Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-4_04-cv-03079/USCOURTS-cand-4_04-cv-03079-0/pdf.json

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

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United States District Court

For the Northern District of California

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1

UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF CALIFORNIA

ANTHONY T. REYES, ET AL.,

Plaintiffs,

v.

CLINTON L. WATSON, ET AL.,

Defendants.

____________________________________/

No. C-04-3079 CW (JCS)

REPORT & RECOMMENDATION RE

PLAINTIFFS’ MOTION FOR ENTRY OF

DEFAULT JUDGMENT BY COURT

[Docket No. 156]

I. INTRODUCTION

Plaintiffs, Anthony Reyes, Mary Reyes and the Reyes Trust, filed this action on July 28,

2004. In their complaint, they named as defendants Clinton L. Watson, Zkara.com, Flex, Inc., and

the George and Mary E. Watson Trust (“the Watson Trust”). On April 6, 2005, Judge Wilken

ordered entry of default as to Defendants Zkara.com, Flex, Inc. and the George and Mary E. Watson

Trust (“the Entity Defendants”) on the basis that those defendants failed to answer the complaint

through counsel qualified to practice law, despite the Court’s explicit order that such an answer be

filed no later than December 6, 2004. In the April 6, 2004 order, the Court stated that Plaintiffs

would be permitted to bring a motion for default judgment when the claims against Defendant

Clinton Watson were resolved.

 In an order filed December 6, 2005, Judge Wilken granted Plaintiffs’ Motion for

Terminating Sanctions Against Defendant Clinton L. Watson on the basis of Watson’s failure to

obey numerous court orders and to comply with discovery rules. Pursuant to that order, default was

entered against Watson and the matter was referred to the undersigned magistrate judge “to hold a

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1

 Although the Complaint listing the filing date as June 18, 2002, the patent that was ultimately

issued, which is attached to the Complaint as Exhibit A, reflects that the application was filed on June 6,

2002. 

2

hearing to determine damages.” December 6, 2005 Order. Plaintiffs now bring a Motion for Entry

of Default Judgment (“the Motion”), seeking entry of default judgment as to all defendants. 

A hearing was held on March 10, 2006. Plaintiffs filed supplemental materials on March 17,

2006. For the reasons stated below, it is recommended that the Motion be GRANTED in part and

DENIED in part.

II. BACKGROUND

Plaintiffs filed this action against Clinton Watson, Zkara.com, Flex, Inc. and the Watson

Trust. According to Plaintiffs, the latter three entities are operated by Watson and are alter egos of

Watson. Complaint, ¶¶ 7-9. Plaintiffs allege that in October 2001, Anthony Reyes entered into an

oral agreement (“the Partnership Agreement”) with Watson concerning ownership and development

of technology relating to Voice Over Internet Protocol Telephony (“the VOIP technology”). 

Complaint, ¶ 11. According to Plaintiffs, they agreed to create a joint enterprise with Watson in

which Plaintiffs would finance the further development by Watson of the VOIP technology, with the

goal of eventually creating one or more legal entities to market and sell products incorporating that

technology and sharing in the resulting profits. Id. On the question of ownership of the technology

itself, Plaintiffs state in their complaint that under the oral agreement, “Watson developed and

owned the VOIP technology.” Id. Plaintiffs further allege that under the agreement, “Watson would

continue to make further developments and related improvements to and commercial

implementations of the VOIP technology which would be co-owned by Reyes and Watson (the

“Partnership IP”) . . .” Id. (emphasis added).

On June 6, 2002, Watson filed a patent application entitled, “Mechanism for Implementing

Voice Over IP Telephony Behind Network,” listing Watson as the inventor. Complaint, ¶ 12.1

 That

patent ultimately issued on January 6, 2004. See Complaint, Ex. A (U.S. Patent No. 6,674,758 B2

(“the ‘758 patent”). 

