UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK
February 14, 2006
LOUIS VUITTON MALLETIER, CELINE S.A., CELINE INC., EMILIO PUCCI S.R.L., AND EMILIO PUCCI INTERNATIONAL B.V., PLAINTIFFS,
BARAMI ENTERPRISES, INC., RODEM, INC., HUI SOON CHOI, BEST PLAN INTERNATIONAL, LTD., NEWCOME TRADING, INC. D/B/A TOSCA, TIEN CHEUNG HONG TEXTILES LTD., VISION APPAREL, LLC, BARHAM HAKAKIAN, JANE DOE A/K/A MRS. HAKAKIAN, AND JOHN DOES 1-10, DEFENDANTS.
The opinion of the court was delivered by: Gabriel W. Gorenstein, United States Magistrate Judge
REPORT AND RECOMMENDATION
Luis Vuitton Malletier, et al., brought this action for (a) counterfeiting, trade dress and trademark infringement, and unfair competition in violation of the Lanham Act, 15 U.S.C. § 1051 et seq.; (b) trademark infringement and unfair competition under New York General Business Law §§ 360-1 and 349; (c) patent infringement under 35 U.S.C. § 271; and (d) copyright infringement in violation of the Copyright Act, 17 U.S.C. § 501. Plaintiffs have moved for a default judgment and inquest pursuant to Fed. R. Civ. P. 55(c). Defendants Barham Hakakian and his wife Mehrnaz Hakakian ("the Hakakians") oppose the motion for a default judgment, move to set aside the default pursuant to Fed. R. Civ. P. 55(c), or, in the alternative, move to vacate pursuant to Fed. R. Civ. P. 60(b) any default judgment that may have been entered. For the following reasons, the Hakakians' motion should be treated as a motion to set aside an entry of default under Fed. R. Civ. P. 55(c) and granted.
On February 23, 2004, plaintiffs filed the original complaint in this action, which named Barami Enterprises, Inc. ("Barami"), and other individuals and entities as defendants, though not the Hakakians. See Complaint and Jury Demand, filed Feb. 23, 2004 (Docket #1) ("Compl."). Barami is a New York corporation, which allegedly has not engaged in any active business since 2002. See Declaration of Kenneth R. Schachter in Support of Cross Motion ("Schachter Decl.") (annexed to Notice of Cross Motion, filed Nov. 11, 2005 (Docket #36) ("Cross Mot.")), ¶ 4. Mehrnaz Hakakian is a principal and officer in International Fashion Concepts, Inc. ("IFC"), a New York corporation that owns and operates a chain of women's apparel stores under the name Barami, which is a trademark that is owned by her husband, Barham Hakakian. Id. ¶ 6.
Plaintiffs sought and obtained an Order to Show Cause, which was signed by the Court on February 24, 2004. See Affidavit of Theodore C. Max in Further Support of Application for Default Judgment, filed Nov. 29, 2005 (Docket #42) ("Max Aff."), ¶ 6. The Order to Show Cause provided that Barami was to respond to plaintiffs' application for a temporary restraining order on or before February 26, 2004. See Order to Show Cause Bringing on Motion for Preliminary Injunction and Early Discovery, and Temporary Restraining Order, filed Feb. 25, 2004 (Docket #3), at 6. The defendants were temporarily enjoined from violating plaintiffs' rights under various laws, including trademark laws, and from destroying any business records or relevant evidence. Id. at 5. Upon learning of the lawsuit, Barham Hakakian contacted plaintiffs' counsel and advised him that there was only a small amount of goods involved, that Barami stores had ceased sales of the accused goods, that the accused merchandise at issue would be removed from the Barami stores, and that the accused merchandise at issue would not be sold in the future. See Schachter Decl. ¶ 4. Although Barami did not appear at the hearing on the Order to Show Cause, Barham Hakakian stipulated on behalf of Barami that Barami consented to the temporary restraining order being converted into a preliminary injunction "on the same terms and conditions, until the final trial on the merits." See Stipulation and Order, filed Feb. 27, 2004 (Docket #6); Max Aff. ¶ 7. The TRO was then converted into a preliminary injunction. Id. For the next several months, there were no filings or orders in the case. It is unclear whether any discussions occurred among the defendants, the Hakakians, or plaintiffs' counsel during that time.
