Faizi v. Temori ( 2023 )

1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 SAN JOSE DIVISION 7 8 AHMAD MUKHTAR FAIZI, Case No. 22-cv-04224-VKD 9 Plaintiff, ORDER GRANTING IN PART AND 10 v. DENYING IN PART MOTION RE CONTEMPT 11 BAKTASH TEMORI, et al., Re: Dkt. No. 47 Defendants. 12 13 14 Plaintiff Ahmad Mukhtar Faizi filed a “Verified Shareholder Derivative Complaint for 15 Money Damages and Injunctive Relief,” on behalf of nominal defendant Falafel Flame, Inc. 16 (“Falafel Flame” or “company”) against two of Falafel Flame’s directors, Baktash Temori and 17 Masoud Rustakhis, as well as a number of entities, including various allegedly unauthorized 18 Falafel Flame eateries. Mr. Faizi now moves, on Falafel Flame’s behalf, for an order finding 19 defendants in civil contempt and liable for sanctions for failing to comply with this Court’s 20 preliminary injunction (Dkt. No. 35). Upon consideration of the moving and responding papers, 21 as well as the oral arguments and testimony presented at the proceedings held on February 14, 22 2023, the Court grants the motion for contempt and sanctions in part and denies it in part.1 23 I. BACKGROUND 24 According to the complaint, on November 20, 2019, Messrs. Faizi, Temori, and Rustakhis 25 founded Falafel Flame to open a chain of restaurants under the trade name “Falafel Flame.” Dkt. 26 No. 1 ¶ 30. Messrs. Faizi, Temori and Rustakhis each own 33.33% of the company. Id. ¶ 31. 27 1 Additionally, Falafel Flame and Messrs. Faizi, Temori, and Rustakhis entered into a “Shareholders 2 Agreement for Falafel Flame, Inc.,” including terms for authorizing and approving future Falafel 3 Flame restaurants. Id. ¶ 251 & Ex. F. Mr. Faizi avers that Falafel Flame does not operate or own 4 a restaurant location, and was established to be the parent holding company, which holds 5 intellectual property rights and grants licenses to individual Falafel Flame locations in exchange 6 for a royalty of $1,000 per month paid to Falafel Flame. Dkt. No. 26-1 ¶¶ 4-5; see also Dkt. No. 1 7 ¶ 33. The complaint further states that on September 8, 2020, Falafel Flame obtained a federally 8 registered service mark, FALAFEL FLAME®. Dkt. No. 1 ¶¶ 32, 42 & Ex. D. 9 In sum, Mr. Faizi claims that defendants opened multiple competing falafel eateries using 10 the FALAFEL FLAME® mark, without proper authorization.2 On October 12, 2022, the Court 11 granted Mr. Faizi’s motion for a preliminary injunction regarding so-called “Unapproved Falafel 12 Defendants” as to trademark infringement only. Dkt. No. 35. The specific focus of Mr. Faizi’s 13 complaint and his proposed injunction were four allegedly unapproved restaurants in Hayward, 14 Sunnyvale, San Jose,3 and Upland, California. See Dkt. No. 35 at 2 n.4 & 13-15; see also Dkt. 15 Nos. 1, 26-2.4 The Court found Mr. Faizi’s proposed injunction overbroad in certain respects and 16 entered a narrower preliminary injunction as follows: 17 Messrs. Temori and Rustakhis, the defendants operating falafel- based restaurants or eateries under the name “Falafel Flame” (“Unapproved 18 Falafel Defendants”), their officers, agents, servants, employees, and all other persons acting in concert or participation with them are enjoined from: 19 (1) Using, imitating, copying, or making any other infringing use of the 20 FALAFEL FLAME® mark and any other mark confusingly similar or identical to the FALAFEL FLAME® mark; 21 (2) Operating Falafel Flame Hayward, Inc. under the name “Falafel 22 Flame” or using the FALAFEL FLAME® mark; 23 24 2 Mr. Faizi’s complaint also asserts individual claims for relief that are not at issue in the present motion. 25 3 Defendants sometimes also refer to the San Jose location as the “Saratoga” location. 