Taco Bell Corp. v. Tbwa chiat/day Inc.

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TACO BELL CORPORATION, 
Plaintiff-Appellant,
No. 07-56532
v.
TBWA CHIAT/DAY INC.,  D.C. No.
CV-04-07019-GPS
Erroneously Sued as TBWA
Worldwide Inc.,
Defendant-Appellee.

TACO BELL CORPORATION,  No. 08-55441
Plaintiff-Appellant, D.C. No.
v.  2:04-cv-07019-
TBWA CHIAT/DAY INC., GPS-CW
Defendant-Appellee.
 OPINION
Appeal from the United States District Court
for the Central District of California
George P. Schiavelli, District Judge, Presiding
Argued and Submitted
December 9, 2008—Pasadena, California
Filed January 23, 2009
Before: Harry Pregerson, Dorothy W. Nelson and
David R. Thompson, Circuit Judges.
Opinion by Judge Thompson
841
844 TACO BELL CORP. v. TBWA CHIAT/DAY
COUNSEL
Robert J. Harris, Chicago, Illinois, for the plaintiff-appellant.
Paul F. Corcoran, New York, New York, for the defendant-
appellee.
TACO BELL CORP. v. TBWA CHIAT/DAY 845
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 indemni-
fication 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 (collec-
tively, “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 sup-
port within Taco Bell for its use of Psycho Chihuahua in its
advertising. He showed the goods to Taco Bell’s senior man-
agers 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 Chihua-
hua was the most popular out of all the designs.
846 TACO BELL CORP. v. TBWA CHIAT/DAY
In November 1996, Taco Bell and Wrench’s licensing
agent, Strategy Licensing, discussed the possible use of Psy-
cho Chihuahua as Taco Bell’s mascot and Taco Bell
requested that Strategy Licensing submit a proposal on finan-
cial 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 adver-
tising ideas to Taco Bell for its new campaign. One of the
ideas involved a male Chihuahua dog passing a female Chi-
huahua 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 Sum-
mer 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.
TACO BELL CORP. v. TBWA CHIAT/DAY 847
Meanwhile, Alfaro believed the character Wrench had cre-
ated 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 dis-
848 TACO BELL CORP. v. TBWA CHIAT/DAY
posed of prior to trial. A judgment was entered against Taco
Bell in the amount of $30,174,031.00, and the court subse-
quently 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 sum-
mary 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
TACO BELL CORP. v. TBWA CHIAT/DAY 849
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, lia-
bility claim, demand, suit or expense, including rea-
sonable 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 ser-
vices or any product or service of [Taco Bell’s] com-
petitors, in any advertising which [TBWA] may
prepare for [Taco Bell], if the assertions or descrip-
tions are based on information or data supplied or
approved by [Taco Bell], and such advertising is
approved by [Taco Bell] before its release, publica-
tion 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
850 TACO BELL CORP. v. TBWA CHIAT/DAY
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 not-
withstanding, [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 of [TBWA’s] negligence or failure to prop-
erly perform its obligations as provided in this Agree-
ment.1
A. Wrench Verdict
The first issue we consider is whether the Wrench jury find-
ings are proof of TBWA’s fault, obligating it to indemnify
Taco Bell for the liability Taco Bell incurred.
A verdict sheet that was provided to the Wrench jury
reflects what that jury found:
Question Number 1: Did Wrench prove by a pre-
ponderance of the evidence
that Wrench and Taco Bell
had a mutual understanding
that if Taco Bell used the
Psycho Chihuahua character
in its advertising and on
products, Taco Bell would
pay Wrench for this use?
Question Number 2: Did Wrench prove by a pre-
1
Taco Bell argues that Paragraphs 7.1 and 7.2 of the Agency Agreement
provide for proportional cross-indemnification in the event that both par-
ties are at fault. The district court did not address this argument because
it found that TBWA was not at all at fault under the given facts, making
the argument irrelevant. For the same reason, we will not address the argu-
ment here.