In letters dated September 21 and 30, 2004, plaintiffs' counsel demanded that Barami cease and desist from any further infringing behavior. See Schachter Decl. ¶ 5. Upon receiving the cease and desist letters, the Hakakians claim they caused IFC to give instructions to its store managers to stop selling any additional merchandise that was allegedly infringing, and to return any such merchandise to IFC's suppliers to be destroyed. Id. ¶ 8. Barham Hakakian allegedly conducted an internal investigation to determine the quantity of the accused goods that had been sold and found that "between May 10 and May 18, 2004, IFC had purchased 120 accused dresses from its supplier," returned 117 dresses to its supplier, and 3 dresses were "sold for an aggregate of $480." Id.
After the investigation, Barham Hakakian was of the view that because the subject matter of the case involved a small amount of infringing goods, the Hakakians would minimize the cost and expense of litigation by retaining Kenneth Schachter as counsel "for the sole and narrow purpose of negotiating a settlement with plaintiffs." Schachter Decl. ¶ 11. On or about November 2, 2004, plaintiffs served discovery on Barami. Max Aff. ¶ 11. On November 29, 2004, Schachter initiated a telephone conversation with Theodore C. Max, plaintiffs' attorney, and advised Max that Barami was out of business, that IFC operated the Barami stores, and that IFC would be prepared to enter into an agreement enjoining the defendants from any future sale of the accused products and disgorge any profits earned from the allegedly infringing sales. Schachter Decl. ¶ 11. Schachter also promised to provide Max with documents relevant to plaintiffs' claims. Id. On December 3, 2004, Schachter sent a letter to Max providing sales documents relating to the accused products, and indicated the Hakakians' willingness to settle. Id. ¶ 12; Letter from Schachter to Max re: Barami, dated Dec. 3, 2004 (reproduced as Ex. 2 to Schachter Decl.). Max responded by demanding discovery from Barami and pointing out that Barami was risking a default, and Schachter replied by reiterating that he did not represent Barami but rather was counsel for the Hakakians. Max Aff. ¶¶ 12-13; Schachter Decl. ¶¶ 12-13; Letter from Max to Schachter, dated Dec. 9, 2004 (reproduced in Ex. 3 to Schachter Decl.); Letter from Schachter to Max, dated Dec. 10, 2004 (reproduced in Ex. 3 to Schachter Decl.). On December 13, 2004, Max wrote to Barham Hakakian and requested that he retain counsel for Barami and provide responses to discovery requests, or else Max would seek a default judgment against Barami. Letter from Max to Barham Hakakian, dated Dec. 13, 2004 (reproduced as Ex. I to Max Aff.). Schachter alleges that, over the course of the next several months, he "called Mr. Max in an effort to negotiate and provided Mr. Max with additional information." Schachter Decl. ¶ 14.
On April 18, 2005, plaintiffs filed an amended complaint that added the Hakakians as defendants. See Amended Complaint, filed Apr. 18, 2005 (Docket #19) ("Am. Compl."). The Hakakians were served with the Amended Complaint on May 4, 2005, see Affidavit of Service, filed May 12, 2005 (Docket ##21-22), and thus under Fed. R. Civ. P. 12(a) their answer was due on May 24, 2005. On May 10, 2005, Max e-mailed Schachter informing him that it was "imperative" that Barami retain counsel, provide full discovery --which he asserted had been "incomplete" -- and address the claims against it. E-mail from Max to Schachter, dated May 10, 2005 (reproduced in Ex. K to Max Aff.). Max also told Schachter that he was "not sure that it [was] appropriate . . . to discuss settlement" if Schachter had not yet been retained as counsel.
Id. Schachter responded with an e-mail informing Max that he had only been retained by Barham Hakakian to negotiate a settlement, and that "Mr. Hakakian will provide [Max] with all information [Max] require[s] and will agree to injunctive relief." E-mail from Schachter to Max, dated May 10, 2005 (reproduced in Ex. K to Max Aff.).
The parties disagree as to what occurred over the course of the next two weeks. Schachter claims he had several telephone conversations with Max in which the parties discussed settlement. Schachter Decl. ¶¶ 17-18. Max asserts that settlement "negotiations never progressed and Mr. Schacter [sic] was advised repeatedly that settlement was not forthcoming." Max Aff. ¶ 19. Max also states that he "made it clear to [Schachter] that settlement negotiations had not yielded a solution and that the Barami defendants needed to retain counsel, answer the Amended Complaint and respond to discovery." Max Aff. ¶ 20.
