United States District Court, D. Arizona
REPORT AND RECOMMENDATION
BRIDGET S. BADE, Magistrate Judge.
Plaintiff Best Western International, Inc. (Best Western) has filed a motion for default judgment in this case alleging breach of contract claims and state and federal trademark infringement claims against Defendants KKR, LLC (KKR) and Ashish Gupta. (Doc. 1.) The Complaint alleges that Defendants breached a contract with Best Western and refused to cease and desist their unauthorized use of Best Western's trade name, trademarks, service marks, logos, and similar identifying symbols (the Best Western Symbols) after the license to use the Best Western Symbols terminated. (Doc. 1 at 2.) The Court has subject matter jurisdiction over Best Western's claims pursuant to 28 U.S.C. § 1331 and § 1367.
Best Western properly served Defendants. (Docs. 9, 10, 11.) Based on Defendants' failure to appear or otherwise respond to the Complaint, the Clerk of Court entered default against Defendants. (Doc. 13.) Best Western now moves for default judgment. For the reasons set forth below, recommends that default judgment be entered in favor of the Best Western and against Defendants.
I. Best Western's Allegations and Request for Damages
This case involves a contract dispute between Best Western and Defendants. Best Western also alleges that Defendants infringed on Best Western's registered trademarks in violation of the Lanham Act and state law.
On January 15, 2008, Defendant KKR applied for a Best Western membership and Defendants KKR and Gupta executed a Membership Application and Agreement (the Membership Agreement) for the hotel property known as the Red Coach Inn located in Newton, Kansas (the Hotel). (Doc. 1 at ¶¶ 3, 4, 22; Doc. 16, Ex. 1 at ¶ 3.) Defendant Gupta signed the Membership Agreement as the voting member for the Hotel and, thus became jointly and severally liable for the responsibilities of the Best Western membership. (Doc. 1 at ¶¶ 4, 23; Doc. 1-1 at 11-12; Doc. 16, Ex. 1 at ¶ 4.) Defendants agreed to and became bound by the terms of the Membership Agreement and the Regulatory Documents. (Doc. 16, Ex. 1 at ¶ 5.) Pursuant to the terms of the Membership Agreement, Defendants agreed to timely pay all fees, dues, charges, and assessments imposed generally on the membership by the Board of Best Western and to promptly pay the costs of all goods or services provided by or ordered through Best Western. (Doc. 1 at ¶¶ 12, 25; Doc. 16, Ex. 1 at ¶ 6.) Defendants further agreed that past due amounts would bear interest at the rate of one and one-half percent (1.5%) per month from the date due until paid. (Doc. 1 at ¶ 25; Doc. 16, Ex. 1 at ¶ 7.) Pursuant to the Membership Agreement, Best Western granted Defendants a non-exclusive license to use Best Western's trademarks and other intellectual property (the Best Western License), which allowed Defendants to use the Best Western Symbols in connection with the Hotel. (Doc 1 at ¶ 11; Doc. 16, Ex. 1 at ¶ 8.) Best Western holds multiple service mark registrations with the United States Patent and Trademark Office (USPTO) for the Best Western marks. (Doc 1 at ¶¶ 13-16; Doc. 16, Ex. 1 at ¶ 9.)
The Membership Agreement limited Defendants' use of the Best Western License. (Doc. 1 at ¶¶ 11-12, 18-20; Doc. 16, Ex. 1 at ¶ 10.) For example, Defendants agreed that termination of the Best Western Membership would result in termination of the Best Western License. (Doc. 1 at ¶ 20; Doc. 1-1, p. 7 at ¶ 22; Doc. 16, Ex. 1 at ¶ 11.) Defendants agreed to remove from public view and stop using all Best Western Symbols and all other references to Best Western within fifteen days of the date of termination of the Best Western License. (Doc. 1 at ¶ 21; Doc. 1-1, p. 7 at ¶ 22; Doc. 16, Ex. 1 at ¶ 12.) Defendants also agreed that, upon termination of the Best Western License, they would take steps necessary to cause the cessation of all advertising and distribution of promotional material containing any Best Western Symbol. (Doc. 1 at ¶ 21; Doc. 1-1, p. 7 at ¶ 22; Doc. 16, Ex. 1 at ¶ 13.)
On September 18, 2014, Best Western notified Defendants that the Board was considering terminating the Hotel's membership because the Hotel received two substandard quality assessment scores within an eighteen month period and the Hotel had failed to return an acknowledgement regarding the failed American Automobile Association inspection. (Doc. 1 at ¶ 31.) Best Western advised Defendants they could request a hearing. ( Id. ) After a hearing, at which information that Defendants provided was considered, Defendants' membership was terminated effective November 6, 2014. (Doc. 1 at ¶¶ 31-32; Doc. 16, Ex. 1 at ¶ 14.) In accordance with the Membership Agreement and Regulatory Documents, Best Western notified Defendants in writing that they were required to discontinue use of the Best Western Symbols on or before November 21, 2014. (Doc. 1 at ¶ 33; Doc. 1-1 at 31-36; Doc. 16, Ex. 1 at ¶ 15.)
