When will company directors be personally liable for acts of
wrongdoing by their company? And what profits will they have to
account to the injured party for?
These questions were considered by the Supreme Court in the
context of a trade mark infringement case in Lifestyle Equities v
Ahmed. Natalie Welch, solicitor in our Brand
Protection team, explores the details...
Background
The claimants, Lifestyle, owned a number of registered trade
marks including a device mark comprising the words "BEVERLY
HILLS POLO CLUB" and depicting an image of a polo player on a
horse. They sued some 16 defendants for trade mark infringement and
passing off, including Hornby Street Ltd for offering for sale
clothing and footwear items bearing logos featuring the name
"SANTA MONICA POLO CLUB" and polo players on horses. The
Ahmeds were directors of Hornby Street and were also sued on the
basis that they had authorised or procured Hornby Street to
infringe or engaged in a common design to cause the company to
commit the acts of infringement.
At first instance, the High Court held that Hornby Street had
infringed Lifestyle's trade marks and committed passing off,
and that the Ahmeds in their personal capacity were jointly and
severally liable for the same infringements. Hornby Street later
went into administration and Lifestyle then elected to claim an
account of profits against the Ahmeds for profits made by both
Hornby Street and the Ahmeds personally as a result of their
infringements. The court held that the Ahmeds were not liable to
account for the profits made by Hornby Street, but did find that
they were liable to account for profits they had derived
personally, namely 10% of their salaries for the relevant period. A
loan made by Hornby Street to Mr Ahmed was also treated as profits
made from the infringement and the High Court also ordered Mr Ahmed
to account for this to Lifestyle.
Both parties appealed to the Court of Appeal – Lifestyle
against the decision not to hold the Ahmeds personally liable to
account for profits made by Hornby Street and the Ahmeds against
the decision that they were jointly and severally liable for Hornby
Street's infringements and that they had made any profits for
which they were liable to account to Lifestyle. The grounds of
appeal were mostly dismissed, except that the Court of Appeal held
that the loan to Mr Ahmed was not a profit derived from the
infringements.
Both parties appealed to the Supreme Court, who considered two
main issues:
- Directors' liability - Whether the Ahmeds were jointly liable with Hornby Street; and
- Account of profits - If so, was it appropriate to order them to
account to Lifestyle for profits and what should be treated as
profits for this purpose?
The Decision
Directors' Liability
The Supreme Court held that the lower courts were wrong to find
the Ahmeds jointly liable for the infringement of Lifestyle's
trade marks by Hornby Street.
The dispute centred on what mental state was required to make the
Ahmeds liable as accessories. Lifestyle argued that the knowledge
required for directors to be jointly liable should be the same as
that required to incur primary liability for committing the offence
concerned. They said that because trade mark infringement is a
strict liability offence for which knowledge is irrelevant,
knowledge should also be irrelevant to the question of whether
directors are liable as accessories. In other words, because Hornby
Street had been found to have committed trade mark infringement, so
too should the Ahmeds be liable as accessories for authorising or
procuring Hornby Street to commit the infringement and/or for
participating in a common design with Hornby Street to commit the
infringement.
The Supreme Court disagreed and held that to be liable as an
accessory to a wrongful act, a person must know the essential facts
which make the act done unlawful, even if the offence so far as the
primary infringer concerned is one of strict liability:
"Only if all the features of the act done which make
it... an infringement of a... trade mark are known
to a defendant whose conduct has procured the infringement will the
defendant be jointly liable with the actual infringer"
(emphasis added).
They must also have had an intention to procure the primary
infringer to do that unlawful act.
Hornby Street was found to have infringed Lifestyle's trade
marks on two bases (i) because most of the their signs were
sufficiently similar to Lifestyle's registered trade marks to
give rise to a likelihood of confusion, and (ii) because their
signs took unfair advantage of the distinctive character or repute
of Lifestyle's trade marks and caused detriment to their
distinctive character. Although the judge at first instance did
consider whether the Ahmeds had knowledge of these matters and
intended them to them to happen, he did not make any findings that
they knew or should have known that there would be a likelihood of
confusion or that Lifestyle's reputation would be harmed by
their use of the signs.
So whilst the Ahmeds were found to have induced Hornby Street to
commit acts of infringement, neither director had the knowledge
that those acts would amount to the unlawful act of trade mark
infringement to make them liable as accessories. The Supreme Court
therefore allowed the appeal and held that the Ahmeds were not
jointly liable for the company's infringements, either because
they procured the infringements or participated in a common
design.
It is worth noting that the Supreme Court firmly rejected the
Ahmeds' argument that directors could not be held personally
liable for a company's infringements if they were acting in
good faith and with reasonable care in discharging their duties to
the company, and did not know or ought to know that their acts
would amount to an infringement of intellectual property rights.
The Court was clear that there is nothing under English law which
exempts a director acting in that capacity from the ordinary
principles of civil liability for wrongful acts.
Account of Profits
As the Ahmeds had not infringed Lifestyle's trade marks,
it was not necessary to decide the questions relating to an account
of profits. Nonetheless, the Supreme Court went on to consider the
issues of whose profits it would have been appropriate for them to
account for (assuming that they had been held personally liable)
and whether the Ahmeds' salaries and the loan to Mr Ahmed
should be treated as profits.
The Court confirmed the principle that a person should only be
ordered to account for profits which they themselves have made from
the infringements. So even if they had been liable as accessories
the Ahmeds would not have been required to account for profits made
by Hornby Street.
They agreed with the Court of Appeal that the loan made by Hornby
Street to Mr Ahmed should not have been regarded as profit. A
person does not make a profit merely by borrowing money and even if
a lender later decides not to redeem the loan (by virtue of it
going into administration for example), it still remains a
loan.
However the Court disagreed that part of the Ahmeds' salaries
should be characterised as profits attributable to the
infringements. Instead their salaries were simply normal
remuneration for their services as directors and it was incorrect
for the lower courts to find that these amounts could properly be
treated at profits personally made by the Ahmeds. Therefore the
facts did not justify any orders for an account of profits.
Comment
The Supreme Court has made it clear that knowledge is the determinative factor when deciding cases of accessory liability and this judgment offers some comfort to directors seeking to avoid joint liability for wrongful acts by their companies. Unless they have knowledge of the essential facts which make the acts of the company unlawful, a director will not be found jointly liable for infringements committed by their company- even in the case of strict liability offences like trade mark infringement.
In the context of intellectual property claims, if claimants wish to join directors to infringement proceedings as accessories, they should think carefully about what evidence they can rely on to show that a director knew or ought to have known that the company was infringing. Whether a director possesses knowledge of the "essential facts" will depend on the circumstances of each particular case, but this may be trickier to establish in cases which are not 'clear cut' and where there is an honest difference of opinion on infringement, for instance arguments about the issues of similarity, likelihood of confusion, or adverse effects on reputation. The case for accessory liability should be considered at the outset and, if viable, should be properly pleaded in statements of case.
Claimants should also think twice about whether to elect an account of profits as a remedy in successful accessory liability claims. The Court's treatment of what represents "profits" in so far as company directors are concerned could mean that damages are a more attractive route to recovering monies from them, but care and advice should be taken when making that decision.
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.
