Opinion
No. CV 01-3658 MJJ
October 7, 2003
ORDER GRANTING DEFAULT JUDGMENT AND PARTIALLY GRANTING PRAYER FOR DAMAGES
INTRODUCTION
Before the Court is the plaintiff, The Original San Francisco Toymakers' ("Plaintiff) Motion for Default Judgment and Prayer for Damages. Because Plaintiff has alleged a justifiable claim, an the defendant, Trendmasters ("Defendant") has failed to participate in the litigation for the past six months, has failed to secure replacement counsel, and failed to respond to the Court's Orders, Plaintiffs Motion for Default Judgment is hereby GRANTED. Further, as Plaintiffs request for damages is partially established by competent evidence, Plaintiffs Prayer for Damages is PARTIALLY GRANTED.
FACTUAL BACKGROUND
Plaintiff is in the business of developing, designing, manufacturing and marketing children's toys. (See First Amended Complaint ("FAC") ¶ 2.) Defendant distributes, markets, manufactures and sells children's toys at the wholesale level. ( Id. ¶ 1.) During 1998 to early 2000, Plaintiff developed "Autotech" toys, which consisted of miniature vehicles that transformed into robots. ( Id. 5.) In February 2000, Plaintiff showcased the initial Autotech product line at a trade show in New York City for the purpose of selling exclusive territorial licensing rights for Autotech to distributors in the United States and Canadian territories for the Fall 2001 sales season and future years. ( Id. ¶ 6.) Defendant viewed Plaintiffs exhibit at the trade show and expressed interest in securing for itself the exclusive rights for U.S. and Canadian distribution of the Autotech line. ( Id.)On or about February 18, 2000, Defendant and plaintiff reached an oral agreement on the material terms for the exclusive licensing of the Autotech line. ( See id. ¶ 9.) The present lawsuit, removed to this Court on September 27, 2001, concerns the alleged breach of that agreement. Defendant actively litigated its case, removing the case from state court, opposing Plaintiffs motion to remand, moving to dismiss the complaint, opposing Plaintiffs motion for leave to file an amended complaint, and attending all hearings and conferences.
However, all participation ceased after Defendant filed an answer to the First Amended Complaint, together with First Amended Counterclaims, on October 30, 2002. The first evidence of Defendant abandoning its role in the case is contained in the Declaration In Support of Motion to Withdraw as Attorney of Record filed by former defense counsel Dorsey Whitney LLP on December 15, 2002. Citing unpaid legal bills, evidence of Defendant's suspected bankruptcy, Defendant's failure to return calls or correspondence, and its refusal to cooperate in mounting a defense, Dorsey Whitney requested leave to withdraw as counsel for Defendant. ( See Declaration ISO Motion to Withdraw.) This motion was granted on January 17, 2003" subject to the condition that Dorsey Whitney continue to receive service of papers for Defendant until it appears with substitute counsel. (Order of January 17, 2003.)
Since this motion was granted, Defendant has failed to obtain new counsel, failed to file a settlement conference statement, and failed to attend the mandatory settlement conference before Magistrate Judge Zimmerman. ( See Declaration of Gerald M. Murphy ISO Motion to Strike and Motion to Enter Default Judgment ¶ 6.) This latter failure to appear prompted Judge Zimmerman to issue an Order to Show Cause. Not only did Defendant fail to respond to the Order, it also failed to attend the April 2, 2003 hearing on this Order. Finally, Defendant has failed to submit any opposition or statement of non-opposition to the motions presently before the Court.
Former counsel for Defendant has continued to receive service of papers for Defendant, but their efforts to forward these papers to Defendant have proven unsuccessful. (See Notice by Former Defense Counsel of Mailing Motion Papers to Defendant Trendmasters, Inc.; Notice of Returned Papers Served Upon Trendmasters, Inc.,) Similarly, the Court has had its mail addressed to Defendant returned by the post office as undelivered.