Schachter asserts that during this period Max agreed to extend defendants' time to answer the Amended Complaint. Schachter Decl. ¶ 18. Indeed, in an e-mail message to Max dated May 26, 2005, Schachter stated, "I am writing to confirm that in view of our discussions concerning settlement you have extended defendants time to answer the complaint." See E-mail from Schachter to Max, dated May 26, 2005 (reproduced as Ex. 5 to Schachter Decl.). Significantly, Max does not address this e-mail in the affidavit he submitted in response to the Hakakians' motion. The affidavit contends only that Schachter's "suggestion that there was an open-ended 'stipulation extending the Hakakian's [sic] time to answer' indefinitely is incorrect." Max Aff. ¶ 21 (quoting Schachter Decl. ¶ 20). No further explanation is given. Thus, it is undisputed that Max did not respond to the May 26 e-mail, although it is clear that e-mail was a means of communication that Max and Schachter had previously employed.
Schachter states that, following the May 26 e-mail, he made several calls and sent numerous e-mail messages to Max offering to settle the case and requesting counter-offers to his various settlement proposals. Schachter Decl. ¶ 19. The only copy of any such communication submitted to this Court is an e-mail dated August 8, 2005, in which Schachter provided additional information to Max regarding the address of a supplier, and in which he reiterated his request for a settlement demand. See E-mail from Schachter to Max, dated Aug. 8, 2005 (reproduced as Ex. 6 to Schachter Decl.). Schachter states that throughout the period between May and September 2005, Max never stated that an answer was required. Schachter Decl. ¶ 20.
On September 12, 2005, plaintiffs moved for entry of a default judgment against defendants Barami, Barham Hakakian, and Mehrnaz Hakakian, and an inquest. See Notice of Motion for Inquest and Default Judgment, filed Sept. 12, 2005 (Docket #25) ("Def. Mot."). Similar motions were made against the remaining defendants several days later. See Docket ##26, 28.
On September 22, 2005, Schachter wrote a letter requesting permission to interpose an answer. Judge Kaplan denied the request stating, "Counsel may make a motion for relief from the judgment." See Memorandum Endorsement, filed Sept. 27, 2005 (Docket #30). At the time of this ruling, however, there was no judgment entered against the Hakakians. Rather, the plaintiffs had submitted a Clerk's Certificate of Default as part of their motion papers seeking a default judgment. See Def. Mot., Exs. C, D; see also Local Civil Rule 55.2(b) (requiring submission of a Clerk's Certificate of Default in any motion for a default judgment). To date, there has been no default judgment entered against the Hakakians.
II. THE INSTANT MOTION
On November 11, 2005, Schachter filed a Notice of Appearance on behalf of the Hakakians (Docket ##34-35). That same day, the Hakakians filed the instant motion along with a memorandum of law in support.*fn1
On December 29, 2005, the parties appeared before the undersigned for oral argument. At the oral argument, the Hakakians were given the opportunity to submit additional evidence with respect to the issue of whether they had a meritorious defense, and plaintiffs were given an opportunity to respond. On January 19, 2006, the Hakakians each filed an affidavit. See Docket #48 ("Barham Aff."); Docket #49 ("Mehrnaz Aff."). In response, defendants submitted a letter brief attaching an affidavit. Letter from Theodore C. Max, dated Jan. 31, 2006 (Docket #51) ("Pl. Reply Letter"); Affidavit of Charles A. LeGrand in Further Support of Application for Default Judgment, filed Feb. 1, 2006 (Docket #50) ("LeGrand Reply Aff.").
In their motion, the Hakakian defendants seek an order (1) setting aside the entry of default against them, (2) "[d]enying plaintiffs' motion for default judgment and/or, to the extent judgment by default has been granted prior to the determination of this motion, setting aside any judgment by default that has been entered against" the Hakakians, pursuant to Fed. R. Civ. P. 55(c) and 60(b), (3) accepting as the answer of the Hakakians, the answer annexed to their Cross Motion as Exhibit 1, and (4) granting the costs and disbursements of the instant motion. See Cross Mot. at 1-2.
A. Applicable Law
The procedural steps contemplated by the Federal Rules of Civil Procedure following a defendant's failure to plead or defend as required by the Rules begin with the entry of a default by the clerk upon a plaintiff's request. Rule 55(a).
