Lakeview Cheese Company, LLC v Nelson-Ricks Creamery Co et al

Filing 31

ORDER granting 19 Motion to Set Aside Default. Defendants Answer is due on or before January 3, 2014. Signed by Judge Candy W. Dale. (klw)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF IDAHO

LAKEVIEW CHEESE COMPANY,
LLC, a Nevada corporation,
Plaintiff,

Case No. 4:13-cv-00361-CWD
MEMORANDUM DECISION AND
ORDER

v.
NELSON-RICKS CREAMERY
COMPANY, a Utah corporation;
NELSON-RICKS CHEESE
COMPANY, INC., an Idaho
corporation; and GREENBERG
CHEESE COMPANY, a California
corporation,
Defendant.

INTRODUCTION
The Court has before it Defendants’ Motion to Set Aside Clerk’s Entry of Default.
In the interest of avoiding delay and because the Court conclusively finds that the
decisional process would not be significantly aided by oral argument, the Court will
resolve the motion without a hearing. Dist. Idaho L. Rule 7.1.

MEMORANDUM DECISION AND ORDER - 1

Having carefully reviewed the record, the Court will grant Defendants’ motion to
set aside default. The Court will decline awarding attorney fees to Lakeview Cheese
Company, LLC, as a condition for doing so.
BACKGROUND
Plaintiff Lakeview Cheese Company, LLC (“Lakeview”) filed its complaint
against Defendants Nelson-Ricks Creamery Company, Nelson-Ricks Cheese Company,
Inc., and Greenberg Cheese Company (collectively, “Nelson-Ricks”) on August 15,
2013, alleging trademark violations. An answer was due on September 9, 2013.
According to the Complaint, Lakeview entered into an asset purchase agreement
with Nelson-Ricks Creamery Company in November of 2012, and the purchase included
federal trademark registrations for the mark BANQUET cheese. As a result, NelsonRicks Creamery Company could no longer sell BANQUET cheese or any other products
with the BANQUET mark. Lakeview contends that it later discovered sales of
BANQUET cheese by Nelson-Ricks Cheese, a joint venture between Nelson-Ricks
Creamery and Greenberg Cheese Company. Lakeview contends that the sale of products
by Nelson-Ricks Cheese with the BANQUET mark constitutes trademark infringement,
and it seeks damages under the Lanham Act, and for common law trademark
infringement as well as breach of contract.
Michael Greenberg is the president of Defendants Nelson-Ricks Cheese Company,
Inc. and Greenberg Cheese Company. He learned of Lakeview’s claims upon receipt of
the complaint filed in this matter. According to Mr. Greenberg, he spoke to Richard
Jackson, an attorney with Lakeview, and agreed to cease selling BANQUET labeled
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cheese, and represents that it was his understanding that no further action would be taken.
Aff. of Greenberg ¶4 (Dkt. 20.) An email sent by Mr. Jackson on August 26, 2013,
confirmed that Greenberg Cheese and Nelson-Ricks Cheese agreed to immediately stop
selling BANQUET labeled cheese, and that based upon that agreement, “Lakeview will
not pursue a temporary restraining order or preliminary injunction.” Aff. of Jackson Ex.
A, (Dkt. 13-1.) Mr. Jackson indicated a settlement agreement was forthcoming. Id.
According to Mr. Greenberg, based upon the agreement he had reached with Lakeview’s
attorney, Mr. Jackson, he did not retain counsel and it was his understanding that the only
settlement term was to stop selling BANQUET labeled cheese in exchange for resolution
of the lawsuit. Aff. of Greenberg ¶5 (Dkt. 20.)
Lakeview next requested an accounting of the sales of BANQUET labeled cheese
from Mr. Greenberg on September 9, 2013. Aff. of Jackson Ex. B, (Dkt. 13-2.) In
response to the request, Mr. Greenberg informed Lakeview: “That was not our deal,” and
indicated his companies had stopped selling the product. Aff. of Jackson Ex. C, (Dkt. 133.) On September 13, 2013, Mr. Jackson responded, indicating that the agreement
regarding injunctive relief did not affect resolution of other aspects of the case, such as
damages for the sale of infringing product, and again requested disclosure of the cheese
sales. Aff. Of Jackson Ex. D, (Dkt. 13-4.) Mr. Jackson informed Mr. Greenberg that, if
the information was not provided: “Lakeview has instructed us to pursue the litigation.”
Id. Additionally, Mr. Jackson noted that the complaint had not been answered, and that
Defendants were in default. Mr. Jackson stated the following:

