The opinion of the court was delivered by: Spatt, District Judge.
On February 24, 2010, following a default by the Defendant Hobré Instruments BV ("Hobré"), United States Magistrate Judge Arlene R. Lindsay issued a Report and Recommendation finding that Cosa Instrument Corporation ("Cosa") and Xentaur Corporation ("Xentaur") (collectively "the Plaintiffs") were not entitled to the declaratory and injunctive relief or the attorneys' fees that they requested in connection with Hobré's default. Presently before the Court is the Plaintiffs' appeal of that Report. For the reasons set forth below, Judge Lindsay's Report is affirmed in part and reversed in part.
A. The Plaintiffs' Allegations
The Plaintiffs manufacture and service calorimeters, devices used to measure the energy content of a gaseous stream. Beginning in 2001, Cosa purchased from Hobré component parts that Cosa modified and used to construct a calorimeter product called COSA 9600. After a dispute with Hobré, Cosa decided to purchase the component parts from Xentaur in order to develop and market a new calorimeter under the COSA 9600 brand name.
In a letter to Cosa, dated October 8, 2008, Hobré's Chief Executive Officer Jeannot Kok claimed that in producing the COSA 9600, Cosa was exploiting confidential proprietary information that it had obtained from Hobré during the course of the companies' business relationship. Kok pointedly asserted that Cosa was infringing Hobré's various intellectual property rights because the COSA 9600 was "identical" to a calorimeter produced by Hobré. Pls. Complaint Ex. C. Kok warned that "[u]nless Cosa acknowledges within a reasonable period of ten business days... that it will cease the production of the COSA 9600... Hobré will seek legal remedies for infringement of its (intellectual) property rights." Id. In closing the letter, Kok noted that Hobré had already taken the step of notifying its attorneys about the matter.
Cosa's President, Christoph Mueller, responded to Kok's letter on November 13, 2008. In his letter, Mueller denied Kok's allegations and insisted that Hobré stop making damaging statements about Cosa to its customers. On December 18, 2008, Hobré's counsel, Kathryn J. Fritz, sent Mueller a letter designed to "apprise Cosa of its violations and to provide it an opportunity to address its wrongdoing." Pls. Com. Ex. C.
Fritz claimed that "at the very least," Cosa had engaged in unfair competition, trademark and trade dress infringement, and copyright infringement. Id. In addition, the letter demanded that Cosa: (1) cease manufacturing, marketing or distributing the COSA 9600 in the United States and around the world; (2) cease all use of Hobré's trademarks; (3) immediately return to Hobré all of Hobré's confidential and proprietary information; and (4) provide Hobré with an accounting of all sales of the COSA 9600. Id. Fritz requested that Cosa notify Hobré of whether it intended to comply with these demands by December 30, 2008 and threatened that anything but full compliance would leave Hobré with "no option but to take all steps necessary to protect its rights." Id. Fritz closed the letter by requesting that Cosa and Xentaur impose a litigation hold on any documents or materials relevant to the parties' dispute. Id.
On January 15, 2009, after settlement discussions broke down, the Plaintiffs commenced this lawsuit seeking a declaratory judgment that: (1) Hobré has no rights in the COSA 9600 trade dress, trademark, or copyright; (2) the COSA 9600 does not infringe upon Hobré's trade dress, trademarks, or copyrights; (3) Cosa has not engaged in unfair competition through the sale of the COSA 9600; and (4) Cosa did not misappropriate Hobré's trade secrets in developing and selling the COSA 9600. In addition to requesting an order enjoining Hobré from challenging their right to sell the COSA 9600, the Plaintiffs sought attorneys' fees under the Lanham Act, 15 U.S.C. § 1117(a)(3), and the Copyright Act, 17 U.S.C. § 505.
By May of 2009, it became clear that the parties could not reach a settlement. At this point, the Plaintiffs requested that Hobré, a Netherlands-based company, allow their American counsel to accept service of the Complaint in order to avoid the costly process of serving a foreign corporation. On June 2, 2009, Hobré advised Andrew I. Gerber, the Plaintiffs' counsel, that it would not allow its American counsel to accept service of the Complaint. On June 30, 2009, Hobré was served at their listed business address in the Netherlands.
Hobré never answered the Complaint. On July 24, 2009, Cosa moved for a default judgment. In an order dated August 28, 2009, the Court entered a default against Hobré and referred the matter to Judge Lindsay for the purpose of conducting an inquest as to damages. On January 7, 2010, Judge Lindsay issued an order deferring the damages inquest in order to give Hobré an opportunity to respond to the Plaintiffs' requests for relief.
On February 11, 2010, Hobré filed a "Memorandum of Law in Opposition to Plaintiffs' Motion for a Default Judgment". See Docket Entry 21. The memorandum of law was accompanied by a declaration from Kok in which he explained Hobré's default:
[d]ue to the expense of pursuing a lawsuit in the United States, and due to the fact that Hobré had developed its next generation of calorimeters, we decided to let our products battle in the competitive marketplace. After negotiations broke off in ...