Taco Bell Corp. v. Tbwa Chiat/Day Inc., 07-56532.

• Decision Date: 23 January 2009
• Docket Number: No. 07-56532.,No. 08-55441.,07-56532.,08-55441.
• Citation: 552 F.3d 1137
• Parties: TACO BELL CORPORATION, Plaintiff-Appellant, v. TBWA CHIAT/DAY INC., Erroneously Sued as TBWA Worldwide Inc., Defendant-Appellee. Taco Bell Corporation, Plaintiff-Appellant, v. TBWA Chiat/Day Inc., Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

552 F.3d 1137

TACO BELL CORPORATION, Plaintiff-Appellant, v. TBWA CHIAT/DAY INC., Erroneously Sued as TBWA Worldwide Inc., Defendant-Appellee.

Taco Bell Corporation, Plaintiff-Appellant, v. TBWA Chiat/Day Inc., Defendant-Appellee.

No. 07-56532.

No. 08-55441.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted December 9, 2008.

Filed January 23, 2009.

Robert J. Harris, Chicago, IL, for the plaintiff-appellant.

Paul F. Corcoran, New York, NY, for the defendant-appellee.

Appeal from the United States District Court for the Central District of California; George P. Schiavelli, District Judge, Presiding. D.C. Nos. CV-04-07019-GPS, 2:04-cv-07019-GPS-CW.

Before HARRY PREGERSON, DOROTHY W. NELSON and DAVID R. THOMPSON, Circuit Judges.

OPINION

THOMPSON, Senior Circuit Judge:

Taco Bell Corp. ("Taco Bell") appeals the district court's summary judgment in favor of its former advertising agency, TBWA Worldwide, Inc. ("TBWA"), in Taco Bell's lawsuit seeking indemnification. This case follows a judgment issued against Taco Bell in the federal district court for the Western District of Michigan for breach by Taco Bell of an implied contract for using a third party's Chihuahua character in its advertising developed by TBWA. Taco Bell sought indemnification from TBWA on the ground that the liability Taco Bell incurred in favor of the third party was caused by TBWA.

We have jurisdiction under 28 U.S.C. § 1291, and we affirm.

I. Background

In June 1996, Ed Alfaro, a licensing manager at Taco Bell, attended a trade show in New York where he first discovered a cartoon depiction of a Chihuahua dog character ("Psycho Chihuahua") being marketed by its creators, Tom Rinks and Joe Shields of Wrench LLC, a Michigan corporation (collectively, "Wrench"). Alfaro told Rinks and Shields that he wanted to explore the use of Psycho Chihuahua by Taco Bell.

During the Summer and Fall of 1996, Wrench provided Taco Bell with goods bearing Psycho Chihuahua's image. From that time through June 1997, Alfaro tried to build support within Taco Bell for its use of Psycho Chihuahua in its advertising. He showed the goods to Taco Bell's senior managers and advertising agency at that time, Bozell Worldwide ("Bozell"). Taco Bell conducted a focus group study which included Psycho Chihuahua and several other designs. Alfaro reported to a senior Taco Bell executive that Psycho Chihuahua was the most popular out of all the designs.

In November 1996, Taco Bell and Wrench's licensing agent, Strategy Licensing, discussed the possible use of Psycho Chihuahua as Taco Bell's mascot and Taco Bell requested that Strategy Licensing submit a proposal on financial terms for the use of Psycho Chihuahua. On November 18, 1996, Strategy Licensing submitted a proposal but Taco Bell did not accept it. Discussions continued about Taco Bell's possible use of Psycho Chihuahua and Taco Bell understood that if it decided to use that character, Taco Bell would have to pay Wrench for such use.

In February 1997, Taco Bell's then-parent company, Pepsi Co., made a presentation to Taco Bell's marketing department regarding the possibility of using Psycho Chihuahua in a Taco Bell "Cinco de Mayo" promotion. Taco Bell then conducted additional focus group studies on Psycho Chihuahua which resulted in positive consumer response.

In March 1997, Taco Bell changed advertising agencies from Bozell to TBWA. Taco Bell commissioned TBWA to create a new advertising campaign for 1998.

Between February and April 1997, Alfaro continued to work with Wrench to develop possibilities for Taco Bell's use of Psycho Chihuahua.

In May 1997, TBWA presented approximately thirty advertising ideas to Taco Bell for its new campaign. One of the ideas involved a male Chihuahua dog passing a female Chihuahua dog to get to Taco Bell food. The executives to which the ideas were presented included Taco Bell's president, Peter Waller, and its chief marketing officer, Vada Hill. Waller and Hill selected TBWA's Chihuahua idea as one of the five advertisements that would be test-marketed during the Summer of 1997. Months later, market research demonstrated favorable results for the TBWA Chihuahua test advertisement and Waller and Hill chose that character as the center of its new advertising campaign starting in January 1998.

