Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Colo.: Sporting goods store franchisees had good cause to set aside default, (Nov 15, 2013)

By Peter Reap, J.D., LL.M.

Todd A. Schneeberger, and Patricia A. Schneeberger—terminated franchisees of a Play It Again Sports sporting goods store—demonstrated good cause to set aside entry of a default judgment in a case brought against them by their former franchisor, Winmark Corporation, the federal district court in Denver has decided (Winmark Corp. v. Schneeberger, November 14, 2013, Martinez, W.). Specifically, the court found: (1) the franchisees were not culpable for their default, (2) the franchisor would not be prejudiced by the setting aside of the default, and (3) the franchisees had a meritorious defense.

The court had granted the franchisor’s motion for a preliminary injunction on March 19, 2013. The preliminary injunction directed the franchisees to immediately cease and desist from using the franchisor’s marks both inside and outside their store. It was understood by the parties that the franchisees were to close the store on or before April 15, 2013, thus no relief was granted with respect to the noncompete provision in the franchise agreement which prohibited the franchisees from competing with the franchisor in any sporting goods business for one year following termination and within an eight-mile radius of the store.

The Clerk’s entry of default was predicated on the franchisor’s motion seeking such entry, the court noted. In that motion, the franchisor outlined that the franchisees had been served and that they had stated on February 25, 2013, that they were did not “have the money to fight Winmark.” That quotation was taken out of complete context, and belied the record post-February 25, 2013, where the franchisees filed a slew of filings in the record after this date, according to the court.

While there was no formal responsive pleading by the franchisees to the franchisor’s complaint, the motion for preliminary injunction was opposed by the franchisees. The franchisees have not stood by silently during the course of this matter, the court observed.

A court could set aside an entry of default for “good cause.” In determining whether a defendant has met the good cause standard, courts considered (1) whether the default was the result of culpable conduct of the defendant, (2) whether the plaintiff would be prejudiced if the default should be set aside, and (3) whether the defendant presented a meritorious defense.

Culpable conduct. Generally a party’s conduct would be considered culpable only if the party defaulted willfully or had no excuse for the default. Conversely, an unintentional or good faith mistake was not considered culpable conduct for the purposes of Rule 55(c).

Despite the franchisees not filing a formal answer, this conduct did not rise to the level which made the franchisees’ action culpable for their default. Context was critical to the court’s reasoning on this factor, the court explained.

Tellingly, the motion for a preliminary injunction was opposed by the franchisees. This evidenced that the franchisees made some effort to mount a defense during the course of these proceedings. While the response could not be construed as an answer per se, it did demonstrate that the franchisees were not been acting in bad faith or that they had been intentionally failing to file an answer in these proceedings, according to the court.

Further, other evidence in the record demonstrated that the franchisees had been anything but a silent player in these proceedings to warrant the entry of default. Multiple filings by the franchisees were illustrative of the action taken by same to defend the action, which militated against any finding of bad faith. Thus, under the liberal “good cause” standards of Rule 55(c), the lack of culpable conduct weighed in favor of setting aside the entry of default, the court held.

Prejudice to plaintiff. The franchisor contended that without default judgment it could not then obtain permanent injunctive relief to require the franchisees to adhere to the noncompete clause of the franchise agreement for the “remainder of its one-year term.” However, for several reasons, the court was not persuaded by the franchisor’s position. First, the court had previously granted the franchisor preliminary injunctive relief with respect to its trademark claim. To that extent, its rights were preserved, which mitigated any prejudice in setting aside the entry of default.

Second, the franchisor must keep in mind that the preferred disposition of any case is on its merits and not by default when considering a motion to set aside entry of default. Courts were not in the business of ‘rubber stamping’ directives from a plaintiff when there was some level of resistance, as here, by a defendant. This was one of the reasons why the standard under Rule 55(c) was a low threshold, the court explained. As such, it provided certain built-in advantages to the moving party as demonstrated in this case.

Because of the above reasons, little to no prejudice to the franchisor would result from the granting of the instant motion. Thus, this factor also weighed in favor of setting aside the entry of default.

Meritorious defense. With respect to the franchisor’s trademark claim, the franchisees contended that they were no longer using the words Play It Again Sports, which was the subject of one of the franchisor’s trademarks. It was an axiom that non-use of a registered mark provided a defense to any trademark infringement claim. Thus, this defense cut in favor of the franchisees’ motion.

As to the other marks in the franchisor’s portfolio—such as the Chasing arrows (design)—the franchisees argued that such trademarks were “universal” and that the “signage is used consistently throughout the world.” If this allegation was taken as true, as the Court must in this context, this could well cut against the validity of the registered marks (or possibly restrict the scope of the marks to select activities). Such evidence deserved further factual development and provided a basis for a meritorious defense for the purposes of the instant motion, the court held.

As to the noncompete clause, the franchisees cross-referenced other motions filed earlier in the proceedings that articulated several defenses. While the franchisees only provided limited detail with respect to these defenses, there was enough in these filings to serve the purpose of rebutting the franchisor’s claim with respect to the noncompete clause (at least at a facial level), the court determined. Accordingly, the third discretionary factor cut in favor of the franchisees and supported their motion to set aside entry of default.

The case is No. 1:13-cv-00274-WJM-BNB.

Attorneys: John Andrew Chanin (Lindquist & Vennum, PLLP) for Winmark Corp.

Companies: Winmark Corp.

Cases: FranchisingDistribution ColoradoNews