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 In their Sur-Reply, Plaintiffs did not deny receipt of the Opposition or the attached documents.

Nor did they object on the basis that any of attached documents were not authentic. Rather, Plaintiffs

acknowledged receipt of the Opposition, including the exhibits. See Sur-Reply at 2 (characterizing

Defendant’s Opposition as nothing more than “a series of ‘Objections to Plaintiffs’ Motion for Default

Filed as an Affidavit’ . . . with attached exhibits. . .”). At oral argument, however, Plaintiffs’ counsel

stated that they had not received any documents from Defendant. Because this statement is clearly

contradicted by Plaintiffs’ own brief, the Court concludes that it was the result of a misunderstanding

on the part of Plaintiffs’ counsel regarding the documents to which the Court was referring at oral

argument. Therefore, the Court concludes, based on Plaintiffs’ failure to object, that the agreements

attached to Defendants’ Opposition are authentic. The Court notes that subsequent to the hearing, at

which this issue was first raised, Plaintiffs have failed to notify the Court that any of the documents filed

as part of Defendant’s February 9, 2006 Opposition are not authentic – even though Plaintiffs filed

supplemental materials on March 17, 2006.

3

 The Court takes judicial notice of the fact that Attorney Docket No. 6064.P001 corresponds

to the ‘758 patent, as is reflected on the website of the United States Patent Offices at www.uspto.gov.

See Fed. R. Evid. 201 (permitting court to take judicial notice of facts that are “capable of accurate and

3

On June 26, 2002, the Watson Trust and the Reyes Trust entered into a Bill of Sale. 

Complaint, ¶ 13. See also Opposition, Ex. A.2 The Bill of Sale described a “certain” Voice-Over

Internet-Protocol (VOIP) technology that was covered by Watson’s patent application. Opposition,

Ex. A. Under the Bill of Sale, the Watson Trust granted the Reyes Trust “perpetual and exclusive

rights to market on a worldwide basis said VOIP . . . technology.” Id. The Bill of Sale was signed

by Mary Reyes as trustee for the Reyes Trust and Clinton Watson as trustee for the Watson Trust. 

Id.

On February 3, 2003, Watson and Reyes formed two Hong Kong corporations to carry out

the Partnership Agreement: NXG International, Ltd. (“NXG”) and iVoice Holdings, Ltd. (“iVoice”). 

Id., ¶ 14. On November 3, 2003, Reyes and Watson entered into a Memorandum of Understanding

with Transnational Diversified Corporation (“TDC”), according to which TDC was to invest

$10 million in venture capital in NXG and iVoice in return for a 50% interest in both companies. 

Id., ¶ 15. Shortly thereafter, TDC funded the first $1 million tranche. Id. 

On August 11, 2003, Mary Reyes and Clinton Watson entered into another agreement (the

“Agreement” or the “August 11, 2003 Agreement”). The Agreement states that “the parties by this

represents [sic] that they are co-owners to the Voice-Over Internet-Protocol Technology. . . .” 

Opposition, Ex. B, ¶ 2. It goes on to describe the VOIP technology as the technology described in

the ‘758 patent application (referred to as Attorney Docket No. 6064.P001).3

 Id., ¶ 2.1. Finally, the

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ready determination by resort to sources whose accuracy cannot reasonably be questioned”).

4

 Also attached to Defendant’s Opposition is an addendum to the August 11, 2003 Agreement

that purports to transfer ownership rights to Mary Reyes. Opposition, Ex. B. That document, however,

was not signed by Watson. Id. See also Supplemental Declaration of Mary Reyes in Support of Motion

for Entry of Default Judgment (“Reyes Suppl Decl.”), ¶ 18.

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Agreement states that Watson is the “inventor-technology provider in a joint co-ownership by virtue

of a Deed of Assignment entered into with Mary Reyes, dated February 3, 2002 . . . ” Id., ¶ 2.2. The

Agreement is signed by Reyes and Watson. Id.

