Posted In: Insurance Recovery
Implied Disparagement: How "Falsely" Advertising Your Own Product May Be A Covered Claim
on January 24, 2017
“My alleged false statements about my own product actually disparaged the plaintiff’s product” is how Vitamin Health, Inc. interpreted Bausch & Lomb’s complaint against it for false advertising. Vitamin Health is currently seeking coverage for defense costs from Hartford Casualty Insurance Company under advertising injury coverage included in its insurance policy. See Vitamin Health, Inc. v. Hartford Cas. Ins. Co., Case No. 15-10071, 2016 WL 2622353 (E.D. Mich. May 9, 2016) According to Vitamin Health, its defense costs should be covered by Hartford because the alleged false advertising impliedly disparages Bausch & Lomb’s product and therefore, is a covered advertising injury claim. The U.S. District Court for the Eastern District of Michigan disagreed and the case is now currently pending in the U.S. Court of Appeals for the Sixth Circuit. Vitamin Health’s argument, however, raises an interesting issue: Can a claim alleging false advertising of the insured’s own product be entitled to insurance coverage on the theory that the false statement impliedly disparages another’s product? If so, at what point does a statement disparage another’s product by implication?
Most Commercial General Liability (“CGL”) insurance policies provide coverage of defense costs for “personal and advertising injury” resulting 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.” Courts agree that this provision covers suits alleging that the insured made false statements, in advertising, about the quality of another’s product and have generally concluded that this provision does not provide coverage for claims alleging that the insured falsely advertised its own product. But a few courts have carved out an exception for when the advertisement about the insured’s own product impliedly disparages another’s product.
In arguing that its claim met this exception, Vitamin Health relied on the decision in E.piphany, Inc. v. St. Paul Fire and Marine Ins. Co., 580 F.Supp.2d 1244 (N.D. Cal. 2008) In E.piphany, the insured sought coverage for its defense costs in a false advertising case. According to the allegations of the underlying complaint, the insured had falsely advertised that that its product was the only all-Java and fully-J2EE software, that it was the first to launch this type of software and was years ahead of the competition. While the focus of the false advertising complaint was on statements the insured made about its own products, the court held that the insured’s alleged false statements were that its product was superior and implied that the competitor’s product was, as a result, inferior. Thus, the alleged false statement disparaged another’s product by implication and fell under the coverage of the insured’s policy.
The U.S. District Court of the Eastern District of Michigan disagreed with Vitamin Health and instead, relied on the decision in Welch Foods, Inc. v. National Union Fire Ins. Co., Case No. 09-12087-RWZ, 2010 WL 3928704 (D. Mass. Oct. 1, 2010), in holding that the false advertising allegations against Vitamin Health were not covered by its insurance policy. In Welch, the underlying complaint alleged that the insured falsely advertised that its juice product contained pomegranate juice when it did not. The underlying complaint was filed by POM Wonderful, LLC, a competitor of the insured and the seller of pomegranate juice products. The insured argued that the false advertising allegations were a covered advertising injury. The court held that the false advertising claim did not even impliedly disparage POM’s products because the false statements did not claim superiority over them. Instead, the false advertising statements were clearly only related to the insureds products and, as a result, were not covered by the insured’s policy.
Here, Vitamin Health’s statement that its product is “AREDS2-compliant” is the focus of the coverage dispute. Bausch & Lomb has advertised that its own product is the only product that is “AREDS2-compliant” and claims that Vitamin Health’s statement that its product is also compliant is false advertising. In the insurance coverage dispute, Vitamin Health argued that its alleged false statement impliedly disparages Bausch & Lomb’s product because it implies that Bausch & Lomb’s statements that its product is the only “AREDS2-compliant” product are false. The district court was correct that the facts of this case are distinguishable from E.piphany in that Vitamin Health’s statements do not claim its product is superior to Bausch & Lomb’s product. However, the facts of this case are also distinguishable from Welch in that POM was not advertising that it was the only supplier of a pomegranate juice product and the alleged false statements implied that was untrue. On its face, this case appears to be one of first impression and questions whether a party can disparage another’s goods by implying that the claim that such goods are superior is false.
The parties have briefed this matter for the Sixth Circuit and are awaiting the court’s final decision. There are potential coverage exclusions that may obviate the need for a decision on this issue. What is clear: whether a false advertising claim is covered by an insurance policy’s advertising injury coverage may not be so simple as determining whether the complaint alleges false statements about the insured’s own product or its competitor’s. Policyholders facing false advertising claims, even when the claim alleges that the false statements are related to the policyholder’s own product, should consult coverage counsel to determine whether they are entitled to coverage for their defense of such claims.
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