Opinion
2:17-cv-02603-GMN-VCF
11-29-2018
NUTRITION DISTRIBUTION LLC, Plaintiff, v. STRONG SUPPLEMENTS, LLC, Defendant.
REPORT AND RECOMMENDATION MOTION FOR DEFAULT JUDGMENT [ECF NO. 18]
Before the Court is Plaintiff Nutrition Distribution's Motion for Default Judgment. (ECF No. 18). For the reasons discussed below, Plaintiff's motion should be granted.
This is an action brought by Plaintiff arising under Section 43 (a)(1)(B) of the Lanham Act for False Advertising against Defendant Strong Supplements LLC. (ECF No. 1). Plaintiff alleges that Defendant has been using, and is continuing to use, false and misleading advertising regarding certain products ("Prohormone Products"). (ECF No. 1 at 2).
Plaintiff alleges these products contain anabolic-androgenic steroid chemicals ("Illicit Steroids"), which peer-reviewed clinical studies have shown to pose extreme health risks with repeated, prolonged consumption. (Id.). Plaintiff asserts that Defendant markets its various Prohormone Products and performance enhancers without mentioning the extreme health risks. (Id. at 2-3). Plaintiff alleges that Defendant's false and misleading advertising campaign violated the Lanham Act and unjustly enriched Defendant at the expense of Plaintiff, who is a legitimate sport supplement manufacturer. (Id. at 3-4). Plaintiff alleges the false and misleading advertising has caused extensive an irreparable harm, including loss of revenue, disparagement, and loss of goodwill. (Id. at 4).
On November 3, 2017, Plaintiff filed a motion for entry of Clerk's Default (ECF No. 6), and the Clerk's Default was entered November 6, 2017. (ECF No. 7). Plaintiff now moves for default judgement. (ECF No. 18).
I. LEGAL STANDARD
Federal Rule of Civil Procedure 55 governs default judgment. "When a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend, and that failure is shown by affidavit or otherwise, the clerk must enter the party's default." Fed. R. Civ. P. 55(a). After the Clerk of Court enters a default, the plaintiff must petition the court to obtain a default judgment. Fed. R. Civ. P. 55(b)(2).
Before considering whether default judgment should be entered, the court has an affirmative duty to ensure that it has personal jurisdiction over the defaulted defendant and subject-matter jurisdiction over the plaintiff's action. In re Tuli, 172 F.3d 707, 712 (9th Cir. 1999). A judgment without jurisdiction is void. Id. If jurisdiction exists, the court's decision to enter default judgment is discretionary. Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980); Televideo Video Sys., Inc. v. Heidenthal, 826 F.2d 915, 917 ("Rule 55 gives the court considerable leeway as to what it may require as a prerequisite to the entry of a default judgment."). /// ///
Federal Rule of Civil Procedure 54(c) limits the court's discretion in one respect. It states that "[a] default judgment must not differ in kind from, or exceed in amount, what is demanded in the pleadings." --------
The Ninth Circuit has adopted seven factors courts may consider when adjudicating a motion for default judgment:
(1) the possibility of prejudice to the plaintiff; (2) the merits of the plaintiff's substantive 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).
II. DISCUSSION
Under Rule 55, the court must engage in three inquiries when recommending default judgment against Defendants: (1) whether the court has jurisdiction and can enter default judgment; (2) whether the court should enter default judgment (i.e., do the Eitel factors favor Plaintiff?); and (3) whether Plaintiff has proven damages. Fed. R. Civ. P. 55. Each inquiry is addressed below.
I. Whether Jurisdiction Exists
The court's analysis of Plaintiff's motion begins with jurisdiction. In re Tuli, 172 F.3d at 712. Generally, jurisdictional allegations must be plausible. Leite v. Crane Co., 749 F.3d 1117, 1121 (9th Cir. 2014). However, on a motion for default judgment, the court accepts the plaintiff's allegations as true. Televideo Video Sys., Inc., 826 F.2d at 917-18. As discussed below, the court finds it has subject-matter jurisdiction over Plaintiff's action and personal jurisdiction over Defendant.
a. Subject Matter Jurisdiction
Under 28 U.S.C. § 1331, the court has "original jurisdiction of all civil actions arising under the Constitution, laws, or treaties of the United States." 28 U.S.C § 1338(a) also grants District Courts jurisdiction in claims relating to "any civil action arising under any Act of Congress relating to patents, plant variety protection, copyrights and trademarks." Additionally, the Federal Trademark Act of 1946 (the "Lanham Act") "grants the federal district courts original jurisdiction over all actions arising under it." 15 U.S.C. § 1121(a).
