MAACO FRANCHISING, INC.
JAMES C. ROLLINS, et al.
John R. Padova, J.
Plaintiff Maaco Franchising, Inc. (“Maaco”) has brought this breach of contract and other claims against Defendants James C. Rollins, Marlene Rollins, and James M. Rollins, arising out of a franchise agreement between Maaco and Defendants. Presently before the Court is Defendants' “Motion to Vacate Default.” For the reasons that follow, we grant the Motion and set aside the entry of default against Defendants.
This case arises out of a contract dispute between Maaco and Defendants. The Complaint alleges that on April 25, 2005, Maaco and Defendants entered into a Transfer Franchise Agreement (the “Franchise Agreement”), under which Defendants were granted the right to operate a Maaco Auto Painting and Bodyworks Center (the “Center”) in Clarksville, Tennessee. (Compl. ¶ 14.) Under the terms of the Franchise Agreement, Defendants were licensed to: (1) operate the Center under the trade name “Maaco”; (2) display the Maaco name, logo, and marks; (3) receive training and access to Maaco's methods; and (4) participate in the Maaco network of licensed vehicle painting and auto body repair shops. (Id. ¶ 17.)
The Franchise Agreement also obligated Defendants to: (1) pay a weekly royalty fee; (2) pay a weekly advertising contribution; (3) provide weekly sales reports; and (4) pay for paint and supplies ordered from Maaco. (Id. ¶ 18.) The Franchise Agreement prohibited Defendants from disclosing Maaco's trade secrets and confidential and proprietary information. (Id. ¶¶ 20-21.) The Franchise Agreement also includes a covenant not to compete. (Id. ¶ 22.) On April 25, 2005, the parties also executed a Maaco Polaris 2000 Software License Agreement (the “Polaris Agreement”), under which Defendants were granted a limited license to use Maaco Polaris software in their operation of the Center. (Id. ¶¶ 24-25.)
Defendants breached the Franchise Agreement by failing to pay Maaco franchise fees and advertising contributions and by failing to pay for paint and supplies ordered from Maaco. (Id. ¶ 28.) Maaco sent Defendants a Notice of Default letter on September 21, 2012, notifying them of their breaches, advising them that they had thirty days to cure those breaches, and informing them that they owed Maaco $176, 257.18. (Id. ¶¶ 29-30.) Defendants failed to cure their breaches within thirty days. (Id. ¶ 31.) Maaco then sent Defendants a Notice of Termination of Franchise Agreement dated December 10, 2012, which advised Defendants that Maaco had terminated the Franchise Agreement. (Id. ¶ 32.) The Notice also demanded strict compliance with Defendants' post-termination obligations under the Franchise Agreement, including immediate and permanent cessation of their use of Maaco marks. (Id. ¶ 33.) Despite Maaco's termination of the Franchise Agreement, Defendants have continued to operate an unauthorized Maaco business. (Id. ¶ 36.)
The Complaint asserts claims against Defendants for: trademark infringement and unfair competition (Count I); breach of the post-termination covenant not to compete (Count II); breach of the covenant of confidentiality (Count III); breach of the Franchise Agreement (Count IV); unfair competition (Count V); and breach of Polaris Agreement (Count VI).
Maaco filed the Complaint on February 12, 2013, and served Defendants on February 21, 2013. Defendants failed to timely answer or otherwise move in response to the Complaint. Maaco filed a request for entry of default against Defendants on March 19, 2013, and the Clerk entered the default on the docket, pursuant to Federal Rule of Civil Procedure 55(b)(1), in favor of Maaco and against Defendants. On April 15, 2013, Defendants filed a “Motion to Vacate Default” and an Answer to the Complaint.
II. LEGAL STANDARD
Defendants have moved to set aside the entry of default pursuant to Federal Rule of Civil Procedure 55(c). Rule 55(c) provides that “[t]he court may set aside an entry of default for good cause.” Fed.R.Civ.P. 55(c). We consider three factors in determining whether to set aside an entry of default: “(1) prejudice to the plaintiff if the default is denied, (2) whether the defendant appears to have a litigable defense, and (3) whether defendant's delay is due to culpable conduct.” Chamberlain v. Giampapa, 210 F.3d 154, 164 (3d Cir. 2000) (citing United States v. $55, 518.05 in U.S. Currency, 728 F.2d 192, 195 (3d Cir. 1984)). Entries of default are disfavored, and the United States Court of Appeals for the Third Circuit “require[s] doubtful cases to be resolved in favor of the party [moving to set aside the default]
'so that cases may be decided on their merits.'” $55, 518.05 in U.S. Currency, 728 F.2d at 194-95 (quoting Tozer v. Charles A. Krause Milling Co., 189 F.2d 242, 245 (3d Cir. 1951) (other citations omitted)).
A. Litigable Defense
The threshold factor in our analysis is whether the Defendants have alleged facts which could constitute meritorious defenses to Maaco's causes of action. Resolution Trust Corp. v. Forest Grove, Inc., 33 F.3d 284, 288 (3d Cir. 1994) (quotation omitted). “The showing of a meritorious defense is accomplished when
'allegations of defendant's answer, if established on trial, would constitute a complete defense to the action.'” $55, 518.05 in U.S. Currency, 728 F.2d at 195 (quoting Tozer, 189 F.2d at 244; and citing Farnese v. Bagnasco, 687 F.2d 761, 764 (3d Cir. 1982)). It is not enough for Defendants to simply deny the factual allegations in the Complaint. Rather, Defendants must allege facts, which, if established, would enable them to prevail in the action. Id at 196. Defendants are “not required
'to prove beyond a shadow of a doubt that they will win at trial, but merely to show that they have a defense to the action which at least has merit on its face.'” Jackson v. Delaware Cnty., 211 F.R.D. 282, 284 (E.D. Pa. 2002) (quoting Emasco Ins. Co. v. Sambrick, 834 F.2d 71, 74 (3d Cir. 1987)) (other citation omitted).
Maaco's claims against Defendants relate to Defendants' alleged breach of the Franchise Agreement, and their continued use of Maaco's marks, materials, and software after Maaco purportedly terminated the Franchise Agreement. Defendants' Answer alleges that Defendants did not breach their obligations under the Franchise Agreement to pay Maaco franchise fees and advertising contributions because Maaco misapplied Defendants' local advertising contributions and improperly demanded “large market advertising expectations upon Defendants' small market center.” (Answer at ¶¶ 62-63; Twenty-Seventh and Twenty-Ninth Affirmative Defenses). The Answer also alleges that, because Defendants did not breach the Franchise Agreement, Maaco's attempted termination of the Franchise Agreement was improper, and thus Maaco is not entitled to enforce its post-termination provisions. (Id ¶¶ 32, 37.) The Answer further alleges that Defendants have not disclosed any of Maaco's trade secrets or proprietary information (id ¶ 55), and that the Center no longer uses the Polaris system (id ¶¶ 70-71). Defendants have thus alleged facts that, if true, would establish that they did not breach the ...