TACO BELL CORP. v. TBWA CHIAT/DAY 851
ponderance of the evidence
that Taco Bell used the Psy-
cho Chihuahua character in
its advertising from 1997 to
2000 and that the character
used by Taco Bell was not
independently created by
[TWBA]?
Question Number 3: Did Wrench prove by a pre-
ponderance of the evidence
that it suffered damages
because Taco Bell did not
pay for its use of the Psycho
Chihuahua character?
The Wrench jury answered all three questions affirmatively.
According to Taco Bell, these findings are proof of
TBWA’s fault. Because TBWA was involved in the creation
of the TBWA Chihuahua character and TBWA had posses-
sion of the Psycho Chihuahua materials, Taco Bell argues the
jury’s findings that Psycho Chihuahua was used by Taco Bell
and the character used was not independently created by
TBWA confirms wrongdoing by TBWA. Taco Bell relies
heavily on the second question in the verdict sheet submitted
to the Wrench jury, but as to that question, the court in the
Wrench trial instructed the jury:
Let me give you some things to consider in deter-
mining whether the Taco Bell Chihuahua is the same
character as the Psycho Chihuahua character . . . .
If you find that the Taco Bell Chihuahua is the same
character as the Psycho Chihuahua character, then
you must still consider whether, on the one hand,
Taco Bell used Wrench’s creation of the Psycho Chi-
huahua character or, on the other hand, whether Taco
852 TACO BELL CORP. v. TBWA CHIAT/DAY
Bell and [TBWA] created the Taco Bell Chihuahua
on an independent creative, but parallel path.
In answering this question, in addition to considering
the differences and similarities—differences between
and similarities of the two dogs, as I pointed out in
the preceding paragraph, you should consider . . . the
access or lack thereof to the Psycho Chihuahua char-
acter by people at Taco Bell and [TBWA].
[1] Considering these instructions to the Wrench jury, no
inference of fault by TBWA can be drawn from the jury’s
verdict. The instructions leave unclear what the Wrench jury
determined on the issue of independent creation of the Chi-
huahua character. The jury was told to consider “whether
Taco Bell and [TBWA] created the Taco Bell Chihuahua on
an independent creative, but parallel path.” The court also
asked the jury to consider “the access or lack thereof to the
Psycho Chihuahua character by people at Taco Bell and
[TBWA].” The Wrench jury was never instructed to differen-
tiate between Taco Bell and TBWA or determine which party
was at fault for the liability to Wrench.
[2] The undisputed facts do not support a finding of fault
or negligence on the part of TBWA. TBWA was not a party
to the implied contract between Taco Bell and Wrench and
was unaware of its existence. TBWA had no knowledge of
Psycho Chihuahua nor Taco Bell’s contact with Wrench
before proposing a Chihuahua character for Taco Bell adver-
tising 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 Chi-
huahua materials, but also because Taco Bell was found liable
for the use of Psycho Chihuahua without compensating
Wrench, not copyright infringement. Taco Bell’s arguments
TACO BELL CORP. v. TBWA CHIAT/DAY 853
speak to copyright issues not pertinent to this case because
those claims were disposed of before trial.
[3] The Agency Agreement’s indemnification provisions
require TBWA to indemnify Taco Bell for liability incurred
as a result of “(i) any materials created, produced, and/or fur-
nished by [TBWA] for [Taco Bell] . . . (ii) [TBWA’s] fault
or negligence in the performance of its obligations hereunder;
or (iii) [TBWA’s] breach of its obligations under this Agree-
ment.” Even if liability arose from “materials created, pro-
duced, and/or furnished by [TBWA] for [Taco Bell],”
Paragraph 7.1 includes an exception for claims covered by
Paragraph 7.2, claims resulting from Taco Bell’s fault.
Although Taco Bell argues the Wrench jury finding warrants
an inference that TBWA misappropriated Wrench’s material,
neither the verdict nor the undisputed facts allow a finding of
TBWA’s fault, but only Taco Bell’s breach of a contract. The
district court properly determined no obligation for TBWA to
indemnify Taco Bell under the Agency Agreement arose from
the verdict.
