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McKesson Medical-Surgical Inc. v. Flower Orthopedic Corp.

United States District Court, E.D. Virginia, Richmond Division

February 15, 2018




         This matter is before the Court on Defendant's MOTION TO SET ASIDE ENTRY OF DEFAULT (ECF No. 15), as well as Plaintiff's MOTION FOR ENTRY OF DEFAULT JUDGMENT (ECF No. 10) and FLOWER ORTHOPEDICS CORPORATION'S MOTION FOR ENLARGEMENT OF TIME TO FILE AN ANSWER AND COUNTERCLAIM (ECF No. 17) . Defendant seeks to set aside the Clerk of Court's Entry of Default (ECF No. 9) for good cause, asserting that it failed to answer the Complaint because the parties were engaged in ongoing settlement negotiations when Plaintiff sought entry of default. For the reasons set forth below, the MOTION TO SET ASIDE ENTRY OF DEFAULT (ECF No. 15) will be granted; FLOWER ORTHOPEDICS CORPORATION'S MOTION FOR ENLARGEMENT OF TIME TO FILE AN ANSWER AND COUNTERCLAIM (ECF No. 17) will be granted; and the MOTION FOR ENTRY OF DEFAULT JUDGMENT (ECF No. 10) will be denied as moot.


         1. Factual Background

         McKesson Medical-Surgical Inc. ("McKesson") is a distributor of medical supplies, medical equipment, surgical supplies, and medical lab supplies. Flower Orthopedics Corporation ("Flower Orthopedics")[1] supplies bone-fixation implants and surgical instruments that are used primarily for the wrist, hand, shoulder, foot, and ankle. The companies entered into a distribution agreement ("the Distribution Agreement") on March 8, 2013, pursuant to which McKesson would be a non-exclusive authorized distributor of Flower Orthopedics' products. Compl. (ECF No. 1) ¶ 7; id., Ex. 1.

         On or around September 1, 2013, the parties agreed to an amendment to the Distribution Agreement, which, in relevant part, provided that: (1) McKesson would be the exclusive distributor of Flower Orthopedics' products to certain customers; and (2) McKesson would purchase certain minimum amounts of Flower Orthopedics' products for several six-month periods beginning in August 2013. Compl. ¶ 8; id., Ex. 2. Nonetheless, according to Flower Orthopedics, McKesson failed to meet its minimum purchase commitment after that point, and, indeed, sold a minimal amount of Flower Orthopedics' products during the course of the parties' relationship. Burckhardt Decl. (ECF No. 16-1) ¶¶ 6-7. As a result, Flower Orthopedics took steps to train McKesson' s sales staff in selling Flower Orthopedics' products, and also hired a separate, independent distribution network that would implement a co-distribution strategy parallel to McKesson's sales efforts. Id. ¶¶ 8-9. Flower Orthopedics claims that it suffered financial harm from having to take these actions because of McKesson's poor distribution. Id. ¶ 10.

         Then, on March 4, 2015, Flower Orthopedics terminated the exclusivity provision of the amended Distribution Agreement, effective 120 days from that date. Compl. ¶ 9. The parties subsequently reached a termination and repurchase agreement ("the Repurchase Agreement") on May 8, 2015, which required Flower Orthopedics to repurchase its products from McKesson in accordance with a particular schedule ("the Repurchase Schedule"). Id. ¶ 10; id., Ex. 3. When Flower Orthopedics was unable to pay consistent with the Repurchase Schedule, the parties modified it by agreement on February 1, 2016 ("the Repurchase Amendment"). Compl. ¶ 11; id., Ex. 4.

         Flower Orthopedics failed to pay McKesson the full amount required by the modified Repurchase Schedule in the Repurchase Amendment. Compl. ¶ 12. As of November 8, 2017, the amount of principal and late charges owed by Flower Orthopedics under the Repurchase Amendment was $2, 287, 176.00. Ringberg Aff. (ECF No. 10-1) ¶¶ 9-12.

         In or around March 2017, Flower Orthopedics' CEO, Oliver Burckhardt ("Burckhardt"), discussed a possible resolution of the repayment schedule with Erik Ringberg ("Ringberg"), McKesson's Vice President for Supplier Management. The individuals exchanged proposals but could not reach any agreement. Ringberg later offered to settle if Flower Orthopedics would pay a larger amount than Burckhardt had proposed, but Flower Orthopedics did not agree to that offer. Burckhardt Decl. ¶ 15.

         2. Procedural Background

         After those negotiations were unsuccessful, McKesson filed its Complaint here on September 19, 2017. ECF No. 1. It asserted three claims: FIRST CLAIM FOR RELIEF, Breach of Contract, related to Flower Orthopedics' failure to pay under the Repurchase Amendment; and SECOND CLAIM FOR RELIEF and THIRD CLAIM FOR RELIEF, Account Stated and Open Account, respectively, for the unpaid amount. Id. ¶¶ 6-22. McKesson then served a summons and a copy of the Complaint on Flower Orthopedics, through its vice president, on September 26, 2017. ECF No. 7.

