Naghavi v. Belter Health Measurement and Analysis Technology Co., Ltd.

Opinion

1 2 3 4

8 UNITED STATES DISTRICT COURT 9 SOUTHERN DISTRICT OF CALIFORNIA 10

11 DR. MORTEZA NAGHAVI, MD, an Case No.: 3:20-cv-01723-H-KSC 12 individual; MEDITEX CAPITAL, LLC, a Delaware limited liability company; ORDER GRANTING MOTION FOR 13 AMERICAN HEART TECHNOLOGIES, DEFAULT JUDGMENT AND 14 LLC, a Delaware limited liability MOTION TO WITHDRAW company, 15 [Doc. Nos. 38, 43.] Plaintiffs, 16 v. 17 BELTER HEALTH MEASUREMENT 18 AND ANALYSIS TECHNOLOGY CO., 19 LTD., 20 Defendant. 21 On November 26, 2019, Plaintiffs Dr. Morteza Naghavi, Meditex Capital, LLC 22 (“Meditex”), and American Heart Technologies, LLC (“American Heart”) brought this 23 action against several defendants for claims arising out of an alleged breach of contract. 24 (Doc. No. 1-4.) Belter Health Measurement and Analysis Technology Co., Ltd. (“Belter”) 25 is the only remaining defendant in the case. Now pending before the Court are two 26 motions: a motion for default judgment against Belter filed by the Plaintiffs (Doc. No. 43) 27 and a motion to withdraw as Belter’s counsel filed by the law firm of Paul Hastings LLP 1 (“Paul Hastings”) (Doc. No. 38). The Court held a hearing on both motions on July 25, 2 2022. (Doc. No. 55.) Naveen Madala appeared at the hearing on behalf of Plaintiffs, and 3 Christopher McGrath appeared from Paul Hastings as attorney of record to Belter. (Id.) 4 No other person appeared on Belter’s behalf. The Court will briefly summarize the factual 5 allegations and procedural history in this case as necessary before turning to the merits of 6 the pending motions. 7 BACKGROUND 8 This dispute revolves around the marketing, manufacture, distribution, and sale of a 9 cardiovascular medical device called “VENDYS.” (Doc. No. 15 at 2.) Belter is a 10 manufacturer and distributor of medical devices in China. (Id. at 2-3.) Plaintiff Meditex1 11 allegedly entered into a series of agreements with Belter which granted Belter exclusive 12 rights to market, distribute, and sell VENDYS in China. (Id. at 3.) In short, Plaintiffs 13 allege that Belter violated these agreements by (i) failing to meet sales targets, (ii) 14 underpaying the licensing fee for VENDYS, and (iii) not delivering VENDYS units to 15 Plaintiffs in the United States. (Id.) 16 The Court has dismissed several defendants from this action. (Doc. Nos. 10, 23, 34.) 17 On November 19, 2020, Plaintiffs filed their Second Amended Complaint (“SAC”) 18 alleging breach of contract and fraud. (Doc. No. 16.) Belter and its corporate parent 19 Eastone Century Technology Co., Ltd. (“Eastone”) then moved to dismiss the SAC. (Doc. 20 No. 17.) The Court dismissed all of Plaintiffs’ claims against Eastone for lack of personal 21 jurisdiction but denied dismissal of Plaintiffs’ claims against Belter. (Doc. No. 23.) Belter 22 filed an Amended Answer to the SAC and a counterclaim on April 6, 2021.2 (Doc. No. 23 27.) Plaintiffs filed an answer to Belter’s counterclaim on April 27, 2021. (Doc. No. 29.) 24

25 1 Plaintiffs allege that Meditex and American Heart are “partners in a joint venture to 26 manufacture, market and distribute cardiovascular devices” and that Dr. Naghavi founded both companies and serves as their “managing member.” (Doc. No. 16 ¶¶ 1-3.) 27 1 On September 8, 2021, Paul Hastings moved to withdraw as attorney of record for 2 Belter. (Doc. No. 38.) Paul Hastings alleged that Belter (i) failed to pay its existing legal 3 fees, (ii) is no longer willing to pay for future fees, (iii) consented to its withdrawal, and 4 (iv) has ceased communications with it. (Doc. No. 38-1 at 2; Doc. No. 38-2, Decl. of Peter 5 M. Stone ¶¶ 3, 5, 7-9.) The Court subsequently issued an order directing Belter to obtain 6 substitute counsel by November 26, 2021. (Doc. No. 39.) The Court encouraged counsel 7 at Paul Hastings to use their best efforts to ensure Belter obtained substitute counsel. (Id.) 8 Paul Hastings provided the Court’s order to Belter on October 28, 2021. (Doc. No. 40.) 9 Belter did not respond by the November 26, 2021 deadline. The Court subsequently 10 issued an order extending the deadline for Belter to obtain substitute counsel to January 12, 11 2022. (Doc. No. 41.) The Court informed Belter that its failure to retain counsel and to 12 comply with the Court’s order risked the Court entering default judgment. (Id.) Paul 13 Hastings provided this order to Belter on December 15, 2021. (Doc. No. 42.) Belter again 14 failed to retain new counsel or otherwise respond to the order. 