4

 There is no mention in the Agreement of the

parties’ respective trusts. Id.

According to Plaintiffs, Watson controlled the development and implementation of the VOIP

technology through computers located in Missouri and California, and possibly other locations. 

Complaint, ¶ 16. On November 30, 2003, Watson threatened to block access to the VOIP

technology if Plaintiffs did not pay him $500,000.00, to which he asserted he was entitled under the

agreements described above. In order to meet the TDC funding conditions, Reyes authorized

payment of $200,000.00 to Watson from NXG. Id. Plaintiffs allege that they paid Watson

$617,000.00 between October 2001 and February 2004, which included the purchase price for the

VOIP technology, wages and benefits, and development and commercial implementation. 

Complaint, ¶ 18. Plaintiffs further allege that Watson has continued to use the VOIP technology and

has failed to meet the terms of the Partnership Agreement, the June 26, 2002 Bill of Sale and the

August 11, 2003 Agreement. Id., ¶ 20.

In their complaint, Plaintiffs asserted the following claims against Defendants: 1) breach of

the oral Partnership Agreement; 2) breach of Co-Ownership Agreement; 3) breach of fiduciary duty

(as to Watson only); 4) fraud and deceit; 5) negligent misrepresentation; 6) unfair competition in

violation of Cal. Bus. & Prof. Code §§ 17200 et seq.; and 7) declaratory relief. Plaintiffs requested

compensatory and punitive damages, attorneys’ fees and costs, and injunctive relief.

In the Motion, Plaintiffs seek entry of default judgment as to all Defendants. Plaintiffs

request $652,921.06 in damages, $81,483.75 in attorneys fees, and a declaration that Plaintiffs are

equal co-owners of the VOIP technology, including the ‘758 patent.

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5

 Prior to the hearing, Defendant Watson sought leave to present witnesses to testify regarding

the merits of Plaintiffs’ claims. The Court denied Watson’s request but notified him that it would

consider any sworn declarations he wished to file in connection with the Motion. Watson did not file

any declarations by his proposed witnesses.

5

In his Opposition, Defendant challenges many of the factual allegations in Plaintiffs’

complaint, including the allegation that the VOIP technology is co-owned. Defendant also

challenges various rulings by Judge Wilken. Attached as exhibits to the Opposition are copies of

various documents referenced in Plaintiffs’ complaint.5

Because the Opposition was filed over a week late, Plaintiffs were permitted to file a SurReply. See Order Granting in Part and Denying in Part Defendant’s Motion to File Late Opposition

and for Withdrawal of Judge Spero and Granting Defendant’s Motion to Call Witness, Filed

February 14, 2006. Plaintiffs assert in their Sur-Reply that the points raised in Defendant’s

Opposition are an attempt to argue the merits of his case and that this attempt should be rejected

because Judge Wilken has already determined that default should be entered against Defendants.

III. ANALYSIS

A. Legal Standard

Under Federal Rule of Civil Procedure 55(b)(2), the court may enter a default judgment

where the clerk, under Rule 55(a), has already entered the party’s default based upon a failure to

plead or otherwise defend the action. Alternatively, default judgment may be entered under Rule

37(b)(2) as a sanction. In this case, default was entered against Zkara.com, Flex, Inc., and the

Watson Trust under Rule 55(a) for failure to defend. In addition, the Court has determined that

default judgment shall be entered as to Watson as a sanction under Rule 37(b)(2). The remaining

questions are: 1) should default judgment be granted as to the Entity Defendants; and 2) what

remedy is appropriate as to all Defendants.

The district court’s decision to enter a default judgment involves some discretion. Lau Ah

Yew v. Dulles, 236 F.2d 415 (9th Cir. 1956) (affirming district court’s denial of default judgment). 