26 4 Mr. Faizi confirmed that his proposed injunction did not concern so-called “approved” Falafel 27 Flame restaurants in Concord, Tracy, and Dublin, California. See Dkt. No. 35 at 3 n.5 (citing Dkt. (3) Operating Falafel Flame Sunnyvale, Inc. under the name “Falafel 1 Flame” or using the FALAFEL FLAME® mark; 2 (4) Operating Falafel Flame Upland, Inc. under the name “Falafel Flame” or using the FALAFEL FLAME® mark; 3 (5) Operating Falafel Flame San Jose, Inc. under the name “Falafel 4 Flame” or using the FALAFEL FLAME® mark; 5 (6) Claiming sponsorship or endorsement by, or similar affiliation with Falafel Flame, or in any other way attempt to benefit from the 6 goodwill of the FALAFEL FLAME® mark; and 7 (7) Engaging in any other act likely to cause confusion or mistake, or to deceive consumers of restaurant services or food/beverage services 8 and products into believing that defendants or their business, products, services, or other commercial activities in California are in 9 any way affiliated, connected, or associated with Falafel Flame or its goods and services offered under the FALAFEL FLAME® mark. 10 It is further ordered that Messrs. Temori and Rustakhis, the 11 Unapproved Falafel Defendants, their officers, agents, servants, employees, and all other persons acting in concert or participation with them: 12 (1) Remove from display and cease all use of any advertisements and 13 marketing, promotional, or sales materials comprising, bearing, or displaying the FALAFEL FLAME® mark, including from all 14 Internet webpages and social media accounts within these defendants’ custody or control; and 15 (2) Remove from display and cease all use of signage, menus, and other 16 physical materials comprising, bearing or displaying the FALAFEL FLAME® mark within these defendants’ custody and control. 17 18 Dkt. No. 35 at 13-15. The injunction was conditioned on the payment of a $4,000 bond, which 19 Mr. Faizi indicates was posted on October 24, 2022. See Dkt. No. 37; see also Dkt. No. 47-3 ¶¶ 3- 20 4 & Ex. A. 21 Mr. Faizi claims that defendants continue to operate the allegedly unapproved eateries in 22 Hayward, Sunnyvale, Upland, and San Jose, California using the FALAFEL FLAME® mark, 23 and/or continue to advertise the FALAFEL FLAME® mark online, in violation of the Court’s 24 injunction. He requests an order (1) finding defendants in contempt of the Court’s injunction, 25 (2) imposing sanctions based on a disgorgement of the unapproved eateries’ profits, (3) imposing 26 a fine of $2,500 per day until defendants comply with the Court’s injunction, and (4) directing 27 defendants to pay Falafel Flame the attorney’s fees incurred in bringing the present motion. 1 II. LEGAL STANDARD 2 A district court has the inherent authority to enforce compliance with its orders through a 3 civil contempt proceeding. Int’l Union, United Mine Workers of Am. v. Bagwell, 512 U.S. 821, 4 827-28 (1994). Civil contempt “consists of a party’s disobedience to a specific and definite court 5 order by failure to take all reasonable steps within the party’s power to comply.” In re Dual-Deck 6 Video Cassette Recorder Antitrust Litig., 10 F.3d 693, 695 (9th Cir. 1993); see also Gen. Signal 7 Corp. v. Donallco, Inc., 787 F.2d 1376, 1379 (9th Cir. 1986) (“Civil contempt occurs when a party 8 fails to comply with a court order.”). 9 “The standard for finding a party in civil contempt is well settled: ‘The moving party has 10 the burden of showing by clear and convincing evidence that the contemnors violated a specific 11 and definite order of the court.’” Fed. Trade Comm’n v. Affordable Media, LLC, 179 F.3d 1228, 12 1239 (9th Cir. 1999) (quoting Stone v. Cty. & Cnty. of San Francisco, 968 F.2d 850, 856 n.9 (9th 13 Cir. 1992)). “‘The burden then shifts to the contemnors to demonstrate why they were unable to 14 comply.’” Id. (quoting Stone, 968 F.2d at 856 n.9). “The contempt need not be willful.” In re 15 Dual-Deck Video Cassette Recorder Antitrust Litig., 10 F.3d at 695 (internal quotation marks and 16 citation omitted). However, contempt sanctions are not warranted where the nonmoving party’s 17 action “appears to be based on a good faith and reasonable interpretation” of the court’s order. Id. 18 (quoting Vertex Distrib., Inc. v. Falcon Foam Plastics, Inc., 689 F.2d 885, 889 (9th Cir. 1982)). 