Artec Group, Inc. v. Klimov, an Individual et al

Filing 327

ORDER by Judge Edward M. Chen Granting 320 Defendant's Motion to Vacate Default. (emcsec, COURT STAFF) (Filed on 9/15/2017) (Additional attachment(s) added on 9/15/2017: # 1 Certificate/Proof of Service) (emcsec, COURT STAFF).

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 7 ARTEC GROUP, INC., 8 Plaintiff, ORDER GRANTING DEFENDANT’S MOTION TO VACATE DEFAULT v. 9 10 ANDREY KLIMOV, et al., Docket No. 320 Defendants. 11 12 For the Northern District of California United States District Court Case No. 15-cv-03449-EMC 13 Plaintiff Artec Group, Inc. is a company that produces 3D scanning and 3D facial 14 recognition devices. Its flagship facial recognition product is the “Broadway 3D” line of devices. 15 Artec filed the instant action, claiming that its trade secrets were misappropriated by its then-CEO 16 Andrey Klimov and a group of “rogue employees” who set up two competing companies, A-Star, 17 LLC and ID-Wise SIA. Artec also filed suit against Axon Business Systems, LLC, a company 18 with whom it had, for a period of time, a distribution agreement pursuant. Under that agreement, 19 Axon, a UAE company, could resell Artec products in the UAE. According to Artec, Axon 20 breached the distribution agreement (1) when it purchased Broadway 3D devices from A-Star and 21 (2) when it purchased competing devices – known as “EnterFace” – from ID-Wise. Currently pending before the Court is Axon‟s motion to set aside its default. Having 22 23 considered the parties‟ briefs and accompanying submissions,1 as well as all other evidence of 24 record, the Court remains of the view that oral argument on the motion is not necessary. 25 hearing on the motion is therefore VACATED. Axon‟s motion to set aside the default is hereby 26 GRANTED. The 27 1 28 The Court is in receipt of Defendant Axon‟s motion for permission to file its Reply, Docket No. 326. The motion is DENIED as moot. I. 1 2 A. DISCUSSION Legal Standard Under Federal Rule of Civil Procedure 55(c), a “court may set aside an entry of default for 3 4 good cause.” Fed. R. Civ. P. 55(c). “To determine „good cause,‟ a court must „consider[ ] three 5 factors: (1) whether [the party seeking to set aside the default] engaged in culpable conduct that 6 led to the default; (2) whether [it] had [no] meritorious defense; or (3) whether reopening the 7 default judgment would prejudice‟ the other party.” United States v. Signed Pers. Check No. 730, 8 615 F.3d 1085, 1091 (9th Cir. 2010). The moving party has “the burden of showing that any of 9 these factors favor[s] setting aside the default.” Franchise Holding II, Ltd. Liab. Co. v. are disjunctive, [a] district court [is] free to deny the motion [to set aside the default] „if any of the 12 For the Northern District of California Huntington Rests. Grp., Inc., 375 F.3d 922, 926 (9th Cir. 2004). On the other hand, as the “factors 11 United States District Court 10 three factors [is] true.‟” Id.; see also Livingston v., Inc., No. 13-cv-03748-JSC, 2015 U.S. 13 Dist. LEXIS 92211, at *7 (N.D. Cal. Apr. 17, 2015) (“Put another way, the defendant must show 14 that „any of these factors favor[s] setting aside the default,‟ and the default may stand if any of the 15 three factors weighs against Defendant.”). 16 B. 17 Culpable Conduct In assessing whether a defendant has engaged in culpable conduct, a court cannot treat a 18 defendant “as culpable simply for having made a conscious choice not to answer [or litigate]; 19 rather, . . . the [defendant] must have acted with bad faith, such as an „intention to take advantage 20 of the opposing party, interfere with judicial decisionmaking, or otherwise manipulate the legal 21 process.‟” Signed Personal Check, 615 F.3d at 1092. The Ninth Circuit has “„typically held that a 22 defendant‟s conduct was culpable . . . where there is no explanation of the default inconsistent 23 with a devious, deliberate, willful or bad faith failure to respond [or litigate].‟” Id. 24 25 26 27 28 In its papers, Artec argues that Axon has engaged in culpable conduct because it mounted a vigorous defense when pursuing its arguments that it should not be a party to this litigation. But once it had exhausted these arguments [via its motion to dismiss for lack of personal jurisdiction and motion to dismiss for failure to state a claim for relief] and was faced with Artec‟s legitimate claims against it and the relevant discovery, Axon claimed to no longer be able to afford U.S. litigation. 2 1 Opp‟n at 3. Artec continues: The bad faith of [Axon‟s] conduct became apparent later when, within days of the completion of discovery in the case, Axon‟s counsel again re-appeared in order to represent Axon at the settlement conference in August – which they were allowed to do even though other individual defendants were ordered to appear in person – and then to take up again Axon‟s claims of lack of personal jurisdiction. 2 3 4 5 6 Opp‟n at 4. The Court declines to find that Axon engaged in culpable conduct for purposes of the 7 8 pending motion. It was not unreasonable for Axon to conclude that it was no longer financially 9 worthwhile to defend the lawsuit, but to still try to contest the default judgment motion which could render it financially liable and to still try to settle the dispute. 