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We have not granted you any extension to answer the complaint.
We have been laboring under the assumption that you would cooperate
with us to resolve the remaining portions of this dispute, given your
agreement to immediately cease and desist from using the Banquet
trademark in connection with your business. If your response is anything
other than an agreement with our approach by 12:00 pm (noon) Monday,
we will pursue all remedies, including default remedies.
Id.
Mr. Greenberg immediately responded to Mr. Jackson’s September 13, 2013
email, indicating that his companies had stopped selling the cheese, and he believed that
ended the disagreement. Id. Ex. E, (Dkt. 13-5.) More email exchanges ensued. Mr.
Jackson wrote on October 3, 2013, to confirm receipt of the information Lakeview had
requested, but again requested additional information, indicating otherwise Lakeview
would “proceed with the litigation.” Id. Ex. G, (Dkt. 13-7.)
One month later, on November 1, 2013, Lakeview filed its motion for entry of
default. (Dkt. 12.) The Clerk of the Court entered default on November 4, 2013, and
Lakeview confirmed it had notified the Nelson-Ricks Defendants in this matter of the
default on November 7, 2013. (Dkt. 14, 15.) On November 8, 2013, Nelson-Ricks
appeared in this matter through counsel, and filed the motion to set aside the default on
November 12, 2013. (Dkt. 16, 19.)
DISPOSITION
1.

Legal Standard
“The court may set aside an entry of default for good cause .... “ Fed. R. Civ. P.

55(c). The “good cause” standard that governs vacating an entry of default under Rule
55(c) is the same standard that governs vacating a default judgment under Rule 60(b). See
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TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001). The good
cause analysis considers three factors:
(1) whether Nelson-Ricks engaged in culpable conduct that led to the
default;
(2) whether Nelson-Ricks has a meritorious defense; or
(3) whether reopening the default judgment would prejudice Lakeview.
United States v. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091
(9th Cir. 2010) (citing Franchise Holding II, LLC v. Huntington Rests. Group, Inc., 375
F.3d 922, 925–26 (9th Cir. 2004)). As these factors are disjunctive, the district court may
deny the motion if any of the three factors are true. Am. Ass'n of Naturopathic Physicians
v. Hayhurst, 227 F.3d 1104, 1108 (9th Cir. 2000).
The party seeking relief from the entry of default bears the burden of showing that
these factors favor such relief. See Franchise Holding II, 375 F.3d at 926. In considering
these good cause factors, however, the United States Court of Appeals for the Ninth
Circuit instructs that the court is to be guided by the underlying policy concern that “
‘judgment by default is a drastic step appropriate only in extreme circumstances; a case
should, whenever possible, be decided on the merits.” Falk v. Allen, 739 F.2d 461, 463
(9th Cir.1984).
2.

Analysis
A.

