Disputes over intellectual property that include allegations of anti-competitive conduct may raise a potential for insurance coverage.  Common allegations in this context which can trigger a duty to defend under the “personal injury” or “advertising injury” coverages found in the standard CGL policy include disparagement of another’s products.  A recent decision by Judge James Ware in the Northern District of California held that allegations of implicit disparagement of a competitor’s products create a potential for coverage.  In E.piphany, Inc. v. St. Paul Fire & Marine Ins. Co. (N.D. Cal. Dec. 16, 2008), false representations by an insured concerning only its own products that did not specifically identify a competitor’s product or business were sufficient to trigger the insurance carrier’s obligation to defend against allegations of disparagement of another’s products.

The insured, E.piphany, manufactured and sold software products that enable businesses to more efficiently manage and optimize their customer interactions.  The key selling point between competing products in this market is whether the software is written in Java and is fully compliant with J2EE application server technology.  E.piphany falsely advertised its product suite as “all Java” and “fully J2EE.”  Although E.piphany’s products had never been “all Java” or “fully J2EE,” E.piphany continued to make numerous claims that its product was the first product suite designed and built on a unified J2EE-based platform, and even represented falsely that it has “a couple of year lead” its competitors.

E.piphany was sued by one of its competitors, Sigma Dynamics, Inc., for false advertising and unfair competition under 15 U.S.C. § 1125(a) and California’s Unfair Competition Law.  E.piphany tendered the lawsuit to its insurance carrier, and the carrier denied coverage on the ground that Sigma’s complaint did not allege “personal injury” or “advertising injury” within the coverage provided by the policy.

On cross-motions for summary judgment in the coverage case, the court held that there was a potential for coverage, and therefore a duty to defend, because E.piphany could be held liable for disparagement.  Although E.piphany only made claims about the superiority of its own products, these claims necessarily implied the inferiority of Sigma’s competing products.

In making this determination, the court recognized that California courts have not explicitly determined whether a cause of action for disparagement can lie where a publication does not expressly identify the disparaged product or business.  The court pointed to a California Supreme Court case which addressed First Amendment limits on defamation claims as support for its holding that disparagement by implication is actionable under California law.  The court also noted that at least one other jurisdiction (Illinois) has found that a duty to defend can be triggered even though the competitor did not specifically allege that the insured disparaged a specific product or business.

Following the E.piphany decision, it is important for insureds to consider whether allegations of anti-competitive conduct may trigger a duty to defend for disparagement, implicit or otherwise.  Conversely, if you or your client are considering asserting claims against a competitor, it is important to consider whether the allegations could trigger a duty to defend in favor of your opponent.