Opinion
3:20-cv-01220-YY
12-11-2020
BRIAN ROLLINS, individually, on behalf of himself and all others similarly situated, Plaintiff, v. WINK LABS, INC., a Delaware corporation; and i.am.plus ELECTRONICS, INC., a Delaware corporation, Defendants.
OPINION AND ORDER
Youlee Yim You United States Magistrate Judge
Plaintiff Brian Rollins filed this class action suit on July 27, 2020, against defendants Wink Labs, Inc. (“Wink”), and i.am.plus Electronics, Inc. When defendants failed to respond to the complaint, plaintiff filed a Motion for Entry of Default, and the Clerk of the Court entered default on October 6, 2020. Defendants have filed a Motion to Vacate Order of Default (ECF #11), which the court, in its discretion, grants for the reasons explained below.
“A magistrate judge is authorized to determine all non-dispositive pretrial motions, including a motion to set aside an entry of default.” Minnesota Life Ins. Co. v. Caradine, C13-2068, 2014 WL 2938342, at *2 n.5 (N.D. Iowa June 30, 2014); see also Stephenson v. Lappin, CVS06 2735LKK EFB PS, 2007 WL 1577632, at *1 (E.D. Cal. May 31, 2007) (holding the magistrate judge's order denying entry of default was non-dispositive because it did not dispose of a party's claim or defense). A decision setting aside an entry of default is analogous to a decision granting a motion to amend the complaint, which the Ninth Circuit has held is non-dispositive. See Bastidas v. Chappell, 791 F.3d 1155, 1164 (9th Cir. 2015) (holding “[i]t should be no surprise that the magistrate judge's decision to grant a motion to amend is not generally dispositive as it does not dispose of a claim or defense) (emphasis in original).
I. Background
Wink produces and sells software and hardware that enable purchasers to use smart home devices and home automation devices from a consolidated user interface. Compl. ¶ 9, ECF #1. Plaintiff alleges that on October 11, 2015, he purchased a Wink Hub, which was advertised and marketed as a device that did not require monthly or subscription fees. Id. ¶¶ 10, 14, 18. He claims that on May 6, 2020, Wink sent its customers an email explaining it was “transitioning to a subscription service” and all customers would have to begin paying a monthly subscription fee of $4.99 on May 13, 2020, or lose access to the Wink Hub. Id. ¶¶ 23, 24. Wink subsequently extended this deadline to July 27, 2020. Id. ¶ 27.
On July 27, 2020, plaintiff filed this class action suit, alleging claims for violation of Oregon's Unlawful Trade Practices Act, O.R.S. 646.605, et seq., and unjust enrichment. Id. ¶¶ 52-71. A similar action was filed on May 8, 2020, in the Northern District of Illinois. Cohen v. Wink Labs, Inc., No. 20cv2809 (N.D. Ill.).
Plaintiff asserts this court has jurisdiction pursuant to 28 U.S.C. § 1332, as amended by the Class Action Fairness Act of 2005, because the matter in controversy exceeds $5,000,000, exclusive of interest and costs, and is a class action in which some members of the proposed class are citizens of different states than defendants. Compl. ¶ 7, ECF #1.
At defendants' instruction, a Chicago attorney, Justin Kay, contacted plaintiff's counsel and offered to accept service. Kay Decl. ¶ 6, ECF #11-1. On August 4, 2020, Kay signed waivers of service for both defendants, acknowledging that an answer or Rule 12 motion had to be filed within 60 days from July 28, 2020, i.e., by September 26, 2020. Waiver Service, ECF ## 4, 5. Defendants failed to file either, and on October 6, 2020, plaintiff filed a Motion for Entry of Default. ECF #7. The Clerk of the Court entered default on October 13, 2020, and on that same day, defendants filed the Motion to Vacate Order of Default at issue here. ECF #11.
