Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_06-cv-06298/USCOURTS-cand-4_06-cv-06298-1/pdf.json

Nature of Suit Code: 190
Nature of Suit: Other Contract Actions
Cause of Action: 28:1332 Diversity-Other Contract

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

OAKLAND DIVISION

AUDIO TOYS, INC.,

Plaintiff,

 v.

SMART AV PTY LTD.,

Defendant. 

No. C 06-6298 SBA

ORDER

[Docket Nos. 24, 26]

Before the Court is defendant Smart AV Pty Ltd.’s (Smart) motion to dismiss for lack of

personal jurisdiction and for inadequate service of process [Docket No. 24], and motion to vacate the

default judgment entered against it [Docket No. 26]. After reading and considering the arguments

presented by the parties, the Court finds these matters appropriate for resolution without a hearing. See

FED. R. CIV. P. 78. For the reasons that follow, the motions are GRANTED. 

BACKGROUND

On October 6, 2006, plaintiff Audio Toys, Inc. filed a complaint against Smart. See Docket No.

1. As there was no response, default was entered on October 30, 2006. See Docket No. 6. On

November 29, 2006, default judgment was entered in favor of plaintiff Audio Toys and against

defendant Smart in the amount of $201,051.86. See Docket No. 9. Smart now seeks to have the default

judgment set aside. 

Smart is an Australian corporation, of about eight employees, with its sole office located in

Newington, New South Wales. Smart makes and markets electronic equipment for use in the

entertainment industry. In November 2004, Smart entered into an agreement with Audio Toys. Audio

Toys alleges that Smart has failed to reimburse it for the costs of defective audio consoles manufactured

by Smart. 

Beginning on October 6, 2006, Smart attended a three day trade show at the Moscone Center

in San Francisco and maintained a booth on the floor of the convention center. The Smart booth was

Case 4:06-cv-06298-SBA Document 33 Filed 06/07/07 Page 1 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 2

manned by Luke Dearnley, a part-time employee of Smart from Australia. Dearnley has never been an

officer or director of Smart. Dearnley promoted and demonstrated Smart products at the trade show,

fielded questions regarding its products, and distributed advertising materials. 

On October 6, 2006, Audio Toys served a copy of the summons and complaint in this action

upon Dearnley. Smart contends this service was deficient and failed to confer personal jurisdiction.

Dearnley has submitted a declaration that he did not understand the service of the summons and

complaint upon him. See Docket No. 25, Ex. 1. He also states that he was not authorized by Smart to

receive service of process on its behalf. Id. The defendant also avers that Dearnley did not deliver the

summons and complaint to it until November 2006, which is why it did not timely respond to the

complaint. Based on this, Smart requests the Court set aside the default judgment and dismiss this

complaint. 

LEGAL STANDARDS

1. Setting Aside a Default Judgment

Under Federal Rule of Civil Procedure 60(b)(1), a court may grant relief from default judgment

in cases of “mistake, inadvertence, surprise, or excusable neglect,” provided that the party moves for

such relief not more than a year after the judgment was entered. FED. R. CIV. P. 60(b)(1). Default

judgment may also be set aside if “the judgment is void.” FED.R.CIV. P. 60(b)(4). Default judgments

are disfavored, and cases should be decided on their merits whenever reasonably possible. Pena v.

Seguros La Comercial, S.A., 770 F.2d 811, 814 (9th Cir. 1985). The interest in finality of judgment

“should give way fairly readily, to further the competing interest in reaching the merits of a dispute.”

TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 696 (9th Cir. 2001). 

2. Motion to Dismiss for Inadequate Service of Process under 12(b)(5)

A court cannot exercise personal jurisdiction over a defendant without proper service of process.

See Omni Capital Int’l, Ltd. v. Rudolf Wolff & Co., 484 U.S. 97, 104 (1987); Direct Mail Specialists,

Case 4:06-cv-06298-SBA Document 33 Filed 06/07/07 Page 2 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 3

Inc. v. Eclat Computerized Techs., Inc., 840 F.2d 685, 688 (9th Cir. 1988) (“A federal court does not

have jurisdiction over a defendant unless the defendant has been served properly under Fed.R.Civ.P.

4”). A judgment is void where the requirements for effective service have not been met. See Mason

v. Genisco Tech. Corp., 960 F.2d 849, 851 (9th Cir. 1992); Veeck v. Commodity Enters., Inc., 487 F.2d

423, 426 (9th Cir. 1973). 

Insufficient service of process may result in dismissal under Federal Rule of Civil Procedure

12(b)(5). When a defendant challenges service, the plaintiff bears the burden of establishing its

sufficiency. See Brockmeyer v. May, 383 F.3d 798, 801 (9th Cir. 2004). Sufficiency of process is

determined by Rule 4. See Employee Painters’ Trust v. Ethan Enters., Inc., 480 F.3d 993, 999 (9th Cir.