Defendant's failure to pursue the litigation prompted Plaintiff to file a motion to strike Defendant's answer and enter default judgment in favor of Plaintiff. The motion was filed on March 18, 2003, and as mentioned above, as of April 21, 2003, the Court received no opposition or statement of non-opposition from Defendant. The Court granted the motion to strike the Defendant's answer and ordered Plaintiff to submit evidence quantifying the prayer for damages.
ANALYSIS
I. Plaintiff Sufficiently Pled Valid Causes of Action for Purposes of Default Judgement
For the purposes of a default judgement, it is not necessary to take proof as to the liability of a defendant since by virtue of his default, the defendant is deemed to have admitted the truth of the well-pled allegations of the plaintiffs complaint. Alan Neuman Productions, Inc. v. Albright, 862 F.2d 1388, 1392 (9th Cir. 1988). However, the plaintiff must sufficiently allege a valid claim against the defendant. Id. (citing Nishimatsu Construction Co. v. Houston National Bank, 515 F.2d 1200 (5th Cir. 1975) ("facts which are not established by the pleadings of the prevailing party, or claims which are not well pleaded, are not binding and cannot support the judgement"). As the Court has already addressed the sufficiency of Plaintiff s Complaint to state a valid cause of action, the Court merely summarizes its January 1, 2002 Order Denying Motion to Dismiss.
A. Fraud and Negligent Misrepresentation
The first and second causes of action are for fraud and negligent misrepresentation. First, to establish a cause of action for fraud and/or deceit, Plaintiff must show: a) misrepresentation by false representation, concealment, or nondisclosure; b) knowledge of falsity; c) intent to deceive; d) justifiable reliance; and e) the resulting damage. Civil Code §§ 1709, 1710; City of Atascadero v. Merrill Lynch, Pierce, Fenner Smith, Inc., 68 Cal.App.4th 445, 482-483 (1998). Second, negligent misrepresentation is a "positive assertion in a manner not warranted by the information of the person making it, of that which is not true, though it is true." Civil Code § 1572(2); see also, 1 Witken, Summary of California Law (9th Ed. 1987); Contracts, § 395, p. 358. Here, Plaintiff alleges that Defendant intentionally refused to memorialize an agreement, though assuring the Plaintiff that it intended to do so. Plaintiff asserts that this was done in bad faith and with the desire to market Plaintiffs product, thereby making it nearly impossible for Plaintiff to negotiate with any other company. As a result, Plaintiff contends that Defendant created a situation where, Plaintiff, under duress, would be forced to sign whatever agreement Defendant desired. Plaintiff incurred damages when Defendant refused to perform, since Plaintiff was subsequently unable to distribute its product. ( See FAC ¶ 9-21, 34-36.) Thus, the Court concludes that Plaintiff has sufficiently pled a factual basis upon which a cause of action for fraud and deceit as well as negligent misrepresentation may lie.
B. Contractual Causes of Action: Breach of Oral Contract, Breach of Contract-Promissory Estoppel, Negligent Performance of a Contract, Breach of Contract to Negotiate.
The elements of an action for breach of contract are: a) the existence of a contract, b) Plaintiff's performance or excuse of nonperformance, c) Defendant's breach, and d) damage to Plaintiff. Cutting Fruit Packing Co. v. Cantry, 141 Cal. 692, 695 (Cal. 1904); Reichart v. General Ins. Co., 68 Cal.2d 822, 830 (1968). The Court concluded that this cause of action was also sufficiently pled. ( See Order Denying Defendant's Motion to Dismiss 8:15-17.) Here. Plaintiff argues that there was a contract between the parties, despite both parties' expectation that the agreement would eventually be expressed in writing; Plaintiff performed by allowing Defendant to exhibit its product and retooling its machinery; Defendant failed to perform by reneging on the contractual terms; and that Plaintiff was forced to incur damages as a result.