19 Additionally, “‘[s]ubstantial compliance with the court order is a defense to civil contempt, and is 20 not vitiated by a few technical violations where every reasonable effort has been made to 21 comply.’” Id. (quoting Gen. Signal Corp., 787 F.2d at 1378-79). 22 Thus, Mr. Faizi must demonstrate by clear and convincing evidence that (1) defendants 23 violated a court order, (2) the noncompliance was more than a technical or de minimis violation, 24 and (3) defendants’ conduct was not based on a good faith and reasonable interpretation of the 25 violated order. Facebook, Inc. v. Power Ventures, Inc., No. 08-CV-05780-LHK, 2017 WL 26 3394754, at *8 (N.D. Cal. Aug. 8, 2017) (citing United States v. Bright, 596 F.3d 683, 694 (9th 27 Cir. 2010)). 1 III. DISCUSSION 2 There is no dispute between the parties that defendants have not complied with the terms 3 of the Court’s preliminary injunction. Indeed, defendants acknowledged at the hearing on the 4 present motion that they have not made any attempt to comply with that order. See Dkt. No. 53. 5 As noted above, the injunction prohibits defendants from (among other things) “[u]sing, imitating, 6 copying, or making any other infringing use of the FALAFEL FLAME® mark”; operating the 7 unapproved eateries under the name “Falafel Flame” or using the FALAFEL FLAME® mark; and 8 engaging in any act likely to “cause confusion or mistake, or to deceive consumers of restaurant 9 services or food/beverage services and products into believing that defendants or their business, 10 products, services, or other commercial activities in California are in any way affiliated, 11 connected, or associated with Falafel Flame or its goods and services offered under the FALAFEL 12 FLAME® mark.” Dkt. No. 35 at 13-14. Further, defendants were affirmatively required to 13 “[r]emove from display and cease all use of any advertisements and marketing, promotional, or 14 sales materials comprising, bearing, or displaying the FALAFEL FLAME® mark, including from 15 all Internet webpages and social media accounts within these defendants’ custody or control” and 16 to “[r]emove from display and cease all use of any advertisements and marketing, promotional, or 17 sales materials comprising, bearing, or displaying the FALAFEL FLAME® mark, including from 18 all Internet webpages and social media accounts within these defendants’ custody or control.” Id. 19 at 15. Process servers retained by Mr. Faizi attest that they visited locations in Hayward, 20 Sunnyvale, and Upland, California on dates in December 2022 and January 2023, and observed 21 continued use of the FALAFEL FLAME® mark on signage and menus. Included with their 22 declarations are photos they took at those locations on the dates in question, documenting their 23 observations. See Dkt. No. 47-4 (December 8, 2022 visit to Upland location); Dkt. No. 47-5 24 (December 6, 2022 visit to Sunnyvale location); Dkt. No. 47-6 (December 5, 2022 visit to 25 Hayward location); Dkt. No. 47-7 (January 6, 2023 visit to Upland location); Dkt. No. 47-8 26 (January 6, 2023 visit to Hayward location); Dkt. No. 47-9 (January 6, 2023 visit to Sunnyvale 27 location). While Mr. Faizi no longer asserts that the eatery in San Jose continues to operate under 1 kitchen that nonetheless continues to use the FALAFEL FLAME® mark to promote its services 2 online. His counsel submits evidence (i.e., screenshots) indicating that, as of January 5, 2023, all 3 four allegedly unapproved locations continued to advertise and promote the FALAFEL FLAME® 4 mark on Falafelflame.com, Grubhub.com, Doordash.com, Facebook.com, and Ubereats.com. See 5 Dkt. No. 47-3 ¶¶ 5-10 & Exs. B-G. Mr. Faizi’s evidence is clear and convincing and establishes 6 violations of the Court’s injunction, at least with respect to the Hayward, Sunnyvale, and Upland 7 locations. 