2007). Rule 4 is a flexible rule that should be liberally construed so long as a party receives sufficient

notice of the complaint. United Food & Commercial Workers Union v. Alpha Beta Co., 736 F.2d 1371,

1382 (9th Cir. 1984). “However, neither actual notice nor simply naming the defendant in the complaint

will provide personal jurisdiction absent ‘substantial compliance with its requirements.’” Benny v.

Pipes, 799 F.2d 489, 492 (9th Cir. 1986), cert. denied, 484 U.S. 870 (1987) (citation omitted).

Rule 4(h) governs service over domestic and foreign corporations. Under Rule 4(h), a plaintiff

may serve a corporation by delivering a copy of the summons to an officer, managing or general agent,

or to any other authorized agent. In the Ninth Circuit, “service of process is not limited solely to

officially designated officers, managing agents, or agent appointed by law for the receipt of process.”

Direct Mail Specialists, 840 F.2d at 688. Service may be made “‘upon a representative so integrated

with the organization that he will know what to do with the papers.’” Id. (citation omitted). Service on

an individual who holds a position that indicates authority with the organization generally is sufficient.

Id. 

In the alternative, under Rule 4(h) service may be effected pursuant to the law of the state in

which the district court is located or in which service is effected, in this case California. Under

California law, a summon may be served on a corporation by delivering a copy of the summons and the

complaint “[t]o the person designated as agent for service of process . . . [to] the president, chief

Case 4:06-cv-06298-SBA Document 33 Filed 06/07/07 Page 3 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 4

executive officer, or other head of the corporation, a vice president, a secretary or assistant secretary,

a treasurer or assistant treasurer, a controller or chief financial officer, a general manager, or a person

authorized by the corporation to receive service of process . . . .” CAL. CIV. PROC. CODE § 416.10. 

ANALYSIS

1. Setting Aside the Default Judgment

In this case, setting aside the default judgment entered against Smart is warranted for two

reasons. First, as will be discussed in greater detail below, the judgment is void due to insufficient

service of process. Second, a default judgment may be lifted for “excusable neglect,” which Smart has

both invoked and demonstrated. 

When a default judgment is challenged on grounds of excusable neglect, three factors, known

as the Falk factors, inform a court’s exercise of discretion: (1) whether the defendant’s culpable conduct

led to the default; (2) whether the defendant has a meritorious defense; and (3) whether reopening the

default judgment would prejudice the plaintiff. Employee Painters’ Trust v. Ethan Enters., Inc., 480

F.3d 993, 1000 (9th Cir. 2007); Falk v. Allen, 739 F.2d 461, 463 (9th Cir. 1984) (per curiam). 

a. Culpability 

In the Ninth Circuit, a defendant’s conduct is culpable for purposes of the Falk factors where

there is no explanation of the default inconsistent with a devious, deliberate, willful, or bad faith failure

to respond. TCI Group Life Ins. Plan v. Knoebber, 244 F.3d 691, 698 (9th Cir. 2001).

Smart has offered a sufficiently benevolent explanation to clear the Falk standard. According

to Smart, the person actually served was Luke Dearnley, a part-time subordinate employee who could

not accept service of process. Dearnley, in turn, did not forward a copy of the summons and complaint

to a higher-ranking employee of Smart until weeks later and after he returned to Australia. 

b. Meritorious Defense

“A defendant seeking to vacate a default judgment must present specific facts that would

constitute a defense. But the burden . . . is not extraordinarily heavy.” TCI, 244 F.3d at 700 (citations

Case 4:06-cv-06298-SBA Document 33 Filed 06/07/07 Page 4 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 5

omitted). The moving party need only assert a factual or legal basis that is sufficient to raise a particular

defense; the question of whether a particular factual allegation is true is resolved at a later stage. See

id. 

In this case Smart asserts a legal defense of lack of personal jurisdiction and insufficient service

of process. It has put forth enough factual and legal grounds to sufficiently raise these defenses. Indeed,

as will be seen, these defenses are meritorious in fact, as well as being sufficiently asserted. 

c. Prejudice

Having to try a case on the merits is not by itself sufficient prejudice. See TCI, 244 F.3d at

701(“To be prejudicial, the setting aside of a judgment must result in greater harm than simply delaying

resolution of the case”). “[T]he standard is wether [the plaintiff’s] ability to pursue his claim will be

hindered.” Id. (citation omitted). “[T]he delay must result in tangible harm such as loss of evidence,

increased difficulties of discovery, or greater opportunity for fraud or collusion.” Id. (citation omitted).