Plaintiff's complaint alleges violations against Defendant for false and misleading advertising under 15 U.S.C. § 1125(a)(1)(B). (ECF No. 1 at 1). Accordingly, the Court has subject matter jurisdiction over this civil action.
b. Personal Jurisdiction
A federal district court may only exercise specific personal jurisdiction over a defendant when certain requirements are met. Sec. & Exch. Comm'n v. Ross, 504 F.3d 1130, 1138 (9th Cir. 2007) (citation omitted). Defendant must satisfy the minimum-contacts test and must be properly served under Rule 4. Id.
Here, the Court has personal jurisdiction over the Defendant. The Supreme Court has said that in order to satisfy Due Process requirements for personal jurisdiction, a corporation must be incorporated or have its principal place of business in the state where the case is brought. Int'l Shoe Co. v. Washington, 326 U.S. 310, 317 (1945). In this case, while Defendants are incorporated in Delaware, Plaintiffs' assert that Defendants' principal place of business is Las Vegas, Nevada. (ECF No. 1 at 5). On October 10, 2017, Plaintiff duly served Defendant with a copy of the Complaint and Summons. (ECF No. 2 & ECF No. 5). Therefore, the Court has jurisdiction over the Defendant. II. Whether the Eitel Factors Favor Default Judgment
Because the court's jurisdictional requirements are satisfied, the court proceeds to the second question: whether the court should enter default judgment under Eitel. Each of the seven factors listed in Eitel is addressed below. /// ///
a. Prejudice to the Plaintiff
The first factor favors entering default judgment in this case. Defendant was properly served in this action and is therefore aware of their infringing conduct. (ECF No. 5). Defendant has not answered or otherwise defended against Plaintiff's claims and a default has been entered. (ECF No. 7). Defendant's failure to answer or defend against Plaintiff's claims is prejudicial to Plaintiff, because Plaintiff's claims cannot otherwise be resolved on the merits absent Defendant's participation. Plaintiff Nutrition distribution will effectively be denied relief if not granted a default judgment. PepsiCo, Inc. v. Cal. Sec. Cans, 238 F. Supp. 2d 1172, 1177 (C.D. Cal. 2002) ("If Plaintiffs' motion for default judgment is not granted, Plaintiffs will likely be without other recourse for recovery.").
In this case, the Plaintiff has shown that they have suffered and will continue to suffer loss of goodwill and business. (ECF No. 1 at 10-11). The Complaint states that Defendant purposefully made false and misleading descriptions about their Prohormone products, including downplaying the health risk, and failing to disclose that Illicit Steroids have been banned by national and international sports agencies. (Id. at 10). This misleading advertising has caused a diversion of business and reputational injury to the Plaintiff. (Id. at 11). Also, since Defendant has failed to appear or communicate an intent to appear, the Plaintiff has no means to recover absent default judgment.
b. The Merits of Plaintiff's Substantive Claim and the Sufficiency of the Complaint
The second and third factors favor entering default judgment in this case. To warrant default judgment, the complaint's allegations must be sufficient to state a claim upon which relief can be granted. Danning v. Lavine, 572 F.2d 1386, 1388 (9th Cir. 1978). Plaintiff's complaint satisfies this standard because its claims "cross the line from conceivable to plausible." Ashcroft v. Iqbal, 556 U.S. 662, 680 (2009) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007)).