15 On March 2, 2022, Plaintiffs filed a motion for default judgment against Belter. 16 (Doc. No. 43.) Paul Hastings provided this motion to Belter on March 7, 2022. (Doc. No. 17 45.) Paul Hastings also restated its request to withdraw as counsel and informed the Court 18 that Belter has not communicated with it regarding the Court’s orders. (Id.) Belter did not 19 file an opposition or otherwise respond to Plaintiffs’ motion for default judgment. 20 On April 18, 2022, the Court issued another order directing Belter to retain substitute 21 counsel within 30 days. (Doc. No. 47.) The Court also struck Belter’s counterclaim 22 pursuant to Fed. R. Civ. P. 41(b) and 16(f) as an appropriate sanction for Belter’s failure 23 to comply with the Court’s orders. (Id.) For a third time, the Court warned Belter that 24 failure to comply with the Court’s orders and to retain substitute counsel may result in 25 default judgment. (Id.) Belter did not obtain substitute counsel or otherwise respond to 26 the Court’s order. The Court subsequently struck Belter’s Amended Answer pursuant to 27 Fed. R. Civ. P. 16(f) and 37(b)(2)(A)(iii) as an appropriate sanction for Belter’s continual 1 failure to comply with the Court’s orders. (Doc. No. 51.) The Court ordered Belter to 2 obtain new counsel and for the new counsel to enter an appearance in this case on or before 3 June 24, 2022 and warned Belter in clear terms that failure to comply with the Court’s 4 order would result in default judgment. (Id.) Despite the Court’s repeated orders and 5 warnings, Belter has still failed to comply with the Court’s orders.3 6 DISCUSSION 7 I. Motion for Default Judgment 8 A. Entry of Default 9 Under Fed. R. Civ. P. 55(a), the Clerk of the Court must enter default “[w]hen a 10 party against whom a judgment for affirmative relief is sought has failed to plead or 11 otherwise defend, and that failure is shown by affidavit or otherwise[.]” In this case, the 12 Clerk of the Court has not entered a default. However, “[b]ecause the court has the 13 authority to enter a judgment by default, it impliedly has the power to perform the 14 ministerial function assigned to the clerk of entering a default.” Lehman Bros. Holdings, 15 Inc. v. Millennium Mortg. Corp., 2010 WL 11596658, at *1 (C.D. Cal. 2010). 16 Belter participated in this action until approximately a year ago. Belter had filed two 17 motions to dismiss along with its parent Eastone (Doc. Nos. 6, 17) and an answer to 18 Plaintiffs’ SAC and a counterclaim (Doc. No. 27). Belter’s last filing before this Court 19 occurred on July 22, 2021. (Doc. No. 36.) In the time since, Belter has failed to obtain 20 substitute counsel or otherwise respond to the Court’s orders. 21 Corporations may only appear and litigate in federal court through counsel. U.S. v. 22 High Country Broad. Co., Inc., 3 F.3d 1244, 1245 (9th Cir. 1993). Since Belter has failed 23 to comply with the Court’s orders that to retain counsel, the Court has struck Belter’s 24 25 26 3 Christopher H. McGrath, an attorney for Paul Hastings LLP, entered an appearance as counsel of record for Belter on July 20, 2022. (Doc. No. 54.) Mr. McGrath entered an 27 appearance in this case only to appear at the hearing on the motions. Paul Hastings still 1 Amended Answer and Counterclaim. (Doc. Nos. 47, 51.) Entry of default is an appropriate 2 penalty for a corporate party’s failure to obtain new counsel. See Vincent Consol. 3 Commodities, Inc. v. Am. Trading & Transfer, LLC, 2008 WL 11508667, at *2 (S.D. Cal. 4 2008); Allergan Inc. v. Photomedex, Inc., 2008 WL 11343591, at *2 (C.D. Cal. 2008). 5 Accordingly, the Court enters default against Belter with this order. 6 B. Default Judgment as a Sanction 7 Plaintiffs move for default judgment against Belter on their claim for breach of 8 contract for failure to retain counsel and failure to comply with the Court’s orders.4 (Doc. 9 No. 43.) “[W]here a corporation repeatedly fails to appear by counsel, a default judgment 10 may be entered against it pursuant to Rule 55.” Higano v. Channing & Assoc., LLC, 2010 11 WL 55891, at *1 (E.D. Cal. 2010) (citing Grace v. Bank Leumi Trust Co. of N.Y., 443 12 F.3d 180, 192 (2nd Cir. 2006)). A court may dismiss an action, with prejudice, based on a 13 party’s failure to obey a court order or local rules. Id. “District courts have inherent power 14 to control their dockets [and] [i]n the exercise of that power they may impose sanctions, 15 including, where appropriate, default or dismissal.” Thompson v. Hous. Auth. of City of 16 L.A., 782 F.2d 829, 831 (9th Cir. 1986). However, the Court is mindful that “[d]ismissal 17 and default judgment are only authorized in extreme circumstances.” U.S. for Use and 18 Ben. of Wiltec Guam, Inc. v. Kahaluu Const. Co., Inc., 857 F.2d 600, 603 (9th Cir. 1988). 