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Travelers Property Casualty Co. v. Charlotte Russe Holding, Inc. - Implied Product Disparagement Claim Triggered Duty to Defend

Duty to Defend Arose Under Coverage for Product Disparagement Where Lawsuit Alleged Excessive Discounting Caused Damage to Reputation of Apparel Brand

(July 13, 2012) __ Cal.App.4th __; 12 C.D.O.S. 7918

July 2012

The California Court of Appeal, Second Appellate District, reversed a Superior Court order that granted an insurer’s motion for summary judgment on the ground there was no potential for coverage of a lawsuit alleging the insureds’ deep discounting of apparel manufactured by the claimant damaged the reputation of the brand.  The Court of Appeal held the underlying claims against the insureds could reasonably be interpreted to constitute a product disparagement claim triggering a duty to defend under the personal injury coverage in the insurer’s commercial general liability policies.

Versatile Entertainment, Inc. (“Versatile”) filed various complaints and cross-complaints against Charlotte Russe Holding, Inc., and others (collectively “Charlotte Russe”) for breach of contract, declaratory relief, and fraudulent and negligent misrepresentation.  Versatile alleged Charlotte Russe agreed to be the exclusive sales outlet for Versatile’s “People’s Liberation” brand apparel.  Versatile alleged Charlotte Russe promised to “promote the sale of premium brand denim and knit products in order to encourage [Charlotte Russe’s] customers to purchase such premium products at a higher price point . . . .”  Versatile contended Charlotte Russe breached that obligation by selling the products at “fire sale” prices, causing diminution in the value of the People’s Liberation brand.

Charlotte Russe tendered the lawsuits to Travelers Property Casualty  Company (“Travelers”) under two consecutive policies providing commercial general liability coverage to Charlotte Russe.  Both policies included coverage for “‘[a]dvertising injury’ caused by an offense committed in the course of advertising your goods, products or services” and for “‘[p]ersonal injury’ caused by an offense arising out of your business, excluding advertising . . . .”  Both coverages applied to claims alleging injury arising out of “[o]ral, 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.”  The advertising injury coverage, but not the personal injury coverage, was subject to an exclusion for injury arising out of breach of contract.

Travelers denied coverage for the lawsuits on the basis the claims did not allege disparagement as required by the policies.  Travelers concluded there was no duty to defend because “‘the reduction of a product’s price is not … a disparagement of that product.’”

Travelers filed a declaratory relief action and made a motion for summary judgment on the ground that the underlying allegations must be compared to the elements of trade libel to properly assess their potential for coverage as disparagement under either the personal injury or advertising injury coverage.  Travelers argued a cause of action for trade libel or disparagement requires an allegation of the publication of a false statement and resulting loss of business and Versatile’s claims against Charlotte Russe alleged neither of these elements.  The trial court granted Travelers’ motion.

The Court of Appeal reversed, holding that Travelers had a duty to defend because Versatile’s claims reasonably could be interpreted as a claim of product disparagement resulting in damage to the People’s Liberation brand.  The Court of Appeal held it is not necessary that the causes of action in the underlying pleadings be labeled “disparagement” or “trade libel.”  The underlying pleadings triggered a duty to defend because the claims included implied allegations of disparagement.  Versatile’s pleadings alleged People’s Liberation brand apparel had been identified in the market as premium, high-end goods and by publishing deeply discounted prices, Charlotte Russe implied they were not high-end goods.  Versatile had pled that the implication of Charlotte Russe’s pricing was a false statement and the Court of Appeal held this was sufficient to create a potential for coverage and a duty to defend.

The Court of Appeal also rejected Travelers’ contention that Versatile’s claims could not be covered because they did not allege all of the elements of trade libel, specifically the element of false publication.  The Court of Appeal reasoned that the duty to defend is not conditioned on the sufficiency of the underlying allegations of a cause of action because Travelers is obligated to defend even claims lacking in merit.  Finding that the trial court erred in granting summary judgment for Travelers, the Court of Appeal reversed.

Please click here for the opinion. 

This opinion is not final.  It may be withdrawn from publication, modified on rehearing, or review may be granted by the California Supreme Court.  These events would render the opinion unavailable for use as legal authority in California state courts. 

This and other case bulletins, as well as other publications of Gordon & Rees LLP, may be found at www.gordonrees.com
 

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