Opinion
Civil Action No. 96-2507.
October 4, 1996
MEMORANDUM AND ORDER
Pursuant to plaintiff's motion, the court entered a default judgment against defendant A H Company on May 13, 1996. A H Company filed a motion to open the default judgment on August 2, 1996 and plaintiff has filed a response thereto. For the reasons set forth below, the court will deny defendant's motion.
BACKGROUND
Plaintiff, Angelo Brothers Company ("Angelo"), is in the business of distributing and selling decorative light bulbs under the trade name "ABCO." In or about 1979, Angelo engaged a Chinese manufacturing firm to produce light bulbs under the ABCO trade name. Angelo demanded that the light bulbs be produced in accordance with its strict quality control standards. While the initial shipments of these bulbs were satisfactory, at some point Angelo discovered significant problems with the bulbs being produced by the foreign manufacturer. Specifically, the cement used on the base of the bulbs to attach the glass to the base was so inferior that the glass would separate from the base when lit. Besides the obvious risk to its reputation from such an inferior product being distributed under the ABCO trade name, Angelo claims that the light bulbs as manufactured posed serious health risks to consumers from shattering glass, burns or electrocution. Angelo specifically rejected the shipment of defective bulbs from the Chinese manufacturer, and received assurances that the defective products would be destroyed.
Some time in March of 1996, Angelo was advised by one of its customers in Pennsylvania that it had purchased defective decorative light bulbs bearing the ABCO trade name from defendant A H Company ("A H"). Upon inspection, Angelo discovered that these were the same defective light bulbs which it had rejected from the Chinese manufacturer. Although it is unclear exactly how the light bulbs that were to have been destroyed made their way into the United States, A H had apparently purchased the bulbs from defendant SIG Import and Export ("SIG"), unaware of their defective condition.
Apparently the parties have been unable to find defendant SIG. The court, however, does not understand A H's argument that it will be prejudiced should the court refuse to open the default judgment because A H wishes to file a cross claim against defendant SIG. Defendant A H's liability is not dependent upon the liability of SIG, see infra, and plaintiff is entitled to recover from A H regardless of whether A H may be entitled to indemnity or contribution from SIG. If A H wishes to file a claim against SIG for indemnity, the court's resolution of this motion will not affect that right.
Angelo immediately contacted A H by a letter dated March 18, 1996, to inform it that the light bulbs it had sold to the Pennsylvania customer under the ABCO trade name had been rejected by Angelo, and were therefore not authorized to be sold under the ABCO trademark. Angelo demanded that A H immediately stop selling the defective bulbs and hold them for destruction. It further demanded the names of the supplier of the bulbs and the customers to whom A H had sold the bulbs. When Angelo's demands were not met, it filed a complaint in this court on March 27, 1996 alleging violations of the Lanham Act for trade name and trade dress infringement. See 15 U.S.C. § 1114 (1), 1125(a). Despite valid service of the complaint upon A H, repeated correspondence from Angelo that it intended to go forward with the suit, and a temporary restraining order issued by this court, A H never filed an answer to plaintiff's complaint. The court entered judgment on the default on May 13, 1996. It was not until August 2, 1996 that A H filed this motion to lift the default judgment.
Although A H seems to allege that it did not receive valid service of process because the complaint was served upon an employee "whom was not authorized to accept service," Def.'s Mot. to Open Default at ¶ 2, defendant does not address the issue in its memorandum of law. Defendant's bare allegation of improper service is not particularly helpful at this stage of the proceedings. In any event, the court notes that Fed.R.Civ.P. 4(e)(1) allows service of process on foreign defendants pursuant to the law of the state in which the district court is located. From the record before the court, it appears service was properly effectuated under Pa. R. Civ. P. 404 and 422.