19 The district court must consider the following factors before dismissing a case or declaring 20 a default: (1) the public’s interest in expeditious resolution of litigation; (2) the court’s need 21 to manage its docket; (3) the risk of prejudice to the other party; (4) the public policy 22 favoring the disposition of cases on their merits; and (5) the availability of less drastic 23 sanctions. Adriana Intern. Corp. v. Thoeren, 913 F.2d 1406, 1412 (9th Cir. 1990). “Where 24 25 26 4 Plaintiffs also assert a claim for fraud in their SAC, but Plaintiffs state in their motion for default judgment that they are not pursuing damages for fraud (Doc. No. 43 at 8) and 27 Plaintiffs’ counsel stated at the hearing that Plaintiffs are not pursuing default judgment on 1 a court order is violated, the first two factors support sanctions and the fourth factor cuts 2 against a default. Therefore, it is the third and fifth factors that are decisive.” Id. 3 As to the third factor, the Plaintiffs suffer prejudice if Belter’s actions impair their 4 ability to go to trial or threaten to interfere with the rightful decision of the case. See id. 5 In this case, Belter’s actions prevent a rightful decision. Belter must be represented by 6 counsel, and it must comply with the Court’s orders for the action to proceed. It has 7 disregarded both requirements. Accordingly, the Court will be unable to reach a decision 8 on the merits of Plaintiffs’ claim. This results in substantial prejudice to the Plaintiffs. 9 For the fifth factor, the Court must consider whether less drastic sanctions are 10 feasible. See id. at 1413. Paul Hastings affirmed that Belter understood that it must be 11 represented by counsel to proceed with this litigation. (Doc. No. 38-2, Stone Decl. ¶ 6.) 12 The Court warned Belter on four occasions that failure to retain counsel risks default 13 judgment. (Doc. Nos. 39, 41, 47, 51.) It also cautioned Belter that if it failed to comply 14 with the Court’s order, it could face monetary sanctions. (Id.) The Court has not imposed 15 monetary sanctions on Belter. In the Court’s view, monetary sanctions are not a feasible 16 alternative to default judgment. Although Belter participated in the case for nearly a year, 17 its behavior in the past nine months indicates that it intends to ignore this suit and the Court. 18 Belter has stopped communicating with Paul Hastings (Doc. No. 28-2, Stone Decl. ¶¶ 8- 19 9.) and it has not responded to the Court’s orders despite the service of those orders upon 20 it (Doc. Nos. 40, 42, 48, 52). Since Belter is a foreign corporation, the Court considers 21 monetary sanctions, even significant ones, to be unlikely to bring Belter back into the 22 litigation. Further, Belter has not responded to the Court’s lesser sanctions of striking 23 Belter’s Amended Answer and Counterclaim. 24 The record before the Court indicates that Belter’s violations are “due to [its] 25 willfulness, bad faith, or fault[.]” Hester v. Vision Airlines, Inc., 687 F.3d 1162, 1169 (9th 26 Cir. 2012). “Disobedient conduct not shown to be outside the control of the litigant is 27 sufficient to demonstrate willfulness, bad faith, or fault.” Hyde & Drath v. Baker, 24 F.3d 1 1162, 1167 (9th Cir. 1994). It is within Belter’s control to obtain replacement or otherwise 2 respond to the Court’s orders. Belter has not complied with the Court’s orders despite 3 numerous opportunities to do so and thus indicated that it does not intend to participate in 4 this litigation any further. Default judgment is appropriate in these circumstances. See 5 Vincent Consol. Commodities, 2008 WL 11508667, at *3. 6 C. Default Judgment for Failure to Respond to the SAC 7 Default judgment may also be appropriate when a defendant fails to enter a timely 8 response to a complaint. Since the Court struck Belter’s Amended Answer from the case, 9 there is currently no operative response to Plaintiffs’ SAC. Accordingly, the Court will 10 also evaluate whether default judgment is appropriate on these grounds. 