The Honor ab l e J
. Ronnie Gree r, United States District Judge f or the Ea stern District of * Tenne ssee, sitting by

desig nation. Sha un Ah e rn is no t a

pa rt y to t his a pp e a l. F or purp os e s o f t

his a pp e a l, t he te rm “ De fe nd a nts ” 1 ref ers only to Schwarzena

u, Ex Celsius L td., and ExC elsius GmbH.

1 NO T R EC OM M EN DE D F OR F UL L- TEX T P UB LIC AT ION F ile Nam e: 09a0347n.06 F iled: May 19, 2009 Nos. 08-5492, 08-5493
UN ITED STA TES C OU RT OF AP P EA LS F OR THE SI XT H C IR CU IT KR OWTOH II LLC, P laintif f-App ellee and Cross-Appellan t,
v. EXCELS IUS INTERNATIONAL L TD, e t al . De fend ant s- App e lla nt s a nd C r os sApp e lle e s. / ON AP P EA L F RO M THE U NI TED STA TES D ISTRIC T C OU RT F OR THE EA S TE RN D IS TR IC T O F K EN TU CKY

BEFORE: CLAY and GIBBONS, Circuit Jud ges; G REER, DistrictJudge. * CLAY, Circ uit Jud ge . Plaintiff, K rowtoh I I , L L C, f

iled suit a g ainst Fra

nk Schwar zenau, Ex Celsius I nternational GmbH (“ExCelsius GmbH” ), and ExCelsi us I nternational L td. (“ExCelsius L td.”), De fenda

nts, and Shaun Aher

n, invoking the district court’s diver sity jurisdiction under 28 1 U.S.C. § 1332. Plaintiff soug ht da mag es and equitable r elief a rising f rom ExC elsius L td.’s alleg ed brea ch of the fra

nchise a g ree ment it entere d into with P laintiff. B ased on the failure of Ahe rn and De fe nd ants to r e sp on d to dis c ov e ry and oth e r c ourt

or de rs , the dis tr ic t court or de re d en tr y of de fa ult2

with respec t to the liabilit y issues involved in the case . After a tria l o n t h e i s s u e o f dama g es, the d i s t r i c t c o u rt aw ar d e d P l a i n t i f f a t o t a l o f $ 7 8 1 , 2 2 6 i nd a m a g e s ar i s i n g f r o m D e f e n d an t s ’ b r e a c h
. In this appeal, De fenda

nts seek re versa l of the distr i ct court’s denial of their motion to set aside the
e ntr y of de fa ult , a s we ll a s the dis tr ic t c ourt ’s awa rd of dama g e s to Pla int if

f. Pla int if f c ro ss- a pp e a ls the district court’s or der, a rg uing that the district court failed to awa rd t he full amount of dama g es to which it was entitled. For the re asons set for

th below, we RE VE RSE the district court’s judg ment, VA CA TE the
awa rd of da mag es, and REMAND fo r f ur the r p ro c e e din g s. I. BACK GR OUND A. F actual History Pr ior to 2 00 3, Hotw or

k E ur op e pr ov ide d “ he a t up c oo l do wn ” or “ ho tw or k” se rv ic e s to
c omp anie s w ithind

us tr ia l f ur na c e s. As the pa

rt ie s e xpla in i n th e ir

br ie fs , in du str ia l f

ur na c e s o pe rate continuously

for many y ear s at hig h temperat u re s . When the furna ces r equire maintenanc e, the t em p er at u re o f t h e f

u rn ac es m u s tb e r edu ce d
. Ho we v er , i mp ro p er co o l i n g p ro ce d

u re s ca nd am age the lin ingof

the fu rn a c e wh ic h, a lth ou g h it c an wi ths tand

hig h te mpe ra

tur e s, is s us c e pti ble to
cra cking or other da

mag e whe n the t emper ature chang es t oo rapidly
. Hotwork Europe and similar companies use highly

specia liz ed combustion equipment to slowly cool the te m p er ature of the fu rn ac e p ri o r t o m a i n t en an ce an d , af t er m ai n t en an ce , t o s l o wl y

