Wrench Llc, a Michigan Limited Liability Company Joseph Shields Thomas Rinks v. Taco Bell Corp.

Citations: 256 F.3d 446; 59 U.S.P.Q. 2d (BNA) 1434; 2001 U.S. App. LEXIS 15097; 2001 WL 760977Docket: 99-1807

Court: Court of Appeals for the Sixth Circuit; July 6, 2001; Federal Appellate Court

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The case involves Wrench LLC, Joseph Shields, and Thomas Rinks (Plaintiffs-Appellants) suing Taco Bell Corporation (Defendant-Appellee) for breach of an implied contract and related torts concerning the alleged unauthorized use of their "Psycho Chihuahua" character. The U.S. District Court for the Western District of Michigan found that the Copyright Act preempted all claims, including those based on implied contracts, and granted Taco Bell summary judgment on the grounds of preemption and lack of novelty in the plaintiffs' ideas. The appellants argued that the district court erred in its preemption analysis under the Copyright Act and incorrectly required a finding of novelty for the implied-in-fact contract claim. The Court of Appeals for the Sixth Circuit reversed the district court's judgment, indicating that further proceedings are warranted. The background details reveal that Taco Bell employees expressed interest in the Psycho Chihuahua character at a trade show, subsequently soliciting promotional materials from the plaintiffs, which were used to gauge consumer interest in the character's marketing potential.

Rinks proposed to Alfaro that Taco Bell should utilize a live dog, enhanced by computer graphic imaging, embodying the personality of Psycho Chihuahua for advertising instead of the animated character. They discussed the potential costs for using the Psycho Chihuahua concept, with Alfaro recognizing that Taco Bell would need to compensate the appellants for this. In September 1996, Rinks and Shields engaged Strategy Licensing to represent Wrench in negotiations with Taco Bell. Strategy's representatives contacted Alfaro about Taco Bell's interest, providing materials that described Psycho Chihuahua as "irreverent, edgy, and spicy" with a strong craving for Taco Bell food.

Throughout late summer and fall 1996, Alfaro and Wrench continued discussions about developing Psycho Chihuahua. On November 18, 1996, Strategy submitted a licensing proposal to Alfaro, suggesting Taco Bell pay fees based on advertising spending, retail licensing sales, and promotional costs. Taco Bell did not accept or reject this proposal and continued discussions. On December 5, 1996, Alfaro met with newly promoted Chief Marketing Officer Hill to discuss licensing ideas, including Psycho Chihuahua.

By February 6, 1997, Alfaro and Strategy representatives met with the appellants to finalize a presentation for Taco Bell’s marketing department. They showcased potential promotional materials and TV commercial ideas featuring a live dog. Concurrently, TLP Partnership also promoted Psycho Chihuahua to Taco Bell, having received Strategy's consent to use the character. Although TLP's ideas received positive consumer feedback in focus groups, Taco Bell opted not to pursue them. Alfaro was unable to secure a meeting with the marketing department that March, but on April 4, 1997, Strategy made a formal presentation of promotional designs to Alfaro's group, which they found impressive. Taco Bell subsequently hired TBWA Chiat/Day as a new advertising agency on March 18, 1997, aiming to launch a campaign by July 1997, with creative directors Bennett and Williams assigned to the account.

On June 2, 1997, Bennett and Williams pitched a Taco Bell commercial concept featuring a male Chihuahua prioritizing a person eating Taco Bell food over a female Chihuahua. This idea originated while they were at a sidewalk café, inspired by a Chihuahua seen trotting independently. Williams later scripted an advertisement involving this Chihuahua, which Taco Bell decided to produce. In June 1997, Alfaro learned of Taco Bell's plans and suggested using Psycho Chihuahua, a character he represented, to Taco Bell's advertising manager, Chris Miller. Alfaro provided materials for Psycho Chihuahua to Miller, who forwarded them to Taco Bell’s advertising agency, Chiat/Day. Taco Bell launched its first Chihuahua commercial in July 1997, which was well-received, leading to a nationwide campaign starting December 1997. In January 1998, Bennett and Williams sued Taco Bell for breach of implied-in-fact contract and various tort and statutory claims under Michigan and California law. The district court partially granted Taco Bell's motion to dismiss, dismissing claims for unjust enrichment, conversion, and dilution as preempted by the Copyright Act, but allowing misappropriation and unfair competition claims to proceed since they required proof of an implied contract. The court also permitted amendments to the conversion claim. In a subsequent decision, the court denied Taco Bell's renewed motion to dismiss the tort claims related to the implied contract but struck down claims based on quasi-contract theories, citing inconsistencies with earlier rulings.