11 C. 12 For the Northern District of California United States District Court 10 Prejudice to Artec “[M]erely being forced to litigate on the merits cannot be considered prejudicial” for 13 purposes of setting aside a default. TCI Grp. Life Ins. Plan v. Knoebber, 244 F.3d 691, 701 (9th 14 Cir. 2001) (adding that it is “obvious” why – “had there been no default, the plaintiff would of 15 course have had to litigate the merits of the case, incurring the costs of doing so”; “[a] default 16 judgment gives the plaintiff something of a windfall,” and “vacating the default judgment merely 17 restores the parties to an even footing in the litigation”). Moreover, “„[t]o be prejudicial, the 18 setting aside of a [default] must result in greater harm than simply delaying resolution of the 19 case.‟” Signed Personal Check, 615 F.3d at 1095. “Rather, „the standard is whether [the 20 plaintiff‟s] ability to pursue his claim will be hindered‟” – e.g., the delay results in “„tangible harm 21 such as loss of evidence, increased difficulties of discovery, or greater opportunity for fraud or 22 collusion.‟” TCI, 244 F.3d at 701. 23 In its papers, Artec does not do much to address the prejudice prong. It simply states that 24 it “is prejudiced by the repeated delays in this case, which will necessarily diminish witnesses‟ 25 memories of the incidents occurring in 2012 to 2015 that comprise the claims against Axon.” 26 Opp‟n at 5. But the delays in this case are not entirely attributable to Axon. In any event, Artec‟s 27 argument of prejudice is fairly conclusory. Artec fails to specify which witnesses will be impacted 28 and why. 3 1 D. Meritorious Defense 2 The “meritorious defense” factor does not impose an “„extraordinarily heavy‟” burden on 3 the party moving to set aside the default.” Signed Personal Check, 615 F.3d at 1094. “All that is 4 necessary . . . is [that the moving party] allege sufficient facts that, it true, would constitute a 5 defense.” Id. (adding that “„the question whether the factual allegation [i]s true‟ is not to be 6 determined by the court when it decides the motion to set aside the default[;] [r]ather, that question 7 „would be the subject of the later litigation‟”). In its motion, Axon argues that it has multiple meritorious defenses. The main defense 8 9 invoked by Axon is lack of personal jurisdiction. However, Axon also argues that, even if there were personal jurisdiction, the “fleshing out” of Artec‟s claims through its motion for default 11 judgment establishes the lack of merit to Artec‟s case. 12 For the Northern District of California United States District Court 10 1. Personal Jurisdiction 13 In assessing Axon‟s personal jurisdiction defense, the Court must first take into account 14 that, previously (in May 2016), Judge Whyte denied Axon‟s motion to dismiss for lack of personal 15 jurisdiction. See Docket No. 104 (order). Given that Judge Whyte‟s ruling is the law of the case, 16 then, arguably, the Court should not now entertain Axon‟s personal jurisdiction defense – 17 especially since (1) Axon has not asked for an evidentiary hearing on personal jurisdiction,2 and 18 (2) Axon has not formally moved for reconsideration of Judge Whyte‟s decision. It makes little 19 sense, however, to take that approach because, effectively, Axon is indicating that it wants 20 reconsideration of Judge Whyte‟s decision, particularly in light of a Supreme Court decision that 21 2 22 23 24 25 26 27 28 Because Judge Whyte considered written materials only in conjunction with Axon‟s motion to dismiss for personal jurisdiction, Artec simply had to make a prima facie showing of personal jurisdiction in order to defeat the motion. See Data Disc, Inc. v. Sys. Tech. Assocs., Inc., 557 F.2d 1280, 1285 (9th Cir. 1977) (stating that where a court “receive[s] only affidavits or affidavits plus discovery materials” in conjunction with a motion to dismiss for lack of personal jurisdiction, a plaintiff “must make only a prima facie showing of jurisdictional facts through the submitted materials in order to avoid a defendant‟s motion to dismiss”). This would not appear to preclude Axon from asking for a full evidentiary hearing on personal jurisdiction, at which time Artec would have to prove such by a preponderance of the evidence. See id. (noting that, if a plaintiff makes a prima facie showing, “it does not necessarily mean that [the plaintiff] may then go to trial on the merits”; “the district court has the discretion to take evidence at a preliminary hearing in order to resolve the contested issues,” and, “[i]n this situation, where plaintiff is put to his full proof, plaintiff must establish the jurisdictional facts by a preponderance of the evidence, just as he would have to do at trial”). 4 1 was issued approximately a year after Judge Whyte‟s ruling. See Bristol-Myers Squibb Co. v. 2 Superior Court, 137 S. Ct. 1773 (2017).3 See Civ. L.R. 7-9(b)(2) (providing that, in filing a 3 motion for leave to file a motion for reconsideration, a party must show, e.g., “[t]he emergence of 4 new material facts or a change of law occurring after the time of such order”). The Court acknowledges Artec‟s position that Bristol-Myers is not a change of law and 5 6 that, in any event, the case is distinguishable from the instant case. Nevertheless, the Court is 7 persuaded that Bristol-Myers sheds additional light on the law on personal jurisdiction such that it 8 would be a sufficient basis to allow Axon to move to reconsider (although the Court expresses no 9 opinion as to how it would ultimately rule on such a motion). Because personal jurisdiction is an 10 issue that may be revisited, the meritorious defense factor (a low threshold) is satisfied. 