re tu rn t h e f

u rn ac e t o i t s h i gh operating tempe rature
. I n 2003, Fosbe l USA, the pare nt company of Hotwo rk E u rope, de cided to sell Hotwork Europe. I n 2003, cer

tain individuals previously associate d with Hotwork Europe for med HotworkPlainti ff , Kr o wt o h I I , p re v i o u s l y

o p er at edu s i n g t h e n am e H o t wo rkUS A. I nAu gu s to f 2 0 0 5, 2 Plaintiff sold it s as s et s to TGC, and also ag ree d to let TGC use the name Hotwork USA. Acc ording ly , Plaintiff chang ed its name to Krow toh (“Hotwor k” spelled ba ckwa

rds). How ever , for purposes of this opinion, Plainti ff a nd Hotwork a

re use d intercha

ng eably
. 3 USA (“H otwork”) , and p u rc h ased the assets of Hotwor k Europe, inc luding the c ompany ’s 2 intellectual prope rty

rig hts and approximately 125 sets of combustion equipm en t . Aher n and Schwar zenau, pre viously employ ed at diff

ere nt branc hes of Ho t wo rk Europe, forme d Ex Celsius GmbH to provide hotwork se rvice s in Europe. To fulfill this g oal, Ex Celsius L td., another c ompany that Aher n and Schwa

rzenau for med, enter ed int o a franchise ag ree ment with Hotwork USA in J une of 2003 (the “ Ag ree ment”). The Ag ree ment set the term of the fra nchise for seven y ear s, with the option to renew f or an
a d d i t i o n a l f

i v e ye ar s . U n d e r

t h e t e r m s o f t h e A g r e e m e n t , E x C e l s i u s L t d
. w a s r e qu i r e d t o p a y a “monthly operating f

ee” equal to f

ive per cent of

the monthly

net sales within the oper ating territory define d by

the Ag ree ment. For

sales made outside of t h at t er ri tory , the Ag ree ment require d Ex Celsius L td. to pay

Hotwork a

ten per cent “co m m i s s i o n ” in addition to the operating f ee. T he parties a lso ag ree d that Hotwork would lease sets of spec ialized combustion equipment to Ex Celsius L td. for six ty

months for $8500 per month, and that Ex Celsius L td. would ow n the equipment at the
e nd of that pe ri od . In a dd iti on

to e qu ipm e nt, ExCe lsi us L td. re c e ive d “ job s in pr oc e ss, ” wo rk

or de rs , and customer

lists from Hotwork. (J.A. 2329.) Howeve r, the pa rties expressly

ag ree d t h at the “owne rship of all rig ht, titl e, and inter est in and t o the license d trade name, tra demar ks . . . , and . . . g oodwill . . . shall remain solely with [ Hotwork].” (J.A. 42.) I n addition, the Ag ree ment restric ted Ex Celsius L td. and its principals from “ eng ag ing dir ectl y o r indirec tly in any business . . . simil ar to that which is cre ated by this Ag ree ment” for a period of t wo y ear s following the termination of4

the fr anc his e “ fo r wh a te ve r re a so n. ” (J.A 51 .) I n July of 20 04 , le ss t

ha n tw o y e ars a ft e r e nte ri ngint o the Agre ement, Ex Celsius L td. terminated the Ag ree ment, citing the alleg edly unsafe condition of the equipment that Hotwor k had provide d. B. P roce dural Hi story I n November

of 2004, Plaintiff f

iled a complaint in the United States District Court for the Easter n District of Kentucky ag ainst Ex Celsius L td., E x Celsius GmbH, Aher n, and Schwa

rzenau. Th e c omp la int

c la ime d b re a c h o f t

he Ag re e me nt, mis a

pp ro pr ia tio n o f t

ra de secr ets , unf

a ir competition, conver sion, and violation of t he L anham Act. To defe nd themselves ag ainst Plainti ff’ s suit, Defenda

nts and Aher

n reta ined local counsel. On J anuar y 27, 2005, Def

endants and Aher

n filed a motion to dism iss Plaintiff’s complaint, arguing that the di strict court lacked personal jurisdiction beca use they had ins ufficie nt contac ts with the forum state . The district cour t concluded that it had pe rs on a l juri sd ic tio n o ve r D e fe nd ants and Ah e rn and de nie d th e mot ion

