Covered or Not: Has Hartford v. Swift Opened a Faster Lane for Intellectual Property and Insurance Mediation?
The California Supreme Court recently issued its longawaited coverage decision in Hartford Casualty Ins. Co. v. Swift Distribution, Inc., 59 Cal. 4th 277 (2014). The Court, applying California state law, upheld the trial court’s granting of Hartford Casualty Insurance Company’s (Hartford) motion for summary judgment, ruling it had no duty to defend or indemnify a claim tendered by its insured under the advertising injury provision of a general liability policy. In so doing, the California Supreme Court resolved a split of authority in the California appellate courts regarding the specificity of allegations required to trigger an insurer’s duty to defend or indemnify claims for advertising injuries. The commercial general liability policy at issue included a provision for coverage of advertising injury.
The California Supreme Court took the case “to clarify the principles governing the scope of a commercial general liability insurer‘s duty to defend [emphasis added] an insured against a claim alleging disparagement.” Its holding “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” by “express mention or by clear implication” clarifies the law on what is necessary to establish a claim of implied disparagement but fails to provide other than a passing mention of the duty to defend. Rather, having defined what allegations had to be stated to state a covered claim for implied disparagement under “advertising injury,” and having found those allegations missing, the Court jumped to the conclusion that there was no duty to defend.
Originally published on Law.com on September 22, 2014.
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The California Supreme Court recently issued its long-
awaited coverage decision in Hartford Casualty Ins.
Co. v. Swift Distribution, Inc., 59 Cal. 4th 277 (2014).
The Court, applying California state law, upheld the trial
court’s granting of Hartford Casualty Insurance Com-
pany’s (Hartford) motion for summary judgment, ruling
it had no duty to defend or indemnify a claim tendered
by its insured under the advertising injury provision
of a general liability policy. In so doing, the Califor-
nia Supreme Court resolved a split of authority in the
California appellate courts regarding the specificity of
allegations required to trigger an insurer’s duty to de-
fend or indemnify claims for advertising injuries. The
commercial general liability policy at issue included a
provision for coverage of advertising injury.
The California Supreme Court took the case “to clarify
the principles governing the scope of a commercial gen-
eral liability insurer‘s duty to defend [emphasis added]
an insured against a claim alleging disparagement.”
Its holding “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” by
“express mention or by clear implication” clarifies the
law on what is necessary to establish a claim of implied
disparagement but fails to provide other than a passing
mention of the duty to defend. Rather, having defined
what allegations had to be stated to state a covered
claim for implied disparagement under “advertising in-
jury,” and having found those allegations missing, the
Court jumped to the conclusion that there was no duty
to defend.
How is this holding likely to impact the settlement of
the underlying cases, especially those that usually
arise as infringement of intellectual property rights?
The answer is that if we take the Court’s language at
face value, parties will be more willing to address the
real meat of the case, the infringement issues. This is
because unless the plaintiff has clearly pled an adver-
tisement that disparages the defendant’s product, the
implied disparagement claim will fall by the wayside
inasmuch as it is no longer a basis for insurance cover-
age.
First, let’s take a quick look at the underlying case to
set this in perspective. Swift, Hartford’s insured, do-
ing business as Ultimate Distribution (Ultimate), was
sued by Gary-Michael Dahl (Dahl), the manufacturer of
the Multi-Cart. Ultimate manufactured, marketed and
sold the Ulti-Cart, which looked and operated a lot like
the Multi-Cart, a collapsible multi-use cart marketed
to help musicians load and transport their equipment.
The Dahl suit, which was at heart a patent and trade-
mark infringement case, also alleged false designa-
tion of origin and damage to business, reputation, and
goodwill. Swift’s advertising of its product promoted
the positive aspects of its own product, using words
such as “innovative” and “superior,” and did not men-
tion Dahl’s product, although the similarities between
the products and the similarity in name could arguably
have led the customer to believe that the advertising
was claiming that Ultimate’s product was being touted
as superior to Dahl’s Multi-Cart.
Swift tendered the Dahl action to its commercial gener-
al liability (CGL) carrier, Hartford, asserting that Dahl’s
claims against it could be interpreted as constituting
disparagement by implication, thereby triggering a duty
to defend under the Hartford policy. Hartford denied
coverage on the grounds that the suit did not allege
that Ultimate had disparaged Dahl or the Multi-Cart,
and filed a complaint for declaratory relief.
Implied disparagement claims are often added to
such intellectual property cases because the heart of
1.800.352.JAMS | www.jamsadr.com
This article was originally published by LAW.COM
and is reprinted with their permission.
Covered or Not: Has Hartford v. swift opeNed
a faster LaNe for iNteLLeCtuaL property aNd
iNsuraNCe MediatioN?
By Barbara A. Reeves Neal, Esq.
Covered or Not | Page 2
the case, trademark and patent infringement, was not
covered by the existing CGL policy, whereas implied
disparagement had found its way into the “advertis-
ing injury” aspect of the CGL’s coverage. Implied dis-
paragement is one of those torts that previously had
a great deal of elasticity. Arguably, any claim in my
product description that made my product sound bet-
ter than your product (nearly identical and allegedly
infringing) “disparaged” your product by comparison.
As Justice Baxter asked Ultimate’s counsel during oral
argument before the Court, “If I say that my wife is
the best wife in the world, does that disparage Justice
Chin’s wife?”
As long as implied disparagement claims were easily
pled and arguably covered, they became key to cov-
erage, requiring a plaintiff to keep those claims alive
until the end of the case. In cases where the focus
properly should be on infringement of intellectual prop-
erty rights, and where focus on such rights in the con-
text of mediation could lead to settlement or narrowing
of issues, the presence of an implied disparagement
claim interfered with settlement discussions. One or
both parties may have held the belief that the implied
disparagement claim was in fact groundless, but as
long as it was the only hope for insurance coverage,
the claim had to remain in the case. If, following Swift,
implied disparagement is no longer a key to insurance
coverage, defense counsel (and plaintiffs’ counsel to
the extent it is relying on insurance coverage) are more
likely to try to resolve such claims earlier.
Unfortunately, while the Court did a fine job of clarify-
ing the elements of a cause of action for disparagement
and implied disparagement (a statement must specifi-
cally refer to the plaintiff‘s product or business by clear
implication or expressly mention or derogate that prod-
uct or business), that normally would not be the end of
the examination as to whether a duty to defend existed.
Prior to Swift, it was well accepted that insurers must
defend any lawsuit in which there is a possibility of cov-
erage, even if the complaint itself is silent, unless their
own investigation conclusively determines that there is
in fact no possibility of coverage (Montrose Chemical
Corporation v. Canadian Universal Ins. Co. (1993) 6
Cal. 4th 287). The Court in Swift seems to be saying
that unless the elements are specifically pled, no duty
to defend exists, even if there is a possibility that there
were elements that might give rise to coverage.
Be that as it may, for the present at least, the value
of implied disparagement claims as a vehicle for po-
tentially obtaining coverage in intellectual property in-
fringement cases has decreased. That should clear
out the underbrush that has previously delayed the
mediation and resolution of intellectual property dis-
putes, as well as insurance coverage disputes arising
from those cases.
Barbara Reeves Neal is an arbitrator, mediator and spe-
cial master working with JAMS, specializing in insur-
ance coverage and based in Los Angeles. She can be
reached at breevesneal@jamsadr.com.
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