8 The evidence is not clear that there is a functioning location in San Jose, whether operating 9 as a ghost kitchen or otherwise. With respect to the San Jose location, Mr. Temori testified that 10 the ghost kitchen no longer exists. While it is unclear when the ghost kitchen closed, there 11 appears to be no dispute that there is no active restaurant operating in San Jose. According to Mr. 12 Temori, a Saratoga location has not yet sold any food and currently is under construction, which is 13 expected to be completed in about two months. Further, Mr. Temori represented to the Court that 14 defendants do not intend to open that location under the name “Falafel Flame.” Dkt. No. 53. Mr. 15 Faizi’s internet screenshots and his stated belief as to the existence of a San Jose ghost kitchen is 16 not clear and convincing evidence of contempt as to that location. 17 In their opposition papers, defendants otherwise presented no evidence refuting Mr. Faizi’s 18 evidence. Nor did they claim that their noncompliance was merely a technical or de minimis 19 violation, or that their conduct was based on a good faith and reasonable interpretation of the 20 Court’s injunction. See Dkt. No. 50. Instead, defendants merely argued that “[t]here is no harm 21 here that cannot be remedied through a settlement or damages after trial.” Id. at 2. They 22 suggested that any remedy for violation of the Court’s injunction should be limited to $1,000 per 23 month, per restaurant, commensurate with Falafel Flame’s customary licensing fee. See id. at 3. 24 At the hearing, Messrs. Temori and Rustakhis both testified to claimed financial 25 difficulties at the restaurants in question (primarily with respect to the Hayward and Sunnyvale 26 locations), as well as stated concerns that complying with the Court’s injunction would cause legal 27 1 disputes with their partners5 in all disputed locations over potential breach of their partnership 2 agreements. However, defendants have not submitted any evidence substantiating their assertions 3 regarding the financial state of the restaurants at issue, the costs of complying with the Court’s 4 injunction, or the basis for their belief that such compliance would lead to legal disputes over their 5 contractual obligations with their partners. 6 “Judicial sanctions in civil contempt proceedings may, in a proper case, be employed for 7 either or both of two purposes; to coerce the defendant into compliance with the court’s order, and 8 to compensate the complainant for losses sustained.” United States v. United Mine Workers of 9 Am., 330 U.S. 258, 303-304 (1947); see also Bagwell, 512 U.S. at 827-28 (“Thus, a contempt 10 sanction is considered civil if it is remedial, and for the benefit of the complainant.”) (internal 11 quotations and citation omitted); Koninklijke Philips Elecs. N.V. v. KXD Tech., Inc., 539 F.3d 12 1039, 1042 (9th Cir. 2008) (civil contempt is characterized by coercive or compensatory purpose, 13 fines payable to the complainant, and conditional nature of the fines imposed). “Compensatory 14 awards are limited to ‘actual losses sustained as a result of the contumacy.” Gen’l Signal Corp., 15 787 F.2d at 1380 (quoting Shuffler v. Heritage Bank, 720 F.2d 1141, 1148 (9th Cir. 1983)); see 16 also United Mine Workers, 330 U.S. at 304 (compensatory fines “must of course be based upon 17 evidence of [the] complainant’s actual loss[.]”). 