11 It is within the district court’s discretion to determine whether default judgment is 12 appropriate. Aldabe v. Aldabe, 616 F.2d 1089, 1092 (9th Cir. 1980). In making this 13 determination, the court will consider the seven factors set forth by the Ninth Circuit in 14 Eitel v. McCool, 782 F.2d 1470, 1471-72 (9th Cir. 1982). The Court takes the complaint’s 15 well-pled factual allegations as admitted on consideration of a default judgment. Benny v. 16 Pipes, 799 F.2d 489, 495 (9th Cir. 1986). Those allegations must be sufficient to establish 17 plaintiff’s entitlement to a judgment under the applicable law. Alan Neuman Prods. Inc. 18 v. Albright, 862 F.2d 1388 (9th Cir. 1988). 19 1. Prejudice to the Plaintiffs 20 The first Eitel factor—the possibility of prejudice to the Plaintiffs—weighs in favor 21 of default judgment. As previously discussed, this case cannot proceed to the merits 22 because of Belter’s failure to participate and comply with the Court’s orders. Thus, the 23 plaintiffs would be denied a judicial determination on their claims. Johnson v. Labadeby, 24 2016 WL 4087061, at *2 (E.D. Cal. Aug. 2, 2016). 25 2. Merits and Sufficiency of the Complaint 26 The second and third Eitel factors—the merits of plaintiffs’ substantive claim and 27 the sufficiency of the complaint—are often discussed jointly because of their close 1 relationship. See, e.g., PepsiCo, Inc. v. Cal. Sec. Cans, 238 F. Supp. 2d 1172, 1175 (C.D. 2 Cal. Dec. 27, 2002). The Ninth Circuit has suggested that these two factors require a 3 plaintiff “state a claim on which the plaintiff may recover.” Id. (citation omitted). 4 Plaintiffs assert a claim against Belter for breach of contract.5 (SAC ¶¶ 33-43.) “The 5 elements of a breach of contract claim are (1) a valid contract; (2) the plaintiff performed 6 or tendered performance; (3) the defendant breached the contract; and (4) the plaintiff was 7 damaged as a result of the breach.” Brooks v. Excellence Mortg., Ltd., 486 S.W.3d 29, 36 8 (Tex. App. Dec. 9, 2015).6 9 The Court begins with the first element. Plaintiffs allege the existence of multiple 10 agreements between Meditex7 and Belter. Plaintiffs allege that Meditex entered into an 11 “Exclusive China Manufacturing, Marketing, Sales, and Distribution Agreement,” also 12 referred to as the “Original Agreement” by Plaintiffs, on March 18, 2016. (SAC ¶ 21.) On 13 February 10, 2017, Meditex and Belter executed the “First Amendment” to the Original 14 Agreement to provide Belter with patent rights on VENDYS in China. (Id. ¶ 23.) On May 15 2, 2017, Meditex and Belter executed a second “Exclusive China Marketing, Sales and 16 Distribution Agreement” or the “New Sales & Marketing Agreement.” (Id. ¶ 24.) Meditex 17 then executed the “Second Amendment” to the Original Agreement which concerned a 18 second patent in China. (Id. ¶ 26.) After Belter’s management changed, Meditex and 19 Belter executed the “Third Amendment” to the Original Agreement on August 10, 2018, 20

21 5 Plaintiffs also assert a claim for fraud. (SAC ¶¶ 44-86.) For the reasons previously 22 noted, the Court does not consider the fraud claim for the purpose of the motion for default judgment. 23

24 6 The Court applies Texas substantive law in accordance with the choice of law provision in the parties’ Manufacturing, Marketing, Sales, and Distribution Agreement. (Doc. No. 25 16, Ex. B at 7.) 26 7 Although American Health and Dr. Naghavi do not appear to be signatories to the 27 agreements, the agreements state that they are between Belter and Meditex and Meditex’s 1 which required Belter to pay the remaining amount of the licensing fee and deliver 2 additional VENDYS units to Meditex in order for Belter to maintain its distribution and 3 marketing rights. (Id. ¶ 31.) Plaintiffs attached each of these agreements to the SAC and 4 their motion for default judgment. In sum, Plaintiffs sufficiently allege numerous 5 contractual agreements between Meditex and Belter. 6 As to the second element, Plaintiffs allege that Meditex “performed all conditions of 7 the Original Agreement, New Marketing & Sales Agreement, First Amendment, Second 8 Amendment, and Third Amendment.” (Id. ¶ 34.) 