Opinion ID: 3054389
Heading Depth: 3
Heading Rank: 3

Heading: issues

Text: Taco Bell argues that TBWA should be precluded from denying that it was at fault and that its fault caused the liability 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 Martin 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 sitting 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 determined 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). Estoppel is mutual if the one taking advantage of the earlier adjudication 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 Chihuahua used by Taco Bell was not independently created by [TBWA]” in support of its argument that TBWA is collaterally 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 character 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 provisions 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 estoppel 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 represents the same legal right that the latter litigant is trying 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 application 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 litigating 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 overcome the conflict created by the Agency Agreement. Under Paragraphs 7.1 and 7.2, TBWA had no indemnification obligation for any liability resulting from Taco Bell’s fault or negligence, but Taco Bell was entitled to indemnification from TBWA for any liability resulting from TBWA’s fault or negligence. Given that conflict of interest, the district court properly 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.