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Nutrition Distribution LLC v. Black Diamond Supplements LLC

United States District Court, D. Arizona

March 1, 2018

Nutrition Distribution LLC, Plaintiff,
v.
Black Diamond Supplements LLC, et al., Defendants.

          ORDER

          JAMES A. TEILBORG, SENIOR UNITED STATES DISTRICT JUDGE.

         Pending before the Court are Defendant Black Diamond Supplements, LLC's and Defendant Supplement Fusion, LLC's (together, “Defendants”) Motion to Set Aside Entry of Default (Doc. 17) and Defendants' Motion to Quash Subpoena Duces Tecum (“Motion to Quash, ” Doc. 18), both filed on December 18, 2017. Plaintiff Nutrition Distribution, LLC (“Plaintiff”) filed timely Responses (Doc. 19; Doc. 20) on January 2, 2018. Defendants then filed Replies (Doc. 21; Doc. 22) on January 12, 2018. The Court now rules on the motions.

         I. Background

         On June 16, 2017, Plaintiff brought suit against Defendants under the Lanham Act (15 U.S.C. § 1125(a)(1)(B)) alleging that Defendants made misleading advertising claims regarding the safety of Defendants' products containing the ingredient 1, 3-dimethlamylamine, methlehexanamine (“DMAA”). (See Doc. 1). Defendants were both served on or about June 20, 2017. (Doc. 10; Doc. 11; see also Doc. 17 at 3). That same day, Defendants' principal, Brian Gamaly, contacted their DMAA vendor, Hi Tech Pharmaceuticals (“Hi Tech”), writing: “I know Hi Tech backs the retailers so I wanted to ensure you guys will cover me in this lawsuit or what's the best way to go about it.” (Doc. 17 at 3, 11). The next day, an agent of Hi Tech replied: “Anything relating to our products in this suit, consider taken care of.” (Id. at 3, 11) Defendants maintain that they interpreted this email to mean that Hi Tech would proceed with this case and that Defendants no longer needed to be involved. (Id. at 3). Defendants further claim that they received no further documents or correspondence regarding the lawsuit in the following months. (Id.)

         On August 4, 2017, Plaintiff filed an Application for Entry of Default (Doc. 12) due to Defendants' failure to appear or otherwise respond to the complaint. The Court entered default against Defendants on August 7, 2017. (Doc. 13). On August 31, 2017, the Court granted Plaintiff leave to conduct discovery on the issue of damages. (Doc. 20 at 2). Defendants assert that they first discovered the existence of the judgment against them on November 20, 2017, when JP Morgan Chase Bank notified Defendants that it received a subpoena duces tecum pertaining to the lawsuit. (Doc. 17 at 3). Defendants then hired legal counsel to address this matter. (Id. at 4). The date of compliance listed on the subpoena was November 29, 2017. (Doc. 18 at 7). On December 15, 2017, JP Morgan Chase Bank produced Defendants' records as requested in the subpoena. (Doc. 20 at 2). On December 18, 2017, Defendants filed the pending motions in this Court to set aside the default judgment and quash the subpoena duces tecum. (See id. (citing Doc. 17; Doc. 18)).

         II. Motion to Set Aside Default

         A. Legal Standard

         The Court may set aside an entry of default for good cause. Fed.R.Civ.P. 55(c). The Court considers three factors to determine if good cause exists to set aside an entry of default: (1) whether the movant engaged in “culpable” conduct; (2) whether a meritorious defense exists; and (3) whether setting aside the default judgment would prejudice the other party. United States v. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010). “The party seeking to vacate a default judgment bears the burden of demonstrating that these factors favor vacating the judgment.” TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001), overruled on other grounds by Egelhoff v. Egelhoff ex rel. Breiner, 532 U.S. 141 (2001). “[D]efault judgments are ordinarily disfavored. Cases should be decided upon their merits whenever reasonably possible.” New Gen, LLC v. Safe Cig, LLC, 840 F.3d 606, 616 (9th Cir. 2016) (quoting Eitel v. McCool, 782 F.2d 1470, 1472 (9th Cir. 1986)).