Further, even if no contract was consummated, Plaintiff asserts a claim for promissory estoppel. The elements of promissory estoppel are: 1) a clear and certain promise was made, 2) it was foreseeable that the promisee would rely on the promise, 3) the promisee reasonably relied on the promise, and 4) as a result the promisee was injured. Southern California Acoustics Co. v. C. V. Holder Inc., 71 Cal.2d 719, 723 (1978). Here, Plaintiff believed that it was already a party to an oral contract and relied on Defendant's representations that the reason a written agreement had not been signed was for internal reasons having nothing to do with the parties. Plaintiff also believed that an agreement would be signed soon, and asserts that it relied on these oral promises and was harmed thereby.
Additionally, negligent acts of performance may be alleged as a breach of a contract. LB Laboratories v. Mitchell, 39 Cal.2d 56, 59 (1952). Plaintiff argues that it performed under the contract by allowing Defendant to exhibit its line of toys, among other things. Defendant, however, exposed Plaintiffs products to the marketplace in an incompetent manner, which led Plaintiffs product to be "irreparably spoiled," further depriving Plaintiff of the use and benefit of the Autotech product line it created.
Lastly, California law expressly recognizes a cause of action for breach of an agreement to negotiate in good faith. Copeland v. Baskin Robbins U.S.A., 96 Cal.App.4th 1251 (2002). Here, Plaintiff asserts that it performed under this agreement by doing all of those things required by Defendant or otherwise necessary for the parties to reach a final written agreement. ( See FAC p. 23:17-24:9.) Plaintiff further asserts that Defendant began by performing but was in breach by concealing, at all times throughout the negotiation, that the Defendant meant to perform "due diligence" by exhibiting the product to see how well the industry responded, without being committed to an actual written contract. This was counter to the express will of Plaintiff and was a breach in bad faith of the contract to negotiate. This is because, while Defendant represented to Plaintiff that it fully intended to sign the contract as soon as possible, Plaintiff asserts that Defendant really intended to sign the contract only if the product line lived up to its due diligence requirements. (Id., p. 25:3-26:21) C. Interference with Prospective Economic Advantage.
The claims for interference with prospective economic advantage are: 1) an economic relationship between the plaintiff and some third party with the probability of future economic benefit to the plaintiff, 2) the Defendant's knowledge of the relationship, 3) intentional acts on the part of the defendant designed to disrupt the relationship, and 4) economic harm to the plaintiff proximately caused by the acts of the Defendant. LiMandri v. Judkins, 52 Cal.App.4th 326, 339 (1997). Additionally, a plaintiff must plead and prove that the defendant "engaged in conduct that was wrongful by some legal measure other than the fact of interference itself.' Id., at 340. Here, Plaintiff asserts that it had received serious inquiries from Spinmasters and several other toy companies. Plaintiff decided to break off negotiations with Spinmaster, however, based on Defendant's promises and representations. In addition, Plaintiffs complaint alleges that Defendant showed Plaintiffs product inappropriately, making it impossible for Plaintiff to continue negotiations with any other marketing agency. Thus, Plaintiff alleges that Defendant purposefully interfered with several economic relationships where Plaintiff had a probability of economic benefit, in order to gain bargaining advantage for the eventual agreement. Further, Plaintiff alleges that Defendant committed tortious conduct including fraud, negligence and violations of California Civil Code § 1710(1)-(4). Therefore, Plaintiff has sufficiently pled intentional and negligent interference with prospective economic advantage. ( See Order Denying Defendant's Motion to Dismiss 8:15-17.)
II. Default Judgment is Granted Due to Defendant's Failure to Participate in Litigation and In Light of the Strength of Plaintiffs Various Claims.
