Wrench, LLC v. Taco Bell Corp.

Brief Fact Summary.

Wrench, LLC (Plaintiff) entered into discussions with Taco Bell Corp. (Defendant) over the possible use of Plaintiff’s “Psycho Chihuahua” cartoon character. When Defendant introduced advertisements using a chihuahua, Plaintiff sued, claiming that Defendant had breached an implied-in–fact contract.

Synopsis of Rule of Law.

When a party requests another party to disclose an idea and understands that the other party discloses it with an expectation of compensation for the use of the idea, an implied-in-fact contract is created.

Facts.

Plaintiff created and promoted a cartoon chihuahua known as “Psycho Chihuahua.” Employees of Defendant’s creative services department saw the character at a trade show and approached Plaintiff about using the character in retail licensing. Plaintiff then hired a licensing agent to continue communications with the Taco Bell employees. Those discussions grew to include advertising, although Defendant’s marketing department was not yet involved. Plaintiff’s licensing agent sent Defendant a proposal for use of the chihuahua character, providing that Defendant would pay Plaintiff a percentage of the amount spent on advertising, a percentage of the retail licensing sales, and a percentage based upon the cost of items such as chihuahua toys sold at Defendant’s restaurants. Defendant neither accepted nor rejected the proposal. Discussions continued and Defendant asked Plaintiff to prepare a presentation for its marketing department. The presentation was prepared, but never given. The creative services department remained interested in the use of the character, however. At this time, Defendant hired a new advertising agency. This agency had previously created a commercial for an automobile company that featured a driving chihuahua and now proposed a commercial for Defendant showing a chihuahua choosing Defendant’s food over a female chihuahua. Plaintiff had previously proposed the same idea. The employees from Defendant’s creative services department still wanted to use Plaintiff’s character and wanted to persuade the marketing department to approve the idea. The materials for a campaign featuring Psycho Chihuahua were passed on to the marketing department, who then sent them to the new advertising agency. A few months later, Defendant aired commercials using a chihuahua saying “Yo quiero Taco Bell.” The commercials were very successful and Defendant continues to use the character. Plaintiff sued Defendant for breach of implied-in-fact contract, misappropriation, conversion, and unfair competition. Defendant moved for summary judgment on all claims, arguing that no implied-in-fact contract was created, and that even if one existed, it was preempted by federal copyright law. Defendant also argued that the idea to use a chihuahua came from its new advertising agency only and that Plaintiff’s ideas were not novel.

Issue.

When one party requests that another party disclose an idea, knowing that the other party discloses it with an expectation of compensation for the idea’s use, is an implied-in-fact contract created?

Held.

(Quist, J.) Yes. When a party requests another party to disclose an idea and understands that the other party discloses it with an expectation of compensation for the use of the idea, an implied-in-fact contract is created. An implied-in-fact contract may come from the conduct, language, or other relevant circumstances of the parties’ interactions. In order for an implied-in-fact contract to exist, there must be mutual assent and consideration, as well as the other elements that would be required of an express contract. An implied-in-fact contract usually arises when a party accepts a benefit from another party for which compensation would normally be expected. When a party can show that both parties understood that compensation would be paid for services provided, a promise to pay fair value may be implied. The parties are not required to have reached an agreement on price, duration, or other terms of the contract for an implied-in-fact contract to exist. Defendant agrees that the parties had reached an understanding that if Defendant used Plaintiff’s character, Defendant would pay Plaintiff for its use. However, Defendant claims that the essential terms of such an agreement, such as price, duration, scope of use, and exclusivity, were never settled and therefore an implied-in-fact contract was not created. Plaintiff claims that those terms are not essential to the creation of an implied-in-fact contract, but that the understanding that Defendant would pay Plaintiff for the use of the character was enough. Several jurisdictions adopt the position Plaintiff proposes, and the reasoning is persuasive. Plaintiff has presented sufficient evidence to create a genuine issue of material fact as to whether an implied-in-fact contract existed between Plaintiff and Defendant. [The trial court then ruled that although Plaintiff had enough evidence to maintain a breach of implied-in-fact contract claim, that claim was preempted by the federal Copyright Act. The court therefore granted summary judgment in favor of Defendant.]

Discussion.

Plaintiff appealed the grant of summary judgment and the Sixth Circuit reversed, finding that the contract claim was not preempted by the federal Copyright Act. In 2003, Plaintiff was awarded over $30 million in damages from a jury.