In determining whether to enter default judgment pursuant to Rule 55(b) of the Federal Rules of

Civil Procedure, courts consider a wide range of factors, including: “(1) the possibility of prejudice

to the plaintiff, (2) the merits of plaintiff’s substantive claim, (3) the sufficiency of the complaint,

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 Where default judgment is entered as a sanction pursuant to Rule 37(b), an additional set of

factors is considered. These factors were addressed in Judge Wilken’s December 6, 2005 Order, in

which the Court granted Plaintiffs’ motion for terminating sanctions.

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(4) the sum of money at stake in the action, (5) the possibility of a dispute concerning material facts,

(6) whether the default was due to excusable neglect, and (7) the strong policy underlying the

Federal Rules of Civil Procedure favoring decisions on the merits.” Eitel v. McCool, 782 F.2d 1470,

1471-1472 (9th Cir. 1986); see also Wright & Miller, Federal Practice and Procedure, Civil §

2685.6

Where a default judgment is deemed appropriate, the factual allegations of the complaint,

except those relating to damages, are taken as true. Geddes v. United Fin. Group, 559 F.2d 557, 560

(9th Cir. 1977) (citing Pope v. United States, 323 U.S. 1, 12 (1944)). However, the court “must still

review the facts to insure that the [p]laintiffs have properly stated claims for relief.” Doe v. Qi, 349

F. Supp. 2d 1258, 1272 (N.D. Cal. 2004); see also Nishimatsu Constr. Co. v. Houston Nat’l Bank,

515 F.2d 1200, 1206 (5th Cir. 1975) (holding that allegations concerning existence and terms of a

contract did not support liability where allegations were contradicted by actual contract). Further,

the Court has discretion to require that a plaintiff seeking entry of default judgment present proof of

any fact alleged as a basis for liability. Apple Computers, Inc. v. Micro Team, 2000 WL 1897354

(N.D. Cal.) (citing 10A Wright, Miller & Kane, § 2688 at 59-61 and Quiridongo Pacheco v. Rolon

Morales, 953 F.2d 15, 16 (1st Cir. 1992)). 

Where a plaintiff has established liability, the plaintiff must then present evidence to

establish the amount of damages. See Geddes, 559 F.2d at 560. More broadly, where other types of

relief, such as an injunction or declaratory relief, are sought, the district court may not grant such

relief without making findings indicating that the non-defaulting party is entitled to it. Sec. and

Exch. Comm’n v. Mgmt. Dynamics, Inc., 515 F.2d 801, 814 (2d Cir. 1975) (holding that district

court had abused its discretion in granting permanent injunction on the basis of default without

making findings that permanent injunction was justified). 

B. The Entity Defendants

Plaintiffs’ claims against the Entity Defendants are based on their allegation that these

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7

 As noted above, the court has the discretion to review evidence in support of a default

judgment motion. On the other hand, Plaintiffs should not be required to litigate claims on which

Defendants have defaulted. Therefore, while the Court reviews the legal sufficiency of Plaintiffs’

claims, it declines to revisit issues Judge Wilken has already resolved. The Court also rejects Defendant

Watson’s attempt to challenge Plaintiffs’ factual allegations, which are deemed to be true by virtue of

Defendant’s default, except to the extent that these factual disputes are relevant to the question of

remedy.

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 Plaintiffs refer to these two agreements collectively as the “Co-Ownership Agreement.”

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Defendants are alter egos of Watson. In addition to the allegations of the complaint, Plaintiffs

provided the Court with evidence that Watson asked Plaintiffs to make payments to him through

both the Watson Trust and Flex, Inc. See Reyes Supp. Decl., ¶¶ 5, 9 & Exs. 1, 2. On the basis of

this evidence, the Court concludes that the Watson Trust and Flex, Inc. should be liable to the same

extent Watson is liable on Plaintiffs’ claims. 