9 Next, the Court turns to the third element—Plaintiffs’ allegations that Belter 10 breached their agreements. The New Marketing & Sales Agreement sets forth a minimum 11 amount of sales revenue that Belter must reach “regardless of circumstances.” (SAC, Ex. 12 F at 3.) If Belter breaches the contract, “Belter shall be fully liable for the upfront fee and 13 the minimum sales as the agreed damages defined upfront.” (Id.) In total, the minimum 14 sales amount for the five-year duration of the New Marketing & Sales Agreement is $21 15 million. (Id. at 5.) Plaintiffs allege that Belter failed to meet this minimum sales guarantee. 16 (SAC ¶ 36.) The Third Amendment required Belter to pay the $250,000 licensing fee by 17 October 31, 2018. (SAC, Ex. J. at 2.) Plaintiffs allege that Belter only paid $100,000 of 18 this licensing fee. (SAC ¶¶ 37, 39.) The Third Amendment also required Belter to provide 19 100 units of VENDYS by December 31, 2018 and 248 units of VENDYS by June 30, 2019. 20 (SAC, Ex. J at 2-3.) Meditex was not required to pay for the units or for shipping the units 21 from Belter to Meditex. (Id.) Plaintiffs allege that Belter breached the Third Amendment 22 by failing to provide 249 of the promised VENDYS units. (SAC ¶ 38.) 23 Finally, Plaintiffs allege a variety of damages from these breaches. Plaintiffs allege 24 that they are owed (i) the remaining $150,000 of the licensing fee plus a penalty amount of 25 $688,500; (ii) the market value of 249 VENDYS units, which Plaintiffs claim is 26 $5,702,100; (iii) a revenue sharing payment of $2,520,000; and (iv) a contract breach 27 penalty of $20,610,000. (SAC ¶¶ 36-43.) 1 The Court concludes that Plaintiffs properly stated a claim for breach of contract on 2 which it may recover. Thus, these factors weigh in favor of the Court granting default 3 judgment. 4 3. Sum of Money at Stake in the Action 5 Next, the Court considers the sum of money at stake in this case. Plaintiffs seek a 6 default judgment of $30,903,600 in damages. Plaintiffs allege that Belter is a valuable 7 company that was purchased in March 2017 for approximately $150 million. (SAC ¶ 48.) 8 Still, Plaintiffs seek a large amount of damages, which generally weighs against default 9 judgment. McKesson Medical-Surgical Inc. v. Custom Glass & Synthetic Design, LLC, 10 2021 WL 6112866, at *2 (D. Ariz. Dec. 27, 2021) ($350,000 in damages is “substantial” 11 and weighs against default judgment); J & J Sports Prods., Inc. v. Cardoze, 2010 WL 12 2757106, at *5 (N.D. Cal. July 9, 2010) ($114,200 in damages disfavors default judgment). 13 However, “[w]hen the sum of money at stake is tailored to the specific misconduct of the 14 defendant, default judgment may be appropriate.” Huddly AS v. Suzhou Washeng Tech. 15 Co., Ltd., 2022 WL 2289065, at *8 (N.D. Cal. Apr. 21, 2022) (citation omitted). 16 “Ultimately, this factor balances the amount of money at stake in relation to the seriousness 17 of defendant’s conduct.” Rosen v. Movie Times, Inc., 2021 WL 1338960, at *4 (N.D. Cal. 18 Apr. 9, 2021). Although the sum of money that Plaintiffs seek is very substantial, it is also 19 tied to the contractual agreements they entered with Belter. Thus, this factor does not 20 weigh against default judgment despite the large amount of damages. 21 4. The Possibility of a Dispute Concerning Material Facts 22 There is little possibility of a dispute concerning the material facts in this case. 23 Although Belter filed an answer and counterclaim, the Court struck those pleadings 24 because of Belter’s failure to comply with the Court’s orders. (Doc. Nos. 47, 51.) Thus, 25 those pleadings are not within this Court’s consideration. “Upon entry of default, all well- 26 pleaded facts in the complaint are taken as true, except those relating to damages.” Dr. 27 JKL Ltd. V. HPC IT Educ. Ctr., 749 F. Supp. 2d 1038, 1051 (N.D. Cal. Oct. 28, 2010). 1 Thus, the Court must accept Plaintiffs’ well-pled allegations, which are supported by the 2 documents attached to Plaintiffs’ SAC. 3 5. Excusable Neglect 4 It is unlikely that Belter’s actions were the result of excusable neglect. Belter twice 5 filed motions to dismiss in this case, filed an answer, and filed a counterclaim. (Doc. Nos. 6 3, 17, 18, 27.) It appears that Belter fully participated in this litigation until a few months 7 after this Court dismissed Plaintiffs’ claims against Belter’s parent company, Eastone. The 8 Court has provided Belter with numerous opportunities to comply with its orders over the 9 last nine months. Counsel from Paul Hastings have represented that they have served 10 Belter with the Court’s orders and Plaintiffs’ motion for default judgment. (Doc. Nos. 40, 11 42, 44, 48, 52.) Belter appears intent on abandoning the litigation and its defense of this 12 action. Accordingly, this factor does not weight against default judgment. See J & J Sports 13 Prods. Inc. v. Cervantes, 2018 WL 3702298, at *4 (E.D. Cal. Aug. 2, 2018); Dr. JKL Ltd., 14 749 F. Supp. 2d at 1051. 