California Supreme Court Holds One-On-One Customer Solicitation Does Not Constitute "Advertising" Within Scope of Advertising Injury Coverage
December, 2003
by Mary F. Stafford and
The California Supreme Court holds that the taking of a competitor’s customer list and the direct solicitation of customers from that list is not “misappropriation of advertising ideas” under the “advertising injury” coverage of a commercial general liability policy, declining to adopt a rule for reviewing “advertising” on a case-by-case basis and instead finding that direct solicitation of a competitor’s customers is not “advertising.” Hameid v. National Fire Ins. of Hartford, 71 P.3d 761, 1 Cal. Rptr. 3d 401 (Cal. 2003).
Facts
Mohammed Hameid opened a beauty salon called “Salon T’Shea.” He purchased a commercial general liability (“CGL”) policy from National Fire Insurance of Hartford (“National Fire”). The policy provided coverage for “advertising injury” arising out of the “misappropriation of advertising ideas or style of doing business.” Salon T’Shea was located near a competitor and shortly after opening, several hairdressers left the competitor to rent space from Hameid. Several months after Salon T’Shea opened, the competitor filed suit against Hameid alleging in part that the competitor’s former hairdressers “possessed trade secrets,” including the customer list, and had misappropriated these trade secrets by utilizing the customer list in order to identify and solicit the competitor’s customers.
Hameid’s own declaration established that he did no advertising except to include a flyer in a ValuPak that was sent in a mass mailing to local residents. The ValuPak specifically excluded any work for existing clients. The two individuals that came from the competitor rented space from Hameid and used the competitor’s client list to personally call and solicit business from their existing clients. No mass mailing was sent directly to clients from the competitor’s list.
Hameid tendered defense of the suit to National Fire under his CGL policy’s “advertising injury" coverage provision, but National Fire refused to defend him. Hameid prevailed in the misappropriation case and brought a declaratory action against National Fire for breach of contract. The trial court found in favor of National Fire and ruled it had no duty to defend Hameid under the policy because the underlying suit claimed misappropriation of trade secrets, and not advertising injury.
The Court of Appeal reversed the judgment, finding that Hameid’s business was a “start-up community beauty salon,” and that the relatively limited solicitation of customers through phone calls and a ValuPak mailer served to call public attention to the salon services. This solicitation was equivalent to widespread promotional activities which prior courts had found constituted advertising under a CGL policy. The Court of Appeal concluded that business marketing included a variety of direct and indirect advertising activities, including misappropriating confidential consumer lists to identify and solicit clients.
Analysis
The Supreme Court Reversed The Court Of Appeal
The policy provided defense and indemnity coverage for “advertising injuries” if the injuries were “caused by an offense committed in the course of advertising [the insured’s] goods and services.” This coverage obligated National Fire to provide a defense if the underlying lawsuit alleged (1) “advertising” by the insured; (2) an “advertising injury” offense as defined by the policy; and (3) a causal connection between the advertising injury and the third-party claimant’s damages. The CGL policy did not define the term “advertising,” but did define “advertising injury” to mean an injury arising out of one or more offenses, including misappropriation of advertising ideas or style of doing business.
In order to answer whether Hameid’s activities constituted “advertising” under the CGL policy, the court turned to numerous jurisdictions that previously reviewed the term “advertising.” The majority of courts have interpreted the term “advertising” to mean widespread promotional activities usually directed to the public at large. Federal courts in California and Minnesota and state courts in Vermont, Maryland, Virginia, Illinois, Massachusetts, Missouri, Kansas and New Hampshire have defined the term “advertising” as widespread promotional activities directed to the public at large. In addition, the Seventh Circuit has applied California law and held that the commonly understood meaning of the term “advertising” is widespread promotional activities.
The California Supreme Court followed these decisions and held that the term “advertising” applies to widespread promotional activities directed at the public and does not apply to targeted solicitation of clients from a competitor’s client list. In adopting a bright line definition of the term “advertising,” the court rejected previous decisions that had reviewed the term on a case-by-case basis. The court expressed concern that if it adopted a malleable definition of “advertising,” it would only encourage litigation that could result in inconsistent interpretations of words commonly used in CGL policies. Defining “advertising” to mean the widespread distribution of promotional materials to the public at large assigns the term its ordinary and popular meaning. It allows for uniformity and the interpretation under different factual circumstances that may or may not lead to coverage. With this interpretation, the small business owner may still invoke their rights to coverage for “advertising injury” if they place spots on the radio or television, buy space on billboards or other locations, or take out advertisements in newspapers directed to the public at large, and their content causes advertising injury.
Learning Point:
Inconsistent interpretations of the term “advertising,” have brought about some changes in the ISO CGL form. Earlier versions of the form did not contain a definition of the term “advertising activities,” leading to endless litigation over its meaning with a variety of results. The 1998 CGL form now includes the following definition of “advertisement”:
“Advertisement” means a notice that is broadcast or published to the general public or specific market segments about your goods, products or services for the purpose of attracting customers or supporters.
The use of a definition of the term “advertisement” will hopefully eliminate most, if not all, litigation over the concept of “advertising.” The definition makes clear the intent to cover only those advertising or promotional announcements aimed at the general public or at least an identifiable market segment. Clearly, there is no intent to cover one-on-one solicitations.
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