DISCUSSION
Fed.R.Civ.P. 60(b) governs the setting aside of a default judgment.See Fed.R.Civ.P. 55(c). Our Court of Appeals has set out four factors which must be considered by a district court in exercising its discretion under Rule 60(b): (1) whether lifting the default would prejudice the plaintiff; (2) whether the defendant has a prima facie meritorious defense; (3) whether the defaulting defendant's conduct is excusable or culpable; and (4) the effectiveness of alternative sanctions. Emcasco Ins. Co. v. Sambrick, 834 F.2d 71, 73 (3d Cir. 1987). While the decision to open a default judgment is committed to the discretion of the trial court, see Harad v. Aetna Casualty and Surety Co., 839 F.2d 979, 982 (3d Cir. 1988), the Court of Appeals "does not favor default judgments and in a close case, doubts should be resolved in favor of setting aside the default and reaching the merits." Zawadski de Bueno v. Bueno Castro, 822 F.2d 416 (3d Cir. 1987). After weighing the equities in this case, and with special consideration to defendant's failure to articulate a meritorious defense, see United States v. $55.518.05 in U.S. Currency, 728 F.2d 192, 195 (3d Cir. 1984), the court is convinced that there is no reason justifying relief from the operation of this judgment. Fed.R.Civ.P. 60(b).
A. Prejudice to the Plaintiff
The first factor to be considered is the prejudice which may inure to Angelo should the default judgment be lifted. Angelo claims it will be prejudiced by any delay in receiving compensation, because it will make it more difficult to collect as A H may hide assets or become insolvent. There is no support in the record for this argument. The only real claim of prejudice seems to be that Angelo would be forced to litigate the matter and would be delayed in receiving compensation for its injury.
"Prejudice exists if circumstances have changed since entry of the default such that plaintiff's ability to litigate its claim is now impaired in some material way or if relevant evidence has become lost or unavailable." Accu-Weather. Inc. v. Reuters, Ltd., 779 F. Supp. 801, 802 (M.D. Pa. 1991). Mere delay in realizing the satisfaction of a default judgment is not sufficient prejudice to prevent the opening of a default judgment. See Emcasco, 834 F.2d at 74. The court therefore finds that no substantial prejudice would inure to Angelo by opening the default judgment. "The lack of prejudice, however, is not, by itself, sufficient to warrant the setting aside of the default." Billy Steinberg Music v. Bonin, 129 F.R.D. 488, 489 (M.D. Pa. 1990).
B. Culpability of Defendant
In order for defendant's conduct to be considered "culpable," defendant's conduct must surpass mere negligence. Willful, intentional, reckless or bad faith conduct is required. See Momah v. Albert Einstein Med. Ctr., 161 F.R.D. 304, 308 (E.D. Pa. 1995). "Moreover, the court is also required to consider the extent to which the error is attributable exclusively to defendant's counsel." Id.
Defendant A H argues that its conduct was not in bad faith. According to an affidavit filed by A H's president, Soleyman Neydavoud, defendant's delay in responding to the complaint was due to two factors. First, Neydavoud claims that Angelo's counsel, Edward J. Hayes, assured him that no complaint would be filed if Angelo's demands were met. See Aff. of Soleyman Neydavoud at ¶¶ 11-14. A H allegedly relied on these assurances, believed that a settlement had been or would be reached, and therefore thought it unnecessary to answer the complaint. Second, Neydavoud claims that they had difficulty finding local counsel in Pennsylvania to respond to the complaint. See id. at ¶¶ 18-20.
Neydavoud's first contention is simply not supported by the record. As demonstrated by the correspondence attached to plaintiff's memorandum of law, Attorney Hayes repeatedly informed A H that it considered the infringement a serious matter and intended to pursue it. A H also proffers no evidence that Angelo's demands were ever met. Indeed, to this day it is unclear exactly what has happened to the shipment of defective light bulbs. Because it did not meet the conditions of Angelo's demands, defendant could not have any reasonable expectation that plaintiff would forego legal action. Further, even if some sort of understanding was reached between the parties regarding the conditions that must be met before a complaint would be filed, it was abundantly clear that Angelo did not consider those conditions to be met when it filed the complaint, pursued and obtained a temporary restraining order, sought entry of default, and sought and obtained entry of judgment on that default. In attorney in Pennsylvania which made it impossible for it to effectively contest the action. At the outset, the court notes its skepticism as to this claim. If defendant had in fact used due diligence from the time the complaint was filed, it should not have been difficult to find a competent lawyer in the entire state of Pennsylvania to enter an appearance. Even assuming that A H was unable to locate a lawyer in Philadelphia until it hired its present counsel, however, defendant has still exhibited bad faith in pursuing this action.
