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Elsevier, Inc. v. Grossman

United States District Court, Second Circuit

December 5, 2013

ELSEVIER, INC., Plaintiff,
PIERRE GROSSMAN, et al., Defendants.



On June 29, 2012, Plaintiff Elsevier, Inc. ("Plaintiff" or "Elsevier") initiated the instant action, alleging claims under 18 U.S.C. § 1962 and New York State law stemming from an alleged magazine subscription fraud perpetrated by Defendants Pierre Grossman ("Grossman"), IBIS Corp. ("IBIS"), Publicacoes Tecnicas Internacionais ("PTI"), and various "John Doe" Defendants (collectively, "Defendants"). Defendants Grossman, IBIS, and PTI acknowledged service on October 29, 2012, but failed to file an answer. Plaintiff obtained entries of default against Defendants Grossman, IBIS, and PTI, and now moves for default judgment against those Defendants. Defendants have cross-moved to vacate the entries of default. For the reasons discussed in the remainder of this Opinion, Defendants' motion is granted, Plaintiff's motion is denied, and Plaintiff is granted leave to replead.


A. Factual Background[1]

Plaintiff Elsevier is a Delaware corporation with a principal place of business in New York. (Compl. ¶ 6). Elsevier publishes scholarly books and journals related to natural and social sciences. ( Id. ). Defendant PTI is a corporation organized under the laws of Brazil, with a principal place of business in Brazil, and an office in Garden City, New York. ( Id. ¶ 7). Defendant IBIS is a corporation organized under the laws of Brazil, with a principal place of business in Brazil, and an office in Garden City, New York. ( Id. ¶ 8). Defendant Grossman is a citizen and resident of Brazil, and the Chief Executive Officer of PTI and IBIS. ( Id. ¶ 9). Plaintiff also brought claims against John Doe Nos. 1-50, who are described, in part, as relatives and/or business associates of PTI, IBIS, or Grossman. ( Id. ¶ 10).

1. Elsevier's Business Model

Elsevier publishes journals consisting primarily of peer-reviewed articles, which are written by scholars and often based upon original research. (Compl. ¶ 11). Elsevier is the sole source for new copies of its journals. ( Id. ¶ 14). Elsevier incurs substantial costs in copyediting, proofreading, typesetting, printing, binding, distributing, and marketing the journals, and in maintaining its editorial offices. ( Id. ¶ 12).

Elsevier sells its journals through annual subscriptions. (Compl. ¶ 13). Elsevier charges two different subscription rates: a full-price rate for institutions, and a discounted rate for individuals. ( Id. ). Elsevier does not permit individuals who purchase journals at the individual rate to then supply them to unidentified institutions for institutional use. ( Id. ¶ 15). To that end, orders placed at the individual rate are governed by contracts that prohibit the individual from ordering on behalf of another undisclosed party or to fulfill an order for an institution. ( Id. ).[2]

Elsevier sells subscriptions directly or through subscription agents. (Compl. ¶ 16). Subscription agents serve as intermediaries between individuals or institutions and Elsevier. ( Id. ). Elsevier relies upon the subscription agents to identify truthfully the type of submission they need, based on the customer's status as an individual or an institution. ( Id. ). Elsevier also provides its subscription agents with terms and conditions that require the agent to identify the end user of each journal. ( Id. ¶ 17).

Elsevier relies upon the income from the institutional subscriptions to make its journals economically feasible. (Compl. ¶ 13). As such, Elsevier suffers financial injury if it receives payment for institutional subscriptions at individual rates. ( Id. ¶ 18). A significant decline in income from its journals could cause Elsevier to stop publishing one or more journals, or publish less information in those journals. ( Id. ). Elsevier asserts that such consequences could adversely impact scholarship and scientific progress. ( Id. ).

Elsevier maintains records of each individual and institutional customer in order to provide customer support, pay royalties, and enhance its products for certain markets. (Compl. ¶ 14). According to Elsevier, the loss of customer information irreparably harms Elsevier. ( Id. ).