On January 5, 2015, Best Western discovered that the Hotel was still displaying Best Western's Symbols on at least two exterior signs at the Hotel, that Best Western's "curvilinear sign cabinet" on the Hotel's main property had not been removed, altered or destroyed as required by the Regulatory Documents on its main property sign, and that three Department of Transportation signs still advertised Defendants' Hotel as a Best Western member. (Doc. 1 at ¶ 34; Doc. 1-1 at ¶¶ 29-31, 42; Doc. 16, Ex. 1 at ¶ 16.) On February 9, 2015, Best Western notified Defendants that they had to satisfy the open and stated account with Best Western, at which point Defendants owed $20, 362.26. (Doc. 1 at ¶ 35; Doc. 16, Ex. 1 at ¶ 17.) On December 30, 2015, a Best Western representative observed that the Hotel was still displaying Best Western's Symbols on at least one exterior sign at the Hotel and that Best Western Symbols had not been removed from the highway signs. (Doc. 16, Ex. 1 at ¶ 18.)
Paragraph 24 of the Membership Agreement provides that if a former member violates the nonexclusive License and continues to use Best Western Symbols beyond the fifteen-day grace period, then the offending party shall be assessed liquidated damages equal to fifteen percent (15%) of the mean of the property's room rates per day, multiplied by the total number of rooms at the property for every day that a former member continues to use the Best Western Symbols beyond the fifteen-day period. (Doc. 1 at ¶ 76; Doc. 1-1, p. 7 at ¶ 24; Doc. 16, Ex. 1 at ¶ 19.) Best Western seeks liquidated damages payable pursuant to the terms of the Membership Agreement. (Doc. 16 at 6; Doc. 1 at ¶¶ 76-77; Doc. 1-1, p. 7 at ¶ 24.) Best Western seeks liquidated damages from November 22, 2014 through and including December 30, 2015. (Doc. 1 at ¶ 33; Doc. 1-1, at 7; Doc. 16, Ex. 1 at ¶ 20.)
Additionally, Best Western asserts that as of December 1, 2015, Defendants owed $24, 388.77 on an open account that Defendants had when they were Best Western members, which represents certain fees and other charges imposed on Defendants as Best Western members. (Doc. 1 at ¶¶ 42, 48, 58, 63-64; Doc. 1-2 at 5-14; Doc. 16, Ex. 1 at ¶ 21.) Pursuant to the Membership Agreement, interest has accrued and continues to accrue on the unpaid amounts at the rate of one and one-half percent (1.5%) per month. (Doc. 1 at ¶¶ 25, 42, 47, 59; Doc. 1-1, p.1 at ¶ 12; Doc. 16, Ex. 1 at ¶ 21.) Defendants further argue that pursuant to paragraph 36 of the Membership Agreement, Arizona Revised Statute §§ 12-341 and 12-341.01, and 15 U.S.C. § 1117, Best Western is entitled to recover its attorneys' fees and costs incurred in pursuing this action. (Doc. 1 at ¶¶ 49, 55, 56, 60, 78; Doc. 1-1, p. 9 at ¶ 36.)
II. Standards for the Entry of Default Judgment
Rule 55(a) of the Federal Rules of Civil Procedure provides that "[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend... the clerk must enter the party's default." After a default has been entered and the defendant fails to appear or move to set aside the default, the court may, on the plaintiff's motion, enter a default judgment. Fed.R.Civ.P. 55(b)(2). Here, the Clerk of Court has entered Defendants' default. Thus, the Court may consider Best Western's request for default judgment.
Once default is entered, the well-pleaded factual allegations in the complaint are taken as true, except for those relating to the amount of damages. TeleVideo Sys., Inc. v. Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987). However, "necessary facts not contained in the pleadings, and claims which are legally insufficient, are not established by default." Cripps v. Life Ins. Co. of N. Am., 980 F.2d 1261, 1267 (9th Cir. 1992) (citing Danning v. Lavine, 572 F.2d 1386, 1388 (9th Cir.1978)); see also DIRECTV, Inc. v. Hoa Huynh, 503 F.3d 847, 854 (9th Cir. 2007) (for default judgment purposes, a defendant is not held to admit facts that are not well-pled or conclusions of law). The court must consider whether the alleged facts state a claim for relief. 10A Wright, Miller & Kane, Federal Practice and Procedure: Civil 3d § 2688, at 63 (1998) (the court must "consider whether the unchallenged facts constitute a legitimate cause of action, since a party in default does not admit mere conclusions of law").
Granting default judgment is within the court's discretion. See Aldabe v. Aldabe, 616 F.2d 1089, 1092-93 (9th Cir. 1980) (considering lack of merit in plaintiff's substantive claims, the court did not abuse its discretion in declining to enter a default judgment). When deciding whether to grant default judgment, the court considers the following factors, referred to as the Eitel factors: (1) the possibility of prejudice to the plaintiff; (2) the merits of the plaintiff's substantive claim; (3) the sufficiency of the complaint; (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect; and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits. Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986).
As set forth below, the Court has applied the Eitel factors to Best Western's motion for default judgment and recommends that default judgment be entered against Defendants.
A. The First, Fourth, Fifth, Sixth, and Seventh Eitel Factors
As discussed below, the first, sixth, and seventh Eitel factors weigh in favor of default judgment in this case. The fourth and fifth factors are neutral.
The first Eitel factor considers whether Best Western will suffer prejudice if default judgment is not entered. Pepsico, Inc. v. Cal. Sec. Cans., 238 F.Supp.2d 1172, 1177 (C.D. Cal. 2002). Defendants have failed to appear or otherwise defend this action. In the absence of a default judgment Best Western "would be without other recourse for recovery" to which it is entitled. See Philip Morris USA, Inc. v. Castworld Prods, Inc., 219 F.R.D. 494, 499 (C.D. Cal. 2003).
The sixth Eitel factor considers whether the default was due to excusable neglect. There is no evidence that Defendants' failure to appear or otherwise defend was the result of excusable neglect. Rather, the record reflects that Defendants failed to appear after being served with the ...