15 6. Policy of Favoring Decisions on the Merits 16 In general, default judgments are disfavored because of the Court’s strong policy 17 favoring decisions on the merits. Eitel, 782 F.2d at 1472. However, in this case, this policy 18 does not weigh against default judgment because Belter’s failure to defend this action or 19 comply with the Court’s orders renders a decision on the merits impractical and highly 20 unlikely. See Cervantes, 2018 WL 3702298, at *4; Dr. JKL Ltd., 749 F. Supp. 2d at 1051. 21 In sum, the Eitel factors weigh in favor of default judgment against Belter for failure 22 to litigate this case. Thus, the Court will enter default judgment on this basis in addition to 23 its conclusion that default judgment is an appropriate sanction. 24 D. Damages 25 The Court now turns to the issue of damages. Under Fed. R. Civ. P. 54(c), a default 26 judgment cannot differ in kind or exceed the demand that is made in the pleadings. Fed. 27 R. Civ. P. 8(a)(3) requires that the Plaintiffs make a specific demand for relief. Philip 1 Morris USA, Inc. v. Castworld Prods., Inc., 21 F.R.D. 494, 501 (C.D. Cal. Dec. 31, 2003). 2 “A plaintiff must prove all damages sought in the complaint.” Dr. JKL Ltd., 749 F. Supp. 3 2d at 1046. In Plaintiffs’ motion, they seek $30,903,600 in damages for breach of contract, 4 which is not different in kind or in amount than the relief they sought in their SAC. (Doc. 5 No. 43 at 9; SAC at 18.) Plaintiffs assert their right to recover both expectation and 6 liquidated damages. 7 The Court begins with Plaintiffs’ claims for expectation damages. First, Plaintiffs 8 seek $150,000 for unpaid licensing fees. Belter agreed to pay Meditex a one-time upfront 9 payment of $500,000 for the right to file Chinese patents under Belter’s name in the New 10 Marketing & Sales Agreement. (Doc. No. 43-2, Decl. of Dr. Moreteza Naghavi (“Naghavi 11 Decl.”), at ¶ 9.) Belter subsequently agreed to pay the remaining $250,000 due for the 12 licensing fee by October 31, 2018. (Naghavi Decl. ¶ 12, Ex. G at 2.) Dr. Naghavi states 13 in his declaration that Belter failed to pay $150,000 of the licensing fee. (Naghavi Decl. ¶ 14 13.) Second, Plaintiffs assert that Belter breached the Third Amendment by failing to 15 deliver 249 units of VENDYS. (Doc. No. 43-1 at 6.) In the Third Amendment, Belter 16 “agrees to ship one hundred units of VENDYS-II JK-001V [to Meditex] . . . no later [than] 17 December 31, 2018” and “Meditex shall not pay for these units or for shipping these units.” 18 (Naghavi Decl., Ex. G at 2.) Belter also “agrees to ship two hundred forty-eight (248) units 19 of VENDYS-II JK001V [to Meditex] . . . by June 30, 2019” and Meditex “shall not pay 20 for these units or for shipping these units.” (Id. at 3.) Dr. Naghavi states that Belter failed 21 to deliver 249 of these units in breach of the Third Amendment. (Naghavi Decl. ¶ 18.) He 22 also states that this breach damaged Plaintiffs in the amount of $5,702,100 because each 23 VENDYS unit is valued at $22,900. (Id. ¶¶ 20, 22.) Third, Plaintiffs seek $2,520,000 in 24 damages for Belter’s failure to meet the minimum sale guarantees set forth in the New 25 Marketing & Sales Agreement. (Doc. No. 43-2 at 5.) In the New Marketing & Sales 26 Agreement, Meditex and Belter agreed that Belter would have exclusive rights for sales 27 and distribution of VENDYS for five years. Belter would compensate Meditex, in part, by 1 paying Meditex twelve and a half percent (12.5%) of total revenue made by Belter through 2 the marketing, sales, and distribution of VENDYS. (SAC, Ex. F at 2.8) Belter also 3 committed to a “minimum amount of sales revenue” for five years and agreed that it would 4 be “responsible for delivering the minimum amount of sales regardless of 5 circumstances[.]” (Naghavi Decl., Ex. E at 2.) Belter also agreed that if it breached the 6 contract, it would be “fully liable for the [licensing fee] and the minimum sales as agreed 7 damages defined upfront.” (Id.) The minimum sales amount was equivalent to $21 8 million. (Id. ¶ 16, Ex. E at 3-4.) Thus, Dr. Naghavi states that Plaintiffs are owed 9 $2,520,000 (12%9 of $21 million) in damages for breach of the New Marketing & Sales 10 Agreement. (Id. ¶ 16.) After review of the evidence, the Court concludes that the sworn 11 statements in Dr. Naghavi’s Declaration and the evidence attached to Dr. Naghavi’s 12 Declaration are sufficient to prove Plaintiffs’ expectation damages for the purposes of this 13 motion to dismiss. See uSens, Inc. v. Chongqing Junma New Energy Auto. Co., Ltd., 2022 14 WL 410938, at *3 (N.D. Cal. Feb. 10, 2022). Accordingly, the Court will award Plaintiffs 15 a total of $8,372,100 in damages. 