to d ism iss
. On J une 11, 2005, Plaintiff filed a motion for a pre liminary injunction seeki n g to preve nt Def en d an t s and Ahe rn “f

rom using the assets of Hotwor k (both confide ntial information and phy sical asse ts) to unfairly compete a g ainst Hotwork” in violation o f th e p o s t- te r

mi n a ti o n r e s tric ti ons set forth in t he Ag ree ment. (J.A. 306.) Pl aintiff asse rted that “ [t ]he goodw ill between Hotwor k and its custome rs al re ady

has bee n irrepa

rable [si c] damag ed by

Def endants’ a ctions, and fur ther irrepa rable damag e will result . . . .” (J.A. 307.) O n J une 28, 2005, the c ourt g rante d Def endants a nd Aher n an extension of time to respond to Plaintiff’s preliminary injunc t i o n m otion and discoveryI n Fe bruar y of 2006, appr ox imately one y ear afte r Plaintiff f iled its motion for a pre liminary 3 injunction, the court denie d the motion, ci t ing Plaintiff’ s failure to act on its motion. The court informed Plaintiff that it could re file the motion if it intended to pursue a pr eliminary injunction. 5 reque sts. On J uly

22 , 2005, Def

endants filed a

n objection to Plaintiff’s motion for a pre liminary injunction. 3 The pa rties also beg an discovery related to Plaintiff’ s claims. Plaintiff se rved a reque st for documents and inter

rog atories a

nd, on Aug ust 1, 2005, the distr i ct co u rt enter ed an “ ag ree d order
e xten din g tim e to r e sp on d” to P la int if f’ s d isc ov e ry

reques ts, g ivi ngDe fe nd ants and Ah e rn un til Aug ust 26, 2005 to file a re sponse. When Def endants a nd Aher n failed to re spond, on September 2, 20 05 , Pl a int if

f f ile d a mot ion to co mpe l. De fe nd ants and Ah e rn did no t r e sp on d to the mot ion to
c omp e l. F ive da y s late r, on Se pte mbe r 7, 20 05 , c ouns e l f or De fe nd ants and

Ah e rn fi le d a mot ion to withdraw, statingth a

t “ D e f e n d ants [and Ahern] have te rminated [their] represe ntation and instructed them to withdraw as counsel . . . in this case ef fec tive immediately .” (J.A. 504.) On Nove mber 14, 2005, the cour

t gr anted the motion, and a lso order ed that, “within six ty (60) day s . . . , new c ounsel should enter an appea

ranc e on behalf of the Def endants [and A hern] or the Def endants [and Aher

n]
s h a ll a d v is e th e Co u rt o f th e ir in te n tion to proc eed pr o s e .” (J.A. 507.) One w eek later, on November

21, 2005, the cour

t gr anted Plaintiff’s motion to compel, g iving Def endants and Ahe rn ninety day s “to file a r esponse to [P ]l aintiff’s motion to compel discovery .” (J.A. 508.) The c ourt
a lso or de re d th e c le rk ’s of fi c e to s e rv e a

c op y on fo rm e r c ouns e l f

or De fe nd ants and Ahe rn, wi th instructions to provide a copy to Defe ndants and Ahe rn. On J une 19, 2006, the district cour t addre ssed the fa ilure of De fenda nts and Aher

n to take action re g ardingthe cour

t’s order of Nove mber 14, 2005:Although A hern joined the other defenda nts in arguing that the district court lac ked per sonal 4 jurisdiction and opposing Plaintiff’s motion for a preliminary injunction, Ahern lef

t the defe ndant companies in De cember of 2005 and subse quently beg an coope rating with Plainti ff. In return f or Ah e rn ’s a ssi sta

nc e in l iti g a tin g its c la ims , Pl a int if f a g re e d n ot t o s e e k d a ma g e s a g a ins t A he rn . T hu s, wh ile Ah e rn re ma ine d a name d de fe nd ant in the pr oc e e din g s in the dis tr ic t c ourt , h e did no t jo in i n the mot ion

