Advertising Injury Coverage and "Implied Disparagement"

Posted by Gene Killian on May 30, 2013

Insurance claims personnel have a natural, probably genetic, aversion to certain topics.  One of them is insurance coverage for “advertising injury.”  So, if your advertising injury claim is in any way unusual, chances are that as a policyholder you’re going to run into trouble with your carrier.

Some brief background:  Commercial general liability policies typically provide coverage for claims of “personal and advertising injury.” This generally includes, for example, coverage for liability claims brought against the policyholder that allege “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.” 

But what if the policyholder is accused of false advertising bragging about its own product, and not specifically trashing, or even mentioning, the competitor’s product?  Does the “advertising injury” coverage contained in standard commercial general liability policies apply to so-called “implied disparagement”?

Let’s take a look at two recent cases involving the question of coverage for “implied disparagement,” one of which involved the venerable Kim Kardashian, who’s famous for being famous.  Kardashian was once quoted as saying:  “I’m Armenian, so I’m obsessed with laser hair removal.”  Fittingly, then, a company called Tria, Inc. hired her as its celebrity spokesperson in connection with a line of products aimed at, you guessed it, hair removal (as well as acne removal).  Tria later became embroiled in trademark litigation with a competitor, Radiancy, Inc., in which Radiancy claimed that Tria (and Kardashian) had made false and misleading statements in its advertising. 

The interesting aspect of this is that Tria’s advertising said nothing at all about Radiancy.  Instead, Tria’s advertising simply touted its own products as being, for example, “faster,” “superior,” “more powerful,” and more “advanced” when compared to other (unnamed) products on the market.  Radiancy claimed that Tria’s advertising, although not directly addressed to Radiancy, nevertheless caused Radiancy to lose sales, and damaged Radiancy’s goodwill.

Tria’s carriers disclaimed coverage for the claims against Tria, arguing that Radiancy had only contended that Tria had made misleading claims about its own products.  If Tria did not directly disparage Radiancy’s products, the argument went, there could be no “advertising injury” coverage.

Wrong, said the Court, writing: “It is significant that the disjunctive policy language (‘slanders or libels…or disparages’) did not delineate specific causes of action to which ‘disparagement’ applied.  This was done in the exclusions section, which carved out a variety of subject matter from coverage.  Given this structure, reading the policy broadly to cover implied, ‘own-product’ disparagement would be consistent with a reasonable insured’s objective expectations.”  (Emphasis added.)  (Alas, the Court then went on to negate coverage for other reasons, such as an intellectual property exclusion.  Not sure why the Court went through the exercise of explaining how “advertising injury” coverage works, only to eviscerate the coverage on other grounds, but so be it.)

You can read the full Tria decision here.      

In another recent case involving insurance coverage for “implied disparagement,”  a pharmaceutical manufacturer named TPU, which sold a prescription topical analgesic called Lidoderm, claimed that the policyholder (JAR) had made false and misleading statements in the course of advertising its own product, a nonprescription topical analgesic called LidoPatch.  The allegedly false statements included:  “Like the prescription brand, LidoPatch will provide relief for up to 24 hours!”  The LidoPatch advertising did not mention Lidoderm by name. 

The Court held that TPU’s allegations were sufficient to trigger the carrier’s duty to defend, writing:  “That plaintiff’s statements did not identify Lidoderm by name is immaterial…Whatever words plaintiff used, TPU clearly understood (and alleges that ‘a substantial segment of consumers’ would likewise believe) that plaintiff’s implicit ‘message’ was about Lidoderm…[and] a statement equating a competitor’s product with an allegedly inferior one is logically indistinguishable from, and no less disparaging than, a statement describing one’s own product as ‘superior’ to the competitors’.”

These cases turn on the reasonable expectations of the policyholder.  If the policy doesn’t expressly limit “false advertising” claims to cases in which the policyholder explicitly and directly disparages a competitor’s product, why shouldn’t coverage exist?  Otherwise, aren’t claims personnel just engaging in what we euphemistically call “post-loss underwriting”?

You can read the full JAR case here.

Advertising Injury Coverage

Posted by Gene Killian on December 20, 2011

In no particular order, the three areas of liability claim that seem to make carriers the most unhappy (or suspicious) are (1) employment claims; (2) environmental claims; and (3) “Coverage B”-type claims (intellectual property, false advertising, etc.).  The Great Pomegranate Wars fall into category (3).  (I should note for accuracy that "Coverage B" is a general liability policy term, and the case discussed below deals with an errors and omissions-type policy.)

According to the Pomegranate Council (and yes, there is a Pomegranate Council):  “Pomegranates are royalty amongst fruit.  They are symbolic of prosperity and abundance in virtually every civilization.”  (Me, I don’t like the seeds.)

Seeking such prosperity and abundance, Welch Foods manufactures and sells fruit juice containing what it describes as "White Grape and Pomegranate" juice. The label on the juice prominently pictures pomegranates when - the horror! - the primary ingredients are actually white grape and apple juice. A competitor, POM Wonderful, LLC, which produces its own blended pomegranate juices, sued Welch in 2009 for false and misleading advertising.  Then a class of disaffected consumers also brought suit against Welch for false advertising and deceptive labeling.