16 Next, the Court proceeds to Plaintiffs’ claims for liquidated damages. Under Texas 17 law, a liquidated damages clause is enforceable if (1) “the harm caused by the breach is 18 incapable or difficult of estimation, and (2) the amount of liquidated damages called for is 19

20 8 Plaintiffs reattached the exhibits to the SAC, including the New Marketing & Sales 21 Agreement, to Dr. Naghavi’s Declaration. It appears that the second page of the New 22 Marketing & Sales Agreement was omitted from the document as it appears as an exhibit to Dr. Naghavi’s Declaration, so the Court references the version of the New Marketing & 23 Sales Agreement as attached to the SAC. Aside from the errant omission of one page, there 24 does not appear to be a substantive difference between the exhibits.

25 9 Plaintiffs state in their motion and Dr. Naghavi states in his declaration that Plaintiffs 26 seek $2,520,000 (12% of $21 million). They do not address why the proper sum owed is not $2,620,000 (12.5% of $21 million). The Court will not speculate, rather, it will take 27 the consistency of Plaintiffs’ statements to mean that their request is not an error, but the 1 a reasonable forecast of just compensation.” Phillips v. Phillips, 820 S.W.2d 785, 788 2 (Tex. 1991). In addition to the two prongs articulated in Phillips, liquidated damages must 3 not be punitive in design or in operation. BMB Dining Servs. (Willowbrook), Inc. v. 4 Willowbrook I Shopping Ctr. L.L.C., 2021 WL 2231258, at *4 (Tex. App. June 3, 2021) 5 (citation omitted). To do so, courts “must also determine whether ‘the actual damages 6 incurred were much less’ than the liquidated damages imposed, measured at the time of 7 the breach . . . when here is an ‘unbridgeable discrepancy’ between the provision as written 8 and the reality of its application, the provision cannot be enforced.” Id. (citations omitted). 9 A contract provision which provides that one party pays the other some multiple of actual 10 damages for breach of the agreement is not liquidated damages, but an unenforceable 11 penalty. Phillips, 820 S.W.2d at 789. If the terms of the contract constitute an 12 unenforceable penalty, the defendant is not required to raise the defense of penalty as an 13 affirmative defense for the provision to be invalid because “courts will not enforce a plainly 14 illegal contract even if the parties do not object.” Id. (citation omitted). 15 Plaintiffs seek $22,531,500 in liquidated damages. (Doc. No. 43-1 at 5-6.) This 16 amount is partly comprised of a $1,921,500 penalty for non-payment of the remaining 17 $150,000 licensing fee at a rate of $1,500 per day from the date of the first missed payment 18 through February 21, 2022. (Id. at 6.) The remaining $20,610,000 is a penalty for breach 19 of “the entire relationship” that is equivalent to 900 VENDYS units at a value of $22,900 20 per each device. (Id.) Notably, the contractual provision of the First Amendment that 21 applies the “900 VENDYS” penalty states: “[i]f Belter unilaterally cancels the agreement 22 . . . or, directly or indirectly causes the relationship to terminate, then Belter must pay 23 $900,000 or 900 units of JK-001V per each patent subject matter.” (Naghavi Decl., Ex. C 24 at 2.) The First Amendment does not state whether Belter must pay the greater or the lesser 25 amount in the event of a breach. 26 The contractual provisions that Plaintiffs seek to enforce are unenforceable penalties 27 because they fail to satisfy the Phillips prongs and the rule against punitive penalties. First, 1 as discussed, the damages for breach of contract are not incapable or difficult of estimation. 2 The contract set forth specific payments that were required to be made to Meditex. The 3 most challenging aspect of the damages calculation is a determination of the fair market 4 value for VENDYS, but Dr. Naghavi represented that the amount is $22,900 per unit. 5 (Naghavi Decl. ¶¶ 20, 22.) 