to s e t a sid e the e ntr

y of de fa ult , a nd ne ve r a g a in p art ic ipate d a s a de fe nd ant. 6 [T] he cor porate defe ndants are ag ain orde red to obtain co u n s el and the individual de fe nd ants are a g a in o rd e re d to eit her ob ta in c ouns e l or ind ic a te to t

he Court the ir intention to procee d pro se by filing suc h cer

tification with the Court. Disreg ard f or this Order w ill be considere d a fa ilure under Fe dera l Rule of Civil Procedur e 55(a ) to “ oth e rw ise de fens e [sic ] as pr ov ide d b y the se ru le s” and

fa ilure to c omp ly

wi ll result in entry

of def ault judgme nt in favor of

the plaintiff. (J. A
. 5 1 3
. ) T h e c o u rt o r d e r e d D e f e n d an ts an d A h e r

n to a p p e ar , e it h e r thr o u g h c o u n s el or, for the individual defenda

nts, pro se, by

Aug ust 27, 2006. The cour t also order ed the cler

k to send a c opy of the orde r to the individual defe ndants at t heir “last known addresses,” and direc ted forme r counse l to forwa rd a c opy of the order v i a el ectronic mail to the individual defenda nts. Finally , the cour

t
war ned that fa ilure to comply “shall result in the C ourt’s entry of default judgme nt in favor of the plaintiffs.” (J.A. 513.) Def endants and Aher

n failed to a ct by Aug ust 27, 2006 and, on September 12, 2006, the court
or de re d th e c le rk

to e nte r d e fa

ult in f a vo r o f P la int if

fs . The dis tr ic t c ourt

c on c lud e d th a t D e fe nd a nts and Ahe rn had f

ailed to otherw ise defe nd under Rule 55(a)
. Howeve r, “[s]i nce the y ha[d] appea

red in the action,” the district court found that Def endants a nd Aher n wer e entitled to “a

hear ing . . . pr ior to entry of def ault judgme nt on the i s s u e o f l iability .” (J.A. 653.) Acc ording ly , the district court schedule d an evide ntiary

hear ing f or Oc tober 17, 2006. On Octobe r 13, 2006, four day s befor e the sc heduled e videntiary hear ing, D efe ndants’ new counsel e ntere d a notice of appea ranc e, and D efe ndants filed a motion to s et aside the entry of de fa ult
. Pla int if

f o pp os e d the mot ion , arguin g that De fe nd ants ’ c ulp a ble c on du c t c a

us e d the de fa

ult 47

and that it was pre

ju d i ced by

Def endants’ de lay . After

a hea ring on the issue, the district cour t denied De fenda

nts ’ mo tion to set aside the def ault, as we ll as Defe ndants’ motion for re consideration of that orde r. Discover y continued, and the district c ourt schedule d a trial on the issue of damag es, which beg an on Marc h 26, 2007. Following an extensive multi-day trial befor e the mag istrate re g arding the damag es Plaintiff claimed it incurr ed as a result of De fenda

nts’ brea ch of the Ag ree ment, the mag istrate re commended that judgment be enter ed in Plainti ff’ s favor in the amount of $781,266. After consideringthe par

ties’ objections, the district court adopted the repor t and re commendation of the mag istrate and e ntere d judgme nt in favor of P laintiff on Marc h 24, 2008. Def endants a ppeale d from the judg ment, as we ll as the district court’s or der de ny ing the motion to s et aside the entry of defa ult. Pl aintiff cross-appe aled the district court’s ruling that it was not entitled to certa in damag es Plaintiff claimed re sulted from De fenda nts’ brea ch. II. M OTI ON TO SET ASI DE THE E NT RYOF DE F AU LT A. Stand ard of Review Th is C ourt

re vie ws a dis tr ic t c ourt ’s de c isi on

to d e ny a mot ion to s e t a sid e an e ntr

y of de fa ult for a n abuse of

discretion. O.J. Distrib., Inc

. v. Hornell Brewing Co. , 340 F.3d 345, 352 ( 6th Cir. 2003). Howe ver, be cause of t h e poli cy favor ing de terminations on the merits, “a ‘g laring abuse’ of discre tion is not require d for rever sal of a court’s refusa l to relieve a party of the ha rsh sanc tion of def ault.” Berthelsen v . Kane , 9 07 F .2 d 6 17 , 6 20 (6 th Cir . 1 99 0) ; Shepard Claims Serv., Inc . v. W illiam Darrah &Assoc. , 796 F.2d 190, 193 (6th Cir. 1986) (“[A] strong pref ere nce for trials on the merits in fede ral c ourts has led to the a doption of a somewhat m o dified standar d of re view whe re defa ults are involved.” ).Although the parties do not conte st this i ssue on appe al, the pre sence of merit o r ious defense s 5 weig hs heavily

