It is a misconception that company directors enjoy the benefit of limited liability for their actions as directors. As a number of recent decisions in the IP field illustrate, the converse is actually true – directors 'enjoy' unlimited liability. Those clients holding the status of director need to make sure that they take appropriate precautions some of which are discussed below.
Introduction – the concept of limited liability
There are two well-known foundation concepts in company law:
- first, that a company is a separate legal entity to its director(s)1; and
- second, that incorporation of a company provides limited liability.
It isn't so well known that, except where a company's constitution provides otherwise, limited liability is strictly the preserve of shareholders, and then only:
- in relation to a company's financial obligations; and
- provided those shareholders are not acting as de facto directors.2
Moreover, a shareholder does not enjoy limited liability to a company for any tort (civil wrong), or breach of fiduciary (good faith) duty, or other actionable wrong committed by the shareholder.3
Directors and shareholders, then, may still be found personally liable for civil wrongs they commit while working for the company. Company directors in particular have no more protection from liability than anyone else when they commit civil wrongs in the course of company business.4
Why is this important? Over 85% of New Zealand companies are companies with two or less shareholder-directors.5 There is consequently a significant danger that if company A somehow infringes the IP rights of company B, company B will decide to take issue not just with company A but also with one or more of company A's directors for their involvement in the alleged infringing activity.
Establishing directors' personal liability for breaches of IP rights
Civil wrongs (torts) are traditionally grounded in common law and include deceit6 and negligence. Less traditional are civil wrongs grounded in legislation (statutory torts). Statutory torts include misleading and deceptive conduct under the Fair Trading Act 1986,7 and infringement of intellectual property ("IP") rights established under, for example, copyright,8 plant variety rights, trade mark and patent legislation.
So how will a director be found liable?
There are two ways in which a director will be found personally and jointly liable with their company for breaches of IP rights:
- Under the specific provisions of the relevant statute; and/or
- Under the principles of common law.
The recent High Court decision in Inverness Medical Innovations, Inc and Anor v MDS Diagnostics Limited and Anor9 is an example of a director being found personally liable in both ways.
Inverness Medical Innovations, Inc v MDS Diagnostics Limited
In 1998, Dr Appanna (the second defendant) recognised an opportunity in New Zealand to sell pregnancy test kits to PHARMAC for a much cheaper price than the incumbent supplier. On 4 November 1999 MDS was incorporated to exploit this opportunity, with Dr Appanna the sole director. Two further directors were appointed in July 2000: the company's accountant and the company's solicitor.
Dr Appanna was the principal participant in the business, responsible for sourcing product from overseas. He was, as the Court observed10:
In November 1999, MDS began importing and selling pregnancy testing devices in New Zealand. In 2006, Inverness alleged that that the importation and sale of the MDS devices infringed its copyright and subsequently sued MDS and Dr Appanna for breach.
Statutory liability under the Copyright Act 1994
The Court held that MDS was liable for primary infringement of Inverness's copyright by copying its products and issuing these copies to the public. The Court also held that Dr Appanna was personally liable for secondary infringement on two grounds: firstly, by importation, and, secondly, for authorising the infringing acts of MDS.
- Dr Appanna's extensive knowledge of the pregnancy testing products on the market since 1998;
- His failure to make relevant inquiries with his principal supplier as to infringement of copyright; and
- His objective to secure valuable PHARMAC contracts by competing aggressively on price.
As for authorising the infringing acts, Inverness claimed that Dr Appanna was personally liable with MDS for having either "authorised, directed, counselled and procured" the acts of MDS or made the wrongful acts of MDS "his own". As the Court identified,11 infringement by authorising another to issue copies to the public is a separate statutory wrong under the Copyright Act. It could therefore be assessed aside from whether Dr Appanna was personally liable under common law. Having regard to its previous findings in respect of the extent of Dr Appanna's activities, and the role he played, the Court was satisfied that, on the balance of probabilities, Dr Appanna had breached the Act by authorising MDS to issue the products to the public. The decision of substance to infringe, the Court said, was that of Dr Appanna.12
Liability at common law
The Court applied two tests to Dr Appanna's actions: first, did he direct or procure the infringing acts; and, second, in the alternative, did he make the wrongful (tortious) acts of the company his own? The Court decided 'yes' under both tests. As to directing and procuring the infringing acts, the reasons the Court cited were13:
- All of the critical decisions relating to infringement of copyright were decisions made by Dr Appanna and by him alone. Although there was evidence of proper corporate governance, there was no evidence of any contributory involvement by either or both of the other two directors (nor any of the employees of the company) in these decisions.
- All of the primary decision making activities of MDS, from the selection of products through to the critical marketing activities in New Zealand, were plainly Dr Appanna's areas of responsibility and within his special expertise. There is no evidence that the other directors of MDS had any requisite expertise, nor was there evidence of any relevant involvement by employees. All relevant activities were controlled personally by Dr Appanna.
