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In a recent case, the United States District Court for the District of New Jersey held that an insured had no duty to defend an insured accused of falsely advertising the origin of its product.  Albion Engineering Company, a New Jersey company, was sued by a competitor for false advertising because it claimed that its products were made in America when, in fact, they were made in Taiwan.  Albion then sought coverage from its insurer, Hartford Fire Insurance Company.  The Hartford policy provided coverage for, among other things, personal and advertising injury.  In Albion Engineering Co. v. Hartford Fire Ins. Co., 2018 WL 1469046 (D.N.J. March 26, 2018), Judge Noel L. Hillman held that there was no coverage for the claims.

Many liability policies provide coverage in connection with “advertising injury.”  In determining the extent to which such coverage exists, it is necessary to closely examine the policy language because the wording of such coverage provisions varies widely.  In addition, over the years insurers have modified their policy wording to address issues raised by the courts.  Thus, decisions issued just a few years ago may have little or no relevance.

The policy at issue in Albion defined “personal and advertising liability” to include injury arising out of the “[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 . . . .”  Thus, coverage was limited to two types of claims: defamation and disparagement.  As summarized by the court:

The issue before this Court is whether the [the underlying action] asserts a claim for “injury . . . arising out of . . . publication of material that slanders or libels a person or organization or disparages a[n] . . . organization’s goods, products or services.”

Id. at *7.  In other words, the issue addressed by the court was whether falsely stating that one’s products are manufactured in the United States is defamatory toward, or disparages products made by, a competitor.

Both Albion and its competitor, Newborn Brothers Co., Inc., a Maryland-based company, manufacture caulking guns and accessories in Taiwan.  Albion claimed, however, that its products were manufactured in the United States.   Newborn sued Albion in federal court in New Jersey, asserting claims for false advertising and product marking under the Lanham Act and tortious unfair competition.  Newborn’s allegations against Albion were summarized by the court as follows:

Albion’s misrepresentations and material omissions concerning the geographic origin of the subject merchandise include that these products are “Made in America” and Albion’s failure to disclose that these products are “Made in Taiwan” are unfair competition that has injured Newborn by causing distributors to substitute the subject merchandise for Newborn’s competitive goods.

Id.

Albion commenced a separate action against Hartford in federal court in New Jersey after Hartford refused to defend it in the underlying action.  Both parties subsequently moved for summary judgment.  Although the duty to defend is broader than the duty to indemnify, Hartford took the position that it had no duty to defend Albion in the underlying action because the allegations against Albion did not give rise to potentially covered claims.

As noted by the court, to state a valid claim for product disparagement under New Jersey law, it must be alleged that the defendant made “false allegations concerning plaintiff’s property or product.”  Id. at *7 (quoting Gillon v. Bernstein, 218 F. Supp. 3d 285, 294 (D.N.J. 2016)).  There was no allegation in the underlying action that Albion made any statements whatsoever about Newborn’s products or that it compared their products in any way.  Nor did Albion claim that only its products were manufactured in the United States.  Rather, Albion simply advertised, albeit falsely, that its own products were made in the United States.  Because Newborn did not allege that Albion disparaged Newborn’s products, the court held that there was no coverage for the claims.  According to the court:

Under New Jersey law, the allegedly disparaging publication must concern the plaintiff in the Newborn Suit or its products. The allegation that Plaintiff falsely represented that its products were made in the United States when they were in fact made in Taiwan contains no statement that references Newborn, explicitly or implicitly.

Id. at *9.

The court further held that Newborn, the underlying plaintiff, failed to state a defamation claim that would trigger a duty to defend.  “As with disparagement, an essential element of defamation is that the statement be concerning the plaintiff.”  Id. at *13.  Because Albion made no reference to Newborn’s products, any defamation claim also would fail.

The court did not address the validity of the Lanham Act claims, presumably because there was no allegation that they would trigger a duty to defend.

Interestingly, Albion lied about its products, but it did not lie enough to trigger insurance coverage.  Had Albion stated that it was the only manufacturer whose products were made in the United States, that its products were somehow better than its competitors’ products because they were made in the United States, or pointed out that Newborn’s products were manufactured overseas, coverage may have been triggered.  Of course, had it done that, Albion also would have opened itself up to potentially greater liability.

As a result of the court’s decision, Albion is left to cover its own costs in the two litigations and any potential judgment in the Newborn action.  In addition, because Albion and Newborn are not the only manufacturers of such productions, Albion may face additional lawsuits.  It would be interesting to see if any “benefit” Albion received from falsely advertising its products outweighed the cost it must now pay.  Regardless, Albion has changed its advertising since the commencement of the underlying action by Newborn.  Albion now states on its website that its products are “designed” in the United States and that it has “substantial USA quality control and manufacturing capabilities.”

This article is reprinted with the permission from NJInsuranceblog.org.