Culpable Conduct

Nelson-Ricks contends its failure to answer the complaint was unintentional,
because they reasonably believed Lakeview’s claims had been resolved by Nelson-Ricks’
promise to stop selling BANQUET brand cheese in return for Lakeview’s agreement to
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not pursue a temporary restraining order or preliminary injunction, and had agreed on
those terms to send a settlement agreement concluding the litigation. Lakeview counters
that Nelson-Ricks, a sophisticated party, received notice of the action and, because of its
sophistication, the failure to answer is itself indicative of culpability. Alternatively,
Lakeview argues that Nelson-Ricks mislead Lakeview, and failed to provide requested
information knowing that, without providing it, Lakeview intended to pursue the
litigation.
Lakeview relies on this Court’s holding in Garner v. Wells Fargo Home Mortg.,
Inc., No. 1:10–CV–266–BLW, 2011 WL 2413841 (D. Idaho June 9, 2011), for its
contention that, because Nelson-Ricks is a legally sophisticated party, its failure to
answer, standing alone, constitutes culpability. But Garner’s holding is not so black and
white. In Garner, the plaintiff sued her former employer, Wells Fargo, for violations of
the Family Medical Leave Act. After several telephone conversations between the
lawyers for the parties, Wells Fargo never filed an answer, a notice of appearance, or
requested an extension of time to answer. Just prior to the hearing on Garner’s motion for
default judgment, Wells Fargo notifed the Court of its intent to file a motion to set aside
the Clerk’s Entry of Default.
The Court recognized there appeared to be two lines of cases in the Ninth Circuit
as to the correct standard for evaluating the “culpable conduct” factor for purposes of
setting aside a default. The TCI Group standard holds that “a defendant’s conduct is
culpable if he has received actual or constructive notice of the filing of the action and
intentionally failed to answer.” Garner, 2011 WL 2413841 at *2 (quoting TCI Group
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Life Ins. Plan v. Knoebber, 244 F.3d 691, 697 (9th Cir. 2001)). The Court explained that
TCI Group indicates that “[n]eglectful failure to answer as to which the defendant offers
a credible, good faith explanation negating any intention to take advantage of the
opposing party, interfere with judicial decisionmaking, or otherwise manipulate the legal
process” is not intentional and should not necessarily be considered culpable conduct.
Garner at *2 (quoting TCI Group, 244 F.3d at 697–98.) Rather, a defendant’s conduct
should be deemed culpable when “there is no explanation of the default inconsistent with
a devious, deliberate, willful, or bad faith failure to respond.” Garner at *2 (quoting TCI
Group at 698.)
The Court next explained that the second line of cases following Franchise
Holding II, LLC. v. Huntington Restaurants Group, Inc., 375 F.3d 922, 926 (9th Cir.
2004), suggests that, “if a defendant has received actual or constructive notice of an
action and fails to answer, this conduct alone is indicative of culpability.” Garner at *2.
But, the Court explained that, in U.S. v. Signed Personal Check No. 730 of Yubran S.
Mesle, 615 F.3d 1085 (9th Cir. 2010), the Ninth Circuit clarified the Franchise Holding
standard for culpability is “inappropriate where the defaulting party is not represented by
counsel or is otherwise not legally sophisticated.” Garner at *2 (citing Mesle, 615 F.3d at
1093). In other words, Mesle limited the application of the Franchise Holding standard,
and found that, with a sophisticated party, “an understanding of the consequences of its
actions may be assumed, and with it, intentionality.” Id.
Mesle further explained that, in this context, the term “intentionally” means that “a
movant cannot be treated as culpable simply for having made a conscious choice not to
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answer; rather, to treat a failure to answer as culpable, the movant must have acted with
bad faith, such as an ‘intention to take advantage of the opposing party, interfere with
judicial decisionmaking, or otherwise manipulate the legal process.’” Mesle, 615 F.3d at
1092. A defendant’s conduct is culpable for purposes of the good cause factors when
there is “no explanation of the default inconsistent with a devious, deliberate, willful, or
bad faith failure to respond.” Id. “Simple carelessness is not sufficient to treat a negligent
failure to reply as inexcusable, at least without a demonstration that other equitable
factors, such as prejudice, weigh heavily in favor of denial of the motion to set aside a
default.” Id. (citing TCI Group, 244 F.3d at 696–97 and Lemoge v. United States, 587
F.3d 1188, 1192 (9th Cir. 2009)).
While the Court in Garner considered Wells Fargo, who was represented by
counsel, to be a legally sophisticated entity, the Court declined to exercise its discretion
and assume Wells Fargo’s culpability based solely on its failure to answer. Garner at *3.
Instead, the Court considered the exchanges between counsel, and concluded that Wells
Fargo’s failure to answer resulted from mere negligence or inadvertence, rather than an
attempt to manipulate the legal process or take advantage of the plaintiff. Id. The Court
declined to find Wells Fargo’s conduct culpable. Id.
Unlike Wells Fargo, the Court declines to find Nelson-Ricks a legally
sophisticated entity. Based upon the email exchanges in the record, there is no indication
that Nelson-Ricks or Mr. Greenberg had access to “multiple in-house attorneys and . . .
outside counsel,” or otherwise “understood the dangers of failing to file an answer.”
Garner at *3. Nelson-Ricks was not acting through counsel when Mr. Greenberg, who
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does not appear to be an attorney, corresponded with Lakeview’s counsel, Mr. Jackson.
According to Mr. Greenberg, he believed the parties had settled the dispute between
them. Such an explanation is not consistent with a devious or deliberate bad faith failure
to respond, but is indicative instead of inadvertence or neglect. Upon receipt of the
Clerk’s Entry of Default, Nelson-Ricks promptly appeared through counsel, and sought
to set aside the default. Given the more lenient standard applied to Rule 55(c) motions in
which default judgment has not been entered, the Court does not believe that NelsonRick’s conduct should be considered culpable. See Garner at *3.
B.