At the conclusion of discovery, the district court granted summary judgment in favor of the appellee, ruling that while there was sufficient evidence to support the appellants' claims of an implied-in-fact contract, these claims were preempted by the Copyright Act. The court reasoned that the appellants' right to payment under the contract was equivalent to the exclusive rights granted to authors by the Copyright Act. Consequently, the appellants' additional tort claims—conversion, misappropriation, and unfair competition—were also deemed preempted. Although the court dismissed the appellee's argument for summary judgment based on "independent creation," it determined that the appellants' expressive work lacked novelty or originality, leading to further dismissal of their claims.

On appeal, the key issues are whether the district court erred in its preemption ruling and in requiring novelty as a component of the implied-in-fact contract claim, along with its conclusion that the appellants' ideas were not novel. The appellate court reviews the grant of summary judgment de novo, emphasizing that summary judgment is appropriate when there are no genuine material facts in dispute. The burden initially lies with the moving party to demonstrate the absence of such issues, after which the non-moving party must present specific facts indicating a triable issue. The district court found sufficient evidence to support the existence of an implied-in-fact contract, and the appellate court agrees with this finding while determining the preemption question under Section 301 of the Copyright Act, which governs equivalent rights to exclusive copyright rights.

Under §301, a state law claim is preempted if two conditions are met: (1) the work falls within the "subject matter of copyright" as defined in 17 U.S.C. §§ 102, 103, and (2) the rights under state law are equivalent to exclusive rights under federal copyright law in 17 U.S.C. § 106. The preemption analysis involves a "subject matter requirement" and a "general scope" or "equivalency" requirement. 

Appellants argue that their claims are based on ideas and concepts presented to Taco Bell, which they assert are intangible and therefore not subject to copyright, as per §102(b). The district court, however, determined that the claims fell within copyright subject matter because they were based on tangible expressions, specifically storyboards and presentation materials. The court referenced the Fourth Circuit’s Berge decision, which held that the preemption scope is broader than the copyright protection scope, rejecting the argument that unprotected ideas are exempt from preemption. Appellants contest this conclusion, asserting it misinterprets §102(b) and cite district court cases supporting their view that unprotected ideas are not within copyright's subject matter.

Appellate courts, including the Second, Fourth, and Seventh Circuits, have determined that the Copyright Act's subject matter encompasses both copyrightable and uncopyrightable elements of expression. Notably, in National Basketball Ass'n, the court ruled that copyright under §301 includes uncopyrightable elements, while Berge clarified that the "scope and protection" of copyright are not synonymous. The Second Circuit emphasized that the presence of uncopyrightable material should not exclude a work from copyright subject matter, as it would allow states to create their own copyright protections contrary to federal intent. The document asserts that the appellants invested significant effort in developing tangible expressions of their Psycho Chihuahua concept, which included various creative elements. The court rejected appellants' argument that their intangible ideas should be separately protected under state law, emphasizing that such a claim would contradict congressional intent to preempt state actions regarding copyrightable works. 

In addressing the "equivalency" requirement of preemption, the court noted that state law claims are only preempted if they assert rights equivalent to those under §106 of the Copyright Act. Equivalency exists if a state law right can be infringed by actions that would infringe copyright. Conversely, if a state claim requires an additional element that alters its nature from a copyright claim, it is not preempted. The court concluded that the appellants' state law implied-in-fact contract claim does not meet the equivalency requirement and therefore survives preemption.

