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7th Circuit Opinion
The default judgment stays (e360: 1, Spamhaus 0)
Page 18: "Generally, this court will not reverse a damages award in a default judgment unless it is clearly excessive."
Pgs 18-19: "Mr. Linhardt’s affidavit is a conclusory statement of the lost value of his business, based largely on his calculations of lost future profits. It provides a list of businesses involved in “actual and pending contracts” and a total calculation of his calculation of loss, but says nothing about the status of his relationship with those businesses before e360 was listed on the ROKSO. That is, the affidavit claims profit loss in absolute numbers, but provides no information whatsoever to support a finding that such future profits were certain prior to Spamhaus’ act. Particularly given the difficulties that Illinois courts have acknowledged in proving non-speculative amounts of lost future profits, [citations omitted], this affidavit alone cannot provide the requisite “reasonable certainty” for a damages award without the necessity of a hearing. We therefore vacate the damages award and remand to the district court for a more extensive inquiry into the damages to which e360 is entitled."
Now things will go back to the district court for redetermination of damages to be paid under the default.
[UPDATE -- Let me explain some things. The DEFAULT JUDGMENT still stands and that is a LOSS -- potentially a big one. Liability is NOT an issue since that is part of the default (so it's also part of that LOSS). The case is going back to the district court only to determine damages. Those damages may include money damages, and e360 may be able to prove that it is entitled to a large amount of money, but it will have to prove that in an adversarial context now, instead of the judge just blindly taking their word for it. And the 7th Circuit has now pretty much stated that the award is "excessive" (see the quote from page 18 above). The eventual final judgment may also include an injunction, BUT that injunction will NOT be able to change Spamhaus' own operational definitions and standards.
I never expected the default to get thrown out. That's an awfully high bar since Spamhaus was present in the case early on, and I've never heard "we got bad advice from our OTHER lawyers" pass a bar set that high. Spamhaus gave that a heroic try, but they lost that one. All that left was relief on the damages and injunction, both of which were granted.]
Nos. 06-3779 & 06-4169
e360 INSIGHT, an Illinois
THE SPAMHAUS PROJECT,
Appeals from the United States District Court
No. 06 C 3958—Charles P. Kocoras, Judge.
ARGUED JUNE 6, 2007—DECIDED AUGUST 30, 2007
Before RIPPLE, KANNE and EVANS, Circuit Judges.
RIPPLE, Circuit Judge. e360 Insight, LLC, and David Linhardt (collectively, “e360”) brought this action in the Cook County Circuit Court, alleging various tort claims against The Spamhaus Project (“Spamhaus”). Spamhaus removed the case to the United States District Court for
Spamhaus is a non-profit company limited by guarantee and organized under the laws of the United Kingdom. It is an internet watchdog group in the business of identifying and blocking internet “spam,” or unsolicited bulk e-mail. In that capacity, it maintains the “Register Of Known Spam Operations” (“ROKSO”), a “3 strikes list” for internet users it believes are responsible for creating and distributing spam messages. R.1, Ex. A at 4. Through the ROKSO, Spamhaus publishes a sort of blacklist of persons or
In December 2003, Spamhaus placed e360 Insight, LLC, and Mr. Linhardt on the ROKSO list. e360 claims that it contacted Spamhaus to inform it that a mistake had been made, but nevertheless it remains on the ROKSO list. e360 also claims that Spamhaus cross-lists businesses who partner with companies and individuals on the ROKSO list and refuses to remove these partners from the blacklist until they terminate their relationship with the primary spammer on the ROKSO list.
e360 brought this action in state court, claiming that Spamhaus was liable in tort for losses e360 suffered as a result of its placement on the ROKSO. Specifically, the complaint alleged that Spamhaus’ placing e360 on the ROKSO list amounted to tortious interference with contractual relations, tortious interference with prospective economic advantage, defamation per se and defamation quod. It sought compensatory and punitive damages, as well as an injunction requiring Spamhaus both to remove e360 from the list and to place a notice on the Spamhaus website that e360 had been included on the ROKSO list in error.
Spamhaus removed the case to the district court on the basis of diversity of citizenship. Spamhaus then answered the complaint on July 21, 2006. In that answer, it denied many of e360’s allegations and asserted fourteen affirmative defenses. Among those defenses were lack of personal jurisdiction, insufficient process and insufficient service of process. R.6 at 8.