As noted, defendant did not even seek California counsel until the default judgment was entered on May 13, 1996. Id. Although it is not clear exactly when A H retained its present counsel, Omid Niknam, Esq., plaintiff claims to have sent Niknam the pleadings in this matter on June 6, 1996. At the very latest, it is clear that A H had obtained Pennsylvania counsel by June 24, 1996, as Niknam made an appearance before this court on that date. Federal Rule of Civil Procedure 12(a) provides: "Unless a different time is prescribed in a statute of the United States, a defendant shall serve an answer within 20 days after being served with the summons and complaint." Fed.R.Civ.P. 12(a). While the time for filing an answer expired in mid-April, the court notes that even after retaining Pennsylvania counsel, defendant waited almost two months to finally enter this motion to open default (far beyond the 20 days normally accorded to lodge a response to a complaint), and to this date, defendant still has not filed a proposed answer. In view of the fact that defendant is generally given only 20 days to enter a response to a complaint, the court finds defendant's contention that it has filed its motion to open default in a timely manner, four and one half months after the complaint was served and two and one half months after the entry of default judgment, to be disingenuous. See Dorwood, 110 F.R.D. at 94; Fed.R.Civ.P. 60(b). The court therefore finds the untimely response and unreasonable delay by defendant in filing this motion to be further evidence of culpable conduct.
C. Availability of Alternative Sanctions
This court is mindful of the Court of Appeal's admonition that default judgment should be a sanction of "last, not first, resort." Emcasco, 834 F.2d at 75. Indeed, Angelo has not exercised the sort of "flagrant bad faith," id., that would by itself lead the court to believe that default judgment is an appropriate sanction. If defendant had a valid defense, the court would be inclined to find an alternative sanction with which to punish defendant's conduct. However, considering defendant's complete failure to articulate any meritorious defense, the court believes refusing to open the default judgment is appropriate in this circumstance.
D. Defendant Has Not Demonstrated A Meritorious Defense
The most important factor for the court to consider is, of course, whether defendant has advanced a meritorious defense. There would be little point in vacating the default judgment if A H would not have any chance of success at trial. See $55,518.05 in U.S. Currency, 728 F.2d at 195. "The showing of a meritorious defense is accomplished when "allegations of defendant's answer, if established at trial, would constitute a complete defense to the action.'" Id. (quoting Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 244 (3d Cir. 1951)). While a defendant "is not required to prove beyond the shadow of a doubt that it will win at trial," Accu-Weather, 779 F. Supp. at 803, the defendant must "raise specific facts beyond a general denial so that [the court] has some basis for determining whether the defendant can make out a complete defense." Momah, 161 F.R.D. at 307.
It is difficult to determine whether the allegations in defendant's answer would constitute a valid defense at trial in light of the fact that defendant has not filed an answer. Nevertheless, the court will examine the allegations contained in defendant's motion to open the default as though it were an answer to the complaint. of course, defendant is still required to set forth these facts with some degree of specificity.
Plaintiff's claims are based on Sections 32 and 43(a) of the Lanham Act. See 15 U.S.C. § 1114(1), 1125(a). The purpose of the Lanham Act is to protect the trademark holder and the general public from misleading uses of a trademark. See Cottman Transmission Sys., Inc. v. Melody, 851 F. Supp. 660, 672 (E.D. Pa. 1994). Generally, in order to recover under the Lanham Act, a plaintiff is required to show that the use of a valid trademark is likely to create confusion concerning the origin of the goods or services and that the use of the trademark is unauthorized. S R Corp. v. Jiffy Lube Int'l. Inc., 968 F.2d 371, 375 (3d Cir. 1992). The sale of goods bearing a "genuine" mark will generally not violate the Lanham Act even if the sale is not authorized. See NEC Electronics v. CAL Circuit ABCO, 810 F.2d 1506, 1509 (9th Cir. 1987), cert. denied, 484 U.S. 851 (1987).
