Ninth Circuit: Agency Not Liable Over Use of Dog in Ads

Monday, January 26, 2009

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Ninth Circuit: Agency Not Liable Over Use of Dog in Ads

Panel Rejects Taco Bell’s Claim Regarding Chihuahua

By a MetNews Staff Writer

The advertising agency that guided Taco Bell’s Chihuahua-themed campaign in the late 1990s is not responsible for any part of the $42 million judgment the fast-food chain suffered in a suit by the company credited with first presenting the idea, the Ninth U.S. Circuit Court of Appeals ruled Friday.

The court upheld the grant of summary judgment in favor of TBWA Chiat/Day Inc., saying Taco Bell could not show that the award in favor of Wrench LLC was covered by an indemnification agreement.

Senior Judge David Thompson, writing for the panel, agreed with U.S. District Judge George Schiavelli of the Central District of California that the agreement only required indemnification if the agency was at fault, and that TBWA was not guilty of wrongdoing because it did not know about Wrench’s idea at the time.

Schiavelli has since resigned from the court.

Evidence presented to the district judge on cross-motions for summary judgment showed that the first contact between Taco Bell and Wrench occurred in 1996 at a New York trade show. Wrench’s principals, Tom Rinks and Joe Shields of Grand Rapids, Mich., introduced Taco Bell licensing manager Ed Alfaro to their character Psycho Chihuahua at that time, and subsequently provided Taco Bell with goods bearing the dog’s image.

There were subsequent discussions among Wrench, Alfaro, a licensing agent, other Taco Bell executives, and the agency that handled the chain’s advertising account before TBWA was hired in March 1997. Those discussions included an acknowledgment that Wrench was entitled to payment if the character was used, but there was no such use at the time and no payment to Wrench.

In May 1997, TBWA presented about 30 ideas to Taco Bell for a campaign to be launched the following year. One involved a male Chihuahua passing a female Chihuahua to get to a Taco Bell meal; after test marketing, a Chihuahua became the center of the ad campaign, which included more than 40 television commercials over a period of more than two years, leading Wrench to sue in the U.S. District Court for the Western District of Michigan.

Taco Bell alleged in its defense that Alfaro did not, and could not, enter into a contract with Wrench; that the dog in the ads was not Psycho Chihuahua; and that TBWA was solely responsible for the Taco Bell Chihuahua character. A jury, however, found for Wrench on its breach-of-implied-contract claim and awarded $30.1 million in damages, to which $12 million in pre-judgment and post-judgment interest was subsequently added.

In its complaint against TBWA, Taco Bell alleged that it was entitled to complete indemnification under either a joint defense and confidentiality agreement, or an agency agreement, both of which were entered into after the suit was filed, although the agency agreement was by its terms retroactive to the beginning of the parties’ relationship. The verdict in the Wrench action, Taco Bell said, established that TBWA was wrongfully expropriated Psycho Chihuahua.

Both the district judge and the appellate court disagreed, saying the issue of whether it was Taco Bell or the ad agency that took the idea was not before the jury in the underlying case.

“The undisputed facts do not support a finding of fault or negligence on the part of TBWA,” Thompson wrote. “TBWA was not a party to the implied contract between Taco Bell and Wrench and was unaware of its existence.”

He continued:

“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.”

Besides, Thompson wrote, the agency agreement specifically allowed TBWA to rely on Taco Bell’s approval of the ads. Not only did Taco Bell approve the use of the Chihuahua, it continued to do so after Wrench sued, the judge pointed out.

“The district court correctly considered Taco Bell’s approval to broadcast the Chihuahua commercials after Wrench filed its lawsuit a dispositive factor in Taco Bell’s fault-based indemnification claim against TBWA,” Thompson explained.

The case is Taco Bell Corporation v. TBWA Chiat Day Inc., 07-56532.