         On October 12 and 13, 2017, after Flower Orthopedics received the Complaint, its New Jersey counsel, G. Robert Marcus ("Marcus"), left two voicemails with McKesson's counsel, Jeffrey Garfinkle ("Garfinkle"). Garfinkle Decl. (ECF No. 20-1) ¶ 11. When Garfinkle returned those calls on October 13, Marcus explained why Flower Orthopedics did not accept Ringberg's last settlement offer, and then made a counter-proposal. Marcus Decl. (ECF No. 16-2) ¶ 3. Garfinkle indicated that any settlement offer would need to be in writing, Garfinkle Decl. ¶ 12, so Marcus sent Garfinkle an e-mail later that day confirming the details of the earlier offer, Marcus Decl. ¶ 3. None of Marcus's communications referenced the Complaint or this litigation, although both attorneys expressed a general desire to avoid litigation in their conversation. Garfinkle Decl. ¶¶ 12-13; Marcus Reply Decl. (ECF No. 21-1) ¶ 3.

         McKesson apparently found the October 13 offer unacceptable, and Garfinkle never responded to Marcus. Garfinkle Decl. ¶ 14. Having not received any response, Marcus claims that he called Garfinkle and left a voicemail on October 20, 2017. Marcus Decl. ¶ 4; Marcus Reply Decl. ¶ 6. Garfinkle asserts that he never received that message. Garfinkle Decl. ¶¶ 15-16.

         In any event, Flower Orthopedics did not file an answer or otherwise respond to the Complaint within the required twenty- one days. See Fed.R.Civ.P. 12(a) (1) (A) (i) . As a result, on October 25, 2017, McKesson requested that the Clerk of Court enter default against Flower Orthopedics. ECF No. 8. The Clerk then entered default on November 6, 2017. ECF No. 9.

         Marcus had left another voicemail with Garfinkle on November 3, but Garfinkle was unable to respond until November 6. When he called Marcus on that date, Garfinkle informed him that McKesson had rejected the October 13 settlement offer, and that the Clerk had entered default against Flower Orthopedics. Marcus Decl. ¶ 4; Garfinkle Decl. ¶ 17. Garfinkle also rejected Marcus's request to have the entry of default set aside. Marcus Decl. ¶ 6.

         Shortly thereafter, on November 8, 2017, McKesson moved to have the Court enter default judgment against Flower Orthopedics. ECF No. 10. Flower Orthopedics did not file an opposition to that motion, but instead moved on November 13 to have the Clerk's entry of default set aside.[2] ECF No. 15. Flower Orthopedics also moved to enlarge the time to file an answer, attaching a proposed Answer and Counterclaim. ECF No. 17; id., Ex. A. McKesson has only responded to Flower Orthopedics' motion to set aside the entry of default. See ECF No. 20.


         1. Legal Standard

         Entry of default is mandatory where, as here, a party "has failed to plead or otherwise defend, and that failure is shown by affidavit." Fed.R.Civ.P. 55(a). However, "[t]he court may set aside an entry of default for good cause." Id. 55(c). Courts analyze six factors when deciding whether good cause exists: "whether the moving party has a meritorious defense, whether it acts with reasonable promptness, the personal responsibility of the defaulting party, the prejudice to the party, whether there is a history of dilatory action, and the availability of sanctions less drastic." Payne ex rel. Estate of Calzada v. Brake, 439 F.3d 198, 204-05 (4th Cir. 2006); see also Consol. Masonry & Fireproofing, Inc. v. Wagman Constr. Corp., 383 F.2d 249, 251 (4th Cir. 1967) ("Generally a default should be set aside where the moving party acts with reasonable promptness and alleges a meritorious defense.").

         Deciding whether a defaulting party has shown good cause "is a matter which lies largely within the [Court's] discretion." Payne, 43 9 F.3d at 204. The Fourth Circuit, however, has "repeatedly expressed a strong preference that, as a general matter, defaults be avoided and that claims and defenses be disposed of on their merits." Colleton Preparatory Acad., Inc. v. Hoover Universal, Inc., 616 F.3d 413, 417 (4th Cir. 2010); see also Tazco, Inc. v. Dir., Office of Workers Comp. Program, U.S. Dep't of Labor, 895 F.2d 949, 950 (4th Cir. 1990) ("The law disfavors default judgments as a general matter . . . ."); Lolatchy v. Arthur Murray, Inc., 816 F.2d 951, 954 (4th Cir. 1987) (w [A] n extensive line of decisions has held that [Rule] 55(c) must be liberally construed in order to provide relief from the onerous consequences of defaults . . . ." (internal quotations omitted)). Moreover, the burden on a defendant seeking relief from entry of default under Rule 55(c) is lower than the burden for relief from default judgments under Rule 60(b). Although analyses under both provisions ...

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