in favor of

setting a side the def

ault. As the di strict court noted, “thre e of the named d e f e n d an t s
— E x C e l s i u s G mb H , S c h w ar z e n a u , an d A h e r

n
— l i k e l y have no liabi li ty under t he Franchi s e Agreeme nt, as E xCel s ius [ L td. ] was the only s igna tor y and the othe r t hree cannotbe cons ide red ‘ s ub-f

ranc his ees . ’ ” (J
. A. 729. ) 8 B. Ana lys is Under Rule 55(c) of the Fe dera l Rules of Civil Procedur e, a “ court may set aside a

n entry of de fa ult fo r g oo d c a

us e .” F e d. R. C iv. P. 5 5( c ). Th is C ourt ha s e sta bli sh e d thre e fa c tor s r e le va nt t o the de te rm inatio n o f w he the r “ g oo d c a us e ” ex is ts to s e t a sid e an e ntr y of de fa ult purs ua nt t o Ru le 55(c) : “( 1 ) [ w] hether

culpable c onduct of the de fenda nt led to the defa

ult, (2) [w] hether

the defe ndant has a

meritorious defe nse, and ( 3) [w] hether the plaintiff will be pre

judiced.” W

aifersong, Ltd. v. Class ic Music Ve nding , 976 F .2 d 290 , 292 (6 th Cir . 1 99 2) ; accord W eiss v. St. Paul Fire & Marine Ins. Co. , 283 F.3d 790, 794 (6th Cir. 2002). Whi le cour ts consider these same thre e fa ctors in evaluatingwhether to set aside a defa ult judgme nt under Rule 60(b), “[i] n prac tice a some what more lenie nt standard is applied to Rule 55(c ) motions.” Sh e pa rd , 7 96 F .2 d at 19 3; W

aifersong , 976 F.2d at 292 (“[T]he methodolgy for considering these fa ctors and the weig ht to be acc orded to them de pe nd s o n w he the r t

he c ourt is c on fr on te d b y

an e ntr y of de fa ult or a de fa ult jud g me nt. ” ). Thus , althoug h “all thre e fa ctors must be considere d in r uling on a motion to s et aside a n entry of def ault,” wh e n a de fe nd ant h a s a

me ri tor iou s def

e ns e and the pla int if

f wo uld no t be pr e jud ic e d, “ it i s an a

bu se of discre tion for a district cour t to deny a Rule 55(c) m otion in the absence of a will ful failure of the moving pa

rty to appea r and ple ad.” Sh e

pa rd , 796 F.2d at 194. On appe al, the par

ties do not dispute the district court’s conc lusion that Defenda nts h ad meritorious defe nses to the claims on which the court e ntere d defa ult
. Thus, the only

contested 59

issues with respec t to setting aside the entry of default are whether Plaintiff would be pre judiced, and
w h e t h e r D e f e n d an t s a c t e d

c u l p a b l y. 1 . P r e

j ud ic e t o P la in t if

f De fe nd ants argue that th e dis tr ic t c ourt a bu se d it s d isc re tio n in

fi nd ingtha

t Pla int if f w ou ld be pre judiced by

setting a side the def

ault. Plaintiff’s arguments reg arding prejudice cente r on the

“ i n c r e a s e d

d i f f i c u l t i e s i nd i s c o v e r

y ” t h a ti ta l l e g e s r e s u l t e d b e c a u s e o f D e f e n d an t s ’ d e l ay . In evaluating pr ejudice, this Court has empha siz ed that “d el ay alone is not a suff icient basis for
e sta bli sh ingpr e

jud ic e . Rathe r, it mus t be sh ow n that de lay wi ll re su lt i n th e los s o f e vid e nc e , c re a te incre ased diff

iculties of discover

y , or provide g reater opportunity for f raud a nd collusion.” INVST Fin. Group, Inc. v . Chem-Nucle ar Sys., Inc