II. Discussion
Under Federal Rule of Civil Procedure 55(c), the court, in its discretion, “may set aside an entry of default for good cause.” Fed.R.Civ.P. 55(c); Franchise Holding II, LLC. v. Huntington Restaurants Group, Inc., 375 F.3d 922, 925 (9th Cir. 2004) (holding a court's decision under Rule 55(c) is reviewed for abuse of discretion). In determining whether “good cause” exists, the court considers three factors:
(1) whether the moving party seeking to set aside the default engaged in culpable conduct that led to the default;
(2) whether the moving party has a meritorious defense; or
(3) whether vacating the default would prejudice the non-moving party.U.S. v. Signed Pers. Check No. 730 of Yubran S. Mesle, 615 F.3d 1085, 1091 (9th Cir. 2010). This standard is “disjunctive, ” meaning “a finding that any one of these factors is true is sufficient reason for the district court to refuse to set aside the default.” Id.; see also Franchise Holding II, 375 F.3d at 926 (holding the court is “free to deny the motion ‘if any of the three factors [is] true'”) (quoting American Ass'n of Naturopathic Physicians v. Hayhurst, 227 F.3d 1104, 1108 (9th Cir. 2000)). The moving party bears the burden of “showing that any of these factors favor[s] setting aside the default.” Id.
This good cause standard is the same standard that governs vacating a default judgment under Rule 60(b). Franchise Holding II, 375 F.3d at 925.
“The court's discretion is especially broad where, as here, it is entry of default that is being set aside, rather than a default judgment.” Mendoza v. Wight Vineyard Mgmt., 783 F.2d 941, 945 (9th Cir. 1986). Additionally, “a case should, whenever possible, be decided on the merits.” Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984). Therefore, “judgment by default is a drastic step appropriate only in extreme circumstances.” Id.
A. Culpability
“[A] defendant's conduct is culpable if [the defendant] has received actual or constructive notice of the filing of the action and intentionally failed to answer.” TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 697 (9th Cir. 2001), as amended on denial of reh'g and reh'g en banc (May 9, 2001). In Mesle, the Ninth Circuit held that, “[w]hen considering a legally sophisticated party's culpability in a default, an understanding of the consequences of its actions may be assumed, and with it, intentionality.” 615 F.3d at 1093. However, if a party “is not a lawyer and . . . unrepresented at the time of the default, ” “the term ‘intentionally' means that a movant cannot be treated as culpable simply for having made a conscious choice not to 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.'” Id. The Ninth Circuit did not further define what constitutes a “legally sophisticated party.” However, the court articulated a different standard for those who are “not a lawyer and . . . unrepresented at the time of the default.” Accordingly, it “may be assumed” that those who are lawyers or represented by lawyers understand the consequences of their actions and act intentionally.
The court also cited its decision in Direct Mail Specialists, Inc. v. Eclat Computerized Technologies, Inc., 840 F.2d 685, 690 (9th Cir. 1988), in which it found the defendant corporation had actual notice of the summons and complaint where its president was a lawyer and “presumably . . . well aware of the dangers of ignoring service of process.” Mesle, 615 F.3d at 1093.
Here, in the initial stages of this case, defendants were represented by Kay, an attorney from Faegre Drinker Biddle & Reath, LLP, an international law firm. Berne Decl. ¶ 4, ECF #15. The firm had represented defendants since 2018, and until recently, also represented defendants in the Northern District of Illinois case. Kay Decl. ¶¶ 2, 3, ECF # 11. Kay signed waivers of service on behalf of defendants. Waiver Service, ECF ## 4, 5. Kay also had discussions with plaintiffs counsel about defendants' financial inability to retain counsel in Oregon and an extension of time to file an answer. Kay Decl., Ex. B, ECF #11-3. Plaintiffs counsel made it clear to Kay, “We plan to move for entry of default.” Id
Given defendants were represented by counsel during this pertinent stage of the proceedings, it “may be assumed” that defendants understood the consequences of failing to answer the complaint. “Parties with legal representation know, or should know, the consequences of a failure to respond.” Baker v. Marlo, CV1602313RGKJPRX, 2016 WL 10677596, at *2 (CD. Cal. Aug. 8, 2016). Defendants argue that Kay withdrew from representation and they do not otherwise have general counsel on staff. However, Kay was still negotiating on behalf of defendants on October 6, 2020, the day plaintiff filed the motion for entry of default, and defendants retained Oregon counsel immediately, i.e., that same day.