On the other hand, Plaintiffs have provided no specific facts in support of their allegation

that Watson is an alter ego of Zkara.com. In the supplemental declaration filed by Plaintiffs, the

only evidence regarding Zkara.com is a statement, based on “information and belief” that Watson is

the alter ego of this entity. In the absence of any specific facts supporting this legal conclusion, the

Court recommends that default judgment be denied as to Zkara.com.

C. Liability

Plaintiffs assert seven claims against Defendants. Below, the Court addresses the allegations

and, where applicable, the evidence in the record relevant to each claim.7

1. Breach of Partnership Agreement

Plaintiffs allege that Watson breached the Partnership Agreement in a number of ways,

including by failing to prepare training manuals, train employees, and turn over know-how and

ownership of the VOIP technology as agreed. Complaint, ¶ 25. The allegations are sufficient to

support liability on this claim.

2. Breach of the Bill of Sale and August 11, 2003 Agreement8

Plaintiffs allege that Watson breached the terms of the Bill of Sale and the August 11, 2003

Agreement by preventing Plaintiffs from exercising their exclusive worldwide right to market the

VOIP technology, in particular, by failing to provide technical support and directly competing with

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Plaintiffs by selling the technology himself. Complaint, ¶ 30. Plaintiffs’ allegations are sufficient to

support liability on this claim. 

3. Breach of Fiduciary Duty

Plaintiffs’ claim for breach of fiduciary duty is based on the alleged breach of the Partnership

Agreement. To the extent the Court finds that there is liability as to the breach of the Partnership

Agreement, liability is also established with respect to the claim for breach of fiduciary duty.

4. Fraud and Deceit

Plaintiffs allege that Defendant intentionally misled them with respect to his intentions as to

the VOIP technology. Under Rule 9 of the Federal Rules of Civil Procedure, fraud must be alleged

with particularity. The Court concludes that Plaintiffs’ allegations are sufficient to find liability on

this claim.

5. Negligent Misrepresentation

Plaintiffs allege that Defendant negligently misrepresented his intentions with respect to the

VOIP technology. Plaintiffs’ allegations are sufficient to establish liability.

6. Unfair Competition

Plaintiffs allege that Defendants’ violation of the Partnership Agreement, the Bill of Sale and

the August 11, 2003 Agreement constitute unfair competition under Cal. Bus. & Prof. Code

§§ 17200 et seq. Section 17200 prohibits business practices that are “unlawful, unfair, or

fraudulent.” Courts have held this section is violated when a defendant engages in any one of these

three categories of conduct. Plaintiffs fail to allege conduct that is either “unlawful” or “fraudulent”

under § 17200. See Accuimage Diagnostics Corp. v. Teraracon, Inc., 260 F. Supp. 2d 941, 954

(N.D. Cal. 2003)(holding that “unlawful” conduct refers to “violations of law, not contract”); Comm.

on Children’s Television, Inc. v. Gen. Foods Corp., 35 Cal. 3d 197, 211) (holding that to state a

claim for “fraudulent” conduct under § 17200 a plaintiff must allege that “members of the public are

likely to be deceived”). Plaintiffs do, however, allege “unfair” conduct. See Podolsky v. First

Healthcare Corp., 50 Cal. App. 4th 632 (1996) (holding that an unfair business practice occurs when

a practice “offends an established public policy or when the practice is immoral, unethical,

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oppressive, unscrupulous or substantially injurious to consumers”). Therefore, Plaintiffs’

allegations are sufficient to support liability on this claim.

7. Declaratory Relief Claim

Plaintiffs bring a declaratory relief claim seeking a declaration concerning the ownership of

the VOIP technology described in the ‘758 patent. This claim is discussed below, in the discussion

of the remedy sought by Plaintiffs.

C. Remedy

Plaintiffs seek damages in the amount of $652,921.06, attorneys’ fees and declaratory relief

in the form of a declaration that Plaintiffs and Watson are co-owners of the VOIP technology,

including the ‘758 patent. 