. , 8 1 5 F. 2 d 3 9 1 , 3 9 8 ( 6 t h C i r. 1 9 8 7 ) ( qu o t i n g Davis v. Musler , 713 F.2d 907, 916 ( 2d Cir. 1983)) (inter nal quotation marks and c itations omi tted)

. Ag ree ing w ith Pl aintiff’s r epre sentations, the district court found that Plain t i ff woul d fac e incre ased diff

iculties in discovery

based on the fac t that “ Aher n . . . indicated that a

number of the documents that would show [D]efendants’ inflated expenses no long er e x ist, so it will b e more d i f f i c u l tf o r t h e p l a i n t i f

f t o a c c o u n tf

o r t h i s n o w t h a t t h e 1 4 m o n t h s h a v e p a s s e d
. ” ( J
. A
. 7 3 0
. ) In addition, the district court dete rmined that De fenda nts “put a complete stop to” discover y , causing evidenc e to bec ome “stale with the passag e of tim e” and incr easing“the diff iculty in finding witnesses . . . whose me mories have unquestionably fade d.” ( Id. ) We conclude that Plaintiff failed to establish that it would be prejudice d by setting a side the entry of defa

ult. Plaintiff ha s not shown that evidenc e wa s lost, or that it would have any incre ased difficulties obtaining rele vant discover y . The re cord doe s not support the district court’s finding thatI n fac t, as a re sult of P l ai n t i ff’ s secr et ag ree ment with Ahern, Plaintiff obtaine d a wider 6 sc op e of do c ume nts tha

n it s d isc ov e ry

or de rs so ught . T hu s, wh ile De fe nd ants did no t r e sp on d to Plaintiff’s discovery reque sts, Plaintiff rec eived all the documents it sought throug h discovery from Aher n. 10 e vid e nc e wa s lo st a s a

re su lt o f D e fe nd ants ’ d ela y . I n a dv a nc ingthe “ los t e vid e nc e ” argume nt, 6 Pla int if f r e lie d o n A he rn ’s de c laratio n, a ss ert in g t hat “i t is no w i mpo ssi ble to g e t a c c ur a te information about the true cost fig ures” that Def endants used to inf

l at e their profits. (J .A. 740.) Despite Plaintiff’s c hara cter ization, t he dec laration provides no support for its argument. Aher n’s decla ration stated that “[t] he decision to inf late and overstate the expenses in the repor ts .
. . was conscious and de liberate . . . . . The ove rstatement of expenses was done on an ad hoc basis, and I am
un a ble to a c c ur a te ly

qu anti fy the a mou nt t he e xpe ns e s w e re ov e rs ta te d. ” (J.A . 5 97 -9 8. ) A he rn did not state that he now was unable to calc ulate the amounts that wer e over stated, or that he no longe r has ac cess to docume nts w hich would enable him to ar rive at such amounts. I nstead, it neve r wa s possible to determine the amount of inflated expenses beca use the overstate ment “wa s done on an ad hoc ba sis.” (J.A. 598.) Further , Plaintiff provided no evidenc e that specific witnesses’ memor ies fade d bey ond maintaining that “witnesses’ memories are bound to fade with the passage of time.” As noted above, “dela

y alone is not a sufficient ba sis for establishing prejudice .” INVST Fin. Group, Inc. , 815 F.2d at 398. I n finding that Plaintiff would suffer prejud ic e from setting aside the de fault, the district cour t
a lso c ite d th e los s o f g oo dw ill Pla int if f e xpe ri e nc e d d

ur ingthe tim e that D e fe nd ants f aile d to participate in the proc eeding s. The district cour t found that Def

endants’ f ailure to de fend
su c c e ssf u l l y f r u s t r a t e d t h e p l a i n t i f

f ’ s a t t e mp t t o s t o p t h e l o s s o f g o o dw i l l w i t h its Europea n customers. L oss of g oodwill an d m ar ketplace harm c aused by the defe ndants’ continuing u nfair c ompetition usi ng the plaintiff’s e quipment with the pla int if f’ s c us tom e rs wa s ir

re pa ra ble ha rm that cann ot be re g a ine d or e ve n a c c ur a te ly11

me a sure d at th is p oin t. .
. . [A]t this po int , th e pla int if f is r e le g a te d to a tte mpt ingto rec over the economic harm i t suffer ed by rec overingfor the r eduction in the value of its assets when they

wer e sold in Aug ust of 2005. (J.A. 1785.) Howeve r, P laintiff s old its business—including the rig ht to use the name Hotwork a nd
a ll of the e qu ipm e nt a sso c ia te d w ithits ho tw or k o pe ra tio ns —in Au g us t of

