CHAPTER 4 - § 4.03
| Jurisdiction | United States |
§ 4.03 THE TWO PESOS CASE
The general disagreement among the Circuit Courts on the issue of inherent distinctiveness created the perfect storm for Two Pesos. If not for this backdrop, it is unlikely that a litigation between two small Mexican fast food chains would have made it all the way from Texas to the Supreme Court. The fact that this dispute arose within the Fifth Circuit also fueled the controversy. As discussed above, the Fifth Circuit was one of a few courts at the time that had adopted the rule of inherent distinctiveness for trade dress (in Chevron). If not for the Chevron decision, the plaintiff (Taco Cabana) may never have succeeded at the district court level, and thus an appeal might have never been filed.
Taco Cabana, a small Mexican fast food restaurant chain, began in 1978 in San Antonio, Texas. The chain was founded by two brothers, Mike and Felix Stehling.27 In 1986, the brothers determined that they had differing business goals and decided to split the business between the two of them. Felix had plans to expand the business and kept five locations operating in the San Antonio area, along with the Taco Cabana name. Mike took over four other locations and renamed them TaCasita, while keeping the restaurants' same general appearance and layout.28
Each of the Taco Cabana (and TaCasita) locations had a motif that was self-described as
a festive eating atmosphere having interior dining and patio areas decorated with artifacts, bright colors, paintings and murals. The patio includes interior and exterior areas with the interior patio capable of being sealed off from the outside patio by overhead garage doors. The stepped exterior of the building is a festive and vivid color scheme using top border paint and neon stripes. Bright awnings and umbrellas continue the theme.29
In 1984, a Houston restaurant developer named Marno McDermot approached the brothers about taking the Taco Cabana restaurant concept nationwide.30 The Stehling brothers rejected McDermot's offer and continued operating on their own until they parted ways in 1986.31 Subsequent to these discussions, McDermot developed his idea for a nationwide chain of Mexican restaurants called Two Pesos, and he incorporated the business in 1985.32 Two Pesos opened its first location that year in Houston, Texas.33 The same year, Two Pesos hired a former Taco Cabana manager to run one of its locations.34
The Two Pesos chain of restaurants grew quickly in Houston and other surrounding areas, opening twenty-nine restaurants between 1985 and 1989.35 In 1986, Two Pesos entered the San Antonio market.36 The Two Pesos restaurants had an overall look and feel that was strikingly similar to that of the Taco Cabana restaurants. Notably, both restaurants featured similar layouts, bright colors, paintings, murals, interior dining, patio areas, a stepped exterior, overhead garage doors to separate the interior areas from the exterior, and neon stripes on the building.37
In January 1987, not long after Two Pesos entered the San Antonio market (where Taco Cabana had been for over eight years), Taco Cabana sued Two Pesos, alleging, inter alia, trade dress infringement under section 43(a) of the Lanham Act. Interestingly, this litigation commenced only six days after the Stehling brothers decided to split the business.38 The case was tried to a jury, who found in favor of Taco Cabana.39
With respect to the trade dress claims, the jury found that (1) Taco Cabana had a protectable trade dress in its restaurant décor; (2) Taco Cabana's trade dress, taken as a whole, was non-functional; (3) the trade dress was inherently distinctive; (4) the trade dress had not acquired secondary meaning in the Texas market; (5) customers might likely associate or confuse a Taco Cabana restaurant with a Two Pesos restaurant; and (6) Taco Cabana was damaged by the trade dress infringement.40 Damages and attorney's fees totaling approximately $2.8 million were awarded against Two Pesos, and Two Pesos was ordered to make changes to the design of its restaurants to avoid further confusion.41 The jury also found that Two Pesos had misappropriated certain trade secrets, including drawings, kitchen layout, and operating procedures.42
Practice Insight:
"I was one of the attorneys who represented the defendant, Two Pesos, in the trial. Throughout the litigation, Sno-Wizard was the controlling Fifth Circuit decision on the issue of functionality in trade dress cases. Sno-Wizard basically held that functional elements were not protectable as trade dress. The trade dress at issue in Sno-Wizard was a device for making 'snow cone' desserts from blocks of ice (see image below). Just weeks before the trial, the Ninth Circuit issued its decision in Fuddruckers, applying the 'functionality as a whole' approach to restaurant trade dress. Whether Sno-Wizard or Fuddruckers would control the jury charge on functionality was a hotly contested issue in the Two Pesos case. The trial judge ruled that he was going to follow Fuddruckers instead of Sno-Wizard, because Fuddruckers was a restaurant case, whereas Sno-Wizard was a product case. I viewed that decision as the death knell of Two Pesos' functionality defense at trial—the rest is history."
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