Wrench LLC v. Taco Bell Corp.

This case raises a question of first impression in this circuit regarding the extent to which the Copyright Act preempts state law claims based on breach of an implied-in-fact contract. Plaintiffs-Appellants Wrench LLC, Joseph Shields, and Thomas Rinks brought this diversity action against Defendant-Appellee Taco Bell Corporation ("Taco Bell"), claiming breach of implied contract and various torts related to Taco Bell's alleged use of appellants' ideas. In three separate opinions, the district court found that the Copyright Act, 17 U.S.C. § 301, preempted all of appellants' claims, including those based on breach of an implied-in-fact contract. On that basis, as well as on the alternate ground that appellants' concept lacked the novelty necessary to sustain their claims, the district court granted summary judgment to Taco Bell. Appellants now appeal the district court's grant of summary judgment, and argue the following: (1) that the district court erred in its preemption analysis under both the "subject matter" and "equivalency" prongs of 17 U.S.C. § 301(a); and, (2) that the district court erred in holding that novelty was required to sustain their implied-in-fact contract claim, and further that their ideas and concepts lacked novelty as a matter of law. For the reasons that follow, we REVERSE the judgment of the district court and remand this case for further proceedings.

I. Background

Appellants Thomas Rinks and Joseph Shields are creators of the "Psycho Chihuahua" cartoon character which they promote, market, and license through their wholly-owned Michigan limited liability company, Wrench LLC. The parties have described Psycho Chihuahua as a clever, feisty dog with an attitude; a self-confident, edgy, cool dog who knows what he wants and will not back down.

In June 1996, Shields and Rinks attended a licensing trade show in New York City, where they were approached by two Taco Bell employees, Rudy Pollak, a vice president, and Ed Alfaro, a creative services manager. Pollak and Alfaro expressed interest in the Psycho Chihuahua character, which they thought would appeal to Taco Bell's core consumers, males aged eighteen to twenty-four. Pollak and Alfaro obtained some Psycho Chihuahua materials to take with them back to Taco Bell's headquarters in California.

Upon returning to California, Alfaro began promoting the Psycho Chihuahua idea within Taco Bell. Alfaro contacted Rinks and asked him to create art boards combining Psycho Chihuahua with the Taco Bell name and image. Rinks and Shields prepared the art boards and sent them to Alfaro along with Psycho Chihuahua T-shirts, hats, and stickers for Alfaro to use in promoting the character. Because Alfaro was not part of the marketing group at Taco Bell, he first sought to gain support for Psycho Chihuahua from top executives outside of the marketing department. After several meetings with non-marketing executives, Alfaro showed the Psycho Chihuahua materials to Vada Hill, Taco Bell's vice president of brand management, as well as to Taco Bell's then-outside advertising agency, Bozell Worldwide. Alfaro also tested the Psycho Chihuahua marketing concept with focus groups to gauge consumer reaction to the designs submitted by Rinks and Shields.

During this time period, Rinks told Alfaro that instead of using the cartoon version of Psycho Chihuahua in its television advertisements, Taco Bell should use a live dog, manipulated by computer graphic imaging, with the personality of Psycho Chihuahua and a love for Taco Bell food. Rinks and Alfaro also discussed what it was going to cost for Taco Bell to use appellants' character, and although no specific numbers were mentioned, Alfaro understood that if Taco Bell used the Psycho Chihuahua concept, it would have to pay appellants.

In September 1996, Rinks and Shields hired Strategy Licensing ("Strategy"), a licensing agent, to represent Wrench in its dealings with Taco Bell. Representatives from Strategy contacted Alfaro about Taco Bell's interest in the Psycho Chihuahua concept, and presented him with additional materials for presentation to Taco Bell's advertising agency. These materials described Psycho Chihuahua as "irreverent," "edgy," and "spicy," with an "over-the-top" attitude and an "insatiable craving" for Taco Bell food. Throughout the late summer and fall of 1996, Alfaro continued his discussions with Wrench about developing Psycho Chihuahua for Taco Bell's use.

On November 18, 1996, Strategy representatives forwarded a licensing proposal to Alfaro. The proposal provided that Taco Bell would pay Wrench a fee based upon a percentage of the money spent on advertising; a percentage of Taco Bell's retail licensing sales; and a percentage of the cost of premiums, such as toys sold at Taco Bell restaurants. Taco Bell did not accept this proposal, although it did not explicitly reject it or indicate that it was ceasing further discussions with Wrench.

On December 5, 1996, Alfaro met with Hill, who had been promoted to the position of chief marketing officer, and others, to present various licensing ideas, including Psycho Chihuahua. On February 6, 1997, Alfaro again met with appellants and representatives of Strategy to review and finalize a formal presentation featuring Psycho Chihuahua that was to be given to Taco Bell's marketing department in early March 1997. At this meeting, appellants exhibited examples of possible Psycho Chihuahua promotional materials and also orally presented specific ideas for television commercials featuring a live dog manipulated by computer graphics imaging. These ideas included a commercial in which a male dog passed up a female dog in order to get to Taco Bell food.

While Alfaro was meeting with appellants, another marketing firm, TLP Partnership ("TLP"), was also promoting appellants' Psycho Chihuahua to Taco Bell marketing executives. TLP presented several ideas, including the Psycho Chihuahua concept, to Taco Bell in anticipation of an upcoming summer promotion. TLP had discovered Psycho Chihuahua at a trade show in New York and had received Strategy's consent to use the image in its presentation. Alfaro was not aware of TLP's presentation. Following the presentation, Taco Bell conducted a series of focus groups to research the reaction to TLP's proposals. Psycho Chihuahua was received positively by consumers, but Taco Bell decided not to use any of TLP's ideas.