As to making the wrongful acts his own, the Court was satisfied that Dr Appanna personally and deliberately associated himself with the relevant acts of MDS by, for example, personally endorsing MDS's products in public promotions, and by being the registered owner of trade marks for the MDS products.
As the decision in Inverness shows, the Court will have little difficulty in establishing a director's personal and joint liability with his/her company for infringement of IP rights where there is express provision in statute and the facts are in support. However, it may not always be possible to establish a directors' personal liability under statute, in which case a complainant can only rely on the common law.
Although not explicitly set out by the Court in Inverness, it appears from a number of UK cases dealing with director liability (in particular the 2002 UK copyright infringement case of MCA Records Inc v Charly Records 14) that a director will be held personally and jointly liable with his/her company under the common law if he or she does the following four things:
- Goes beyond his/her normal, constitutional role as a director in the governance of the company; and
- Intends to infringe another person's IP rights; and
- Participates in or directs or procures or incites another to commit an infringing act (of which the company might itself be the "other"); and
- Shares a common purpose or design with the company to infringe a statutory right. Procurement of an infringing act under (3) may lead to a common design and so give rise to joint liability.
These factors are of course determined on a case by case basis by the Court.
In order to avoid similar findings, directors and companies need to establish sound business practices to assist in any commercial decision making process.
The obvious starting point is to try to avoid infringing the rights of others in the first place. This means being aware of the sorts of rights your competitors may possess. That may involve conducting research to establish whether or not certain intellectual property rights exist for any products/processes in your field of interest, and more importantly, maintaining a watch on your competitors' IP activities by updating that search on a regular basis.
However, no matter how vigilant you are (innocent) infringement remains a possibility. There are a few pragmatic steps you can take to minimise the prospect of personal liability. These include:
- Holding directors meetings on a regular basis and in accordance with accepted standard practice (for example, by producing an agenda of items to be discussed, appointing a chair for each meeting, making notes at the meetings and producing minutes which record the nature of any discussion and the decisions made);
- Recording and documenting all essential company decisions;
- Ensuring that all directors are involved in the decision making process (even if the decision falls within the area of expertise of one specific director); and
- Taking heed if your company receives a cease and desist letter alleging that your company's activities are infringing the rights of others. It is often best to stop the alleged infringing activity, but as a minimum you should seek competent legal advice.
Another measure that can be taken to mitigate personal loss is to take out directors' and officers' liability insurance. D&O liability insurance protects the directors, officers, and senior managerial staff in a company against claims arising from their actions and decisions whilst carrying out their duties associated with the management of the company. However, it is important to note that liability insurance policies generally only cover wrongful acts committed by directors and officers acting in their official capacities. As with any insurance policy, any perceived coverage should be clarified with the relevant insurance agents.
Directors can be jointly liable for breaches of intellectual property rights by their companies. If you are concerned about whether or not your company's products or processes may breach the intellectual property rights of others, it is well worth seeking professional advice from a specialist intellectual property law firm prior to making any commercial decision when launching your own product line or manufacturing process. This is something we can assist you with.
In addition, it is worth considering taking out D&O insurance and/or statutory liability insurance to safeguard oneself from having to delve deep into your own pockets should you be unfortunate enough to be found personally liable for breaching another's IP rights.
Please feel free to contact us for further information on Patent Searching and Competitor Watch services, representation in IP infringement actions and D&O / Statutory Liability insurance.
1. Section 15 Companies Act 1993.
2. Section 97(1) and 97(2) Companies Act 1993.
3. Section 97(3) Companies Act 1993.
4. Personal Liability – No Special Immunity For Directors: Law Link Summer 2008 http://www.lawlink.co.nz/articles.php?articleid=121.
6. For example, Standard Chartered Bank v Pakistan National Shipping Corporation  1 AC 959;  1 All ER 173.
7. For example, Kinsman v Cornfields Ltd (2001) 10 TCLR 342.
8. For example, Performing Right Society, Limited v. Ciryl Theatrical Syndicate Limited and Another  2 K.B. 146; C. Evans & Sons Ltd v Spritebrand Ltd and Anor  F.S.R. 267
9. Inverness Medical Innovations, Inc and Anor v MDS Diagnostics Limited and Anor 24/6/10, Woodhouse J, HC Auckland (CIV 2007-404-748).
10. Ibid at .
11. Ibid at .
12. Ibid at .
13. Ibid at -.
14. MCA Records Inc v Charly Records  FSR 401, subsequently successfully applied in WebSphere Trade Mark  EWHC 529 (Ch);  FSR 39 (regarding trade mark infringement) and Boeglie-Gravures S.A. v Darsail-ASP Ltd & Pyzhov  EWHC 2690 (Pat) (regarding patent infringement). See also the New Zealand case of Winchester International (NZ) Limited & Anor v Cropmark Seeds Limited  NZCA 301 (CA) (regarding infringement of the Plant Variety Rights Act 1987).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
James and Wells is the 2009 New Zealand Law Awards winner of the Intellectual Property Law Award for excellence in client service.