United States District Court, D. Arizona
A. TEILBORG, SENIOR UNITED STATES DISTRICT JUDGE.
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.
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.)
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.
Motion to Set Aside Default
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)).
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
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)).
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).
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).
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 ...