Tuesday, January 27, 2009
That little Taco Bell chihuahua is worth millions--$42 millions--to Joseph Shields and Thomas Rinks, of the Wrench agency, who dreamed up the idea in a phenomenally successful marketing campaign for Taco Bell some years ago. But the chain took the idea to another agency and after it lost a lawsuit to Mr. Shields and Mr. Rinks, tried to sue that agency, TBWA Chiat\Day, to make it liable. But the 9th Circuit found Taco Bell solely liable for the breach.
Considering these instructions to the Wrench jury, no inference of fault by TBWA can be drawn from the jury's verdict. The instructions leave unclear what the Wrench jury determined on the issue of independent creation of the Chihuahua character. The jury was told to consider "whether Taco Bell and [TBWA] created the Taco Bell Chihuahua on an independent creative, but parallel path." The court also asked the jury to consider "the access or lack thereof to the Psycho Chihuahua character by people at Taco Bell and [TBWA]. " The Wrench jury was never instructed to differentiate between Taco Bell and TBWA or determine which party was at fault for the liability to Wrench.
The undisputed facts do not support a finding of fault or negligence on the part of TBWA. TBWA was not a party to the implied contract between Taco Bell and Wrench and was unaware of its existence. TBWA had no knowledge of Psycho Chihuahua nor Taco Bell's contact with Wrench before proposing a Chihuahua character for Taco Bell advertising on June 2, 1997. The facts that Taco Bell did not have input on TBWA's creation of its advertising character and that a box of Psycho Chihuahua materials was sent to TBWA are of no consequence not only because TBWA created its own Chihuahua character before it received the Psycho Chihuahua materials, but also because Taco Bell was found liable for the use of Psycho Chihuahua without compensating Wrench, not copyright infringement. Taco Bell's arguments speak to copyright issues not pertinent to this case because those claims were disposed of before trial.
The Agency Agreement's indemnification provisions require TBWA to indemnify Taco Bell for liability incurred as a result of "(i) any materials created, produced, and/or furnished by [TBWA] for [Taco Bell] . . . (ii) [TBWA's] fault or negligence in the performance of its obligations hereunder; or (iii) [TBWA's] breach of its obligations under this Agreement." Even if liability arose from "materials created, produced, and/or furnished by [TBWA] for [Taco Bell]," Paragraph 7.1 includes an exception for claims covered by Paragraph 7.2, claims resulting from Taco Bell's fault. Although Taco Bell argues the Wrench jury finding warrants an inference that TBWA misappropriated Wrench's material, neither the verdict nor the undisputed facts allow a finding of TBWA's fault, but only Taco Bell's breach of a contract. The district court properly determined no obligation for TBWA to indemnify Taco Bell under the Agency Agreement arose from the verdict.
The next issue we consider is whether TBWA is at fault for breach of the Agency Agreement, leading to Taco Bell's liability in Wrench. Subparagraph 7.2(iii) provides that Taco Bell will indemnify TBWA for any liability resulting from "risks which have been brought to the attention of and discussed with [Taco Bell] and [Taco Bell] has nevertheless elected to proceed as evidenced in writing and signed by either the Vice President of Advertising or Senior Vice President - Marketing of [Taco Bell]."
Taco Bell argues that the district court ignored material evidence of TBWA's breach of its obligations under Paragraph 7 to "exercise its best judgment in the preparation and placing of [Taco Bell's] advertising and publicity with a view to avoiding any claims, proceedings, or suits being made or instituted against Taco Bell." It is Taco Bell's position that it was TBWA's responsibility to make sure Taco Bell's advertising campaign did not misuse Psycho Chihuahua and TBWA breached its duty when it failed to do advertising copy clearance, uncover an application for a trademark, and bring risks of using a Chihuahua in advertising to Taco Bell's attention.
Subparagraph 7.2(iii), speaking to Taco Bell's indemnification obligations to TBWA, does not require any copy clearance, trademark searches, or risk reporting by TBWA, but obligates Taco Bell to indemnify TBWA when Taco Bell elects to proceed in the event that risks are brought to its attention. Additionally, Taco Bell was the party aware of the potential risks of using a Chihuahua character in its advertising. It was Taco Bell that had an undisclosed contract with Wrench and denied the existence of that contract. Taco Bell's argument that TBWA failed to meet an obligation under the Agency Agreement by failing to do copyright and trademark searches is meritless not only because it is not supported by the language in the Agency Agreement, but also because the Wrench liability included neither copyright nor trademark damages. As discussed, the entire judgment was based on Taco Bell's breach of an implied contract to pay Wrench for use of Psycho Chihuahua.
Taco Bell argues that TBWA should be precluded from denying that it was at fault and that its fault caused the liability to Wrench. We disagree.
The Supreme Court has held that "federal common law governs the claim-preclusive effect of a dismissal by a federal court sitting in diversity." ...Federal common law requires application of "the law that would be applied by state courts in the State in which the federal diversity court sits." Id. The Wrench judgment was rendered by a federal court sitting in diversity in the Western District of Michigan, and the court applied Michigan law. Therefore, any preclusive effect of the Wrench jury verdict and judgment is governed by Michigan law....
Under Michigan law, three elements must be satisfied for issue preclusion to apply: (1) a question of fact essential to the judgment must have been actually litigated and determined by a valid and final judgment; (2) the same parties must have had a full and fair opportunity to litigate the issue; and (3) there must be mutuality of estoppel....The district court properly found that collateral estoppel did not apply because Taco Bell was at fault in Wrench and nothing further could be inferred from the undisputed facts. ...
Taco Bell relies on the Wrench jury finding that "the Chihuahua used by Taco Bell was not independently created by [TBWA] " in support of its argument that TBWA is collaterally estopped from disputing its fault or negligence. For the reasons discussed above, the jury instructions underlying that finding left doubt as to what the Wrench jury decided on the independent creation issue and prevent issue preclusion as to TBWA's asserted fault. ...The district court's analysis is correct. Considering the instructions given, the Wrench jury finding that the character used by Taco Bell was "not independently created by [TBWA] " does not clearly establish what the jury decided on the "independent creation" issue, the issue of fact Taco Bell is attempting to preclude TBWA from contesting. The requirement that the question of fact essential to judgment be actually litigated and determined is, therefore, not met. ...Taco Bell and TBWA also lacked the privity required for issue preclusion. The fault-based indemnification provisions of the Agency Agreement created a direct conflict between Taco Bell and TBWA which prevented Taco Bell from representing TBWA's interests during the Wrench trial. This created a due process bar to enforcing issue preclusion against TBWA. ...
Taco Bell and TBWA were not in privity in the Wrench action because the terms of the Agency Agreement put their interests in conflict. The parties' acknowledgment of their "mutuality of interest in a common defense" of the Wrench claims in the Joint Defense Agreement does not overcome the conflict created by the Agency Agreement. Under Paragraphs 7.1 and 7.2, TBWA had no indemnification obligation for any liability resulting from Taco Bell's fault or negligence, but Taco Bell was entitled to indemnification from TBWA for any liability resulting from TBWA's fault or negligence. Given that conflict of interest, the district court properly determined that Taco Bell could not have adequately represented TBWA's interests in Wrench. Holding the Wrench verdict binding on TBWA would be a due process violation.
Furthermore, as properly decided by the district court, TBWA cannot be held at fault under the Agency Agreement which allows it to rely on the approval of Taco Bell. Taco Bell approved the Chihuahua character proposed by TBWA and continued to approve the Chihuahua advertisements for broadcasting after the Wrench lawsuit was initiated, despite the existence of its implied contractual commitment to Wrench.