18 Mr. Faizi argues that Falafel Flame is entitled to sanctions based on disgorgement of 19 defendants’ profits for the period of contumacy. While disgorgement of profits is recognized as an 20 appropriate measure for a contempt sanction in trademark cases, see Jerry’s Famous Deli, Inc. v. 21 Papanicoloaou, 383 F.3d 998, 1004 (9th Cir. 2004), Mr. Faizi has presented no evidence to 22 support a sanction based on defendants’ profits. See, e.g., Adobe Sys., Inc. v. Software Tech., No. 23 5:14-cv-02140-RMW, 2015 WL 6951875, at *6 (N.D. Cal. Nov. 10, 2015) (declining to impose 24 25 5 Although the Court ordered defendants and “any other person(s) who has an ownership interest(s) in the establishments that are at issue in the Court’s October 12, 2022 preliminary 26 injunction order” to appear and attend the February 14, 2023 hearing in person (see Dkt. No. 52), defendants did not inform their partners about that order. Indeed, Mr. Temori testified that while 27 their partners generally are aware of the October 12, 2022 injunction order, their partners are not 1 civil contempt sanctions based on defendants’ profits where plaintiff presented no evidence that 2 would enable the calculation of defendants’ revenue from violations of the court’s preliminary 3 injunction). Accordingly, Mr. Faizi’s request for sanctions based on defendants’ profits is denied. 4 Equally unpersuasive is Mr. Faizi’s request for an order imposing a fine of $2,500 per day 5 until defendants comply with the Court’s injunction. Mr. Faizi explains that his proposed fine is 6 based on “$500 per unapproved restaurant and $500 for continuing to market and sell products as 7 ‘Falafel Flame’ online.” See Dkt. No. 47-2 at 2; see also Dkt. No. 47-1 at 11. However, Mr. Faizi 8 has not demonstrated that the proposed fine is based on any actual loss sustained by Falafel Flame. 9 Accordingly, the Court declines to impose a daily fine of $2,500. 10 More persuasive is defendants’ suggestion that any sanction should be based on Falafel 11 Flame’s $1,000 monthly licensing fee as compensation for use of its intellectual property. See 12 Dkt. No. 1 ¶¶ 33, 34 & Ex. B. Although Mr. Faizi objects that such a compensatory scheme will 13 not be effective at coercing compliance and simply assumes that each of the locations in question 14 could obtain Falafel Flame’s authorization and an approved license, this proposal is logically tied 15 to a quantifiable loss resulting from defendants’ noncompliance with the October 12, 2022 16 injunction. The Court’s injunction took effect on October 24, 2022, when Mr. Faizi says that the 17 required $4,000 bond was posted. See Dkt. No. 37; see also Dkt. No. 47-3 ¶¶ 3-4 & Ex. A. On 18 the record presented, defendants continued to use the FALAFEL FLAME® mark; and, assuming 19 they continue to violate the injunction, as of February 21, 2023, they will owe Falafel Flame 20 $12,000 in licensing fees (i.e., $1,000 x 3 restaurants = $3,000 x 4 months = $12,000). If 21 defendants continue to violate the terms of the Court’s injunction, sanctions will continue to 22 accrue at $1,000 every thirty days for each establishment that remains in noncompliance with the 23 injunction. 24 There remains an issue regarding where the civil contempt funds should be deposited and 25 how they should be disbursed. At the hearing, all parties agreed that the funds are payable to 26 Falafel Flame, and not to Mr. Faizi individually. As noted above, Messrs. Faizi, Temori, and 27 Rustakhis each own a third of the company. Further complicating matters, it appears that Messrs. 1 contend that they have no access to the financial accounts for the Concord location that Mr. Faizi 2 controls.6 On this record, and absent any other suggestion by the parties, the Court concludes that 3 the fairest result is to have the contempt sanctions deposited into an escrow account, in compliance 4 with the procedures set out below. 