United States: California Limits The Duty To Defend Against Liability For Trademark Infringement As An "Advertising Injury"

Last Updated: August 27 2014
Article by Ana Guardado

In June 2014, two courts applying California insurance law limited the scope of an insurer's duty to defend against allegations of trademark infringement within the context of coverage for "personal and advertising injury" under a general liability policy.

At issue in Hartford Casualty Insurance Co. v. Swift Distribution Inc. et al., 59 Cal. 4th 277 (2014) (Hartford), was whether allegations that an insured infringed on a competitor's trademark and presented false and misleading advertisements that were likely to cause consumer confusion and mistake constituted an advertising injury covered under the Hartford liability policy. 

Hartford issued a general commercial liability policy to Ultimate Support Systems that provided a duty to defend and indemnify for "personal and advertising injury" from claims arising from "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." Ultimate was sued by a competitor, Multi-Cart, for allegations of patent and trademark infringement and dilution. Ultimate and Multi-Cart both produced and sold collapsible carts used to transport music equipment. Multi-Cart claimed Ultimate's cart was nearly indistinguishable from its patented cart and the similarities were likely to confuse consumers and wrongly suggest the two companies were affiliated. Ultimate tendered defense of the suit to Hartford and Hartford denied coverage on the grounds that the suit did not allege Ultimate disparaged its competitor and therefore the suit did not trigger Hartford's duty to defend.

The Court of Appeal and Supreme Court agreed that Hartford had no duty to defend. According to the Multi-Cart complaint, Ultimate did not mention its competitor's name or product in any of its advertisements. Nonetheless, Ultimate contended the underlying suit contained allegations of disparagement where Multi-Cart claimed Ultimate's product design and brand name led consumers to confuse the two products and that Ultimate's advertisements claiming its product's superiority implied the inferiority of Multi-Cart. The Court disagreed that Multi-Cart's trademark infringement allegations constituted disparagement. The Court reasoned that consumer confusion resulting from similarity may support a claim of patent or trademark infringement but it does not by itself support disparagement. In addition, Ultimate's advertisements contained generic assertions of the company's excellence and "mere puffing" does not necessarily imply a derogatory comparison. Multi-Cart's trademark infringement allegations did not claim that Ultimate expressly asserted or clearly implied Multi-Cart's product was inferior.  

Previously, under Travelers Property Casualty Co. of America v. Charlotte Russe Holding, Inc., 207 Cal.App.4th 969 (2012) (Charlotte Russe), one intermediate appellate court had found a claim of disparagement did not require an express false statement about another party or product, and even inferences of "injurious false statements" could form the basis for a claim of disparagement. In Charlotte Russe, plaintiff clothing producer alleged that retailer sold its products for heavily reduced prices suggesting to consumers that the products were of inferior quality. The court found coverage for "disparagement" because the retailer "published prices" that falsely indicated a premium good was less valuable and the implication of the retailer's pricing was disparaging to the clothing producers.

In Hartford, the Court of Appeal and Supreme Court disagreed with the conclusion from Charlotte Russe that a reduction in price, even a steep reduction, constitutes disparagement because a seller can reduce prices for many legitimate business reasons that do not clearly indicate the seller believes the product is of poor quality. The Hartford court held a claim of disparagement requires a plaintiff 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.  The court explained that disparagement without an express injurious false statement about another company or product requires a "clear or necessary inference," and disapproved of Charlotte Russe to the extent that the opinion is inconsistent with this limited scope of disparagement. 

In another recent case, the Ninth Circuit applied California law to limit when a claim for trademark infringement constituted a covered "personal and advertising injury" in Street Surfing, LLC v. Great Am. E&S Ins. Co., 752 F.3d 853 (9th Cir. 2014). In August 2005, Great American issued a general commercial liability policy with coverage for personal and advertising injury liability to inline skateboard company Street Surfing, LLC. The policy contained exclusions for prior publications of injurious material (prior publications exclusion) and injuries arising out of infringement of another's intellectual property rights (intellectual property ("IP") exclusion and advertising injury ("AI") amendment).

In June 2008, Street Surfing was sued for trademark infringement by the registered owner of the trademark "Streetsurfer." The trademark owner alleged that Street Surfing's use of the "Street Surfing" logo and brand name was too similar and therefore a wrongful use of "Streetsurfer" – a trademarked advertising idea. Street Surfing tendered defense of the suit to Great American and Great American denied coverage under the IP exclusion and AI amendment with a reservation of rights to assert other applicable terms, provision, conditions, and/or exclusions. Great American did not specifically rely on the prior publications exclusion in denying coverage. 

Street Surfing filed suit against Great American seeking a declaration that it was obligated to defend and indemnify Street Surfing in the trademark infringement action. Great American conceded the trademark suit was potentially covered as an "advertising injury" under the policy's coverage for "use of another's advertising idea," but rejected Street Surfing's argument that the "slogan infringement" coverage applied. Slogan infringement coverage applies to liability arising from infringing on another's "attention-getting phrase used in advertising or promotion." While it is conceivable the name of a product or business, like "Streetsurfer" may be a "slogan," the underlying allegations and evidence did not suggest that the trademark owner used "Streetsurfer" as a slogan. The trademark suit alleged that Street Surfing wrongfully used "Street Surfing" in its brand name and logo, thereby injuring the trademark owner of "Streetsurfer."

Even though the trademark suit was potentially covered by the policy as an advertising injury, the district court found coverage was precluded by the prior publications exclusion as a matter of law because Street Surfing produced products with the "Street Surfing" logo and brand name before the policy period began.  Street Surfing continued to advertise the "Street Surfing" logo and brand name on different products during the policy period and it argued that each of these publications were a "fresh wrong" that were covered under the policy.

To determine whether coverage was precluded as a matter of law, the court looked to the pleadings and available evidence of when Street Surfing first used the name "Street Surfing," and whether Street Surfing published the allegedly wrongful advertisement before the policy's effective date, August 2005. While the trademark complaint left open the possibility that Street Surfing began wrongfully using the name after August 2005, Street Surfing mentioned that it sold products affixed with its logo and brand name in the Great American policy application -- before the policy period began in August 2005. The court found this extrinsic evidence sufficient to show that Street Surfing first wrongfully used "Street Surfing" advertising before obtaining the policy. Street Surfing's later publications of the "Street Surfing" logo and brand name were substantially similar to its prior publications because Street Surfing's liability arose out of the same alleged wrongful act  (i.e. use of the "Street Surfing" idea).

The Ninth Circuit affirmed the district court's ruling of summary judgment in favor of Great American, finding the prior publications exclusion precluded coverage for the trademark infringement suit as a matter of law.

Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.

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