Faizi v. Temori

Background

Ahmad Mukhtar Faizi brought a shareholder derivative action for himself and on behalf of Falafel Flame, Inc. He sued Baktash Temori, Masoud Rustakhis, and other defendants, including entities associated with allegedly unauthorized Falafel Flame restaurants. The court’s earlier preliminary injunction addressed trademark infringement under the federal Lanham Act and prohibited defendants from using the FALAFEL FLAME mark or operating the identified restaurants under that name or mark.

The court previously found noncompliance with the injunction and imposed monetary sanctions. In an August 18, 2023 order, it gave defendants additional opportunities to comply and ordered daily fines of $50 against Temori and $50 against Rustakhis beginning October 2, 2023, unless the defendants complied or substantiated an inability to comply. The court warned that continued noncompliance could lead to striking defendants’ answer and entering default.

Temori and Rustakhis submitted declarations on September 29 and October 31, 2023. The declarations stated that the Upland location had closed and that the men had informed the majority owners of the Hayward, San Jose, and Sunnyvale locations that the restaurants were required to stop using the Falafel Flame name and trademark. They also stated that the majority owners were unwilling to change the names. At a November 7 hearing, defense counsel could not say when Temori and Rustakhis had stopped having majority ownership or control over those locations.

Legal standard

The court explained that it may strike pleadings or enter default as sanctions when a party disobeys a court order. Default is a procedural consequence of failing to participate or comply; it is not the same as a default judgment, which would require a later ruling on the requested relief. Before imposing these sanctions, courts consider the public interest in resolving cases promptly, the court’s need to manage its docket, prejudice to the other party, the preference for decisions on the merits, and whether less severe sanctions are available.

Discussion

For Falafel Flame Hayward, Falafel Flame Sunnyvale, and Falafel Flame San Jose, the court found that the first three factors favored sanctions because the continuing noncompliance had produced multiple sanctions motions and hearings and hindered the efficient resolution of the case. Although the preference for decisions on the merits generally weighed against default, the court concluded that the entities’ ongoing disobedience suggested they did not intend to litigate the matter. The court also found that lesser sanctions had been tried, additional opportunities to comply had been provided, and the defendants had been warned about potentially case-dispositive sanctions.

The court therefore struck the answers of Falafel Flame Hayward, Falafel Flame Sunnyvale, and Falafel Flame San Jose with respect to Faizi’s first Lanham Act claim and directed the clerk to enter default against those defendants on that claim. Faizi may file a motion for default judgment by December 6, 2023. The court said that motion must address subject-matter jurisdiction, personal jurisdiction, and related service-of-process issues. Despite the entry of default, the three defendants may file papers opposing the motion for default judgment, asserting defenses to the requested judgment, or explaining why their default should be set aside.

For Temori and Rustakhis, the court provisionally suspended, as of October 31, 2023, the daily fines that had accrued since October 2. The court did not find on the record that either man remained at fault for the entities’ ongoing noncompliance. It therefore did not strike their answer to the Lanham Act claim or enter default against them.

Disposition

Judge Virginia K. DeMarchi struck the answers of Falafel Flame Hayward, Falafel Flame Sunnyvale, and Falafel Flame San Jose as to claim 1 and directed entry of default against those defendants on that claim. The court did not strike the answers of Temori or Rustakhis and did not enter default against them. No default judgment was entered in this order.