See October 6, 2020 email setting Zoom video conference for 1 p.m. Kay Decl., Ex. B, ECF # 11-3, at 2.
Defendants' counsel notes that plaintiffs counsel filed the Motion for Entry of Default on October 6, 2020, just ten minutes after he called and left messages with them that he had been retained. Mot. 9, ECF #11; see Southwick Decl., ¶¶ 3, 4, ECF #11-4. However, this was merely a coincidence. An email by one of plaintiff s attorneys on the morning of October 7, 2020, states that plaintiffs counsel were working from home, he “just saw” defense counsel's message, and he was “very surprised to learn of his appearance.” Berne Decl., Ex. 1, ECF #15-1. In fact, another email shows that plaintiffs counsel had a Zoom meeting with Kay at 1 p.m. on October 6, 2020, during which time Kay “reiterated the financial difficulties hampering Defendants' ability to retain counsel.” Kay Decl., ¶ 20, ECF #11-1; id, Ex. B, ECF #11-3. On October 7, 2020, Kay sent an email to plaintiffs counsel explaining, “Following our conversation about your unnecessary insistence on moving for default, the client was able to retain” Oregon counsel. Berne Decl., Ex. 1, ECF #15-1. Thus, it is clear plaintiffs counsel were unaware defendants had retained Oregon counsel when they filed the Motion for Entry of Default.
Because defendants were represented by counsel, it also “may be assumed” that defendants intentionally failed to respond to the complaint. Mesle, 615 F.3d at 1093. Defendants claim that financial difficulties prevented them from retaining Oregon counsel sooner and filing an answer by the deadline. In essence, defendants contend that their financial difficulties prevented them from acting intentionally. However, there are no details in the record about the extent of defendants' financial difficulties and whether those hardships in fact prevented defendants from hiring local counsel. Notably, defendants hired Oregon counsel on the same day the default was entered. Therefore, defendants have not met their burden regarding culpability.
If the court finds a defendant is culpable, it is not required to consider the other two factors. See P. Intl. Airlines, Inc. v. Caprel Enterprises, Inc., 161 F.3d 13 (9th Cir. 1998) (holding the court need not consider “meritorious defense” if culpable conduct is shown). However, nothing prevents the court from doing so. “A district court may exercise its discretion to deny relief to a defaulting defendant based solely upon a finding of defendant's culpability, but need not.” Brandt v. Am. Bankers Ins. Co. of Fla., 653 F.3d 1108, 1112 (9th Cir. 2011); see also Franchise Holding II, 375 F.3d at 926 (holding “the district court was free to deny the motion if any of the three factors was true”) (emphasis added); Mesle, 615 F.3d at 1091 (“finding that any one of these factors is true is sufficient reason for the district court to refuse to set aside the default”) (emphasis added). Thus, the court proceeds to consider the other two factors.
B. Meritorious Defense
“A defendant 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 at 1094. In fact, it is “minimal.” Id. “All that is necessary to satisfy the ‘meritorious defense' requirement is to allege sufficient facts that, if true, would constitute a defense.” Id. “‘[T]he question whether the factual allegation [i]s true' is not to be determined by the court when it decides the motion to set aside the default. . . . Rather, that question ‘would be the subject of the later litigation.'” Id. “The underlying concern . . . is to determine whether there is some possibility that the outcome of the suit after a full trial will be contrary to the result achieved by the default.” Hawaii Carpenters' Tr. Funds v. Stone, 794 F.2d 508, 513 (9th Cir. 1986) (citing Wright & Miller § 2697 (Supp. 1986)). Thus, a defendant seeking to set aside a default must make only “some showing of a meritorious defense as a prerequisite to vacating an entry of default.” Id.