[4] Furthermore, as properly decided by the district court,
TBWA cannot be held at fault under the Agency Agreement
which allows it to rely on the approval of Taco Bell. Taco
Bell approved the Chihuahua character proposed by TBWA
and continued to approve the Chihuahua advertisements for
broadcasting after the Wrench lawsuit was initiated, despite
the existence of its implied contractual commitment to
Wrench.
[5] Taco Bell argues that its approval of advertising created
by TBWA was only an approval of costs as provided for in
Paragraph 4.12 of the Agency Agreement. This argument con-
2
4. Approvals and Billing Procedures.
4.1 Approvals. [TBWA] will obtain [Taco Bell’s] prior
approval for all work [TBWA] does on [Taco Bell’s]
854 TACO BELL CORP. v. TBWA CHIAT/DAY
tradicts the statement of Taco Bell’s counsel at oral argument
of the summary judgment motions in the district court:
So I would dispute strongly that there was an
approval of the ads in the form of agreeing that they
go forward and shifting the risk. I wouldn’t dispute
that there was approval in the sense of, Yes, let’s run
them. I think we’ll sell some more tacos. That, I
think there was an approval of.
In addition to the fact that the commercials were broadcast,
the admission of Taco Bell’s counsel confirmed that Taco
Bell approved the Chihuahua commercials for airing. The dis-
trict court correctly considered Taco Bell’s approval to broad-
cast the Chihuahua commercials after Wrench filed its lawsuit
a dispositive factor in Taco Bell’s fault-based indemnification
claim against TBWA. The admission confirmed that there
was approval pursuant to the Agency Agreement’s authoriza-
tion section.
Paragraph 6.4 of the Agency Agreement states:
6.4 Authorization. [TBWA] will be entitled to rely
and act upon any instruction, approval or authoriza-
tion given by [Taco Bell] or by any of [Taco Bell’s]
representatives.
Under this paragraph, TBWA was permitted to rely on Taco
Bell’s approval of advertising TBWA created.3 The district
behalf. If [TBWA] believes actual costs for production proj-
ects, subject to an estimate, will vary by more than 10%,
[TBWA] will send [Taco Bell] a revised estimate for [Taco
Bell’s] approval. Variances under 10% will be deemed
approved by [Taco Bell]. After a project is completed,
[TBWA] will reconcile actual costs against the estimates
and an appropriate adjustment will be made.
3
Taco Bell argues that Subparagraph 7.2 (iii) of the Agency Agreement
governs approvals and it provides that even if Taco Bell gives approval,
TACO BELL CORP. v. TBWA CHIAT/DAY 855
court properly relied on the fact that Taco Bell approved for
airing the Chihuahua commercials between January 1998 and
June 2000 while denying the existence of its contractual obli-
gation to Wrench. Under the Agency Agreement, TBWA can-
not be found at fault for liability arising from advertisements
approved by Taco Bell.
B. Agency Agreement
The next issue we consider is whether TBWA is at fault for
breach of the Agency Agreement, leading to Taco Bell’s lia-
bility in Wrench. Subparagraph 7.2(iii) provides that Taco
Bell will indemnify TBWA for any liability resulting from
“risks which have been brought to the attention of and dis-
cussed 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 Presi-
dent - Marketing of [Taco Bell].”
Taco Bell argues that the district court ignored material evi-
dence of TBWA’s breach of its obligations under Paragraph
7 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.” It is Taco Bell’s position that it
was TBWA’s responsibility to make sure Taco Bell’s adver-
tising campaign did not misuse Psycho Chihuahua and
TBWA breached its duty when it failed to do advertising copy
clearance, uncover an application for a trademark, and bring
risks of using a Chihuahua in advertising to Taco Bell’s atten-
tion.
Taco Bell’s obligation does not apply to the extent that damages are
incurred as a result of TBWA’s negligence or failure to perform its obliga-
tions under the Agency Agreement. The claim that Subparagraph 7.2 (iii)
governs approval is meritless as there is a specific section speaking
directly to approval, Paragraph 6.4, and Paragraph 7.2 speaks only to Taco
Bell’s indemnification obligations to TBWA.