         1.Culpable Conduct

         Failure to answer may be “culpable conduct” if the defendant acted intentionally. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d at 1092. The term intentionally, in the context of default judgment, requires that the movant act with bad faith, “such as an intention to take advantage of the opposing party, interfere with judicial decisionmaking or otherwise manipulate the legal process.” Id. (internal quotation marks and citation omitted); see also TCI Grp. Life Ins. Plan, 244 F.3d at 697-98 (9th Cir. 2001) (“Neglectful failure to answer as to which the defendant offers a credible, good faith explanation . . . is not ‘intentional' . . . and is therefore not necessarily-although it certainly may be, once the equitable factors are considered-culpable or inexcusable.”).

         Here, the facts do not suggest that Defendants possessed the requisite bad faith necessary for the Court to conclude that they acted culpably by failing to answer the cause of action. After being served by Plaintiff, Defendants relied on their vendor's statement that “[a]nything relating to our products in this suit, consider taken care of.” (Doc. 17 at 4). After this discussion, Defendants provide that they did not receive copies of several documents in this case, including the Application for Entry of Default. (Id. at 3). On November 20, 2017, when Defendants learned that the lawsuit had not been “taken care of, ” as promised by the vendor, Defendants promptly hired counsel and addressed the lawsuit. (Id. at 4). None of these facts show “an intention to take advantage of the opposing party, interfere with judicial decision making, or otherwise manipulate the legal process.” Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d at 1091 (reasoning that courts will only find conduct culpable for the purpose of the good cause factors “where there is no explanation of the default inconsistent with a devious, deliberate, willful, or bad faith failure to respond” (internal citation omitted)).

         Plaintiff does not dispute these facts, but instead raises a legal argument on this prong. (See Doc. 19 at 4). Namely, Plaintiff argues that failing “to file an answer despite receiving actual notice is considered culpable conduct as a matter of law.” (Doc. 19 at 4). Plaintiff further argues that a court need not conclude that Defendants acted in bad faith in order to find their conduct culpable. (Id.) This argument overstates the rule in the Ninth Circuit. First, whether a defendant was properly served and failed to respond to the complaint is not necessarily dispositive. See NewGen, LLC, 840 F.3d at 616 (reasoning that even if a defendant was properly served and ignored the deadline to respond, it may still have a good faith explanation to absolve it of conduct that otherwise appears to be of bad faith).

         Plaintiff continues that “if a defendant has received actual or constructive notice of an action and fails to answer, this conduct alone is indicative of culpability.” See, e.g., Franchise Holding II, LLC v. Huntington Restaurants Grp., Inc., 375 F.3d 922, 926 (9th Cir. 2004). But, the Franchise Holding rule only applies to “legally sophisticated” defendants and should not be applied when the defaulting party was not represented by counsel at the time. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d at 1093 (“When considering a legally sophisticated party's culpability in a default, an understanding of the consequences of its actions may be assumed, and with it, intentionality, ” but when the party “is not a lawyer and [was] unrepresented at the time of the default; accordingly, the proper standard to apply [is] that of TCI Group”); see also Lakeview Cheese Co. v. Nelson-Ricks Creamery Co., 296 F.R.D. 649, 653 (D. Idaho 2013) (reasoning that the application of the Franchise Holding standard is limited to sophisticated parties).

         Here, Defendants were not represented by counsel until after they received notice of their default. (See Doc. 17 at 4). Additionally, Defendants email correspondence with their vendor demonstrates that Defendants lacked the necessary sophistication for the Court to impute intentionality to their failure to respond to Plaintiff's compliant. (See id. at 3, 11). As such, the Franchise Holding standard does not apply to Defendants under these facts. Moreover, even if Franchise Holding did apply, the Court still finds that Defendants offer a “credible, good faith explanation, ” negating any allegations of a “bad faith intention to take advantage of the opposing party, interfere with judicial decisionmaking, or otherwise ...


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