Meritorious Defenses

A party seeking to vacate a default judgment must present specific facts that
would constitute a defense. But the burden on a party seeking to vacate a default
judgment is not extraordinarily heavy.” Mesle, 615 F.3d 1094 (quoting TCI Group, 244
F.3d at 700). Rather, the defendant satisfies the meritorious defense requirement if it
alleges sufficient facts that, if true, would constitute a defense. Id. Whether or not those
allegations are true is not determined by the court upon the motion to set aside the
default, but would be the subject of later litigation. Id.
Nelson Ricks satisfies the meritorious defense requirements. Nelson Ricks
indicates it intends to rely upon its good faith belief that Lakeview’s claims against it had
been settled in return for its promise to discontinue selling BANQUET labeled cheese.
Further, Nelson Ricks argues that any damages Lakeview suffered are unliquidated and
subject to proof. Nelson Ricks does not appear to deny that it was selling BANQUET
labeled cheese prior to August 26, 2013. Lakeview considers Nelson-Rick’s arguments to
MEMORANDUM DECISION AND ORDER - 9

be without merit, arguing that Nelson-Ricks has not proven its defenses, and that its
defenses do not go to the merits of Lakeview’s claims.
Although Nelson-Ricks apparently does not deny that it was selling BANQUET
labeled cheese prior to August 26, 2013, it correctly points out that Lakeview must still
prove its damages related to the infringement, an essential element of its claims against
Nelson-Ricks. Further, if there was indeed an enforceable agreement between the parties
to settle the matter, or estoppel applies, Lakeview may be precluded from seeking
damages for its claims. It is not for the Court to decide these issues now, however. 1
Suffice it to say that the facts as alleged, if true, would constitute a defense. Accordingly,
this factor supports setting aside the default.
C.

Prejudice to Plaintiff

“To be prejudicial, the setting aside of a judgment must result in greater harm than
simply delaying resolution of the case” or “being forced to litigate on the merits.” TCI
Group, 244 F.3d at 701; accord Mesle, 615 F.3d 1094. Rather, “[t]he standard is whether
[the plaintiff’s] ability to pursue his claim will be hindered.” Falk, 739 F.2d at 463.
Lakeview asserts that it has suffered prejudice because its ability to timely
discover the nature and extent of Nelson-Rick’s misconduct has been thwarted, and it has
now lost “several weeks” of opportunity. Lakeview’s argument is weak, at best, and
constitutes the sort of minimal delay to resolution of the case that does not rise to the
level of prejudice. The Complaint was filed on August 15, 2013, and an answer was due

1

The parties argue extensively about the facts and the merits of Nelson-Rick’s defenses. However, in the context of
this motion, the Court does not reach the merits of Nelson-Rick’s defenses.