5 Additionally, the Court agrees that Falafel Flame may recover reasonable attorney’s fees 6 and costs incurred in connection with the present motion for contempt. See, e.g., SunEarth, Inc. v. 7 Sun Earth Solar Power Co., Ltd., No. C11-4991 CW, 2013 WL 4516835, at *3 (N.D. Cal. Aug. 8 23, 2013) (allowing award of reasonable attorney’s fees and costs that plaintiffs incurred in 9 bringing motion for contempt); Stanley Black & Decker, Inc. v. D & L Elite Investments, LLC, No. 10 12-4516-SC, 2013 WL 3799583, at *4 (N.D. Cal. July 19, 2013) (“Attorney fees are recoverable 11 to compensate a party for the costs and expenses incurred in connection with a successful motion 12 for contempt.”) (citing Koninklijke Philips Elecs. N.V. 539 F.3d at 1042-43). Briefing on the 13 requested fees shall proceed as set forth below. 14 IV. CONCLUSION 15 Based on the foregoing, Falafel Flame’s motion for an order of contempt is granted in part 16 and denied in part as follows: 17 (1) Mr. Faizi has not met his burden to establish contempt of the October 12, 2022 18 injunction with respect to the allegedly unapproved eatery in San Jose, California. His 19 motion for a finding of contempt and the imposition of sanctions as to that location is 20 denied. 21 (2) The Court finds Messrs. Temori and Rustakhis in contempt of the October 12, 2022 22 injunction with respect to the establishments in Hayward, Sunnyvale, and Upland, 23 California. The Court imposes civil contempt sanctions as to those locations as 24 follows: 25 a. Assuming continued noncompliance with the October 12, 2022 injunction, as of 26 27 6 Additionally, defendants maintain that Mr. Faizi has been removed as an officer of Falafel 1 February 21, 2023, defendants will owe Falafel Flame $12,000 in licensing fees 2 for the use of the company’s intellectual property. 3 b. Should defendants continue to violate the terms of the Court’s October 12, 2022 4 injunction, they must pay an additional $1,000 per month to Falafel Flame 5 every thirty days after February 21, 2023 for each of the Hayward, Sunnyvale, 6 or Upland locations that remain in noncompliance with the injunction. 7 c. Defendants shall pay the ordered sanctions into an escrow account, in 8 compliance with the procedures set out below, until they comply with the 9 October 12, 2022 injunction. 10 (3) By February 27, 2023, Mr. Faizi shall establish an escrow account on behalf of Falafel 11 Flame and file papers with the Court demonstrating that the account has been opened. 12 If it is necessary to identify the account number in any public filings, the account 13 number shall be redacted and identified by only the last three digits or alphanumeric 14 identifiers. 15 a. Within ten days from the date the escrow account is opened, defendants shall 16 deposit all amounts then due and owing, for each full thirty-day period of 17 noncompliance with the October 12, 2022 injunction, and shall file a certificate 18 of compliance with the Court. 19 b. Beginning thirty days from February 21, 2023, and every thirty days thereafter, 20 defendants shall continue to deposit sanctions in the amount of $1,000 per 21 month for each of the Hayward, Sunnyvale, or Upland establishments that 22 continues to operate in violation of the Court’s October 12, 2022 injunction. 23 Defendants shall file a certificate of compliance the next court day following 24 each such deposit. 25 c. The funds deposited into the escrow account shall not be released to any party, 26 except by further order of the Court. 27 (4) By March 1, 2023, plaintiff’s counsel shall file an application with the Court 1 contempt, including any declarations, timesheets or other documentation necessary to 2 enable defendants and the Court to assess the reasonableness of the requested hourly 3 rates and work performed. By March 8, 2023, defendants shall file a response, which 4 shall address only the amount of the fees requested. Plaintiff’s counsel shall file a 5 reply by March 15, 2023. Unless otherwise ordered, the matter of the requested fees 6 will be deemed submitted on the papers without further oral argument. 7 IT IS SO ORDERED. 8 Dated: February 15, 2023 9 10 Unigguia Z We, hu March: VIRGINIA K. DEMARCH I United States Magistrate Judge 12 © 15 16 = 17 Z 18 19 20 21 22 23 24 25 26 27 28