2. Defendants' Alleged Subscription Fraud

Elsevier alleges that Defendants engaged in a fraud by conspiring to purchase individual subscriptions from Elsevier at discounted rates and then resell those subscriptions to institutions at the higher rate, thereby reaping substantial illegal profits while depriving Elsevier of revenue and customer information. (Compl. ¶ 20). Specifically, Elsevier alleges that Grossman conspired with a group of coconspirators, identified in the Complaint as John Doe Nos. 1-50, who are relatives and/or business associates of Defendants PTI, IBIS, or Grossman (the "Subscribing Defendants"). ( Id. ¶¶ 10, 21). The Subscribing Defendants, who are from various states, subscribed to certain journals published by Elsevier at individual rates between 2003 and 2011. ( Id. ¶ 22). The Subscribing Defendants obtained the journals through the mail and interstate wires, and caused PTI and IBIS to resell them to institutions at substantially higher rates. ( Id. ). Grossman also resold the individual-rate journals to institutions at the institutional rate. ( Id. ¶ 23).

According to the Complaint, the Subscribing Defendants and Grossman placed orders for individual subscriptions using false names and/or addresses. (Compl. ¶ 24). The Subscribing Defendants and Grossman then sent journals to several common addresses, including addresses in Garden City, New York, and São Paolo, Brazil. ( Id. ¶ 25). Each of the Defendants shared in the profit from this scheme. ( Id. ¶ 26).

B. The Instant Action

Plaintiff filed the instant action on June 29, 2012. (Dkt. #1). On October 29, 2012, Defendants Grossman, IBIS, and PTI, through their counsel, executed a waiver of service stating that their answer was to be due on November 19, 2012. (Dkt. #5).[3] Defendants did not file an answer. On March 15, 2013, Plaintiff filed the acknowledgment of service (Dkt. #5) and requested that the Clerk of Court enter a default as to each Defendant (Dkt. #6, 7). The Clerk of Court entered a default as to Defendants Grossman, IBIS, and PTI on June 7, 2013 (Dkt. #8, 9, 10), and on June 24, 2013, this case was reassigned to the undersigned (Dkt. #11).

On June 30, 2013, Plaintiff filed an application for default judgment. (Dkt. #12, 14, 15). The Court issued an Order to Show Cause on July 30, 2013, requiring Defendants Grossman, IBIS, and PTI to show cause on August 30, 2013, as to why a default judgment should not be entered against them. (Dkt. #12). Defendants' counsel filed a response to the Order to Show Cause on August 23, 2013 (Dkt. #19, 20, 21), and appeared in this case for the first time on August 29, 2013 (Dkt. #23). Plaintiff filed a reply on August 30, 2013. (Dkt. #24, 25, 26).

At the show cause hearing held on August 30, 2013, the Court heard extensive argument from both parties regarding the entry of default judgment. Upon learning that the parties were amenable to settlement, the Court postponed its consideration of Plaintiff's motion for three weeks to allow the parties to engage in settlement discussions. (Aug. 30 Tr. 15-17). On September 18, 2013, the parties requested an extension of the time in which to engage in settlement discussions, which the Court extended to October 4, 2013. (Dkt. #27). On October 4, 2013, the parties notified the Court that they were unable to reach a settlement the case, and asked the Court to consider Plaintiff's pending motion. (Dkt. #28).


A. Applicable Law

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 and that fact is made to appear by affidavit or otherwise, the clerk shall enter the party's default." Fed.R.Civ.P. 55(a). When a party defaults, they are generally deemed to admit all well-pleaded claims, except for those dealing with damages. Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 108 (2d Cir. 1997) (holding that "[i]t is, of course, ancient learning that a default judgment deems all the well-pleaded allegations in the pleadings to be admitted" (citation omitted)). However, a plaintiff is not entitled to a default judgment as a matter of right simply because a party has defaulted. See Erwin DeMarino Trucking Co. v. Jackson, 838 F.Supp. 160, 162 (S.D.N.Y. 1993) (noting that courts must "supervise default judgments with extreme care to avoid miscarriages of justice"). To the contrary, because there is a "preference for resolving disputes on the merits, " any doubts "should be resolved in favor of the defaulting party." Powerserve Int'l, Inc. v. Lavi, 239 F.3d 508, 514 (2d Cir. 2001) (citing Enron Oil Corp. v. Diakuhara, 10 F.3d 90, 95, 96 (2d Cir. 1993)).