A Legal Standard
There is a two-step process to secure a default judgment pursuant to Federal Rule of Civil Procedure 55. Plaintiff must first seek an entry of default under Federal Rule of Civil Procedure 55(a). Under Rule 55(a), the Clerk may enter default "[w]hen a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend" the action. Once the default is entered, plaintiff may then seek a default judgment. See Fed.R.Civ.Proc. 55(b)(1) and (2). The decision of whether to grant or deny a request for default judgment lies within the sound discretion of the district court. See Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). In exercising its discretion, the district court is guided by consideration of the following factors:
(1) the possibility of prejudice to the plaintiff if relief is denied; (2) the substantive merits of plaintiffs claim; (3) the sufficiency of the complaint; (4) the sum of money at stake in the action; (5) the possibility of a dispute concerning material facts; (6) whether the default was due to excusable neglect; and (7) the strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits.Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1986).
"The general rule of law is that upon default the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true." Televideo Systems, Inc. v. Heidenthal, 826 F.2d 915, 917-18 (9th Cir. 1987) (per curiam) (quoting Geddes v. United Financial Group, 559 F.2d 557, 560 (9th Cir. 1977) (per curiam)). The entry of default judgment conclusively establishes the facts as to liability, but not damages. See Geddes v. United Fin. Group, 559 F.2d 557, 560 (9th Cir. 1977). Rule 55(b)(2) provides that "in order to enable the court to . . . determine the amount of damages or to . . . make an investigation of any other matter, the court may conduct such hearings or order such references as it deems necessary and proper. . . ." See Fed.R.Civ.P. 55(b)(2); Henry v. Sneiders, 490 F.2d 315, 318 (9th Cir. 1974). However, the court need not conduct such a hearing if damages can be easily ascertained. See Fustok v. Conti Commodity Servs., Inc., 873 F.2d 38, 40 (2d Cir. 1989).
B. Analysis
Plaintiff requests that the Court enter a default judgment and award damages against Defendant for failure to participate in the litigation. As discussed above, Defendant failed to appear at the settlement conference, failed to respond to Judge Zimmerman's Order to Show Cause, and failed to attend the hearing for the Order to Show Cause. In addition, since Defendant is a corporation, it must be represented by counsel to appear before this Court, and with the conditional grant of Dorsey Whitney's motion to withdraw as counsel of record, Defendant is currently unrepresented. As Defendant has not informed the Court that it has secured substituted counsel, nor given the Court any indication that it intends to acquire representation, it cannot even appear in further actions before this Court.
When considering entry of default judgment as a sanction for failure to participate in litigation, the Court must consider prejudice to the party requesting default. Stars' Desert Inn Hotel Country Club. Inc. v. Hwang, 105 F.3d 521, 524 (9th Cir. 1997). The record in the present case furnishes strong evidence that Defendants have not participated in the litigation in any way since November 2002, and there is no indication that this level of activity will change. Defendant's inaction has prevented Plaintiff from adjudicating its rights, and given the sum of money at stake, as well as the suggestion of Defendant's bankruptcy, further delay could seriously harm any possibility of recovery. ( See Declaration In Support of Motion to Withdraw as Attorney p. 2.)
Further, while there is a strong policy underlying the Federal Rules of Civil Procedure favoring decisions on the merits, here Plaintiffs complaint sufficiently asserts causes of action upon which recovery may be based. Additionally, the degree of likelihood of success on the merits is sufficient to award a Default Judgment where Defendant has failed to form a defense. This is even more the case since Defendant's Executive Vice President admitted to there at least being an agreement to negotiate. ( See Deposition of DeWayne Booker p. 111:2-4.)
Finally, lesser sanctions, such as Judge Zimmerman's Order to Show cause, have been attempted in this case, but have provoked no response from Defendant. The repeated failure of Defendant to attend hearings, the inability of its former defense counsel to serve papers upon it, and the undelivered mail returned to the Court, all inspire little confidence that Defendant's failure to form a defense is due to excusable neglect or that a sanction less than default judgment will have any effect. As such, award of default is appropriate.