6 Second, Plaintiffs have not demonstrated that the penalty is a reasonable forecast of 7 just compensation. As to the late payment penalty, Plaintiffs’ calculation is based on Belter 8 failing to pay $150,000 for approximately 27 months. Plaintiffs provide no basis for the 9 Court to conclude that a penalty award of 12 times the amount of the unpaid debt is 10 reasonable. On its face, the penalty is equivalent to an extremely unrealistic interest rate 11 on the principal balance owed to Meditex. Further, Plaintiffs do not state why a 12 $20,610,000 penalty (or even the $900,000 penalty) is a reasonable forecast for just 13 compensation for the dissolution of the contractual agreement. The Court notes that the 14 parties entered into a limited agreement for five years. (Naghavi Decl., Ex. A at 2.) 15 Certainly, Plaintiffs must have wished for those five years to be quite lucrative, but even if 16 Belter had satisfied the minimum sales targets, Plaintiffs would have only received 17 $2,620,000 in revenue sharing payments for that time period. In Phillips, 820 S.W.2d at 18 789, the Texas Supreme Court considered a contractual provision that provided multiples 19 of the actual damages incurred to be an unenforceable penalty. That is true of both penalty 20 provisions here. Likewise, the Court concludes that the penalty provisions are 21 impermissibly punitive and excessive. See, FPL Energy, LLC v. TXU Portfolio Mgmt. 22 Co., L.P., 426 S.W.3d 59, 72 (Tex. 2014) (concluding that there is an “unacceptable 23 disparity” between a $29 million liquidated damages award and actual damages of 24 approximately $6 million). 25 Accordingly, the Court declines to award the $22,531,500 in liquidated damages that 26 Plaintiffs seek because they constitute an unenforceable penalty under Texas law. 27 1 II. Motion to Withdraw 2 The Court will now address Paul Hastings’ motion to withdraw as counsel of record 3 for Belter. “An attorney may not withdraw as counsel except by leave of court, and the 4 decision to grant or deny counsel’s motion to withdraw is committed to the discretion of 5 the trial court.” Beard v. Shuttermart of Cal., Inc., 2008 WL 410694, at *2 (S.D. Cal. Feb. 6 13, 2008) (internal citations omitted). “In ruling on a motion to withdraw as counsel, courts 7 consider: (1) the reasons why withdrawal is sought; (2) the prejudice withdrawal may cause 8 to other litigants; (3) the harm withdrawal might cause to the administration of justice; and 9 (4) the degree to which withdrawal will delay the resolution of the case.” Id. 10 The Court concludes that good cause for withdrawal exists. Paul Hastings states that 11 Belter has ceased communicating with them and that the Belter’s previous point of contact 12 has left their law firm. (Doc. No. 28-2, Stone Decl. ¶¶ 8-9.) An inability to communicate 13 with the client is often regarded as rendering counsel’s continued representation to be 14 unreasonably difficult. See, e.g., Beard, 2008 WL 410694, at *2; Orange Cty. Elec. Indus. 15 Health & Welfare Tr. Fund v. Moore Elec. Contracting, Inc., 2011 WL 2940311, at *2 16 (N.D. Cal. July 20, 2011). Paul Hastings also states that Belter failed to pay outstanding 17 legal fees, which courts have found to be a valid ground for withdrawal. Leatt Corp. v. 18 Innovative Safety Tech., LLC, 2010 WL 444708, at *2 (S.D. Cal. Feb. 2, 2010). Finally, 19 Paul Hastings seeks withdrawal with the consent of Belter. The withdrawal leaves Belter, 20 a corporation, without counsel and unable to appear in this Court. CE Res., Inc. v. 21 Magellan Grp., LLC, 2009 WL 3367489, at *2 (E.D. Cal. Oct. 14, 2009); CivLR 83.3(j). 22 However, with this order, the Court enters default judgment against Belter; thus, there is 23 no concern that granting the motion to withdraw will further delay the resolution of this 24 case. 25 Given the Court’s order on Plaintiffs’ motion for default judgment, the Court grants 26 Paul Hastings’ motion for withdraw after Paul Hastings transmits the Court’s judgment to 27 Belter. 1 CONCLUSION 2 For the foregoing reasons, the Court enters default against Belter and grants 3 || Plaintiffs’ motion for default judgment. The Court awards Plaintiffs $8,372,100 in 4 ||damages. The Court also grants Paul Hastings’ motion to withdraw upon entry of the 5 || Court’s judgment and Paul Hastings’ transmission of the judgment to Belter. 6 7 IT IS SO ORDERED. DATED: July 25, 2022 Nu | I. _ MARILYN L. HUFF, Senter District Judge 10 UNITED STATES DISTRICT COURT 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28