National Union sold Welch a liability policy covering Welch's loss "arising from a Claim ... for any  actual of alleged Wrongful Act of [Welch]."  It defined "[w]rongful act" as  “any breach of duty, neglect, error, misstatement, misleading statement, omission or act by [or on behalf of the Organization]."

The broad coverage grant in the policy quoted above seems to include claims of false or misleading advertising, and the trial court agreed.  The coverage issue, however, was beclouded by a policy exclusion reading as follows:

 

“ANTITRUST EXCLUSION

The Insurer shall not be made liable to make any payment for Loss in connection with a Claim made against the insured…alleging, arising out  of, based upon or attributable to, or in any way involving either directly or indirectly, antitrust violations, price fixing, price discriminations, unfair competition, deceptive trade practices and/or monopolies, including actions, proceedings, claims or investigations related thereto…"

 

By its title, the “antitrust exclusion” seems to deal with antitrust-type claims rather than false advertising claims.  But the trial court felt otherwise, writing:

“While the exclusion at issue is entitled ‘[a]ntitrust exclusion,’ its scope is not so limited. Indeed, the very next exclusion in the contract, Exclusion 19, states that ‘[t]he headings in this policy are there purely for the convenience of the parties and they form no part of the definition of the scope of the coverage provided.’ Moreover, the plain language of the exclusion is broad enough to include a variety of anti-competitive behavior. Nothing in the text of the exclusion limits it solely to antitrust claims. To the contrary, the fact that it includes a range of anti-competitive conduct suggests that its scope is broader than antitrust claims… Since the exclusion applies, National Union has no duty to defend, and no duty to advance defense costs.”

Bad rulings are what appeals courts are for, right?  Umm...not in this case.  The United States Court of Appeals for the First Circuit has now issued a decision affirming the trial court, writing:

“No definition was provided in the policy for the terms ‘unfair competition’ or ‘deceptive trade practice’…Although Exclusion 4(c) bears the label ’Antitrust Exclusion,’ and several of the descriptions of covered claims refer to ‘antitrust’ or typical antitrust claims such as ‘monopolies,’ the plain language of the other excluded claims – particularly ‘unfair competition’ and ‘deceptive trade practices’ – is far broader and not so limited.”

(Here’s a question for the First Circuit.  If ‘false advertising’ and ‘unfair competition’ mean the same thing, then why have they been historically separately referenced in commercial general liability policies?)

Some thoughts on the implications of this decision.  First, a wise person once said that the only justice in the halls of justice is usually in the halls.  The reversal rate in the federal appeals court is about 14%.  So, if you can do a deal, do it.  Second, it’s important to have specific coverages for specific exposures. “General” coverages (such as the one involved in the Welch decision) contain so many carveouts and exclusions that they can often be worthless when trouble strikes.  So, if your business may have an advertising liability exposure, review it with your broker or risk management consultant and make sure that you’re properly protected.  And third, while businesses need a comprehensive coverage program, never count on insurance.  Proper operational controls are paramount.  “Insurance” often simply means the right to sue a carrier.

The First Circuit citation is Welch Foods, Inc. v. National Union Fire Ins. Co., No. 10-2261 (1st Cir. Oct. 24, 2011).

Late Notice of Claim

Posted by Gene Killian on November 23, 2011

In my experience, there are three main reasons why companies delay in giving notice to their carriers of potentially covered claims.  First, the underlying suit is an “oddball,” such as an intellectual property claim, that the risk manager thinks isn’t covered.  Second, the company is worried that its premiums will rise.  Third, the person responsible for reporting (and following up on) claims is very busy, and the problem drifts to the bottom of the pile. 

Commercial insurance claims are complicated enough.  The last thing you want to do is give the carrier an unexpected gift, namely, another possible ground upon which to deny coverage.  Late notice qualifies as such a gift.

The recent Second Circuit decision affirming the trial court in Rockland Exposition, Inc. v. Great American Ins. Co., No. 10-4276-cv, seems to have involved some or all of the three reasons I listed above.  (The trial court decision is reported at 746 F. Supp. 2d 528, 2010 U.S. Dist. LEXIS 103267.) I should note that the Rockland case was decided under New York’s old, draconian late notice law (under which even very brief delays in giving notice can result in a forfeiture of coverage, regardless of whether the carrier was actually prejudiced).  In July 2008, N.Y. Ins. Law §3420 was amended to prohibit insurance companies from denying claims as untimely unless the policyholder’s failure to provide timely notice actually prejudiced the insurance company.  The amendment applies only to policies sold after January 17, 2009, so if you’re dealing with a delayed-manifestation claim of some type under New York law, you may still have to wrestle with the old requirements. 

Most states (including New Jersey) follow the “prejudice” rule with respect to occurrence-based policies, meaning that the insurance company has to show it was harmed by the late notice before it can be relieved of its coverage obligations.  The Reminger law firm, based in Ohio and Kentucky, has compiled a helpful chart showing which states follow the “prejudice” rule and which do not. 

