No Defense of False Advertising

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L&K Coffee claimed its various insurance companies erroneously denied coverage to defend it against a Lanham Act false-advertising lawsuit brought by Hawaiian coffee growers. The district court concluded the applicable insurance policies did not obligate a defense and entered summary judgment in the insurance companies’ favor.

In L&K Coffee LLC, dba Magnum Roastery; Kevin Kihnke v. LM Insurance Corporation; Liberty Insurance Corporation; Selective Way Insurance Company; Valley Forge Insurance Company; Continental Casualty Company, No. 22-1727, United States Court of Appeals, Sixth Circuit (June 1, 2023) the Sixth Circuit resolved the coverage dispute.

Contents

FACTS

L&K Coffee, LLC, a Michigan-based company, roasts and sells coffee products throughout the United States. Defendants are insurance companies from whom L&K purchased general commercial liability and umbrella insurance policies.

Coffee growers from the Kona region of the Island of Hawai’i sued L&K and other coffee companies for “false designation of origin, false advertising, and unfair competition” in violation of the Lanham Act, 15 U.S.C. § 1125(a), in the Western District of Washington. These “Kona Plaintiffs” alleged that the defendants falsely designated the origin of the coffee they branded and distributed as “Kona” coffee “when most of the coffee beans contained in the coffee products were sourced from other regions of the world.”

The Kona Plaintiffs’ operative complaint summarized their contentions as to L&K as follows: “L&K falsely designates the geographic origin of its “Kona” coffee products with the prominent placement of KONA on the front of the packaging.”

The deceptive marketing was alleged to be designed to mislead consumers into believing that L&K’s Magnum Exotics “Kona” products contain coffee from the Kona District, when the coffee products actually do not contain a significant amount of Kona coffee, if any. The plaintiffs also alleged that L&K deliberately misled the consumer into believing that L&K’s Magnum Exotics coffee products contain significant amounts of premium Kona coffee beans in order to justify the high price L&K charges for what is actually ordinary commodity coffee.

L&K asked the insurance companies to defend and indemnify them in that matter under the policies’ “personal and advertising injury” coverage. Personal and advertising injury, in pertinent part, is defined as an “injury . . . arising out of” (1) a publication that “disparages a person’s or organization’s goods, products or services,” or (2) “[i]nfringing upon another’s . . . slogan in your advertisement.” Based on this language and the Kona Plaintiffs’ allegations, the insurance companies denied coverage because, as one insurer put it, “none of the offenses in the definition of ‘personal and advertising injury’ include false advertising, and none of the allegations in the complaint fall within any of the offenses in the definition.”

ANALYSIS

The duty of an insurance company to provide a defense depends upon the allegations in the complaint and extends to allegations which even arguably come within the policy coverage. An insurer’s duty to defend does not depend solely upon the terminology used in a plaintiff’s pleadings. Rather, it is necessary to focus on the basis for the injury and not the nomenclature of the underlying claim in order to determine whether coverage exists.

The term “disparage” means an untrue statement directed towards another’s property. A disparagement claim requires a company to make false, derogatory, or disparaging communications about a competitor’s product.” (emphasis in the opinion)

The Kona Plaintiffs alleged L&K violated the Lanham Act’s prohibition on false designation of one’s own product. See 15 U.S.C. § 1125(a)(1). The Sixth Circuit concluded that this is not “disparagement.”

Upon review of the Kona Plaintiffs’ complaint, the Sixth Circuit Court agreed with the district court that the complaint does not set forth an arguable theory of recovery. In the Kona Plaintiffs’ own words, “only coffee grown on farms located within the Kona District of the Big Island of Hawaii . . . can be truthfully marketed, labeled, and sold as Kona coffee.” L&K violated the false designation of its product and that was not a covered cause of loss.

It never pays to lie to your customers. When doing so harms someone else you are subject to damages from those your lie harms. By falsely designating its product of “Kona” coffee when L&K claimed its cheap, generic coffee was “Kona” Coffee it was involved in a tort that was not covered by the policies of insurance.

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Barry Zalma, Esq., CFE, is available at http://www.zalma.com and zalma@zalma.com

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