III. Prayer for Damages
The Plaintiff asserts that it is owed $1,800,000.00 in damages. (Plaintiffs Offer of Proof 32:11.) This damage amount represents "a) the unpaid balance of the exclusive territory licensing fee of $650,000.00; b) $695,853.60 in lost future royalties; and c) $454,146.45 for the second year line extension costs incurred in reliance on Defendant's fraud and deceit." ( Id., 32:11-14.)
A. Exclusive Territorial Licensing Fee
Damages for equitable and promissory estoppel include specific performance, expectation damages and reliance damages. Swinerton Walberg Co. v. City of Inglewood-L.A. County Civic Center Authority, 40 Cal.App.3d 98, 105 (1940). Though there is some debate as to whether expectation or reliance damages are appropriate as damages for equitable estoppel on a contractual dispute, this remedy is appropriately "limited as justice requires." Id. (quoting 1A Corbin, Contracts (1963) § 200, p. 221.)
The first source of Plaintiff s damages are $650,000.00, which represents the balance of what Plaintiff would have received as a result of consummating an exclusive territory licensing agreement. This amount includes the fee of $750,000.00, minus $100,000.00 given by the Defendant to Plaintiff as a deposit (referred to as "earnest money"). (Plaintiffs Offer of Proof, p. 2:22-23, 6:5-6.) Plaintiff cites Defendant's internal email correspondence, email correspondence between the parties, and material offered at the deposition of DeWayne Booker as proof that $750,000.00 was the amount the parties agreed upon as the price of the exclusive territory licensing fee. ( See Plaintiffs Offer of Proof, Exhibits D and E, Defendant's emails dated 2/26/00-2/29/00; see also Deposition of DeWayne Booker, p. 103-04.) As the exclusive territory licensing fee represents monies that the Plaintiff would have received had the underlying contract been consummated, it is recoverable under the theories of equitable and promissory estoppel asserted in Plaintiffs Complaint. Plaintiff may therefore recover $650,000.00.
B. Lost Future Royalties
Plaintiff argues that the appropriate damages for the tort of interference with prospective economic advantage are those proximately caused thereby. (Plaintiffs First Amended Complaint, p. 20 ¶ 52. (quoting Civil Code § 3333) ("Damages for breach of an obligation not arising from the contract include `the amount which will compensate for all determinant proximately caused thereby, whether it should have been anticipated or not."). The second source of Plaintiff s prayed for damages are for "lost future royalties," in the amount of $695,853.60. These damages are recoverable under theories for negligent and intentional interference with prospective economic advantage, if the Plaintiff can prove this amount represents the economic harm proximately caused by acts of Defendant. Greyhound Exhibitgroup Inc. v. ELUL. Realty Corp., 973 F.2d 155, 159 (2nd Cir. 1992). Here, the amount of proposed damages is derived by taking a royalty rate of 6.5% (with a 5% adjustment allowable for sales discounts, returns and defectives), the agreed royalty rate paid on minimum sales of $9,000,000.00, and applying it to $10,705,440.00. (Beatty, Decl., May 6, 2003, ¶ 5.) This latter amount is what Plaintiff considers to be the net anticipated sales amount had the product not been `Irreparably spoiled" by Defendant's improper exhibition of Plaintiff s product at the July 2000 Hong Kong trade show. (Jodel Decl., May 6, 2003, ¶ 16.)
Though these damages may ultimately be capable of competent calculation, they can not be awarded to Plaintiff on this record. Plaintiffs only offer of proof of lost future royalties totaling $695,853.60 is based upon the personal opinion of Plaintiff s Chief Financial Officer, Thomas Beatty. Beatty asserts that $10,705,440.00 is the minimum reasonable projection of sales for a year one product launch for a product similar to Plaintiffs, comparably designed, manufactured, packaged, priced, and distributed. (Beatty Decl., May 6, 2003, ¶ 5.) His opinion, however, is based on "conversations with toy company executives and licensors," that this is a reasonable sales projection had Defendant performed. (Id.) Moreover, he relies upon his personal knowledge as to the "minimum reasonable projection of sales for a year one product launch," to support his opinion. However, Plaintiff produces no competent evidentiary support for the opinion of either the "toy company executives and licensors" or Beatty himself. Therefore, Plaintiff may not recover the $695,853.60 in lost royalties that they requested.