Plaintiff's complaint alleges false advertising against Defendant in violation of Section 43(a)(1)(B) of the Lanham Act. (ECF No. 1 at 10). To state a claim for false advertising under the Lanham Act the plaintiff must allege that: (1) the defendant made a false statement of fact about a product in a commercial advertisement, (2) the statement actually deceives or has the tendency to deceive a substantial segment of its audience, (3) the deception is material, (4) the defendant caused the false statement to enter interstate commerce, and (5) the plaintiff has been or is likely to be injured as a result of the false statement. Southland Sod Farms v. Stover Seed Co., 108 F.3d 1134, 1139 (9th Cir. 1997).
Plaintiff Nutrition Distribution has sufficiently alleged each of these elements as discussed above. (ECF No. 1 at 10-11). Because the Court accepts these allegations as true, Televideo Video Sys., Inc. v. Heidenthal, 826 F.2d 915, 917-918, Plaintiff has plausibly alleged that Defendants violated Section 43(a)(1)(B) of the Lanham Act and that they were harmed by Defendant's false advertising.
c. The Sum of Money at Stake in the Action
The fourth factor considers "the amount of money at stake in relation to the seriousness of [the] Defendants' conduct." PepsiCo, Inc., 238 F. Supp. 2d at 1177. "If the sum of money at stake is completely disproportionate or inappropriate, default judgment is disfavored." Twentieth Century Fox Film Corp. v. Streeter, 438 F. Supp. 2d 1065, 1071 (D. Ariz. 2006).
Plaintiff seeks monetary damages for (1) Defendant's profits with a multiplier of 1.5 for $6,117,739.40 under 15 U.S.C. § 1117(a)(1) and (2) attorney's fees and costs in the amount of $14,954.00 under 15 U.S.C. § 1117(a)(3). (ECF No. 18-10 at 2). Under the Lanham Act,
When a violation of any right of the registrant of a mark registered in the Patent and Trademark Office, a violation under section 1125(a) or (d) of this title, or a willful violation under section 1125(c) of this title, shall have been established in any civil action arising under this chapter, the plaintiff shall be entitled, subject to the provisions of sections 1111 and 1114 of this title, and subject to the principles of equity, to recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action.15 U.S.C. § 1117(a). Under this section of the Lanham Act, the Plaintiff is only asking for damages that the statute provides for.
Pursuant to 15 U.S.C. § 1117(a), if the Court finds that the amount of recovery sought based off of profits is excessive, the Court may in its discretion enter judgment for such sum as the Court shall find to be just, according to the circumstances of the case. While the sum of money requested for relief is not so completely disproportionate as to disfavor default judgment, I find it is excessive according to the circumstances of this case. Therefore, the Court will discuss more below in the monetary damages section an appropriate determination of the damages award.
d. The Possibility of a Dispute Concerning Material Facts
The fifth factor favors entering default judgment in this case. "Upon entry of default, all well-pleaded facts in the complaint are taken as true, except those relating to damages." PepsiCo, Inc., 238 F. Supp. 2d at 1177.
Given the sufficiency of Plaintiff's complaint in alleging the facts necessary to establish its claims for relief, and Defendant's subsequent failure to answer, no dispute has been raised regarding material elements in the complaint. It is unlikely any such dispute will arise.
e. Whether Default Was Due to Excusable Neglect and the Strong Policy Favoring Decisions on the Merits
The sixth and seventh factors favor entering default judgment in this case. The sixth factor considers whether the defendant's default was the product of excusable neglect. Eitel, 782 F.2d at 1471-72. This factor favors default judgment where, as here, the defendant has been properly served. Landstar Range, Inc. v. Parth Enterprises, Inc., 725 F.Supp.2d 916, 922 (C.D. Cal. 2010). Nutrition Distribution properly served Defendant. (ECF No. 5). There is no evidence before the court that Defendant's failure to respond is due to excusable neglect.
The seventh factor considers the strong policy under Federal Rule of Civil Procedure 55 that "cases should be decided on their merits whenever reasonably possible." "[T]he mere existence of Fed. R. Civ. P. 55(b) indicates this preference, standing alone, is not dispositive." PepsiCo, Inc., 238 F.Supp.2d at 1177. Where a defendant fails to respond to a complaint, a judgment on the merits is "impractical, if not impossible." Id.
The sixth and seventh Eitel factors weigh in favor of an entry of default judgment. Therefore, Plaintiff Nutrition Distribution's motion for default judgment should be granted.