856 TACO BELL CORP. v. TBWA CHIAT/DAY
[6] Subparagraph 7.2(iii), speaking to Taco Bell’s indemni-
fication obligations to TBWA, does not require any copy
clearance, trademark searches, or risk reporting by TBWA,
but obligates Taco Bell to indemnify TBWA when Taco Bell
elects to proceed in the event that risks are brought to its
attention. Additionally, Taco Bell was the party aware of the
potential risks of using a Chihuahua character in its advertis-
ing. It was Taco Bell that had an undisclosed contract with
Wrench and denied the existence of that contract. Taco Bell’s
argument that TBWA failed to meet an obligation under the
Agency Agreement by failing to do copyright and trademark
searches is meritless not only because it is not supported by
the language in the Agency Agreement, but also because the
Wrench liability included neither copyright nor trademark
damages. As discussed, the entire judgment was based on
Taco Bell’s breach of an implied contract to pay Wrench for
use of Psycho Chihuahua.
C. Issue Preclusion
Taco Bell argues that TBWA should be precluded from
denying that it was at fault and that its fault caused the liabil-
ity to Wrench. We disagree.
[7] The Supreme Court has held that “federal common law
governs the claim-preclusive effect of a dismissal by a federal
court sitting in diversity.” Semtek Int’l Inc. v. Lockheed Mar-
tin Corp., 531 U.S. 497, 508 (2001). Federal common law
requires application of “the law that would be applied by state
courts in the State in which the federal diversity court sits.”
Id. The Wrench judgment was rendered by a federal court sit-
ting in diversity in the Western District of Michigan, and the
court applied Michigan law. Therefore, any preclusive effect
of the Wrench jury verdict and judgment is governed by
Michigan law. Id. at 509.
[8] Under Michigan law, three elements must be satisfied
for issue preclusion to apply: (1) a question of fact essential
TACO BELL CORP. v. TBWA CHIAT/DAY 857
to the judgment must have been actually litigated and deter-
mined by a valid and final judgment; (2) the same parties
must have had a full and fair opportunity to litigate the issue;
and (3) there must be mutuality of estoppel. Monat v. State
Farm Ins. Co., 677 N.W.2d 843, 845-46 (Mich. 2004). Estop-
pel is mutual if the one taking advantage of the earlier adjudi-
cation would have been bound by it had it gone against him.
Id. at 846-47.
[9] The district court properly found that collateral estoppel
did not apply because Taco Bell was at fault in Wrench and
nothing further could be inferred from the undisputed facts.
That court stated:
TBWA is not bound by the jury verdict in Wrench.
First, Taco Bell cannot establish an “identity of
issues” between the implied-in-fact contract claim in
Wrench and the fault-based indemnification claim in
the current action. Second, Taco Bell failed to show
TBWA and Taco Bell were in privity with respect to
the Wrench action. Thus, application of the estoppel
bar would violate TBWA’s due process rights. It
would be “inequitable” therefore to bind TBWA to
the Wrench jury findings under these circumstances.
Taco Bell relies on the Wrench jury finding that “the Chi-
huahua used by Taco Bell was not independently created by
[TBWA]” in support of its argument that TBWA is collater-
ally estopped from disputing its fault or negligence. For the
reasons discussed above, the jury instructions underlying that
finding left doubt as to what the Wrench jury decided on the
independent creation issue and prevent issue preclusion as to
TBWA’s asserted fault. The district court correctly reasoned:
As discussed above Taco Bell seeks to bind TBWA
to the portion of the Wrench jury’s finding that states
“that the character used by Taco Bell was not inde-
pendently created by [TBWA].” However, in the
858 TACO BELL CORP. v. TBWA CHIAT/DAY
corresponding jury instruction, the jury was
instructed to consider “whether Taco Bell and
[TBWA] created the Taco Bell Chihuahua on an
independent creative, but parallel path.” The court
also asked the jury to consider “the access or lack
thereof to the Psycho Chihuahua character by people
at Taco Bell and [TBWA].” As noted supra, the
Wrench jury was never instructed to determine
which party, Taco Bell or TBWA, was at fault for
the liability in Wrench. At the very minimum, the
jury instruction raises a doubt or confusion as to the
basis and breadth of the jury’s finding that “the char-
acter used by Taco Bell was not independently cre-
ated by [TBWA].” Where doubt exists as to the basis
for the jury’s finding, collateral estoppel does not
apply.