It appears to be undisputed that Angelo has a valid trade mark in the name ABCO and a valid trade dress in the packaging of its product. Plaintiff argues that it produces a high quality good; a high standard that the public has come to expect of the ABCO name. According to plaintiff, the connection between its trade name and packaging and the defective light bulbs which defendant sold to the public is likely to cause confusion in the public by associating the high quality reputation of the ABCO trademark with the inferior quality of the Chinese manufactured goods. Angelo further argues that the use of its trade name and dress in this case is unauthorized, as it never approved the use of its name on the defective product produced by the Chinese manufacturer and the mark of the goods sold by defendant is therefore not genuine.
Plaintiff finds considerable support for its position in the case of El Greco Leather Prod. Co., Inc. v. Shoe World, 806 F.2d 392 (2d Cir. 1986), cert. denied, 484 U.S. 817 (1987). In that case, the plaintiff, El Greco, had contracted with a Brazilian shoe factory to manufacturer shoes under its trade name, "CANDIES'." See id. at 393. El Greco soon became dissatisfied with the Brazilian manufacturer, and cancelled its order, citing production delays. See id. at 394. Despite the cancellation, the Brazilian factory apparently continued production of the shoes, and eventually sold them to an intermediary in the United States, who then sold them to defendant Shoe World. See id. When Shoe World resold the shoes, El Greco brought suit under the Lanham Act. See id.
The Court of Appeals for the Second Circuit reversed the district court's dismissal of the complaint and found a violation of the Act. The court reasoned that "[o]ne of the most valuable and important protections afforded by the Lanham Act is the right to control the quality of the goods manufactured and sold under the holder's trademark." Id. at 395.Accord Weil Ceramics and Glass, Inc. v. Dash, 878 F.2d 659, 668 n. 11 (3d Cir. 1989) (dicta), cert. denied, 493 U.S. 853 (1989). Accordingly, no trademark can be truly genuine unless the trademark holder approves the distribution of the goods after inspecting their quality. See id. "For this purpose, the actual quality of the goods is irrelevant; it is the control of quality that a provide a defense. As theEl Greco court held:
Defendant attempts to distinguish El Greco on the ground that it is not an opinion of the United States Court of Appeals for the Third Circuit and is therefore not binding on this court. Contrary to defendant's assertion, El Greco has been favorably received in a number of jurisdictions, see, e.g., Intel Corp. v. Terabyete Int'l. Inc., 6 F.3d 614, 618 (9th Cir. 1993); Rey v. Lafferty, 990 F.2d 1379, 1392 n. 10 (1st Cir. 1993), cert. denied, 114 S.Ct. 94 (1993); Matrix Essentials v. Emporium Drug Mart, 988 F.2d 587, 590-91 (5th Cir. 1993); Shell Oil Co. v. Commercial Petroleum. Inc., 928 F.2d 104, 107 (4th Cir. 1991); General Elec. Co. v. Speicher, 877 F.2d 531, 534 (7th Cir. 1989), including this one. See Dash, 878 F.2d at 668 (citing El Greco favorably). While the decision is not binding on me, I find Judge Pratt's reasoning sound, and will therefore follow its holding.
Even though Shoe World was involved neither in the manufacture nor the affixing of the CANDIE'S trademark to the shoes, its sale of the shoes was sufficient 'use' for it to be liable for the results of such infringement and its claimed lack of knowledge of its supplier's infringement, even if true, provides no defense.El Greco, 806 F.2d at 396. Thus, A H's alleged good faith will not provide a meritorious defense. See Telechron. Inc. v. Telicon Corp., 198 F.2d 903, 908 (3d Cir. 1952) ("It is not essential to infringement of a registered trademark that the junior in the field intended to appropriate his predecessor's mark or good will."); Chips'n Twigs, Inc. v. Chip-Chip. Ltd., 414 F. Supp. 1003, 1015 (E.D. Pa. 1976) ("[A]n action for trademark infringement does not depend on proof of wrongful or fraudulent intent and . . . good faith is no defense.").
