one of the enumerated offenses in the commercial general liability policy that could be considered advertising injuries. (Homedics, Inc. v. Valley Forge Ins. Co. (9th Cir. 2003) 315 F.3d 1135, citing Bank of the West v. Superior Court (1992) 2 Cal.4th 1254, 1273-1274.)

For example, a claim of patent infringement (the type of claim at issue in Bank of the West) does not occur in the course of advertising activities within the meaning of advertising-injury coverage simply because the insured advertises an infringing product, if the infringement claim is based on the sale or importation of the product, as opposed to its advertisement. Iolab Corp. v. Seaboard Sur. Co. (9th Cir. 1994) 15 F.3d 1500, 1505. Simply put, to satisfy the causation requirement, the advertising activity must cause the injury, not merely expose it. Simply Fresh Fruit Inc. v. Continental Ins. Co. (9th Cir. 1996) 94 F.3d 1219, 1233. Many putative advertising-injury claims fail on this requirement.

But the causation requirement will normally be satisfied where the insured is accused of violating a competitor’s copyright in its advertising. This is because the injury from copyright infringement in an advertisement “emanates within the advertisement itself and requires no further conduct.” (Cahill v. Liberty Mut. Ins. Co. (9th Cir. 1996) 80 F.3d 336, 339 n. 3.) In other words, because the Copyright Act makes each act of infringement a separate violation for which damages can be recovered, simply using another’s copyrighted material in an advertisement is deemed to damage the copyright owner.

No advertising injury without an advertisement

Other putative advertising-injury claims get tripped up on the absence of any actual “advertising.” Courts have held that personal solicitations to potential customers do not satisfy the requirement of “advertising.” Hence, in S.B.C.C., Inc. v. St. Paul Fire & Marine Ins. Co. (2010) 186 Cal.App.4th 383, the insured temporary staffing agency (Rombe) was a franchisee of TRC Staffing. Rombe announced at a breakfast meeting that it would no longer be affiliated with TRC Staffing, was starting its own competing agency, and asked those in attendance to become its customers. The court held that this in-person solicitation was not an advertisement, and that a subsequent account of the event posted on the internet did not involve any advertising-injury offense enumerated in the policy. (Id. at p. 493.)

In Oglio Entertainment Group, Inc. v. Hartford Cas. Ins. Co. (2011) 200 Cal.App.4th 573, 584, Davis, who recorded “cheesy” lounge style recordings of popular songs and genres of music under the name “Richard Cheese.” He claimed that the insured Oglio, “sought out artists to copy Davis’s product and later sold a competing product, injuring Davis’s sales and the value of his professional name.” (200 Cal.App.4th at p. 584, emphasis in original.) Held: no coverage because Oglio’s acts of seeking out artists to copy Davis’s product and later selling a competing product does not allege that Oglio copied Davis’s advertising idea or style of advertisement in its own advertising. (Ibid.)

Finally, in Simply Fresh Fruit, Inc. v. Cont’l Ins. Co. (9th Cir. 1996) 94 F.3d 1219, 1220, the insured was sued in state court for misappropriating a competitor’s automated method for slicing fresh fruit. The competitor claimed that by misappropriating its method, the insured was able to decrease its production costs, eroding the competitor’s economic advantage. The Ninth Circuit held that there was no advertising-injury coverage, because the allegations were based on the misappropriation of the fruit-slicing method, not that it was advertised.

No advertising, no foul

Admit it. Even if you have never given much thought to advertising-injury coverage before, by the time you read my description about the Simply Fresh Fruit case you knew how it was going to come out. You were thinking something like, “no allegation of advertising; therefore no advertising-injury coverage.” Even if you were not thinking that as you read the description of the case, you get it now.

My point is this: If you litigate cases between commercial entities you need to know about advertising-injury coverage. You may either have to spot the coverage issue and advise your client to tender the claim to its insurer, or you may be bringing the case and you may decide to include advertising-related claims to ensure that there may be insurance coverage. Or you may decide to omit what could be a gratuitous comment in your complaint that might have little to do with the underlying claim, but which might trigger a defense under the coverage for disparagement. Hopefully, this article will spur you to read more about this area, and to become more comfortable with advertising-injury concepts.