20 05 , b e fo re De fe nd a nts delay ed the pr og ress of the lawsuit by failing to respond to discovery and other court orde rs. Fur

ther, althoug h the district court noted that Plainti ff no long er c ould pursue an injunction, the dism issal of Plaintiff’s preliminary

injunction moti on resulted f ro m i t s o wn failure to reque st a hea ring or otherwise a ct on its moti on, and not a s a conse quence of De fenda nts’ conduct. The district court there fore abused its discre tion in finding that s et t i ng aside the e ntry of def ault would prejudice Plaintiff. 2. Defendan ts’ Culpabl e Conduct On appe al, Def

endants al s o argue that their c onduct in failing to respond to discover y and other c ourt order s was excusable, and not c ulpable. I n the context of a Rule 55(c) motion, “it is not absolutely

nece ssary that the neglec t or oversight offere d as reason for the delay in filing a responsive pleadingbe excusable.” Sh e pa rd, 7 96 F .3 d a t 19 4. I ns te a d, fo r a de fe nd ant’ s a c tio ns to c on sti tut e culpable c onduct, the “de fenda nt m u s t d i s p l ay

either a n intent to thwart judicial proce eding s or a
re c kle ss d isr e g ard

fo r the e ff

e c t of its c on du c t on

tho se pr oc e e din g s, ” ra

the r t ha n n e g lig e nt c on du c t. Id. I n addition, “[w] hen aske d to se t a side an entry of defa ult, a court considers . . . [a] defe ndant’s
c ulp a bil ity [] in th e g e ne ra l c on te xt of de te rm ini ngwh ethe r a

pe tit ion e r i s d e se rv ingof e qu ita ble relief .” W aifersong , 976 F.2d at 292. I n connec tion with Defenda nts’ motion to s et aside t h e entry of def ault, Schwar zenau submitt ed an a ffidavi t s t ati ng that he and A hern ha d deter mined that Aher

n would have pr imary12

responsibility

for ha ndling the la

wsuit. Schwarzenau asser ted that he ag ree d to dismiss local counse l in Kentucky

based on A hern’s as suranc es that, ac cordingto an international law expert that he
c la ime d h e c on su lte d, Pla int if f wo uld have to s e e k a

jud g me nt i n G e rm any

be fo re De fe nd ants c ou ld be held l i ab le for mone y

damag es. Schwa

rzenau fur

ther stated that he did not rec eive a ny court order s or other notifica

tion that he could be subject to an entry of default until Aug ust of 2006. At that time, he im mediately contac ted a Ger man attorney and retained local counsel in Kentuc ky , who moved to set aside the en t ry of def ault. Despite Schwa

rzenau’s e x planations, the district court conclude d that Def

endants’ c onduct demonstra ted an intentional disreg ard f or the c ourt’s proce eding s, and there fore constituted culpable c onduct. The district c ourt als o deter mined that Plaintiff’s secr et neg otiations with Aher n to obta in r eleva

nt doc uments did not aff

ect its finding that D e f e n d an t s a c t e d

c u l p a b l y. The district cour

t th u s re j ec t ed S chwa

rzenau’s a ssertion that he did not rec eive a ny court
or de rs , a fi nd ing that is su pp or te d by the re c or d. Al tho ug h D e fe nd ants argue that Sc hw arze na u d id
no t r e c e ive the June 20 06 or de r wa rn ingthat a

fa ilure to a

pp e ar c ou ld r e su lt i n th e e ntr y of de fa ult , the rec ord makes clea

r that the district court orde red that a copy of the orde r be se nt to the individual defe ndants’ per sonal addre sses, and a lso require d their for mer c ounsel to send them co p i es of the order s via standar d and ele ctronic ma il. Ho we ve r , t