On August 23, 2006, counsel for both sides appeared before the district court at a status call. The court began addressing the issue of diversity of citizenship when then-counsel for Spamhaus interrupted the court and the following exchange ensued:
MR. BROWN [then-counsel for Spamhaus]: Your
THE COURT: You represent who?
THE COURT: Okay.
MR. BROWN: Spamhaus.
And my client wants to participate in the defense no
I am not authorized to do anything more today than
[the Court engages counsel for the plaintiffs.]
THE COURT: All right.
Do you know whether your client has another law
MR. BROWN: My position—or my understanding—
So, I don’t know for certain—
THE COURT: Do they want to lose?
I mean, that is what is on the horizon if they want to
MR. BROWN: They have been fully informed of the
[exchange regarding motion to withdraw as counsel]
THE COURT: Okay.
Here is what we are going to do. I am going to give
[court reinstates TRO entered in state court]
THE COURT: [granting the motion to withdraw as
But no judgment, just a default. Okay?
R.56-1 at 2-3, 6-7.
A week later, e360 filed a motion for a default judgment, supported by an affidavit from Mr. Linhardt that stated the amounts in which he believed his business had been harmed by being placed on the ROKSO. On September 13, 2006, the district court entered judgment and awarded the full amount of compensatory damages stated in Mr. Linhardt’s affidavit, $11,715,000.00, as well as $1,917.50 in costs. It denied attorney’s fees and punitive damages. The court also entered a permanent injunction, the details of which we shall examine shortly.
Spamhaus filed a timely Rule 60(b) motion to vacate the default and the default judgment. At the hearing on that motion, new counsel for Spamhaus articulated several
I do not think there was anything unknowing or
. . . [T]he idea that Rule 60 accommodates at least
That was apparently, you say, pressed by way of an
. . . .
We do not undertake to take one side of a case and
. . . .
So, I think it would be unfair to the plaintiff at this
Id. at 8-10. Although briefing was requested by Spamhaus, the court immediately denied the motion.1
[1 Spamhaus also had moved to quash a citation to discover assets, arguing again the defense of lack of jurisdiction and improper service. The court responded simply: “That defense will not carry the day.” R.56-4 at 11.]
Spamhaus timely appealed both the entry of default judgment and the denial of its Rule 60(b) motion to vacate that judgment.
Spamhaus raises many challenges to the district court’s entry of default judgment, the character of the relief awarded and the failure of the court to grant its Rule 60(b) motion and to reopen for factual development certain of the issues decided in the default. Specifically, Spamhaus challenges the district court’s authority to enter a default judgment without affirmatively inquiring into the factual basis for personal jurisdiction and effective service.
A. Validity of the Default
We review both the district court’s decision to enter a default judgment and the denial of a motion to vacate the judgment for an abuse of discretion. Homer v. Jones-Bey, 415 F.3d 748, 753 (7th Cir. 2005).
1. Personal Jurisdiction and Service
Default judgments rendered without personal jurisdiction are void and, therefore, we shall “set aside a default judgment as a per se abuse of discretion if the district court that entered the judgment lacked jurisdiction.” Swaim v. Moltan Co., 73 F.3d 711, 716 (7th Cir. 1996); see also Homer, 415 F.3d at 753; Robinson Eng’g Co. Pension Plan & Trust v. George, 223 F.3d 445, 448 (7th Cir. 2000); Bally Export Corp. v. Balicar, Ltd., 804 F.2d 398, 400 (7th Cir. 1986).
In support of its argument that the judgment is void, Spamhaus contends that the district court abused its discretion in entering judgment without first conducting an affirmative inquiry into whether it had personal jurisdiction over Spamhaus and whether service of process was effected in compliance with applicable rules. Spamhaus concedes that this court has not imposed an affirmative duty on the district court to inquire into the factual bases
[2 Spamhaus relies on System Pipe & Supply, Inc. v. M/K Viktor Kurnatovsky, 242 F.3d 322, 324 (5th Cir. 2001), Tuli v. Republic of Iraq, 172 F.3d 707, 712 (9th Cir. 1999), and Dennis Garberg & Associates, Inc. v. Pack-Tech International Corp., 115 F.3d 767, 771 (10th Cir. 1991), as well as several district court cases from within this circuit in which personal jurisdiction was examined by the court sua sponte prior to entering a default judgment.]