III. Remedies Requested by Plaintiff
a. Injunctive Relief
Next, the Court considers whether it should grant Plaintiff Nutrition Distribution a permanent injunction against Defendant. The Lanham Act vests the district court with
power to grant injunctions, according to the principles of equity and upon such terms as the court may deem reasonable, to prevent the violation of any right of the registrant of a mark registered in the Patent and Trademark Office or to prevent a violation under subsection (a), (c), or (d) of section 1125.15 U.S.C. § 1116(a).
To show that a permanent injunction is warranted, a plaintiff must show:
(1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006).
The facts set forth in the complaint show that Nutrition Distribution has suffered and will continue to suffer a loss of business and goodwill and reputation absent permanent injunctive relief. (ECF No. 1 at 10-11). See Rent-A-Center, Inc. v. Canyon Television & Appliance Rental, Inc., 944 F.2d 597, 603 (9th Cir. 1991) ("[I]ntangible injuries, such as damage to...goodwill, qualify as irreparable harm."); MySpace, Inc. v. Wallace, 498 F. Supp. 2d 1293, 1305 (C.D. Cal. 2007) ("Harm to business goodwill and reputation is unquantifiable and considered irreparable.").
Several district courts have granted injunctions in the default judgment context by accepting as true the facts alleged in plaintiffs' complaints, including facts establishing irreparable injury. See, e.g.,; Innovative Office Products, Inc. v. Amazon.com, No. 10-4487, 2012 WL 1466512, at *4 (E.D. Pa. Apr. 26, 2012) (granting permanent injunction because allegations in complaint must be accepted as true and established patent infringement and injury to plaintiff); Phillip Morris USA, Inc. v. Castworld Prods., Inc., 219 F.R.D. 494, 499 (C.D. Cal. 2003) ("since, by defaulting, Defendant is deemed to have admitted the truth of Plaintiffs averments, the evidence before the Court established that Plaintiff will likely suffer great prejudice through the loss of sales and diminution of goodwill if default is not entered").
Also, the balance of hardships and public interest weighs in Nutrition Distribution's favor. Plaintiff has been suffering continuing loss of goodwill and reputation due to Defendant's misleading and false advertising. Without a permanent injunction, the Plaintiff will continue to suffer harm. The public interest weighs in the Plaintiff's favor, because the public will not be deceived about potentially harmful products. Therefore, a permanent injunction should be granted against the Defendant.
b. Monetary Damage
Under 15 U.S.C. § 1117(a) of the Lanham Act, the Plaintiff may recover (1) defendant's profits, (2) any damages sustained by the plaintiff, and (3) the costs of the action. In assessing damages, the court may enter judgment for any sum above the amount found as actual damages, not exceeding three times such amount. 15 U.S.C. § 1117(a). "If the court shall find that the amount of the recovery based on profits is either inadequate or excessive the court may in its discretion enter judgment for such sum as the court shall find to be just, according to the circumstances of the case." Id.
"In assessing profits, the plaintiff shall be required to prove defendant's sales only; defendant must prove all elements of cost or deduction claimed." Id. In this case, Plaintiff has proved the profits from Defendant's PayPal sales for the "Prohormone Products" in the amount of $1,345,902.67. (ECF No. 18-1 at 2). Plaintiff arrives that this number by reviewing and totaling all of Defendant's PayPal sales for products containing the Prohormone Products. (Id). Out of $18,087,258.40 total PayPal sales, Plaintiff found a total of $1,345,902.67 definitive purchases containing the Prohormone Products. (Id).
