Australia: Director's Cut - Director Found Personally Liable In Patent Infringement

(Inverness Medical Switzerland GmbH v MDS Diagnostics Pty Limited [2010] FCA 108)

The Federal Court of Australia recently found a company director personally liable for patent infringement. The facts of the case and the salient points considered by the Court in reaching this finding are discussed below.

Inverness Medical is the patentee of four patents relating to (among other things) pregnancy tests. Inverness sought orders against five respondents for infringement of its patents. Only the first three respondents appeared. The first respondent (MDS Aus) is the Australian "sponsor" of, and the second respondent (MDS NZ) is the New Zealand and Australian distributor of, QuickStream and QuickCard (i.e. the pregnancy tests that were the subject of the proceedings). The third respondent, Dr Appanna, is a director of both MDS Aus and MDS NZ.

Inverness alleged that Dr Appanna, a family physician in Auckland, New Zealand, was personally liable as a joint tortfeasor for the infringement by the MDS companies and also for authorising the same infringement - the latter allegation relates to s13(1) of the Australian Patents Act that defines the exclusive rights given by a patent and states: Subject to the Act, a patent gives the patentee the exclusive rights, during the term of the patent, to exploit the invention and to authorise another person to exploit the invention.

The following three tests were considered in determining whether a director is liable as a joint tortfeasor for acts committed by the company of which s/he is a director:

  1. The test propounded by Lindgren J in Microsoft Corporation v Auschina Polaris Pty Ltd (1996) 71 FCR 231 at 246, namely whether the director "directed or procured the infringing act" (the Auschina test) (applying Performing Right Society Ltd v Ciryl Theatrical Syndicate Ltd [1924] 1 KB 1 at 15 per Lord Aitkin).
  2. The test first suggested by Finkelstein J in an obiter remark in Root Quality Pty Ltd v Root Control Technologies Pty Ltd [2000] FCA 980; (2000) 177 ALR 231 at [146], namely whether the director's conduct is "such that it can be said of him that he was so personally involved in the commission of the unlawful act that it is just that he should be rendered liable" (the Root Quality test).
  3. The test propounded in the Canadian case Mentmore Manufacturing Co Limited v National Merchandising Manufacturing Co In (1978) 89 DLR (ED) 195, namely whether "the director made the infringing conduct his own in the sense that the director deliberately, wilfully or knowingly pursue[d] a course of conduct that was likely to constitute infringement or that reflected indifference to the risk of infringement" (the Mentmore test).

Having duly considered these tests, Bennett J said: "The question is whether Dr Appanna knowingly pursued a course of conduct which, judged objectively, led to infringement or was likely to constitute infringement, or reflected indifference to the risk of infringement." and, further, "I do not accept that the fact that Dr Appanna controls the MDS companies as shareholder, or the mere description of Dr Appanna as Managing Director are, alone, sufficient to establish that he directed or procured the infringing acts of the MDS companies. Dr Appanna's liability should be determined by reference to his involvement in the management and operations of MDS concerning the MDS devices. His shareholding of itself is insufficient to establish liability either as a joint tortfeasor or under s 13. Something more is necessary."

MDS contended that while Dr Appanna played an important role in the day to day operations of MDS, he did not at any relevant time possess the acumen, ability or skill to determine by himself the strategic and business decisions adopted by MDS NZ. MDS said that the evidence establishes that Dr Appanna "was part of a suite of appropriately skilled personnel who managed and supervised the operations of MDS, both its day to day activities and the 'higher level' strategic and business decisions".

Bennett J found "There is no evidence that any director of MDS Aus other than Dr Appanna played an active role in the management of that company." and stated "I am satisfied that Dr Appanna's position as the Managing Director of MDS NZ and his participation in the procurement and distribution of the MDS devices in New Zealand and Australia are sufficient to establish that he deliberately, willfully or knowingly pursued a course of conduct that resulted in MDS selling products that infringed the Inverness patents. Further, he was aware of competing products on the market and was indifferent as to whether or not those products were protected by patents. In taking part in the activities of MDS NZ and MDS Aus as a director and in the management of those companies, Dr Appanna directed or procured the obtaining of and the selling of the products that infringed Inverness' patents. Accordingly, he is liable under both the Mentmore test and the Auschina test."

Regarding "authorising" the conduct of MDS (s13(1)), the Court noted the exclusive rights of the patentee include the right to exclude others from exploiting the invention or authorising another person to exploit the invention. Infringement of the right to authorise exploitation in s 13 looks to whether the product being exploited infringes the claimed invention and not whether the person authorising that conduct intends to authorise infringement or knows that the product will infringe. The Court found that there is no requirement that the person knows that the authorisation is of an infringement of a patent.

Bennett J found that "A person authorises an infringement if he or she 'sanctions, approves or countenances' the infringement" and noted "That is not to say that a director of a company, by reason only of that position, authorises any act of infringement by the company. It is still necessary to show actions that demonstrate that the person did sanction, approve or countenance the act of infringement." It was also indicated that "There can be no dispute that Dr Appanna knew that the infringing act of the sale of the MDS devices would occur. He had the power to prevent those acts and some duty to interfere. Express or formal permission is not essential and inactivity or indifference may reach a degree from which authorisation or permission may be inferred (Australasian Performing Right Association Ltd v Metro on George Pty Ltd (2004) 61 IPR 575 at [19] per Bennett J). Dr Appanna authorised MDS to sell the infringing products. I am satisfied that he had the power to prevent the companies from committing the acts of exploitation (Metro on George at [18]). He arranged for the sourcing of the products and personally participated in the distribution of those products. Dr Appanna sanctioned, approved and countenanced the sale of products that infringed Inverness' exclusive right to exploit the invention of the first patent and the second patent."

The Court found, therefore, that Dr Appanna was liable under s 13(1) of the 1990 Act for "authorising the infringement" of the patents.

This sends a warning to directors to be mindful of infringement issues not only in the interests of good business practice but also to avoid being found personally liable.

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.

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