A federal appellate court ruled today that Taco Bell, and not its ad agency TBWA, is responsible for the $42 million payment to the original creators of the now famous Taco Bell Chihuahua mascot.

The latest in a decade-old lawsuit, today’s ruling upheld the decision of a lower court that had to decide whether Taco Bell or TBWA was responsible for paying tens of millions of dollars in damages to Wrench, the ad firm that came up with the idea of “Psycho Chihuahua,” which later became the internationally-known Taco Bell Chihuahua.

A good description of the events leading up to the trial can be found in today’sappellate court’s decision. To sum it up, a licensing executive from Taco Bell approached Joseph Shields and Thomas Rinks, the founders of Wrench, after seeing the concept of Psycho Chihuahua at a trade show. He thought it would be a good fit for an upcoming Taco Bell ad campaign.

After price negotiations between Taco Bell and Wrench fell through, Taco Bell turned to their primary ad agency, TBWA, to create a mascot and theme for an upcoming $500 million ad campaign. Taco Bell gave TBWA materials related to Psycho Chihuahua to develop a similar idea for the campaign.

When Shields and Rinks saw the now famous “Yo Quiero Taco Bell” Chihuahua on TV in 1998, they quickly sued Taco Bell.

The two creators of Psycho Chihuahua won the suit and a $42 million judgment.

Taco Bell, after initially entering a “joint defense agreement” with TBWA, then sued the agency, asking for “full indemnification.” Because Taco Bell gave the Psycho Chihuahua materials to TBWA, the judge ruled that Taco Bell was fully liable for the $42 million in damages awarded to Wrench. Taco Bell appealed and lost again with today’s ruling.

Asked whether or not Taco Bell will appeal to a higher court, further dragging out this case, a company spokesperson said, “We just received the opinion today and are reviewing our options.”