Disparage Me Not: Maryland Federal District Court Finds No Coverage for Phone Unlocking Suit

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In Wireless Buybacks, LLC v. Hanover American Insurance Co. (D. Md. Dec. 8, 2016), the U.S. District Court for the District of Maryland held that an insurer had no duty to defend its insured against claims stemming from the company’s unauthorized acquisition and resale of Sprint phones.

As background, Sprint accused Wireless of illegally acquiring Sprint phones, unlocking them so they could function on non-Sprint wireless networks, and reselling the phones overseas. Sprint filed a sixteen-count suit against Wireless, alleging mainly business torts. Wireless subsequently filed a declaratory action judgment against its insurer based on the insurer’s refusal to afford Wireless a defense to the suit. The coverage dispute focused on the Disparagement Offense under the subject CGL Policy’s definition of “personal and advertising injury,” i.e., “Oral or written publication, in any manner, of material that … disparages a person’s or organization’s goods, products or services.” Both parties moved for partial summary judgment.

The district court began its analysis by reducing the dispute to the question of whether the underlying lawsuit sets forth that Sprint suffered an injury arising out of Wireless’ publication of disparaging material. The district court simultaneously cautioned that the duty to defend depends on the facts alleged and causes of action contained in the underlying complaint, not the labels assigned to causes of action. As such, the absence of a product disparagement cause of action was not dispositive.

The district court then turned to whether the underlying complaint alleged disparagement of Sprint’s phones. Importantly, the district court rejected the insurer’s contention that “disparagement” should be interpreted in accordance with the common law tort of product disparagement. The district court, while not necessarily adopting Wireless’ “layman’s” definition of disparagement, i.e., “to deprecate by indirect means,” still found that the underlying complaint could not satisfy the disparagement requirement under the lesser definition advanced by Wireless.

In particular, the district court rejected Wireless’ “false equivalence” argument — that the underlying complaint alleged that Wireless falsely portrayed its phones as equivalent to Sprint’s phones. It reasoned that Wireless did not expressly compare its products to Sprint’s products, but rather sold phones containing the Sprint trademark and profited from Sprint’s goodwill. Since the underlying complaint did not allege that Wireless misled consumers into thinking that it was selling a product superior to Sprint’s product (when in reality it was selling its own inferior product), disparagement was not implicated because there was no “false comparison.” The district also rejected Wireless’ argument that the underlying complaint alleged disparagement because Wireless’ alleged scheme harmed Sprint’s reputation and that Wireless made statements to advance that scheme. The district court reminded that mere allegations of reputational harm do not rise to the level of disparagement.

This decision illustrates the trend of courts limiting implied disparagement coverage. While policyholder attorneys were initially finding success with this theory, courts have since clamped down on the near infinite scope of the Disparagement Offense suggested by said attorneys. Coverage practitioners should familiarize themselves with this decision.