Clothing retailers, particularly in these economic conditions, often have to steeply mark down prices in order to move merchandise.  When a retailer does so, the brand may see the re-pricing as a degradation of its name.  If the brand brings a lawsuit against the retailer over the fire sale prices, does the retailer’s insurer have an obligation to pay for the defense costs?  The answer in a recent California case is yes.

The underlying litigation in Travelers Property Casualty Company of America v. Charlotte Russe Holding, Inc. began in 2009 between Versatile Entertainment, which contracted with the retailer Charlotte Russe to be the exclusive sales outlet for People’s Liberation denim and knits.  Versatile alleged that Charlotte Russe had begun a “fire sale” of its goods at “close-out prices” which would damage and diminish the People’s Liberation brand and trademark.  The lawsuit eventually settled in 2011.

Charlotte Russe, like many retailers, had an insurance policy that covered “advertising injury” claims, which covered claims alleging injury arising out of “[o]ral, written, or electronic publication of material that slanders or libels a person or organization or disparages a person’s or organization’s goods, products or services, provided that claim is made or ‘suit’ is brought by the person or organization that claims to have been slandered or libeled, or whose goods, products or services have allegedly been disparaged . . .”.  The question was:  did selling People’s Liberation clothes at “fire sale” prices amount to slander or libel?

The California Court of Appeal said yes.  It found that accusations of “disparag[ing] a person’s or organization’s goods, products or services” amounted to slander or libel.  Versatile’s pleadings alleged that the People’s Liberation brand had been identified as “premium, high-end goods,” and that Charlotte Russe’s published prices for the goods implied that they were anything but.  Therefore, the Court found, the implication created by Charlotte Russe’s prices was false, which was enough under the policy.

The Court of Appeal’s ruling didn’t mean that Charlotte Russe was entitled to reimbursement of any settlement paid, just that its insurer was required to reimburse the costs it incurred in defending the suit.

The ruling has already been criticized by a different panel of the same Court of Appeal in the case of Hartford Casualty Insurance Company v. Swift Distribution, Inc., which rejected the “falsity by implication” theory, but for now the Charlotte Russe case is good law, and retailers may have insurance coverage for lawsuits alleging that “fire sale” prices damaged a manufacturer’s brand.