Here, defendants proffer Kay's declaration in which he describes sending plaintiff's counsel “a detailed letter with exhibits explaining that [plaintiff] was subject to a mandatory arbitration clause that precluded his filing of a lawsuit.” Kay Decl., ¶ 7, ECF # 11-1. efendants include Kay's August 4, 2020 letter in which he explained that “[s]ince at least November 2013, ” all Wink Hub users “must sign up for an account and agree affirmatively to the Terms of Use, ” including a binding arbitration clause. Id., Ex. A, ECF #11-2. The letter states that plaintiff signed up for a Wink account on October 11, 2015, at 10:12:56 PM EST. Id. It also contains screenshots of the Wink sign-up process and the specific language of the arbitration clause:
YOU AND THE COMPANY AGREE THAT THE SOLE AND EXCLUSIVE FORUM AND REMEDY FOR ANY AND ALL DISPUTES AND CLAIMS RELATING IN ANY WAY TO OR ARISING OUT OF THE AGREEMENT . . . SHALL BE FINAL AND BINDING ARBITRATION.Id.
Defendants have presented specific facts that would constitute a defense, i.e., that plaintiff was required to sign up for a Wink account in conjunction with his purchase of a Wink Hub, and in doing so agreed to a binding arbitration clause that precludes him from pursuing this lawsuit. See Whitmore v. Universal American Mortg., No. CV-14-01299-PHX-DGC, 2014 WL 5431203, at * 1 (D. Ariz. Oct. 27, 2014) (finding binding arbitration agreement “is a defense sufficient to satisfy the meritorious defense requirement”).
This court does not decide whether these factual allegations are true. Mesle, 615 F.3d at 1094. “All that is necessary” is for defendants to “allege sufficient facts that, if true, would constitute a defense.” Id. Accordingly, plaintiff's hearsay and personal knowledge objections are not determinative. In Huerta v. Akima Facilities Mgt., LLC, 16-CV-00434-KAW, 2017 WL 783686 (N.D. Cal. Mar. 1, 2017), the court rejected a similar argument that the defendant had failed to establish a meritorious defense by proffering a declaration that was not based on personal knowledge: “[E]ven excluding Mr. Steinberg's declaration, AFM has alleged sufficient facts to raise a meritorious defense, which is all that is required by the Ninth Circuit.” Id. at *4. “[T]he defendant's burden [is] satisfied by allegations of fact contained in the briefing itself.” Id.; see also Ross v. Kipperman, 14CV2236 JAH JMA, 2015 WL 4546968, at *2 (S.D. Cal. July 28, 2015) (finding that objections based on hearsay and lack of foundation “are without merit because only factual allegations, not admissible evidence, is required at this stage to support a meritorious defense”). Thus, defendants have met their “minimal” burden on this factor.
Moreover, even if plaintiff's hearsay and personal knowledge objections were valid, all this court would have to do is reopen the briefing for defendants to submit the Declaration of Travis Lopez that was filed as part of their Motion to Dismiss for Lack of Jurisdiction. ECF #20. In his declaration, Lopez, who is Head of Finance at i.am+ and familiar with Wink's records, attests that plaintiff signed up for a Wink account on October 11, 2015, and since at least November 2013, all persons who want to use a Wink Hub must sign up for an account and affirmatively agree to the Terms of Use, which includes a mandatory arbitration clause. Id. Lopez's declaration contains all of the same screenshots, images, and Terms of Use language in Kay's August 4, 2020 letter.
C. Prejudice
“To be prejudicial, the setting aside of a judgment must result in greater harm than simply delaying resolution of the case.” TCI Grp., 244 F.3d at 701 . “Rather, ‘the standard is whether [plaintiff's] ability to pursue his claim will be hindered.'” Id. (quoting Falk, 739 F.2d at 463). “[T]he delay must result in tangible harm such as loss of evidence, increased difficulties of discovery, or greater opportunity for fraud or collusion.” Thompson v. American Home Assur. Co., 95 F.3d 429, 433-34 (9th Cir. 1996).