1. Damages

 Plaintiffs seek to recover the amounts they paid Watson under the contracts in the form of

wages and benefits ($133,366.20), capitalization for the partnership ($284,911.16), expenditures for

partnership property ($34,643.70) and a “venture funding bonus” ($200,000.00). See Declaration of

Mary Reyes in Support of Motion for Entry of Default Judgment (“Reyes Decl.”). Plaintiffs have

supported their request with detailed invoices. See id. Having carefully reviewed the evidence

provided, the Court finds that Plaintiffs’ damages are support by the evidence and should be

awarded in full. 

2. Attorneys’ Fees

Plaintiffs request attorneys’ fees pursuant to Cal. Bus. & Prof. Code §§ 17200 et seq. 

However, the unfair competition law does not provide for attorneys’ fees. Walker v. Countrywide

Home Loans, Inc., 98 Cal. App. 4th 1158 (2002). A prevailing defendant in an unfair competition

action may seek attorneys’ fees as a private attorney general pursuant to Cal. Code Civ. Proc.

§ 1021.5. That section allows a court to award attorneys’ fees to a prevailing party where “a

significant benefit, whether pecuniary or nonpecuniary, has been conferred on the general public or

a large class of persons.” Here, however, Plaintiffs do not allege that a significant benefit has been

conferred on the general public. Nor is there evidence in the record of such a benefit. Therefore,

Plaintiffs’ request for attorneys’ fees should be denied.

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9

 Plaintiffs have also provided minutes of a June 27, 2002 meeting of the NRW Board of

Directors meeting which state, “It is reported by Clinton Watson that he has sold the rights to his two

patents for plug & play VOIP phones and the voting rights of his shares to Ms. Mary Reyes for

$250,000 USD which was paid in full to Mr. Watson on June 26, 2002.” Reyes Supp. Decl., Ex. 6. 

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3. Declaratory Relief

Plaintiffs seek declaratory relief in the form of a declaration that “Plaintiffs and defendant

Watson are equal co-owners of the VOIP Technology, including United States Patent No. US

6,674,758 B2.” Plaintiffs’ Proposed Order. The Court concludes that Plaintiffs are entitled to

declaratory relief based on the August 11, 2003 Agreement, signed by Watson and Reyes, which

states that Mary Reyes became a co-owner of the VOIP technology under a deed of assignment

dated February 3, 2002. Opposition, Ex. B; see also Reyes Supp. Decl., ¶ 15 (stating that the right

to co-ownership was transferred to Mary Reyes in a deed of assignment dated February 3, 2002). 

Although the deed of assignment is not in the record, the Court concludes that the signed August 11,

2003 is sufficient to evidence the transfer.9

 

However, it is recommended that any declaratory relief afforded Plaintiffs make clear that

co-ownership is between Watson and Mary Reyes only. Plaintiffs have pointed to no evidence or

allegations suggestion that any of the other Plaintiffs are co-owners. In addition, because the VOIP

technology at issue is not anywhere clearly defined, it is recommended that the co-ownership rights

be declared only as to the ‘758 patent. It is evident from the August 11, 2003 Agreement that the

term “VOIP technology” at a minimum referred to the technology referred to in the ‘758 patent.

Thus, declaratory relief should be afforded in the form of a declaration that Mary Reyes and

Defendant Watson are equal co-owners of the VOIP technology described in US Patent No.

6,674,758 B2. 

III. CONCLUSION

Default judgment should be entered as to all Defendants except Zkara.com. It is

recommended that the Court award the following relief: 1) $652,921.06 in damages; and

2) declaratory relief in the form of a declaration that Plaintiff Mary Reyes and Defendant Clinton

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Watson are equal co-owners of the VOIP technology described in United States Patent No.

6,674,758 B2. It is recommended that Plaintiffs’ request for attorneys’ fees be DENIED.

Dated: April 3, 2006

 

JOSEPH C. SPERO

United States Magistrate Judge

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