Plaintiff Audio Toys states that it if the default judgment is set aside, it “fears that SMART AV

will either move or hide assets.” Docket No. 29, at 9. Audio Toys has offered no evidence that this fear

on its part has a substantive basis. Having offered no other grounds, Audio Toys has not demonstrated

prejudice from the lifting of the default judgment. 

Therefore, the default judgment entered against defendant Smart on November 29, 2006, in the

amount of $201,051.86, is hereby vacated. 

2. Service of Process

The burden is on Audio Toys to demonstrate effective service upon Smart. It has not done so.

There is no assertion that Dearnley was an officer, a managing agent, or an agent appointed by law for

accepting receipt of service of process. In the absence of this, there must be some indication that

Dearnley had some position of authority within Smart, or was a representative of Smart so integrated

with the organization that he would know what to do with the papers. See Direct Mail Specialists, 840

F.2d at 688.

Case 4:06-cv-06298-SBA Document 33 Filed 06/07/07 Page 5 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 6

Here there is very little evidence on Dearnley’s place within the Smart organization. The

evidence before the Court is limited to the declaration of Larry D. Droppa, president of Audio Toys.

Droppa attended the trade show at the Moscone Center and observed Dearnley providing informational

materials and instructional information to potential and existing customers. See Docket No. 27, Ex. 2

(Droppa Decl.). He also observed Dearnley demonstrating the capabilities of Smart’s products. Id. at

2. On one point Audio Toys’s general manager, Gordon Smart, approached Dearnley and spoke briefly

with him. Id. Dearnley provided Gordon Smart with a business card that reflected that he was an

employee of the defendant. Id. at 2-3. 

 Taking all the facts presented by Audio Toys at true, Dearnley was an employee manning a

booth at a trade show on behalf of Smart on the floor of a convention center. As characterized by Audio

Toys, Dearnley was a product specialist who gave demonstrations of products offered by Smart and

distributed advertising materials. This fails to demonstrate that Dearnley had any position of authority

within Smart or was sufficiently integrated into the organization that he could accept service of process

on its behalf. This same paucity of evidence also makes it impossible to conclude that Dearnley was

a “general manager” of Smart for purposes of an alternative analysis of service of process under

California law as laid out in California Civil Procedure Code section 416.10.

The manager of Smart, David Hannay, was also present at the trade show. See Docket No. 32,

Ex. 8 (Hannay Decl.). Based on this, Audio Toys maintains that it is “reasonably certain that Mr.

Dearnley would have advised Mr. Hannay of service of the lawsuit upon SMART AV during the time

they were in attendance at the trade show.” Docket No. 27, at 7. This would seem a fairly reasonable

assumption. Nonetheless, the Court has to focus on the person served, in this case Dearnley, not

Hannay, and not engage in or predicate its legal findings on assumptions. Moreover, even actual notice

of the complaint will not provide personal jurisdiction where there is not substantial compliance with

Rule 4. See Benny v. Pipes, 799 F.2d 489, 492 (9th Cir. 1986), cert. denied, 484 U.S. 870 (1987). Thus,

even if Hannay had actual notice of the complaint at the trade show, the failure to substantially comply

with Rule 4 prevents the Court from exercising personal jurisdiction over Smart. 

Case 4:06-cv-06298-SBA Document 33 Filed 06/07/07 Page 6 of 7
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28 7

Audio Toys has not demonstrated sufficient service of process upon Smart. Therefore this Court

lacks personal jurisdiction over the defendant. It also means that the default judgment entered against

Smart is void and must be vacated. 

Finally, under Federal Rule of Civil Procedure 4, a plaintiff must serve a defendant with a copy

of summons and complaint within 120 days of filing a complaint. Audio Toys’s complaint was filed

on October 6, 2006, well over four months ago. When a plaintiff fails to properly serve a defendant

within 120 days of filing the complaint, the Court “shall dismiss the action without prejudice as to that

defendant or direct that service be effected within a specified time.” FED. R. CIV. P. 4(m).

CONCLUSION

Accordingly, the Court GRANTS defendant Smart AV Pty Ltd.’s motion to dismiss for lack of

personal jurisdiction and for inadequate service of process [Docket No. 24]. The Court further

GRANTS the defendant’s motion to vacate the default judgment entered against it [Docket No. 26]. The

Clerk of Court is directed to VACATE the default judgment entered against the defendant Smart AV

Pty Ltd. and to close the case file and all pending matters related to it. 

IT IS SO ORDERED.

June 6, 2007 _________________________________

Saundra Brown Armstrong 

United States District Judge

Case 4:06-cv-06298-SBA Document 33 Filed 06/07/07 Page 7 of 7