Plaintiff argues that granting defendants' motion will allow defendants more than three months to respond to the complaint. Resp. 13, ECF #14. However, this “[d]elay in itself does not constitute prejudice.” U.S. v. Assorted Firearms, 605 F. A'ppx. 603, 606 (9th Cir. 2015) (citing TCI Grp., 244 F.3d at 701). Plaintiff also argues that “[d]efendants have not indicated that they actually intend to defend.” Resp. 13, ECF #14. To the contrary, defendants have repeatedly insisted that a valid arbitration clause precludes this suit, and they have filed a motion to compel arbitration.
Plaintiff also contends that, given the financial difficulties defendants have had in retaining counsel, “allowing Defendants to further delay could mean that assets that would otherwise be available to compensate Plaintiff and the putative class are no longer available and that a delayed judgment would have lower priority than other creditor claims.” Resp. 13, ECF #14. Plaintiffs cite Franchise Holding II in support of this argument. Id. There, the court found the plaintiff would be prejudiced by further delay because the defendant had defaulted on four loans and had not made a payment in two years. Those are not the facts here, and plaintiff's contentions are merely speculative.
In sum, “reopening the default judgment would not prejudice Plaintiff[], given the early stage of the litigation.” Blacktail Mt. Ranch Co., LLC v. Jonas, 611 F. App'x. 430 (9th Cir. 2015) (cited pursuant to 9th Cir. R. 36-3). There is no prejudice.
D. Good Cause Exists to Set Aside the Default
As defendants have satisfied two of the three factors-meritorious defense and lack of prejudice-there is good cause to grant the motion. See Vapor Spot, LLC v. Breathe Vape Spot, Inc., CV 15-2110 PSG (EX), 2016 WL 7042107, at *4 (C.D. Cal. Mar. 1, 2016) (setting aside default where two out of three factors were established).
Other facts also militate in favor of setting aside the default. Notably, default was entered less than two weeks after plaintiff filed the motion for entry of default, i.e., less than the 14 days that is allowed for the filing of a response to a motion. Additionally, defendants filed their motion to set aside the default on the day the default was entered. “‘Where timely relief is sought from a default . . . and the movant has a meritorious defense, doubt, if any, should be resolved in favor of the motion to set aside the [default] so that cases may be decided on their merits.'” Mendoza, 783 F.2d 941, 945-46 (9th Cir. 1986) (quoting Schwab v. Bullock's Inc., 508 F.2d 353, 355 (9th Cir. 1974) (quoting 7 J. Moore, Moore's Federal Practice ¶ 60.19, at 232- 33)); see also Bury v. Bradish, 369 F. App'x. 858, 859 (9th Cir. 2010) (holding district court did not abuse its discretion by granting motion to set aside where it was timely filed, the defendant had potentially meritorious defenses, and setting aside the entry of default would not prejudice the plaintiff) (cited pursuant to 9th Cir. R. 36-3).
Granting defendants' motion falls squarely within the court's “especially broad” discretion. Mendoza, 783 F.2d at 945. This is not one of those “extreme circumstances” that warrants the “harsh sanction” of default. Falk, 739 F.2d at 463; Mesle, 615 F.3d at 1091. At its core, the good cause analysis involves “equitable factors, ” TCI Group, 244 F.3d at 696, and must account for the strong preference for trying cases on their merits. Falk, 739 F.2d at 463. “Clearly the spirit of Rule [55] would not be served, and substantial justice would not be done, by pegging a [$5,000,000] default” under the circumstances here. Schwab v. Bullock's Inc., 508 F.2d 353, 356 (9th Cir. 1974).
CONCLUSION
Defendants' Motion to Vacate Order of Default (ECF #11) is GRANTED, and the entry of default entered on October 13, 2020, is vacated. Within one week of the date of this order, the parties shall propose a briefing schedule for defendants' Motion to Dismiss for Lack of Jurisdiction (ECF #20).
IT IS SO ORDERED.