The cases on which Spamhaus relies involve foreign defendants who had not appeared in the action. See Dennis Garberg & Assocs., Inc. v. Pack-Tech Int’l Corp., 115 F.3d 767, 772 (10th Cir. 1997) (“[A] district court must determine whether it has jurisdiction over the defendant before entering judgment by default against a party who has not appeared in the case.” (emphasis added)). We need not decide whether we would impose the same rule on district courts in this circuit if faced with that situation because it is not the one we face here: Spamhaus removed the case, actually appeared through counsel in federal court and filed an answer specifically challenging personal jurisdiction.3
[3 Indeed, Spamhaus alternately asks this court to treat it as an appearing party; as we shall examine shortly, Spamhaus urges this court to hold that a supposed failure of the plaintiff to comply with certain notice requirements of Federal Rule of Civil Procedure 55(b)(2), which apply only where the defendant “has appeared in the action,” requires reversal.]
As is clear from its oral ruling on Spamhaus’ 60(b) motion, the district court interpreted its conduct preceding default as a waiver of the previously asserted defenses. See R.56-4 at 10 (noting that the court would not “pretend as if none of these things took place . . . [and there had been] no opportunity to defend this case[,] no decision made to knowingly abandon the defense”); id. at 8-9
We perceive no error in the district court’s conclusion that Spamhaus intentionally elected to abandon its available defenses when it withdrew those defenses from consideration by the court and indicated that it was prepared to accept a default. Spamhaus’ then-counsel confirmed that it wished to “participate in the defense no further” and “do absolutely nothing.” See R.56-1 at 3, 5. It was not erroneous to treat this kind of voluntary abandonment of defenses, raised but not pursued, as a waiver. See Johnson v. Zerbst, 304 U.S. 458, 464 (1938); Trs. of Cent. Laborers’ Welfare Fund v. Lowery, 924 F.2d 731, 732-33 (7th Cir. 1991) (noting that courts have recognized “privileged defenses referred to in Rule 12(h)(1) may be waived by ‘formal submission in a cause, or by submission through conduct,’ ” even before an answer is filed (quoting Marcial Ucin, S.A. v. SS Galicia, 723 F.2d 994, 996-97 (1st Cir. 1983)). Based on its conduct before the court, we have no doubt that Spamhaus understood the defenses available to it, consistently asserted those defenses in the early stages of those proceedings and then affirmatively elected to abandon those defenses before the district court. We see no reason to allow Spamhaus to escape the consequences of
[4 Spamhaus also claims that the district court had an affirmative obligation to find that the complaint was served consistent with the Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil or Commercial Matters, opened for signature Nov. 15, 1965, 20 U.S.T. 361 (appended to Fed. R. Civ. P. 4). Specifically, Spamhaus relies on Article 15 of the Convention, which provides, in pertinent part: “Where a writ of summons or an equivalent document had to be transmitted abroad for the purpose of service, under the provisions of the present Convention, and the defendant has not appeared, judgment shall not be given until it is established” that service was effected in a manner approved of by the Convention. The difficulty for Spamhaus is that, as we already have determined, it is not a defendant that “has not appeared.” It did appear in the action and raise improper service of process under the Hague Convention as an affirmative defense. It withdrew that defense along with the answer. Article 15, by its terms, does not apply to a party who has appeared. The court did not have an affirmative obligation, under these circumstances, to raise service of process on behalf of Spamhaus prior to entering the default.]
2. Notice of the Default Judgment
Spamhaus also claims that the default judgment entered was invalid because Spamhaus was not served with the written notice of the application for a default judgment as provided by Federal Rule of Civil Procedure 55(b)(2)5 and
[5 Rule 55(b)(2) provides, in pertinent part:
A certificate of service attached to the motion for default and signed by an attorney for e360 states that service of the motion was effected in three ways: (1) electronic filing with the clerk of the court, “which will send notification of such filing” to listed attorneys with the firm that formerly represented Spamhaus; (2) “Federal Express via International Priority”; and (3) “caus[ing] to be hand delivered” to the Spamhaus Project. R.20 at 6. Under Local Rule 5.5(a)(1), this certification made by an attorney of record qualifies as proof of service. Accordingly, the remaining question is whether any of these methods of service was acceptable under Rule 5 of the Federal Rules.