Plaintiff refers several times to Exhibit AA to the Offer of Proof as support for this aspect of damages. However, Exhibit AA is a chart of development costs, offering nothing in the way of proof of projected sales. Without more there is no way for the Court to know whether such projections are accurate.
C. Second Year Line Extension Costs
The appropriate remedy for a breach of an agreement to negotiate are those damages which the plaintiff incurred in reliance on the defendant to negotiate in accordance with the covenant of good faith and fair dealing implied in every contract. Copeland v. Baskin Robbins U.S.A., 96 Cal.App.4th 1251, 1263 (2002). This measure includes the "plaintiffs out of pocket costs in conducting the negotiations" but may not include "lost expectations (profits)." Id. Plaintiffs third source of damages is the cost of $454,146.45 in retooling fees, representing 50% of the total second year line extension costs of $908,292.91 incurred by Plaintiff. This is what Plaintiff asserts the parties agreed would be paid to the Plaintiff once sales volume reached $9,000,000.00. (Plaintiffs Offer of Proof, Exhibit T) Though, this claim for damages would have failed under a theory of lost expectation since Plaintiff failed to offer sufficient proof to establish the Plaintiff would have reached sales volume of $9,000,000.00, these costs are appropriate as damages under an agreement to negotiate theory as reliance costs. This is because these costs were incurred upon Defendant's request, prior to breach, and in reliance that the agreement would be conducted in good faith. (Plaintiffs' Offer of Proof 21:4-8.) Further, to the extent that Defendant's retooling of "the packaging of the Autotech products from Plaintiffs original design to a style of Defendant's choosing" represents a part of this cost, they are recoverable as reliance costs as well. Id.
Defendant cites the declaration of Thomas Beatty to establish that the amounts cited as costs are accurate. Thomas Beatty, the Chief Financial Officer of Plaintiff corporation, attests that this number represents the actual costs of retooling Plaintiffs facilities, for the second year line and was done upon the request of Defendant. In the Plaintiffs view, these costs were incurred consistent with the parties' contractual relationship. (Beatty Decl. p. ¶ 4). As proof of Plaintiff s costs Plaintiff offers a chart of the Autotech total development cost, detailing the exact amount spent on each facet of the product, for both year one and two. (Plaintiffs Offer of Proof, Exhibit AA.) These costs include the tooling costs as well as costs for research and development. Id. Plaintiff also offers a chart of its second year costs excluding those that, while included in Exhibit AA, were beyond the scope of the agreement between the parties. (Plaintiffs Offer of Proof, Exhibit BB.) Plaintiff may therefore recover $454,146.45 in retooling fees.
CONCLUSION
For the foregoing reasons, Plaintiffs motion for default judgment is GRANTED. Further, for the reasons stated above, Plaintiffs prayer for damages is GRANTED in part and DENIED in part. Plaintiff is awarded $650,000.00, for the balance of what Plaintiff would have received under an exclusive territory licensing agreement; and $454,146.45 in retooling fees. Therefore, Default damages of $1,104,146.40 are awarded. IT IS SO ORDERED.
JUDGMENT IN A CIVIL CASE
() Jury Verdict. This action came before the Court for a trial by jury. The issues have been tried and the jury has rendered its verdict.
(X) Decision by Court. This action came to trial or hearing before the Court. The issued have been tried or heard and a decision has been rendered.
IT IS SO ORDERED AND ADJUDGED
The Plaintiffs Motion for Default Judgment is granted and Plaintiffs prayer for damages is granted in part and denied in part.