Then, pursuant to Rule 55(c), the defendant has an opportunity to seek to have the default set aside. If that motion is not made or is unsuccessful, and if no hearing is needed to ascertain damages, judgment by default may be entered by the court or, if the defendant has not appeared, by the clerk. Rule 55(b). Finally, Rule 55(c) authorizes a motion to set aside a default judgment pursuant to Rule 60(b).
See generally, 10 C. Wright & A. Miller, Federal Practice and Procedure: Civil ss 2681-2700 (1973).
Meehan v. Snow, 652 F.2d 274, 276 (2d Cir. 1981). Because no default judgment has been entered, the instant motion cannot be treated as one to vacate a default judgment pursuant to Fed. R. Civ. P. 60(b). While the docket sheet does not contain an actual entry reflecting the Hakakians' default, we view the Clerk's Certificates of Default (Exs. C, D to Def. Mot.) as equivalent to "an entry of default" within the meaning of Rule 55(c). In any event, both parties agree that the proper standard of review for the instant motion is the same as that for a motion to set aside an entry of default under Rule 55(c). See Def. Mem. at 6; Pl. Opp. Mem. at 5.
A court may set aside an entry of default for "good cause shown." Fed. R. Civ. P. 55(c). "Good cause" is assessed based upon the following three factors: (1) whether the default by defendants was willful; (2) whether setting aside the default would prejudice the non-defaulting party; and (3) whether the defaulting party has presented a meritorious defense. Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 96 (2d Cir. 1993); United We Stand America, Inc. v. United We Stand, America N.Y., Inc., 128 F.3d 86, 89 (2d Cir. 1997).*fn2 "Other relevant equitable factors may also be considered, for instance, whether the failure to follow a rule of procedure was a mistake made in good faith and whether the entry of default would bring about a harsh or unfair result." Enron, 10 F.3d at 96. Because there is a "preference for resolving disputes on the merits," doubts "should be resolved in favor of the defaulting party." Id. at 95, 96.
1. Willfulness of the Hakakians' Default
The Second Circuit has interpreted "willfulness" as being "more than merely negligent or careless." SEC v. McNulty, 137 F.3d 732, 738 (2d Cir. 1998) (citing cases). A default may be found to have been willful where the conduct of counsel or the litigant was "egregious and was not satisfactorily explained." See id. at 738 (citing American Alliance Insurance Co. v. Eagle Insurance Co., 92 F.3d 57, 60-61 (2d Cir. 1996)).
In this case, the Hakakians have pointed to evidence showing that they could have reasonably believed that settlement discussions had not terminated. See Schachter Decl. ¶ 19. Some courts have held that a reasonable belief that an action will settle supports a finding of a lack of "willfulness." See Gonzalez v. City of New York, 104 F. Supp. 2d 193, 196 (S.D.N.Y. 2000) ("Although the individual defendants should have answered despite the settlement negotiations, their failure to do so does not evince the type of bad faith which would warrant default judgments against them."); accord State Street Bank and Trust Co. v. Inversions Errazuriz Limitada, 246 F. Supp. 2d 231, 250 (S.D.N.Y. 2002) ("a good faith belief that an action will settle constitutes a reasonable basis for failing to interpose an answer") (citing Gonzalez). Other courts have criticized this view. See Int'l Painters and Allied Trades Union and Industry Pension Fund v. H.W. Ellis Painting Co., Inc., 288 F. Supp. 2d 22, 28 n.4 (D.D.C. 2003). It is not necessary to decide this narrow question, however, because the Hakakians' attorney, Schachter, specifically stated to Max in an e-mail his understanding that the plaintiffs had extended defendants time to answer. See E-mail from Schachter to Max, dated May 26, 2005 (reproduced as Ex. 5 to Schachter Decl.). It is undisputed that Max never responded to this e-mail, and Max has not offered any reason why Schachter did not reasonably believe that he could postpone filing an answer. Under these circumstances, the Hakakians have provided a "satisfactory explanation" for their behavior. See McNulty, 137 F.3d at 738. Certainly, plaintiffs have not shown that the Hakakians' failure to answer was "egregious" or otherwise "willful." See id.
