Taco Cabana is a U.S.-based fast food restaurant chain specializing in Tex-Mex cuisine and is a wholly owned subsidiary of Carrols Corporation. Taco Cabana is headquartered in San Antonio, Texas. As of July 2007, it has over 140 locations throughout Texas, Oklahoma and New Mexico.
Many Taco Cabana restaurants are open 24 hours a day, and for most of the chain's history all locations were painted in the company's signature pink, some of which is retained in the new architectural concept developed in part by Stephen Clark, who became president of the company in 1995.
Taco Cabana, which was founded by Mike and Felix Stehling in 1978, opened its first restaurant at the corner of San Pedro and Hildebrand Avenues in San Antonio, Texas . The original location evolved out of a need for the Stehling's to add parking for their popular bar, the Chrystal Pistol. The brothers purchased the vacant Dairy Queen located across the street from the bar, but ultimately recognized the site was a potential business opportunity. Rather than tear down the building for additional parking they decided to open a taco stand. The open air design of the existing structure led to the "patio cafe" concept that defined the chains subsequent locations. Additionally, after having all of the patio furniture stolen after closing for the first night of business, the around-the-clock service concept began.
The restaurant, which focuses on fresh foods rather than pre-packaged, pre-prepared foods and serves beer and margaritas, quickly became a successful venture. The Stehlings soon developed the restaurant concept and by 1985 expanded it into a chain of six restaurants in San Antonio area.
In 1984, the Stehling brothers were approached by Houston restaurant developer Marno McDermot about taking the Taco Cabana concept nationwide. The brothers rejected McDermot's offer and by 1986 with Felix wanting to take the chain and expanding it and Mike wanting to maintain a smaller enterprise, the brothers decided to part ways. The restaurants were split with Felix maintaining five locations and the Taco Cabana name and Mike keeping four locations renamed TaCasita.
During that same period Marno McDermot did not drop the idea for a nationwide patio-dining concept and in association with business associate, Thom Dietrich, developed his own operation and incorporated Two Pesos in 1985. The company would open its first two restaurants in Houston later that year and hire a former Taco Cabana manager to run one of its stores. Two Pesos quickly expanded to 19 locations in eighteen months. By 1988 the company continued its rapid expansion and had opened locations throughout the southwest and in such far flung cities like Atlanta, Denver, Norfolk and Minneapolis.
In January 1987 Taco Cabana International filed suit against Two Pesos for allegedly duplicating Taco Cabana’s “Trade dress” and for theft of trade secrets (see Two Pesos, Inc. v. Taco Cabana, Inc., 505 U.S. 763 (1992)' section below). Two Pesos lost the case and appealed the ruling all the way to the Supreme Court, who in June 1992 upheld the two lower court rulings in favor of Taco Cabana.
The company went public that same year and again filed suit against Two Pesos alleging that they had not significantly altered their restaurants as was mandated in the previous court ruling.
In January 1993 Taco Cabana announced that it was purchasing cash strapped Two Pesos' restaurant assets in exchange for 940,000 shares of Taco Cabana stock, approximately valued at $22 million. The sale included all 38 company-owned restaurants as well as all 51 franchised or licensed restaurants, operating under the Two Pesos and Shortstop Hamburgers names. Taco Cabana converted most Two Pesos locations into Taco Cabana restaurants, closed others and sold the Shortstop Hamburger chain.
In 2001 the company was delisted when it became a privately held, wholly owned subsidiary of Carrols Corporation.
Two Pesos opened its first restaurant in 1985. By 1987 it had established a chain of restaurants with locations in Austin, Houston, Dallas and El Paso. As Taco Cabana expanded into those cities it became clear that the Two Pesos chain had not only saturated these markets with several locations, but had also established themselves as the first Tex-Mex Patio Cafe restaurant in those markets. Two Pesos restaurants were alleged by Taco Cabana to have copied the "look and feel" of their restaurants. Primarily citing that Two Pesos copied the 24-hour patio cafe concept and had architecturally similar buildings and features such as overhead doors to open the secondary dining room to the patio dining area, double drive thru windows, open kitchens, similar menu boards, brightly colored canopies and murals, similar floor plans and brightly colored buildings (Taco Cabana's Pink vs. Two Peso's Turquoise).
In 1987 Taco Cabana sued Two Pesos for infringement of trade dress under the Lanham Act and for theft of trade secrets under Texas Common Law in the United States District Court for the Southern District of Texas. The trial court held that Two Pesos had intentionally and deliberately infringed Taco Cabana's trade dress. Damages awarded to Taco Cabana were approximately $2 million and U.S. District Judge John V. Singleton ordered Two Pesos to "change the appearance of its existing Texas restaurants and the design of all future units to avoid confusion with Taco Cabana outlets" and that Two Pesos must post in all existing units a sign stating the outcome of the trial. The "white sign with 1-inch black letters must read: "Notice: Taco Cabana originated a restaurant concept which Two Pesos was found to have unfairly copied. A court order requires us to display this sign to inform our customers of this fact to eliminate the likelihood of confusion between our restaurant and those of Taco Cabana."
Two Pesos appealed, but the ruling was upheld by the Appellate Court. Two Pesos continued its appeals to higher courts until it reached the US Supreme Court in 1992.
The Supreme Court unanimously upheld the two lower court rulings and decided in favor of Taco Cabana. Two Pesos, Inc. v. Taco Cabana, Inc. is a landmark case that is often cited in trade dress litigation.