An implied contract under Michigan law requires mutual assent and consideration, distinguishing between contracts implied in fact and those implied in law. Contracts implied in fact necessitate a meeting of the minds through words or conduct, while contracts implied in law are imposed by law without such a meeting. The appellants' claim is based on a breach of a promise to pay for their creative work, emphasizing that it is the failure to pay—not just the use of the work—that constitutes the breach. This contractual right to payment is not infringed upon by actions that would typically violate copyright rights since the payment promise is an additional element necessary for the state law claim. This claim is qualitatively different from copyright infringement as it requires proof of an enforceable promise, mutual assent, consideration, and evidence of the work's value and its usage. Remedies under Michigan law for breach of an implied contract include recovering the reasonable value of services rendered, contrasting with copyright law remedies, which are limited to injunctions, destruction of infringing articles, and recovery of actual damages or statutory damages. Notably, damages for the reasonable value of the defendants' use of the work are not available under copyright law. The claim is supported by authoritative copyright law commentary, emphasizing that a breach of contract claim based on a promise to pay is not preempted as it involves more than mere reproduction or distribution of a copyrighted work.

Appellants' state law contract claim is not preempted, but not all state law contract claims survive preemption merely due to the inclusion of a promise. Specifically, if a contract claim involves only a promise to refrain from actions that infringe exclusive rights under 17 U.S.C. § 106, it is preempted. Preemption applies when state law rights would be undermined by acts that infringe copyright. The majority of contract claims will likely survive scrutiny; however, claims directly addressing the unauthorized reproduction of expressive materials may be preempted. Supported by case law, the distinction is made between contracts that involve additional elements beyond unauthorized reproduction and those that do not. For instance, in Acorn Structures, Inc. v. Swantz, the contract was not preempted as it did not arise from copyright issues, while in Endemol Entm't B.V. v. Twentieth Television, Inc., a claim was preempted as it only involved promises not to benefit from copyrighted work. The appellants' claim is based on an implied-in-fact contract, which differs from quasi-contracts; the former arises from mutual consent through conduct or words, while the latter are obligations created by law without mutual intent. Nimmer on Copyright highlights the importance of distinguishing between these two types of contracts in legal analysis.

A critical distinction exists between claims based on quasi-contracts (implied in law) and those based on contracts implied in fact. A quasi-contract claim hinges solely on unauthorized use of a work, requiring no additional elements beyond reproduction, performance, distribution, or display. In contrast, a claim implied in fact necessitates an expectation of compensation, which must be inferred from the parties' conduct. The Ninth Circuit's ruling in Del Madera Props. v. Rhodes, Gardner, Inc. illustrates this, where the court suggested that a lack of an essential element for unjust enrichment under California law led to preemption by the Copyright Act. Had the expectation of compensation been present, the unjust enrichment claim would not have been preempted. In the current case, the appellants' implied-in-fact contract claim includes this expectation, which is not covered by §106 of the Copyright Act. However, the claim fails as the work was not conducted under conditions that warranted an expectation of payment. The district court erred in its preemption analysis, concluding that the state law implied-in-fact contract claim is not preempted.

On the issue of independent creation, the appellee argues for summary judgment, claiming the concept of a live Chihuahua in Taco Bell advertising was independently created. Citing Kienzle v. Capital Cities/Am. Broad. Co., the appellee asserts it can counter a prima facie case of improper use by showing independent creation. Appellants argue they have strong circumstantial evidence that Taco Bell used their Psycho Chihuahua concept. The district court found insufficient evidence from Taco Bell’s witnesses to grant summary judgment on independent creation, and genuine issues of material fact remain.

Regarding novelty, the appellants argue the district court mistakenly determined that originality or novelty was necessary to sustain their contract claim under Michigan law. The district court concluded that the ideas lacked novelty, resulting in summary judgment for the appellee. However, it is concluded that the district court erred in asserting that novelty is a requirement for a contract-based claim in Michigan.