Plaintiff is requesting Defendant's total sales be calculated at $4,078,492.93 for their Prohormone Products. (Id. at 3). Plaintiff reaches the total sales number from an estimation based on Plaintiff's similar previous case where the PayPal sales were 37.6% of Defendant Strong Supplement's total sales. (Id. at 2-3). However, in that case (Nutrition Distribution, LLC. v. Icon Supplements), Plaintiff had documentation from Defendant Icon Supplement's bank, JP Morgan Chase, with the monthly deposit totals from credit card purchases. (ECF No. 18-7 at 3). In that case, it was easy to see that the PayPal purchases were in fact 37.6% of the total sales. However, the 37.6% or even the 33% the Plaintiff is claiming in this case is not an industry standard, it is just based on one specific case. In this case, Plaintiff has not proven that the PayPal sales were the 33% of total sales of Prohormone Products. (ECF No. 18-1 at 3). The Court has to make too many assumptions to estimate total sales of the Prohormone Products based on one previous case. The Lanham Act explicitly states that Plaintiff must prove Defendant's sales. 15 U.S.C. § 1117(a). Therefore, the Court finds that Plaintiff has only proven sales in the amount of $1,345,902.67.
As for the requested 1.5 multiplier, "[t]he plain language of the Lanham Act permits a district court, in its discretion, to enter judgment 'for any sum above the amount found as actual damages, not exceeding three times such amount.'" Skydive Ariz., Inc. v. Quattrocchi, 673 F.3d 1105, 1114 (9th Cir. 2012). In this case, the Court recommends it is appropriate to apply a 1.5 times multiplier, making the damages award $2,018,854. This is appropriate given the irreparable injuries of damage to the goodwill and reputation of the Plaintiff, and the deception to the public of potentially harmful substances.
In addition, the court may award reasonable attorney's fees under the Lanham Act in exceptional cases. 15 U.S.C. § 1117(a). Courts have found that a case may be considered exceptional when the defendant disregards the proceedings and does not appear. Taylor Made Golf Co. v. Carsten Sports, 175 F.R.D. 658, 663 (S.D. Cal. 1997). Therefore, in this case the awarding of attorney's fees is reasonable since the Defendant failed to appear at all.
When seeking attorney fees, Counsel should provide (1) contemporaneous billing records, (2) counsel's hourly rate, and (3) evidence that this rate is reasonable for an attorney of his or her skill and experience. Id. at 663-64. Plaintiff has submitted appropriate billing records in the total of $13,995. (ECF No. 18-1 at 3-4). It is represented that the hourly rates for the three attorneys are reasonable market rates for the different degrees of specialization and experience. (Id). The attorney's fees therefore should be granted.
Plaintiff also seeks costs under 15 U.S.C. § 1117. (Id at 4). The costs requested are $959. (Id). The associated costs with filing this action should be granted.
ACCORDINGLY, and for good cause shown,
IT IS RECOMMENDED that Nutrition Distribution's Motion for Default Judgment (EFC No. 18) be GRANTED.
IT IS RECOMMENDED that Nutrition Distribution be awarded DAMAGES for (1) Defendant's profits in the amount of $2,018,854 pursuant to 15 U.S.C. § 1117(a)(1); (2) attorney's fees in the amount of $13,995 pursuant to 15 U.S.C. § 1117(a)(3); and (3) Costs in the amount of $959 pursuant to 15 U.S.C. § 1117(a)(3). The total recommended award being granted totals $2,033,808.
IT IS RECOMMENDED that permanent injunctive relief prohibiting Defendant from producing, licensing, marketing, or selling any products containing Prohormones be GRANTED.
IT IS FURTHER RECOMMENDED that FINAL JUDGMENT be entered against Defendant.
NOTICE
Pursuant to Local Rules IB 3-1 and IB 3-2, a party may object to orders and reports and recommendations issued by the magistrate judge. Objections must be in writing and filed with the Clerk of the Court within fourteen days. LR IB 3-1, 3-2. The Supreme Court has held that the courts of appeal may determine that an appeal has been waived due to the failure to file objections within the specified time. Thomas v. Arn, 474 U.S. 140, 142 (1985). This circuit has also held that (1) failure to file objections within the specified time and (2) failure to properly address and brief the objectionable issues waives the right to appeal the District Court's order and/or appeal factual issues from the order of the District Court. Martinez v. Ylst, 951 F.2d 1153, 1157 (9th Cir. 1991); Britt v. Simi Valley United Sch. Dist., 708 F.2d 452, 454 (9th Cir. 1983).
IT IS SO RECOMMENDED.
DATED this 29th day of November, 2018.
/s/_________
CAM FERENBACH
UNITED STATES MAGISTRATE JUDGE