Revisiting - The Taco Bell & Chihuahua Case

Sometime in 1998, Joseph Shields and Thomas Rinks, owners of an ad agency Wrench, filed a suit against American fast food restaurant chain Taco Bell for breach of contract.?

Shields and Rinks claimed that they had pitched their work “Psycho Chihuahua” to Taco Bell. However, Taco bell associated with another ad agency TBWA Chiat Day and executed the idea?

Taco Bell, in its defense, stated that it had not entered into any agreement with Shields and Rinks and added that the Chihuahua character used by Taco Bell was not Psycho Chihuahua, taco bell claimed that it was independently created by TBWA.

The advert was an instant hit and earned millions for Taco Bell, in the Chihuahua (through special effects) used to speak Yo Quiero Taco Bell! ("I want Taco Bell!")

Thereafter in 2003, a federal jury determined that Taco Bell has breached a contract (implied contract) when it used Shields and Rinks's idea of Psycho Chihuahua without compensating them.?

Hence The Michigan Federal Court ordered Taco Bell to pay damages of US$ 30 million along with an interest of US$ 12 million to be paid Shields and Rinks.

Amusingly, Taco Bell filed a suit against its ad agency TBWA in California, seeking an indemnification, claiming (in fact blaming) that TBWA was liable for the infringing advertisement. The District Court held that the evidence only proves Taco Bell’s fault. TBWA was not privy to the implied contract entered upon by Taco bell and Wrench, in fact, TBWA was unaware, had no knowledge that Shields and Rinks proposed the idea of Psycho Chihuahua before Taco bell.

The Court felt no merit in Taco Bell's argument that TBWA failed to meet its obligation under the agreement by failing to do copyright and trademark searches as it was not supported by the language in the parties' agreement, and the liability that Taco Bell had towards Wrench was based on breach of implied contract and included neither copyright nor trademark damages. Hence the Court held TBWA had no obligation to indemnify Taco Bell. Taco Bell appealed against the order before the Appellate Court.

Wherein, the San Francisco-based the Ninth Circuit Court of Appeals ruled Taco Bell is responsible for the advertisement and not the ad agency TBWA, therefore it is Taco Bell that has to pay awards due to Shields and Rinks.

This is one of the important cases where liability regarding unauthorized use of ideas /concepts was ascertained on the basis of an implied contract. It was also an eye-opener for people who assumed that “if there is no written contract there is no liability”?