Alfaro was unable to arrange a meeting with the marketing department during March 1997 to present the Psycho Chihuahua materials. On April 4, 1997, however, Strategy made a formal presentation to Alfaro and his group using samples of uniform designs, T-shirts, food wrappers, posters, and cup designs based on the ideas discussed during the February 6, 1997, meeting. Alfaro and his group were impressed with Strategy's presentation.

On March 18, 1997, Taco Bell hired a new advertising agency, TBWA Chiat/Day ("Chiat/Day"). Taco Bell advised Chiat/Day that it wanted a campaign ready to launch by July 1997 that would reconnect Taco Bell with its core group of consumers. Chuck Bennett and Clay Williams were designated as the creative directors of Taco Bell's account.

On June 2, 1997, Bennett and Williams proposed a commercial to Taco Bell in which a male Chihuahua would pass up a female Chihuahua to get to a person seated on a bench eating Taco Bell food. Bennett and Williams say that they conceived of the idea for this commercial one day as they were eating Mexican food at a sidewalk café and saw a Chihuahua trotting down the street, with no master or human intervention, "on a mission." Bennett and Williams contend that this image caused them jointly to conceive of the idea of using a Chihuahua as a way of personifying the intense desire for Taco Bell food. Williams subsequently wrote an advertisement script using a Chihuahua, which Taco Bell decided to produce as a television commercial.

When, in June 1997, Alfaro learned that Chiat/Day was planning to use a Chihuahua in a commercial, he contacted Hill again about the possibility of using Psycho Chihuahua. Hill passed Alfaro on to Chris Miller, a Taco Bell advertising manager and the liaison between Taco Bell's marketing department and Chiat/Day. On June 27, 1997, Alfaro gave Psycho Chihuahua materials to Miller along with a note suggesting that Taco Bell consider using Psycho Chihuahua as an icon and as a character in its advertising. Miller sent these materials to Chiat/Day, which received them sometime between June 28 and July 26.

Taco Bell aired its first Chihuahua commercial in the northeastern United States in July 1997, and received a very positive consumer reaction. On that basis, Taco Bell decided that the Chihuahua would be the focus of its 1998 marketing efforts, and launched a nationwide advertising campaign featuring Chihuahua commercials in late December 1997.

Appellants brought suit in January 1998, alleging breach of implied-in-fact contract as well as various tort and statutory claims under Michigan and California law. Appellee filed a motion to dismiss, which the district court granted in part and denied in part. See Wrench LLC v. Taco Bell Corp., No. 1:98-CV-45, 1998 WL 480871, at *9; 49 U.S.P.Q.2d 1032 (W.D. Mich. June 18, 1998) ("Wrench I"). Although the district court dismissed appellants' unjust enrichment, conversion, and dilution claims on the basis that they were preempted by the Copyright Act, see Wrench I, 1998 WL 480871, at *5-6, the court held that appellants' misappropriation and unfair competition claims were not preempted because they required appellants to prove an "extra element" not required for a copyright infringement claim, namely, the existence of a legal relationship arising from an implied contract. See id. at *6-7. The district court also granted appellants leave to amend their conversion claim so that it might survive preemption. See id. at *7-9.(1)

In a second, published, decision, the district court denied appellee's renewed motion to dismiss appellants' tort claims to the extent that they derived from an alleged implied-in-fact contract. See Wrench LLC v. Taco Bell Corp., 36 F. Supp. 2d 787, 790-91 (W.D. Mich. 1998) ("Wrench II"). However, the district court granted appellee's motion to strike appellants' claims to the extent that they derived from a theory of quasi-contract or implied-in-law contract. See Wrench II, 36 F. Supp. 2d at 790-91. The district court reasoned that such allegations were inconsistent with the court's prior ruling in Wrench I that appellants' unjust enrichment claim was preempted. See id.

At the close of discovery, the district court granted appellee's motion for summary judgment. See Wrench LLC v. Taco Bell Corp., 51 F. Supp. 2d 840 (W.D. Mich. 1999) ("Wrench III"). The district court determined that there was sufficient evidence to support appellants' allegations that the parties had entered into an implied-in-fact contract. See Wrench III, 51 F. Supp. 2d at 848. The district court nevertheless held that appellants' contract claim was preempted under the Copyright Act because, in the court's view, appellants' right to be paid under the contract was equivalent to the exclusive rights that the Copyright Act grants to authors. See id. at 850-58. Based on the court's reasoning in Wrench I and Wrench II, appellants' remaining tort claims -- conversion, misappropriation, and unfair competition -- were also preempted. See id. Although the district court rejected appellee's argument that summary judgment was warranted based on appellee's evidence of "independent creation," the court found as a matter of law that appellants' expressive work was not novel or original, and thus dismissed appellants' claims on that additional ground. See id.

The issues before us on appeal are: (1) whether the district court erred in finding that appellants' implied-in-fact contract claim is preempted by the Copyright Act; and, (2) whether the district court erred in finding that novelty was required as an element of appellants' implied-in-fact contract claim and, if so, whether the district court erred in its finding that appellants' ideas and concepts were not novel as a matter of law.

* * *

Click the case caption above for the full text of the
Court's opinion.

While we conclude that Michigan would not impose a requirement of novelty in an action based upon a contract implied in fact, it does not appear that the result of this case would change even if Michigan were to follow the New York view, which requires only novelty to the defendant. Here, Taco Bell does not claim that it was aware of appellants' ideas prior to disclosure. Accordingly, we find that the district court erred in granting summary judgment to the appellee on the ground that appellants failed to show that their ideas were novel or original.

The judgment of the district court is REVERSED and this action is REMANDED to the district court for further proceedings consistent with this opinion.

Unknown

Unknown

Reported by Kent Morlan