h e d i s t r i c t c o u r t d i d c r e d it Sc hw arze na

u’ s st a te me nts that A he rn

ha d r e sp on sib ili ty fo r h and lin g the laws uit and th at Sc hw arze na u w a s unf

a mil iar w iththe Am e ri c an le g a l sy ste m, statements which e x plain Schwar zenau’s failure to act even if he did rec eive copies of t he cour t’s order s. Whi le the fa cts sug g est t h at S ch wa rz en au m ad e aco n s ci o u s
— al t h o u gh m i s gu i d ed

— d ec i s i on to i g no re the dis tr ic t c ourt pr oc e e din g s, his e xplanatio n d e mon str a te s th a t he did no t in te nd

to13

disrespec t the court proc eeding s. By acting quickly to se t a side the defa ult, De fenda

nts “ have g iven evidenc e of respe ct for the cour t’s proce ss,” favoring leniency for De fenda

nts. Sh e pa rd , 796 F.2d at 194 (quoting 6 Moore’ s Fe dera l Practice ¶ 55.01[2] at 55-61 (1985 e d.)). Also reduc ing the culpability of Def endants’ actions is Plaintiff’s own conduct. The district court fa iled to take into acc ount Plaintiff’s own i naction for much of the t ime that Def endants we re
a bs e nt f ro m th e lit ig a tio n, inc lud ingits fa ilure to pur su e its pr e lim ina ry inj un c tio n mo tio n, a s w e ll
a s Pla int if

f’ s su rr e pti tio us c on du c t in

ne g oti a tin g an ag re e me nt w ithAh e rn wi tho ut D e fe nd a nts ’ knowledg e. See B urrell v. Hende rson , 434 F.3d at 834 (6th Cir. 2006) (findingthat the plaintiff’s

“ fa il[ure ] to pr os e c ute he r cl a im fo r 16 mon ths ” and the fa c t tha t “th e c a se wa s h and le d im pr op e rl y by multipl e par

ties” “diminishe[d] [t he defe ndant’s] c ulpability ” and ma de it unfair to lea ve in place the defa ult judg ment). Considering Def endants’ conduct “in the g ener al context of de t er m ining whether [Defenda nt] is deserving of equitable relief ,” W aifersong , 976 F.2d at 292, we conc lude that the dis tr ic t c ourt

a bu se d it s d isc re tio n in

de nyingDe fe nd ants ’ m oti on to s e t asi de the e ntr

y of de fa ult
. Whil e the dis tr ic t c ourt wa s un de rs tand a bly fr us tr a te d by De fe nd ants ’ c on du c t, D e fe nd a nts ’ meritorious defe nses, the complete absenc e of a ny prejudice to Plainti ff, Plaintiff’s own conduc t, as well as “ the s trong policy in favor of deciding cases on their merits,” Sh e pa rd , 7 96 F .2 d at 19 4, a ll
war rant setting a side the entry of def ault. See id. (n oti ng that “w he n th e fi rs t tw o f a c tor s mi lit a te in favor of setting aside the e ntry , it is an abuse of di scre tion for a district court to deny a Rule 55(c ) motion in t he abse nce of

a willful failure
. . . t o ap p ea r”). Howeve r, as this Court previously has noted, the finding that the entry of defa ult should be set aside “does not pr eclude the district court from . . . dete rmining some a ppropriate . . . sanction” a g ainst Defe ndants for the delay cause d by their conduc t. Id. at 195.14

F ina lly , b e c a

us e we c on c lud e tha

t the dis tr ic t c ourt

sh ou ld h a ve se t a sid e the e ntr y of de fa ult , it is nece ssary to vacate the district cour t’s awa rd of damag es to Plaintiff. There fore , we do not re ach the par ties’ ar g uments reg ardingthe issue of damag es. III . CO NC LU SION We RE VE RSE the district court’s order denying Def endants’ motion to set aside the entry of def ault, VA CA TE the di strict court’s a war d of dama g es, and REMAND the case to the district
c ourt fo r f ur the r p ro c e e din g s.