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September 9, 2013. The delay at issue is three months, during which time the parties were
discussing possible settlement of the matter. Lakeview has not identified the type of
prejudice that its ability to pursue its claim will be impacted. Rather, the Court can
immediately set a scheduling conference, and put this matter on track in an expeditious
manner.
Moreover, default judgment has not been entered, and Lakeview would be
required to proceed to hearing in any event to establish its claims and the amount of
damages before it could obtain a default judgment. Fed. R. Civ. P. 55(b)(2). For these
reasons, the Court does not find that the relatively short delay would prejudice Lakeview.
Nelson-Ricks offers an additional argument that Lakeview’s counsel is
disqualified, because of Mr. Jackson’s letters to Mr. Greenberg. The Court declines to
consider Nelson-Rick’s argument at this time, as a proper motion for disqualification is
not before the Court. Further, the alleged “prejudice” to Defendants by Mr. Jackson’s
continued representation of Lakeview is not the type of prejudice the Court considers in
the context of the pending motion.
D.

Attorney Fees

Lakeview argues that the Court should condition the setting aside of the default
upon Nelson Rick’s payment of Lakeview’s attorneys’ fees and costs incurred in
obtaining the default and responding to Nelson-Rick’s motion. Nelson-Ricks did not
respond to Lakeview’s argument that attorney fees and costs should be awarded.
The decision to award fees and costs is discretionary. Nilsson, Robbins, Dalgarn,
Berliner, Carson & Wurst v. Louisiana Hydrolec, 854 F.2d 1538, 1546–47 (9th Cir.
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1988) (approving conditioning of vacating default judgment on defendant’s payment of
plaintiff’s attorneys’ fees); Garner at *6-7; See also Eagle Rock Sanitation, Inc. v.
Jefferson County, No. 4:12–cv–00100–EJL–CWD, Order November 9, 2012 (Dkt. 17)
(awarding a flat fee of $1,000 against Defendants for Plaintiffs’ counsel’s preparation of
the motion for entry of default and for its response to the motion to set aside the clerk’s
entry of default). The ability to impose a reasonable condition, such as payment of
attorney fees, allows the Court to balance any undue prejudice to the moving party
against the Court’s preference for resolving disputes on the merits. Pall Corp. v. Entegris,
Inc., 249 F.R.D. 48, 52 (E.D.N.Y. Feb. 13, 2008).
Here, only two months elapsed between the time the Answer was due and the
motion for entry of default was granted. In less than two weeks after the Clerk’s entry of
default, Defendants appeared and moved to set it aside. During the time elapsed, it
appears from the record that the parties were engaged in settlement discussions. The facts
here do not suggest the exercise of the Court’s discretion in favor of awarding fees and
costs. While the Court does not condone Nelson-Rick’s carelessness, Mr. Greenberg was
not an attorney, and was not represented by an attorney. And, the case had not progressed
to the point that default judgment was being sought, as in Garner, nor had Mr. Greenberg
engaged in carelessness like counsel for the county in Eagle Rock, who simply
miscalendared the deadline and had no acceptable excuse. The Court therefore finds that
an award of attorneys’ fees and costs is not warranted under the circumstances.

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CONCLUSION
Based upon the above, the Court concludes that Defendants meet the standard for
setting aside the Clerk’s Entry of Default. The Clerk’s entry of default will be vacated,
and the parties shall each bear their own costs and attorney fees. 2
ORDER
NOW THEREFORE IT IS HEREBY ORDERED:
1) Defendants’ Motion to Set Aside Default (Dkt. 19) is GRANTED.
2) Defendants’ Answer is due on or before January 3, 2014.

December 13, 2013

2

After Defendants filed the motion to set aside default, Lakeview filed a notice of voluntary dismissal of Defendant
Nelson-Ricks Creamery Company. Accordingly, this Order applies to the remaining Defendants, Nelson-Ricks
Cheese Company, Inc., and Greenberg Cheese Company, Inc. The use of the moniker “Nelson-Ricks,” as stated in
the introduction, was meant to apply to all Defendants.

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