Allegations That The Insured Unlawfully Acquired And Resold Sprint Phones Did Not Constitute Product Disparagement

On Behalf of | Apr 19, 2018 | Firm News

In Wireless Buybacks, LLC v. Hanover American Insurance Co., 223 F.Supp.3d 443 (2016) the court held that Hanover had no duty to defend its insured under its policy’s coverage for product disparagement against allegations that the insured had unlawfully acquired and then resold Sprint smart phones. The insured, Wireless Buybacks, LLC, purchased a CGL policy through Hanover which contained “personal and advertising injury” coverage. This coverage applied to injuries arising out of product disparagement.

Wireless Buybacks was sued by Sprint Nextel Corp. and Sprint Communications Company for allegedly acquiring, unlawfully, Sprint phones and then reselling the phones. It was alleged that Wireless Buybacks acquired the Sprint phones without authorization and then unlocked them so that they could function on non-Sprint wireless networks. Wireless Buybacks then resold the phones overseas. Hanover denied a defense to Wireless Buybacks, asserting that the conduct of Wireless Buybacks did not constitute product disparagement under the policy. The case was decided under Maryland law. Under Maryland law, when a court examines whether a complaint alleges a potentially covered claim, the inquiry focuses on the substance of the allegations, not on labels. With that in mind, the relevant inquiry focused on whether Sprint suffered an injury that arose out of the publication of disparaging material, irrespective of how Sprint labeled its counts in the complaint.

In order to trigger coverage, Wireless Buybacks argued that Sprint’s claims constituted product disparagement based on a theory of “false equivalents.” Wireless Buybacks argued that Sprint’s complaint alleged that Wireless Buybacks had falsely portrayed its phones as equivalent to those sold by Sprint. Wireless Buybacks argued that the complaint alleged that Wireless Buybacks falsely portrayed its phones as equivalent to those sold by Sprint. The physical phones were essentially identical. However, Sprint alleged that the phones were nevertheless inferior because they did not have Sprint’s backing and utilization rights even though the physical phones bore Sprint’s trademark. Wireless consumers believed they were obtaining warrantied Sprint phones when they were not, and the confusion harmed Sprint’s reputation. False claims of equivalency constituted disparagement according to Wireless Buybacks.

The court acknowledged that there was case law supporting the treatment of false equivalency as product disparagement for purposes of coverage. However, these cases included that false equivalency was product disparagement only when the insured explicitly compared its product to that of a competitor. The court found that utilization of a false equivalency framework to establish product disparagement was a poor fit for the allegations asserted against Wireless Buybacks because Wireless Buybacks was not making a false comparison between the phones it sold and the phones sold by Sprint. The phones that were sold by Wireless Buyback contained the Sprint trademark. Wireless Buybacks benefitted from Sprint’s good reputation. The alleged scheme upon which Sprint was suing was predicated on the unauthorized exploitation of the Sprint trademark and goodwill, not disparagement. The court noted that the allegations made by Sprint were more in the form of a “passing off” claim where the claimant alleges that the insured misled consumers into thinking it was selling the superior product of a competitor when in fact it was selling its own inferior product. Passing off claims may constitute intellectual property violations, but they were not product disparagement claims. The court held that Hanover was not obligated to defend Wireless Buybacks in the Sprint litigation.