2. Prejudice to Plaintiffs
The only argument that plaintiffs have made to support a finding of prejudice is that the delay in setting aside the default will result in an unspecified "loss of evidence" through the "dulling of memories." Pl. Opp. Mem. at 9-10. However, "delay alone is not a sufficient basis for establishing prejudice. Rather, it must be shown that delay will result in the loss of evidence, create increased difficulties of discovery, or provide greater opportunity for fraud and collusion." Davis v. Musler, 713 F.2d 907, 916 (2d Cir. 1983) (internal quotation marks and citations omitted). Plaintiffs here fail to point to any facts supporting the possibility that evidence has been lost or that discovery will be frustrated. Given the relatively short delay involved in this case, mere speculation on these points is insufficient to show prejudice.
3. Existence of a Meritorious Defense
"A defendant seeking to vacate an entry of default must present some evidence beyond conclusory denials to support his defense. The test of such a defense is measured not by whether there is a likelihood that it will carry the day, but whether the evidence submitted, if proven at trial, would constitute a complete defense." Enron, 10 F.3d at 98; see American Alliance, 92 F.3d at 61 ("A defense is meritorious if it is good at law so as to give the factfinder some determination to make.") (internal quotation marks and citation omitted).
Here, the Hakakians have submitted sworn affidavits stating that neither they nor IFC or its affiliates created or manufactured -- or had anything to do with the production of -- any of the accused goods. See Mehrnaz Aff. ¶ 4; Barham Aff. ¶ 3. The Hakakians also state that while they caused IFC to purchase the alleged goods, they had no knowledge of any infringements. Schachter Decl. ¶¶ 7-8; Mehrnaz Aff. ¶¶ 5-7; Barham Aff. ¶¶ 3-4. Furthermore, the Hakakians state they never authorized the sale of any infringing products in the stores and that they did not harbor any intention -- or know of any intention on the part of employees of IFC -- to infringe plaintiffs' trademarks or trade dress. Id.
Plaintiffs counter that the Hakakian defendants do not refute that they sold goods bearing plaintiffs' trademarks, and that such a failure "strongly suggests that the Hakakian Defendants knew or should have known that the accused infringing goods violated the rights of Louis Vuitton." Pl. Reply Letter at 2. However, the Hakakians are not obligated to prove that their defense will "carry the day." Enron, 10 F.3d at 98. See, e.g., Davis, 713 F.2d at 916 (defendant "need not conclusively establish the validity of the defense(s) asserted"). If the Hakakians prove that they were unaware of the infringements, then they will have a meritorious defense to plaintiffs' claims that the alleged infringing behavior constituted "willful and wanton" or "intentional" conduct. See, e.g., Am. Compl. ¶¶ 307, 407 & p. 114; see also 15 U.S.C. § 1125(c)(2); 15 U.S.C. § 1117(b). Given the "preference for resolving disputes on the merits," any doubts about the validity of the Hakakians defenses must be "resolved in favor of the defaulting party," Enron, 10 F.3d at 95, 96. The Hakakians "have made a sufficient showing at this juncture to justify further briefing and consideration by the district judge," Davis, 713 F.2d at 916, and thus this factor too weighs in their favor.
Because all three factors governing consideration of a motion to vacate an entry of default weigh in the Hakakians' favor, their motion to set aside the entry of default (Docket #36) should be granted. Plaintiffs' motion for a default judgment (Docket #25) should be denied except as to Barami Enterprises, Inc., which has not opposed the motion. The proposed answer submitted by the Hakakians (Exhibit 1 to Docket #36) should be deemed filed and the case should proceed as to the Hakakians. The Hakakians' request for "costs and disbursements of this motion," Cross Mot. ¶ (d), should be denied as there is no statutory or other basis for the award of such costs.
PROCEDURE FOR FILING OBJECTIONS TO THIS REPORT AND RECOMMENDATION
Pursuant to 28 U.S.C. § 636(b)(1) and Rule 72(b) of the Federal Rules of Civil Procedure, the parties have ten (10) days from service of this Report and Recommendation to serve and file any objections. See also Fed. R. Civ. P. 6(a), (e). Such objections (and any responses to objections) shall be filed with the Clerk of the Court, with copies sent to the Hon. Lewis A. Kaplan, 500 Pearl Street, New York, New York 10007, and to the undersigned at 40 Centre Street, New York, New York 10007. Any request for an extension of time to file objections must be directed to Judge Kaplan. If a party fails to file timely objections, that party will not be permitted to raise any objections to this Report and Recommendation on appeal. See Thomas v. Arn, 474 U.S. 140 (1985).
GABRIEL W. GORENSTEIN United States Magistrate Judge