Federal Rule of Civil Procedure 5 lists the acceptable methods of service of process under the Federal Rules. Included among the acceptable forms of service is:
(A) Delivering a copy to the person served by:
(i) handing it to the person;
(ii) leaving it at the person’s office with a clerk or
Fed. R. Civ. P. 5(b)(2)(A). In-hand delivery is, therefore, a specifically approved method of service under the Rules. Spamhaus’ conclusory allegation that “no authorized representative of Spamhaus has ever been properly served with in-hand delivery of any document,” Appellant’s Br. at 17, without more, does not defeat the proof of service provided to the district court, nor does it require this court to remand to allow further factual development in the face of a certificate of service by an officer of the court. Nor has Spamhaus cited any precedent in support of its contention that the record must contain more specific evidence “demonstrating how . . . service was purportedly perfected.” Id. at 16-17.
Moreover, although a party is not required to file a Rule 60(b) motion in the district court to raise challenges to the entry of a default judgment, this court has recognized that when a party does so, the failure to raise certain defenses specifically may waive those defenses for purposes of appeal of the underlying judgment. See Swaim, 73 F.3d at 718-19. Although our cases applying this rule have dealt with issues of personal jurisdiction, service to bring a party into the action and capacity to be sued, id., the logic employed in those cases applies with equal force to the particular defense of failure of notice under Rule 55(b). In each case, the request made on appeal from the underlying default judgment is that we remand for factual findings that would justify relief from the judgment because the district court has the special competence to make those findings of fact. See id. Sensibly, then, when a party chooses to move for relief from judgment under Rule 60(b) in the
promotes the twin concerns of juridical efficiency and
Id. at 719. In its 60(b) motion in this case, Spamhaus never asserted that e360 had failed to comply with the notice requirements of Rule 55 and that this failure justified relief from judgment. Its only contention regarding service of process was a failure of service to bring it into the case, in connection with its argument that the district court lacked in personam jurisdiction. Spamhaus now seeks an opportunity to offer countervailing proof on the issue of service of the motion for default judgment; that is an argument that Spamhaus should have addressed to the district court in the first instance when, as here, a Rule 60(b) motion challenging the default judgment also was filed.
B. Remedial Issues
Spamhaus asserts that the district court erred in entering judgment in an amount of more than $11 million on the basis of Mr. Linhardt’s affidavit alone. It also cites a host of objections to the district court’s entry of injunctive relief. We consider each of its objections in turn.
As we have noted, at the hearing in which Spamhaus withdrew its answer and prior counsel withdrew their appearance, the district court informed e360 that it would be required to prove up its damages. At minimum, according to the court, the affidavit of a knowledgeable person would be required. In response, e360 filed a formal motion for default judgment and attached Mr. Linhardt’s affidavit. In his affidavit, Mr. Linhardt stated that e360 had lost “actual and pending contracts,” the value of which he had calculated to be $2,465,000. R.20, Ex. A at 6. He further stated that he had lost “numerous opportunities to obtain future work” and that he had calculated “the lost value of the business as a result of the inability to monetize the revenue potential from the company and in the lost enterprise value to be at least $9,250,000.” Id. He then
Generally, this court will not reverse a damages award in a default judgment unless it is clearly excessive. Merrill Lynch Mortgage Corp. v. Narayan, 908 F.2d 246, 253 (7th Cir. 1990). A default judgment establishes, as a matter of law, that defendants are liable to plaintiff on each cause of action alleged in the complaint. United States v. Di Mucci, 879 F.2d 1488, 1497 (7th Cir. 1989). We also have stated, however, that,
[e]ven when a default judgment is warranted based on
In re Catt, 368 F.3d 789, 793 (7th Cir. 2004) (citing Credit Lyonnais Sec. (USA), Inc. v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999)). Under the law of this circuit, judgment by default may not be entered without a hearing on damages unless “the amount claimed is liquidated or capable of ascertainment from definite figures contained in the documentary evidence or in detailed affidavits.” Dundee Cement Co. v. Howard Pipe & Concrete Prods., Inc., 722 F.2d 1319, 1323 (7th Cir. 1983) (collecting authority).