Further support for the proposition that good faith will not provide a defense to A H is found in the statutory language itself. 15 U.S.C. § 1114(2) specifies specific instances of good faith infringement which will not lead to liability. If the Act were not intended to apply to innocent infringers generally, it would not have been necessary to carve out a special exception where innocent infringers could not be held liable.
The only colorable defense put forth in defendant's memorandum is that the "First Sale Doctrine," as applied in Sebastian Int'l v. Longs Drug Stores, 53 F.3d 1073 (9th Cir. 1995), cert. denied, 116 S.Ct. 302 (1995), should apply in this case and protect A H as a good faith purchaser. In Sebastian, the Court of Appeals for the Ninth Circuit held that "with certain well-defined exceptions, the right of a producer to control distribution of its trademarked products does not extend beyond the first sale of the product." Id. See also NEC Elec. v. CAL Circuit ABCO, 810 F.2d 1506, 1509 (9th Cir. 1987) ("Trademark law generally does not reach the sale of genuine goods bearing a true mark even though such sale is without the mark owner' s consent.") (emphasis added). The purpose of the doctrine is to promote the alienability of goods by restricting the trademark owner's power to control the distribution of its goods once they have left its control. See Sebastian Int'l, Inc. v. Consumer Contacts (PTY) Ltd., 847 F.2d 1093, 1096 (3d Cir. 1988).
The First Sale Doctrine has no application here. A H argues that once the light bulbs left the Chinese manufacturer, the First Sale Doctrine prevented A H from attempting to enforce its standards of quality control. If, in fact, Angelo had approved of the light bulbs and then attempted to enforce some type of quality controls in the downstream sale and distribution of its light bulbs, A H's position would at least be arguable. Compare Graham Webb Partnership v. Emporium Drug Mart, 916 F. Supp. 909, 914-17 (E.D. Ark. 1995) (plaintiff could not use the Lanham Act to force professional consultation to accompany the sale of its hair products) with Shell Oil Co. v. Commercial Petro., Inc., 928 F.2d 104 (4th Cir. 1991) (trademark infringement found where Shell's quality control standards were necessary to maintain the quality of its product). This is not a case, however, where Angelo is trying to assert its own quality controls on the downstream market through the Lanham Act. Rather, Angelo is simply exercising its right to determine what goods bear sufficient quality at the outset to be worthy of bearing its trademark. Angelo disapproved of the defective light bulbs before they ever entered the stream of commerce, as is its right under the Lanham Act. See El Greco, 806 F.2d at 395. Because Angelo never approved the light bulbs, they never acquired a genuine mark. The First Sale Doctrine does not limit the registrant's right to initially inspect its goods, and it therefore does not apply to goods which do not bear a genuine mark — goods which were never approved by the registrant. Thus, A H's invocation of the First Sale Doctrine does not supply it with a meritorious defense.
See Summit Tech. v. High-Line Med. Inst., 922 F. Supp. 299, 310 n. 7 (C.D. Cal. 1996) (explaining that the first sale doctrine as announced by the Ninth Circuit in Sebastian does not apply to cases like El Greco where the product never acquired a genuine mark because it was disapproved of by the registrant).
* * *
Despite the six months which have passed since the filing of the complaint in this case, defendants have been unable to put forth a defense which shows any likelihood of success on the merits. The lack of a meritorious defense, coupled with defendant's inexcusable delay in defending this suit justify the denial of its motion to open the default judgment. An appropriate order follows.
ORDER
AND NOW, this 4 day of October, 1996, after consideration of defendant's motion to open default judgment and accompanying memorandum of law, and plaintiff's response thereto, it is hereby ORDERED that defendant's motion is DENIED.