Advertising Law Blog

In January, 2009, the Ninth Circuit Court of Appeals ruled that Taco Bell is liable for the $42 million in breach-of-contract damages award to two Michigan admen who created the Chihuahua idea that served as the foundation for the fast-food chain's hit $500 million ad campaign in the 1990s. The campaign starring the talking dog as a beret-wearing revolutionary or sombrero-sporting bandit was a huge success.

In 1998, Joseph Shields and Thomas Rinks, owners of the Wrench ad agency, sued Taco Bell for breach of contract. They claimed they had been in talks with Taco Bell ad agents to rework their "Psycho Chihuahua" cartoon for TV spots when Taco Bell took the idea to ad shop TBWA Chiat Day. In its defense in Wrench, Taco Bell alleged there was no contract with Wrench, the Chihuahua character used by Taco Bell was not Psycho Chihuahua, and the Chihuahua character used by Taco Bell was independently created by TBWA. In June 2003, the Wrench jury determined that Taco Bell had breached an implied contract by using Psycho Chihuahua without compensating Wrench. All copyright claims were disposed of prior to trial. The federal court in Michigan ordered Taco Bell to pay Shields and Rinks $30 million in damages, plus close to $12 million in interest. In turn, Taco Bell sued TBWA in California, seeking indemnification and claiming that the ad agency was liable for the disputed content.

On January 26, 2009, the Ninth Circuit ruled that TBWA is not liable and found that the district court properly concluded that there is evidence only of Taco Bell's fault in its liability to Wrench. The court reasoned that TBWA was not a party to the implied contract between Taco Bell and Wrench, that TBWA was unaware of its existence, and that TBWA had no knowledge of Psycho Chihuahua before proposing a Chihuahua character for Taco Bell advertising. Taco Bell's argument that TBWA failed to meet an obligation under the agreement between them by failing to do copyright and trademark searches was found to be meritless not only because it was not supported by the language in the parties' agreement, but also because the Wrench liability included neither copyright nor trademark damages. The entire judgment was based on Taco Bell's breach of an implied contract to pay Wrench for use of Psycho Chihuahua. Accordingly, TBWA had no obligation to indemnify Taco Bell.

Wrench was one of a line of California cases holding that the unauthorized use of a plaintiff's ideas or concepts may form the basis of liability on the theory of breach of implied contract. Thus, although the result may not be the same under another set of facts, the Wrench decision should be a warning to businesses that they should not assume that they do not have responsibilities just because there is not a written contract in place. To learn more about advertising law issues, please click here.