[10] The district court’s analysis is correct. Considering the
instructions given, the Wrench jury finding that the character
used by Taco Bell was “not independently created by
[TBWA]” does not clearly establish what the jury decided on
the “independent creation” issue, the issue of fact Taco Bell
is attempting to preclude TBWA from contesting. The
requirement that the question of fact essential to judgment be
actually litigated and determined is, therefore, not met. See
Monat, 677 N.W.2d at 845.
[11] Taco Bell and TBWA also lacked the privity required
for issue preclusion. The fault-based indemnification provi-
sions of the Agency Agreement created a direct conflict
between Taco Bell and TBWA which prevented Taco Bell
from representing TBWA’s interests during the Wrench trial.
This created a due process bar to enforcing issue preclusion
against TBWA. The district court properly applied Michigan
law regarding the privity requirement for issue preclusion
stating:
Michigan law also requires that, for collateral estop-
pel to apply, the same parties, or their privies must
TACO BELL CORP. v. TBWA CHIAT/DAY 859
have had a full and fair opportunity to litigate the
issue to be precluded. Monat, 469 Mich. at 682-83,
677 N.W.2d at 845-46. Michigan’s Supreme Court
held that “[t]o be in privity is to be so identified in
interest with another party that the first litigant repre-
sents the same legal right that the latter litigant is try-
ing to assert.” Adair v. Mich. State, 470 Mich. 105,
122, 680 N.W.2d 386, 396 (2004), remanded on
other grounds. Michigan courts have held that appli-
cation of collateral estoppel is appropriate where
there is “substantial identity” between the parties.
Dearborn Heights Sch. Dist. No. 7, 233 Mich. App.
at 126, 592 N.W.2d at 412. “The purpose of the
substantial-identity rule is to ensure that collateral
estoppel is applied only where the interests of the lit-
igating party are adequately represented in the first
proceeding.”
[12] Taco Bell and TBWA were not in privity in the
Wrench action because the terms of the Agency Agreement
put their interests in conflict. The parties’ acknowledgment of
their “mutuality of interest in a common defense” of the
Wrench claims in the Joint Defense Agreement does not over-
come the conflict created by the Agency Agreement. Under
Paragraphs 7.1 and 7.2, TBWA had no indemnification obli-
gation for any liability resulting from Taco Bell’s fault or neg-
ligence, but Taco Bell was entitled to indemnification from
TBWA for any liability resulting from TBWA’s fault or neg-
ligence. Given that conflict of interest, the district court prop-
erly determined that Taco Bell could not have adequately
represented TBWA’s interests in Wrench. Holding the
Wrench verdict binding on TBWA would be a due process
violation.
D. California Civil Code § 2778(6)
[13] Taco Bell contends the district court was required to
take as true that TBWA did not independently create its Chi-
huahua character. California Code § 2778(6) states:
860 TACO BELL CORP. v. TBWA CHIAT/DAY
In the interpretation of a contract of indemnity, the
following rules are to be applied, unless a contrary
intention appears:
....
(6) If the person indemnifying, whether he is a
principal or a surety in the agreement, has not rea-
sonable notice of the action or proceeding against the
person indemnified, or is not allowed to control its
defense, judgment against the latter is only presump-
tive evidence against the former;
....
[14] Section 2778(6) does not apply here. TBWA is not an
indemnitor under the undisputed facts of this case because no
fault or negligence of TBWA caused the duty to indemnify to
arise. Taco Bell’s argument assumes the Wrench verdict
established TBWA’s fault but, as previously discussed, it did
not. Therefore, TBWA does not constitute an “indemnifying
person” and § 2778(6) does not apply.
III. Conclusion
The district court properly concluded there is evidence only
of Taco Bell’s fault in its liability to Wrench. As a result, no
indemnification obligation from TBWA to Taco Bell arose.
AFFIRMED.