The Second Circuit has made clear that

It is an "ancient common law axiom" that a defendant who defaults thereby admits all "well-pleaded" factual allegations contained in the complaint. [ Vermont Teddy Bear Co. v. 1-800 Beargram Co., 373 F.3d 241, 246 (2d Cir. 2004)]. However, it is also true that a district court "need not agree that the alleged facts constitute a valid cause of action." [ Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981)]. Indeed, we have recently suggested that, prior to entering default judgment, a district court is "required to determine whether the [plaintiff's] allegations establish [the defendant's] liability as a matter of law." [ Finkel v. Romanowicz, 577 F.3d 79, 81 (2d Cir. 2009)].

City of New York v. Mickalis Pawn Shop, LLC, 645 F.3d 114, 137 (2d Cir. 2011). In other words, a default "only establishes a defendant's liability if those allegations are sufficient to state a cause of action against the defendant." Taizhou Zhongneng Imp. & Exp. Co. v. Koutsobinas, 509 F.App'x 54, 56 (2d Cir. 2013) (summary order).

Relatedly, while courts may find that factual allegations are not well-pled only in "very narrow, exceptional circumstances, " they are not similarly bound when analyzing the sufficiency of Plaintiff's allegations. Compare Trans World Airlines, Inc. v. Hughes, 308 F.Supp. 679, 683 (S.D.N.Y. 1969) ("[o]nly in very narrow, exceptional circumstances' may a court find a factual allegation not well pleaded'"), modified on other grounds, 449 F.2d 51 (2d Cir. 1971), rev'd on other grounds, 409 U.S. 363 (1973), with In re Wildlife Ctr., Inc., 102 B.R. 321, 325 (E.D.N.Y. 1989) ("[e]ven after default it remains for the court to consider whether the unchallenged facts constitute a legitimate cause of action, since a party in default does not admit mere conclusions of law" (citation omitted)); see also Gerritsen v. Glob Trading, Inc., No. 06 Civ. 3756 (SLT) (RLM), 2009 WL 262057 (E.D.N.Y. Feb. 4, 2009) (finding that a default judgment should not be entered on claims that were not well-pled); Am. Centennial Ins. Co. v. Seguros La Republica, S.A., No. 91 Civ. 1235 (MJL), 1996 WL 304436 (S.D.N.Y. June 5, 1996) (finding that "there must be a sufficient basis in the pleadings for the judgment entered" (citation omitted)).

B. Application

1. The Entries of Default Will Be Set Aside

Defendants have moved to set aside the Clerk's entries of default. A court may set aside an entry of default for "good cause." Fed.R.Civ.P. 55(c). "Three factors determine good cause: (1) whether the default was willful;

(2) whether the adversary has presented a meritorious defense; and (3) whether setting the default aside would prejudice the adversary." Loop Prod. v. Capital Connections LLC, 797 F.Supp.2d 338, 345-46 (S.D.N.Y. 2011) (citing Commercial Bank of Kuwait v. Rafidain Bank, 15 F.3d 238, 243 (2d Cir. 1994)).

i. The Default Was Willful

Turning to the first factor, Defendants argue that their conduct in defaulting was not egregious, and that their counsel acted promptly to set aside the entry of default upon learning of it. (Def. Opp. 6). "[W]illfulness requires something more than mere negligence, such as egregious or deliberate conduct, although the degree of negligence in precipitating a default is a relevant factor to be considered." Odfjell Seachem A/S v. Cont'l ...

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