Mr. Linhardt’s affidavit is a conclusory statement of the lost value of his business, based largely on his calculations of lost future profits. It provides a list of businesses involved in “actual and pending contracts” and a total calculation of his calculation of loss, but says nothing
[6 We do not believe that the fact that the district court declined the request for punitive damages and attorney’s fees demonstrates, as e360 asserts, that it undertook an adequate evaluation of the evidence of damages presented to it. As is made clear by the court’s order, it believed that absent countervailing evidence from Spamhaus, the affidavit justified the full amount of compensatory damages requested. Given the nature of the damages sought and the conclusory statements in the affidavit, we cannot say that this scrutiny was sufficient.]
2. Injunctive Relief
Spamhaus also raises a number of challenges to the district court’s entry of a permanent injunction. Under the terms of the injunction, Spamhaus is prohibited from
First, Spamhaus contends that the district court’s entry of a permanent injunction should be vacated because the court never considered whether injunctive relief was appropriate and, in its order granting such relief, failed to comply with Rule 65 in setting forth reasons for its issuance. See Fed. R. Civ. P. 65(d).
As we already have stated, although a default judgment establishes liability, it does not answer whether any
The district court concluded that e360’s success by default and the failure of Spamhaus to interpose objections to relief simply entitled e360 to a permanent injunction. We conclude that a more substantial inquiry by the district court was necessary prior to the entry of equitable relief. See eBay, 126 S. Ct. at 1839 (“According to well-established principles of equity, a plaintiff seeking a permanent injunction must satisfy a four-factor test before a court may grant such relief. A plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction.”); see also Fed. R. Civ. P. 65(d) (“Every order granting an injunction and every restraining order shall set forth the reasons for its issuance . . . .”).
[7 The origin of the injunctive relief was a temporary restraining order (“TRO”) issued in state court before the case was removed. We are unpersuaded by e360’s contention that, because the state court conducted an appropriate inquiry, no independent inquiry into the propriety of injunctive relief was required of the district court before issuing a preliminary and then a permanent injunction. In any event, the state proceedings, aside from the TRO itself, are not of record in this matter, and we see no evidence in the record that indicates that they were fully before the district court.]
As currently written, the injunction suffers from independent legal infirmities. It fails to comply with “the rule
In our evaluation of the injunction, we are mindful that it followed a default judgment, and, therefore, we take as true the facts of the complaint. See Black v. Lane, 22 F.3d 1395, 1399 (7th Cir. 1994). In this case, the facts upon which the judgment is supported demonstrate only that at the time that Spamhaus initially posted that e360 was a “spammer”—the posting upon which the cause of action was based—the posting was false. That the label was false when originally posted does not mean that, applying Spamhaus’ generally applicable criteria for determining what a spammer is, e360 ought to be given a free pass for all time. Rather, it simply means that, whatever the initial factual basis Spamhaus had used to list e360 on the ROKSO, Spamhaus may not rely on that basis in the future.
If Spamhaus were to discover additional evidence that e360 meets the ROKSO criteria and subsequently were to place e360 on the ROKSO on the basis of that new evidence, Spamhaus would be entitled to a separate judicial determination that this new label is in fact false and that it is liable for defamation. An injunction that bars Spamhaus from referring to e360 as a spammer prospectively, without taking account of the actual grounds for liability in this action, is not tailored to the scope of the violation. For the same reason, the injunction’s requirement that Spamhaus post notice to the effect that e360 is not a spammer cannot be sustained. Whether e360 is now a spammer is not a fact determined by the default judgment. The fact determined
Finally, although we decline to address them fully in the context of this injunction that we already have determined cannot stand, we note that there are sensitive First Amendment issues presented in the context of permanent injunctions in defamation actions. See generally Erwin
The district court’s conclusion that issues of jurisdiction and service of process were waived by Spamhaus’ con-
AFFIRMED in part;
VACATED and REMANDED in part
A true Copy:
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