Faizi v. Temori

Background

Ahmad Mukhtar Faizi filed a verified shareholder derivative complaint on behalf of nominal defendant Falafel Flame, Inc. A derivative action is brought by a shareholder on behalf of a company. The complaint named Falafel Flame’s directors, Baktash Temori and Masoud Rustakhis, along with various restaurant and business entities.

According to the complaint, Faizi, Temori, and Rustakhis founded Falafel Flame on November 20, 2019, and each owned 33.33% of the company. The company obtained a federal registration for the FALAFEL FLAME® service mark on September 8, 2020. The complaint also alleged that Falafel Flame owned trade secrets, including recipes, menu information, supplier lists, operating-cost data, business margins, and business know-how.

The three founders opened Falafel Flame restaurants in Concord, Dublin, and Tracy, California. According to the complaint, each new restaurant received a license to use the company’s mark and recipes in exchange for a monthly $1,000 royalty. Faizi alleged that Temori and Rustakhis later created or operated additional restaurants in Sunnyvale, San Jose, Hayward, and Upland, California, and several “Blaze BBQ” entities, using Falafel Flame’s mark and recipes without proper authorization. He also alleged that they did not give him ownership in the additional restaurants.

The complaint asserted 22 claims, including derivative claims for trademark infringement, trademark dilution, trade-secret violations, misrepresentation, breach of fiduciary duties, unfair competition, conspiracy, conversion, breach of contract, and fraudulent concealment. It also asserted direct claims by Faizi for trade-secret violations, misrepresentation, breach of fiduciary duties, breach of contract, conspiracy, and fraudulent concealment.

Defendants’ Motion

The defendants moved under Federal Rule of Civil Procedure 12(b)(6), which permits dismissal for failure to state a legally sufficient claim. They argued that the shareholders’ agreement barred all of the claims because it allowed them to engage in competing activities and waived rights or claims against Temori and Rustakhis. They also argued under Rule 9(b), which requires fraud-based claims to be pleaded with particularity, that Faizi’s direct intentional-misrepresentation claim lacked sufficiently specific facts.

Court’s Analysis

The court rejected the argument that the shareholders’ agreement barred the complaint. It said the defendants’ position overlooked the complaint’s central allegation: although the defendants might be permitted to compete with Falafel Flame, they could not do so by infringing the company’s intellectual property. The court found that the complaint provided sufficiently detailed allegations that the defendants engaged in self-dealing transactions to open competing restaurants while using the FALAFEL FLAME® mark and trade secrets without proper authorization. The court also found that the defendants had not shown, at this stage, that the agreement had to be interpreted or enforced in a way that barred all of the claims.

The court separately considered Faizi’s direct claim for intentional misrepresentation under California Civil Code section 1709. The complaint alleged that Temori and Rustakhis misrepresented their commitment not to use or disclose Falafel Flame’s trade secrets and service mark, including through licensing agreements. It also alleged that they made those misrepresentations to retain ownership in the unauthorized competing restaurants and prevent Faizi from receiving ownership in them. The court found these allegations sufficiently specific to give the defendants notice of the alleged misconduct and allow them to prepare a defense. It therefore rejected the Rule 9(b) challenge.

Disposition

The court denied the defendants’ motion to dismiss the complaint. It also denied the motion to dismiss Faizi’s direct intentional-misrepresentation claim. The order did not resolve the ultimate merits of the claims; it held that the claims could proceed past the pleading stage.