2. 12 For the Northern District of California United States District Court 11 Breach of Contract Furthermore, even if personal jurisdiction could not be contested, the Court would still find 13 the meritorious defense factor satisfied. Following the Court‟s 12(b)(6) order, only contract and 14 related claims remain in this case. The contract provisions at issue are §§ 2.9, 2.11, and 7.5 of the 15 distribution agreement. With respect to § 2.9 (which barred Axon from distributing competitive products and 16 17 imposed an obligation on Axon to keep Artec informed of sales of competitive products), there is 18 a serious question as to whether it survived termination of the distribution agreement. Although § 19 7.2 of the distribution agreement provides that “[t]he restrictions on the use and dissemination of 20 Confidential Information stated in Section[] . . . 2.9 shall survive termination,” Dist. Agmt. § 7.2, 21 the provisions of § 2.9 that were allegedly breached do not appear to be related to the use and 22 dissemination of Confidential Information.4 Moreover, even if § 2.9 did survive termination, there 23 3 24 25 26 Bristol-Myers was decided on June 19, 2017. This was after not only Judge Whyte‟s personal jurisdiction order, see Docket No. 104 (order, filed on May 5, 2016), but also this Court‟s 12(b)(6) order. See Docket No. 154 (order, filed on December 8, 2016). This was also after this Court‟s order giving final approval to defense counsel‟s motion to withdraw. See Docket No. 254 (order, filed on May 19, 2017). 4 27 28 To the extent Artec tries to argue survival based on a different theory – namely, renewal of the distribution agreement by virtue of continued dealings between Artec and Axon – that argument is potentially problematic for several reasons. First, that is not the theory of survival that Artec pled in its complaint. Second, that position goes directly against § 7.1 of the agreement which provides 5 1 is a serious question as to whether it is, at least in part, an impermissible restraint on trade under 2 California Business & Professions Code § 16600. The Court‟s 12(b)(6) order did not foreclose the 3 § 16600 defense and, based on Artec‟s motion for default judgment, which sheds light on the 4 factual basis for the claim of breach based on § 2.9, there is a fair argument that the defense is 5 applicable. 6 With respect to § 2.11 (which imposes an obligation on Axon to notify Artec of misuse of 7 Artec‟s intellectual property rights), there are also potentially meritorious defenses. For example, 8 it is not clear that, at the time Axon entered into the purchase agreement with A-Star for the 9 Broadway 3D devices, it knew or should have known that A-Star was not authorized to sell EnterFace product used Artec trade secrets or simply was a rebranding of stolen Broadway 3D 12 For the Northern District of California Broadway 3D devices. Also, it is not clear that Axon knew or should have known that ID-Wise‟s 11 United States District Court 10 devices. In the absence of such actual or constructive knowledge, Axon‟s duty to notify might not 13 be triggered. 14 Finally, as to § 7.5 (which provides that, upon termination of the distribution agreement, 15 Axon shall cease all use of the Artec marks), there seem to be serious questions on the merits as 16 well. In its motion for default judgment, Artec indicates that, post-termination of the agreement, it 17 and Axon continued to deal with one another and Axon continued to distribute Artec product. 18 Thus, liability for a breach of § 7.5 would seem to depend on there being an unauthorized use of 19 the Artec marks by Axon. As noted above, it is not clear that, at the time Axon entered into the 20 purchase agreement with A-Star for the Broadway 3D devices, it knew or should have known that 21 A-Star was not authorized to sell Broadway 3D devices. 22 23 24 25 II. CONCLUSION Taking into account the above three factors, the Court concludes that there is good cause to set aside Axon‟s default. Axon‟s motion is therefore granted. The Court shall hold a status conference to address how best to proceed in light of the 26 27 28 that “renewal must be acknowledged in writing by ARTEC and [Axon].” Dist. Agmt. § 7.1 (emphasis added). Finally, continued dealings between Artec and Axon does not necessarily mean that all terms of the distribution agreement were thereby adopted by the parties. 6 1 Court‟s ruling. Artec and Axon are required to appear for the status conference. This includes 2 counsel for Axon who asked for permission to file an opposition to Artec‟s motion for default 3 judgment and who filed the motion to set aside the default. In light of their pending settlement 4 with Artec, the Klimov Defendants may appear at the status conference (including telephonically) 5 but are not required to do so. 6 7 8 The status conference shall be held on September 28, 2017, at 10:30 a.m. A joint status conference statement shall be filed by September 21, 2017. This order disposes of Docket No. 320. 9 10 IT IS SO ORDERED. 12 For the Northern District of California United States District Court 11 13 14 Dated: September 15, 2017 ______________________________________ EDWARD M. CHEN United States District Judge 15 16 17 18 19 20 21 22 23 24 25 26 27 28 7

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