And now, back to Rockland.  The case involved an underlying trademark infringement suit against the policyholder in federal court in New Jersey, relating to competing trade shows (note Reason No. 1 for not giving notice, above).  The policy required written notice of claim to the carrier “as soon as practicable.”  The policyholder delayed almost three months in giving written notice to the carrier, and the appeals court held that coverage was precluded because of the delay.  

The excuses given by the policyholder for providing late notice (each rejected by the court) were as follows: 

1. Only a month after receiving the summons and complaint, the policyholder told its broker (orally) about the suit.  Not good enough, said the trial court (affirmed by the Second Circuit): "An insurance broker is the agent of the insured, not the insurance company, and notice to an insurance broker, absent exceptional circumstances, is not notice to the insurer.”  The court added:  “Where, as here, an insurance policy requires written notice of a claim, oral notice is of no legal significance.” 

2. The policyholder argued that oral notice to an “agent” of the carrier was sufficient, because the policy contained an endorsement reading:  "Notice given by or on behalf of the insured, or written notice by or on behalf of the injured person or any other claimant, to any agent of ours in New York State, with particulars sufficient to identify the insured, shall be considered to be notice to us."  The policyholder contended that because the first clause omitted the word “written,” written notice was not required.  The trial court disagreed, writing:  “Here, it is difficult to believe that by adding  provision 2.e -- the main goal of which was obviously to allow notice to agents, as an alternative to notice to the insurer -- the Parties also intended to surreptitiously repeal two explicit provisions requiring written notice.”  Not that this would have mattered, because the court also concluded that there was no evidence that the broker (Marshall & Sterling) was an agent of the carrier.  There was, for example, no written agency agreement.

3. The policyholder argued that it delayed in giving notice because it did not realize that it had insurance coverage for intellectual property lawsuits.  The trial court again disagreed, stating:  “Where coverage is unclear, reasonable insurance-holders give notice.”   

Even if you’re in a state that requires the carrier to show prejudice, late notice is an expensive battle that you don’t want to fight.  Give notice early and often, and strictly follow the policy requirements when doing so.  If you ask your broker to give notice, make the request in writing and make sure you get a copy of the actual notice letter. 

Insurance coverage for intellectual property lawsuits

Posted by Gene Killian on December 16, 2010

Most lawyers brag about the cases they’ve won.  I prefer to pick apart the ones I’ve lost.  It’s cathartic.

The subject of general liability insurance coverage for supposed intellectual property offenses is hotly contested.  Depending on the “personal injury” and “advertising injury” coverage forms used in a particular policy, for example, insurance may exist for claims of patent or trademark infringement.   Generally and not surprisingly, insurance companies disagree.

So, here are the facts from a recent case we handled.  Companies A and B manufactured food preservatives overseas.  Our client -  Company C - approached the two manufacturers and offered to become the U.S. distributor for the products.  The parties signed a letter of intent, which included a confidentiality agreement as to the trade secrets of Companies A and B.

A and B alleged that C later “improperly associated itself with [the products] and promoted itself as the distributor of [the products] in the U.S., manufactured using [A and B’s] patented process and promoted itself as knowledgeable in the use of [A and B’s] trade secrets.”  A and B also alleged that C “began selling its own version of [the product] to the same customers.”

Companies A and B sued for (1) patent infringement, (2) unfair competition, and (3) theft of trade secrets. 

We then went after C’s liability insurance carrier for coverage under the “personal and advertising injury” form in the general liability policy.  In relevant part, the policy defined “advertising and personal injury” as injury arising out of “[c]opying, in your ‘advertisement,’ a person’s or organization’s ‘advertising idea’ or style of ‘advertisement.’”  The policy defined “advertising idea” as “any idea for an ‘advertisement.’”  Finally, the policy defined “advertising” as “the widespread public dissemination of information or images that has the purpose of inducing the sale of goods, products or services through…(1) Radio; (2) Television; (3) Billboard; (4) Magazine; (5) Newspaper; or…[a]ny other publication that is given widespread public distribution.”

Seizing on the last phrase (“any other publication that is given widespread distribution”), we moved for summary judgment on the duty to defend.  As you know if you’re an insurance aficionado, the carrier’s duty to defend is supposed to be triggered if there’s any possibility that coverage may ultimately exist.  We figured that the allegations in the underlying complaint (for example, that C “improperly associated itself with [the products] and promoted itself as the distributor of [the products] in the U.S.”) should suffice.

The judge didn’t buy what we were selling, though, holding in part: “The policy requires ‘widespread’ public dissemination…in order to constitute an advertisement…[T]he underlying complaint provides no support for the notion that the dissemination of information at issue was widespread.”

This (in my humble opinion) is a dopey ruling.  Under the law relating to the duty to defend, the proper question is whether there existed any possibility of widespread dissemination of information.  If so, the duty to defend should have been triggered.  I personally would like to have taken this one up to the Third Circuit for review, but we’d negotiated a high/low agreement with the carrier, so we settled following the court’s decision.  (A decent result for the client, since a less-than-perfect settlement is almost always better than a protracted litigation.  But I feel like I got cut off from dinner after the shrimp cocktail.)