Meanwhile, Alfaro believed the character Wrench had created from the original Psycho Chihuahua closely resembled the TBWA Chihuahua to be used in Taco Bell commercials. He alerted Taco Bell's in-house counsel that Wrench would likely sue because of the similarities between the characters. Taco Bell sent a box of Psycho Chihuahua materials to TBWA at some point between June 27, 1997 and July 26, 1997. Alfaro drafted a memorandum that accompanied the materials, describing the parallel path he had taken with Wrench and their idea of using a Chihuahua to advertise Taco Bell food.

By January 1998, Taco Bell began using a Chihuahua to advertise its food. Wrench then sued Taco Bell, claiming that Taco Bell was using Psycho Chihuahua in its advertising without providing compensation to Wrench. Wrench LLC v. Taco Bell Corp., 51 F.Supp.2d 840 (W.D.Mich.1999).

In February 1998, Taco Bell and TBWA entered into a joint defense and confidentiality agreement ("Joint Defense Agreement"). They also executed a contract controlling their business relationship ("Agency Agreement"). The Agency Agreement was executed January 19, 1999 but the parties agreed to make the effective date retroactive to April 1, 1997 to include all of TBWA's services to Taco Bell from the beginning of their business relationship.

In its defense in Wrench, Taco Bell alleged there was no contract with Wrench because Alfaro had no authority to bind the company, the Chihuahua character used by Taco Bell was not Psycho Chihuahua, and the Chihuahua character used by Taco Bell was independently created by TBWA.

TBWA created and broadcast over forty more Chihuahua commercials between January 1998 and June 2000. 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. A judgment was entered against Taco Bell in the amount of $30,174,031.00, and the court subsequently amended the judgment to account for pre-judgment and post-judgment interest, bringing the total to over $42,000,000.00.

Taco Bell requested full indemnification from TBWA for its liability to Wrench. Within weeks of the Wrench trial, Taco Bell filed this lawsuit against TBWA, suing it for breach of the Agency Agreement, express indemnification, and declaratory relief. Both sides moved for summary judgment. The district court denied Taco Bell's motion and granted TBWA's cross-motion. Summary judgment was entered in favor of TBWA, and this appeal followed.

II. Discussion

We review de novo the district court's grant of summary judgment. Universal Health Servs., Inc. v. Thompson, 363 F.3d 1013, 1019 (9th Cir.2004).

Taco Bell argues the district court erred in granting summary judgment in favor of TBWA because (1) the Wrench verdict established TBWA's fault; (2) TBWA breached the Agency Agreement; (3) TBWA was collaterally estopped from litigating the issue of its fault; and (4) the district court was required to take as true that the Chihuahua character used in Taco Bell's advertising was not independently created by TBWA, confirming fault on the part of TBWA.

Taco Bell relies heavily on TBWA's alleged obligation to indemnify Taco Bell under the indemnification section of the Agency Agreement which states:

7. Indemnification. [TBWA] agrees 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] or [TBWA].

7.1 Agency Indemnification. [TBWA] agrees to defend, indemnify, and hold [Taco Bell], its officers, directors, employees and agents . . . harmless from any loss, damage, liability, claim, demand, suit or expense, including reasonable attorneys' fees and costs, that [Taco Bell] may incur or be liable for as a result of any claim, suit or proceeding made, threatened or brought against [Taco Bell] based upon or arising out of (i) any materials created, produced, and/or furnished by [TBWA] for [Taco Bell] (except for claims covered by Paragraph 7.2 below); (ii) [TBWA's] fault or negligence in the performance of its obligations hereunder; or (iii) [TBWA's] breach of its obligations under this Agreement.

7.2 Client Indemnification. [Taco Bell] agrees to defend, indemnify and hold [TBWA], its affiliated companies and their officers, directors, employees and agents . . . harmless from any loss, damage, liability claim, demand, suit or expense, including reasonable attorneys' fees and costs, that [TBWA] may incur or be liable for as a result of any claim, suit or proceeding made, threatened or brought against [TBWA] based upon or arising out of (i) assertions for or descriptions of [Taco Bell's] products or services or any product or service of [Taco Bell's] competitors, in any advertising which [TBWA] may prepare for [Taco Bell], if the assertions or descriptions are based on information or data supplied or approved by [Taco Bell], and such advertising is approved by [Taco Bell] before its release, publication or broadcast; (ii) the nature or use of [Taco Bell's] products or services; (iii) 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]; or (iv) [Taco Bell's] fault or negligence. The foregoing notwithstanding, [Taco Bell's] obligation to indemnify, defend, and hold [TBWA] harmless hereunder shall not apply to the extent that damages are incurred as a result...