In Wrench III, the district court revisited the issue of novelty in relation to claims of misappropriation and conversion, building on its previous findings in Wrench II. The court examined whether Michigan recognizes conversion of an idea provided by a plaintiff if that idea is novel or original, referencing Sarver v. Detroit Edison Co. to support the notion that such claims could be valid under Michigan law. However, in Wrench III, the court largely relied on New York case law to conclude that the appellants’ ideas were not novel as a matter of law. 

The court assumed that the novelty requirement for conversion and misappropriation claims would also extend to implied-in-fact contract claims. Conversion is grounded in property law, which generally does not protect ideas unless they meet criteria of novelty and concreteness. Sarver emphasized that for an idea to be protected under property theory, it must possess property-like traits, with originality or novelty being crucial to its value. 

In contrast, contract claims may have a modified novelty requirement or none at all, as property rights extend universally while contract rights are confined to the involved parties, allowing them to determine the value of an idea. However, novelty is often still required in implied contract actions to ensure consideration for an implied promise. Critics, including the authors of Nimmer on Copyright, argue against imposing a novelty requirement in implied contract cases, suggesting that the obligation to pay for idea disclosure does not necessitate the idea itself being novel. The excerpt indicates that Sarver provides insight into Michigan's likely stance on these issues.

In Sarver, the plaintiff sued her employer for conversion and breach of contract, claiming the employer appropriated an idea submitted through an employee suggestion program. The court dismissed the conversion claim, determining the idea was "neither novel nor unique," thus not constituting property eligible for conversion. However, it upheld the breach of contract claim, stating that if the plaintiff seeks compensation for the efforts involved in formulating and submitting her idea, it qualifies as a breach of contract, irrespective of novelty. The Sarver court referenced the Supreme Court of Alaska's decision in Reeves v. Alyeska Pipeline Services Co., which established that novelty is not a necessary element for implied contract claims. The court favored the California approach, which does not require novelty, over New York's stricter standards. It emphasized that implied-in-fact contracts, similar to express contracts, require mutual intent without necessitating evaluation of consideration adequacy. The Michigan court aligned with the Reeves decision, indicating that it does not require novelty for implied-in-fact contract claims, contrasting with New York's position as discussed in Wrench III. The summary highlights a significant legal distinction regarding the requirement of novelty in contract claims related to idea contributions.

The New York Court of Appeals has established that novelty is not a requirement in all cases of idea disclosure. The defendant in the case acknowledges that the idea originated from the plaintiffs, which shifts the focus from misappropriation to the idea's value as consideration in a contract. If a seller's claim arises from a contract formed after the idea's disclosure, the essential inquiry is whether the idea was valued by the buyer, not its novelty. The court typically respects the buyer's agreement on the idea's value. The absence of novelty does not equate to a lack of value. Recent case law, including Nadel v. Play By Play Toys, confirms that New York law allows for contract-based claims based on the idea's novelty to the buyer rather than originality in general. In this instance, Taco Bell did not assert prior knowledge of the plaintiffs' ideas, leading the court to determine that the lower court erred in granting summary judgment due to a lack of novelty or originality. Consequently, the district court's judgment is reversed, and the case is remanded for further proceedings. The appellee did not contest the district court's ruling concerning the relationship between the tort claims and contract claims. Additionally, copyright protection is outlined in Section 102, detailing the types of works eligible for copyright.

Copyright protection does not extend to ideas, procedures, processes, systems, methods, concepts, principles, or discoveries, regardless of their expression in an original work. Legal precedents clarify that state laws protecting ideas themselves, rather than their expression, are outside copyright jurisdiction. Claims seeking compensation for underlying concepts, rather than their specific expressions, are not preempted by copyright law. Section 106 of the Copyright Act outlines the exclusive rights of copyright owners, including reproduction, preparation of derivative works, distribution, public performance, and public display of works. Additionally, the value of an infringer's use can be a basis for calculating actual damages. While contracts generally do not create exclusive rights and may not be preempted, the Seventh Circuit has noted that not all contracts are automatically exempt from preemption. The notion that implied-in-fact contracts are preempted has been referenced in various cases.