In Lifestyle Equities CV v Ahmed ([2021] EWCA Civ 675), the Court of Appeal gave some helpful guidance on when directors will be jointly and severally liable with the company for acts of IP infringement.
Directors and other company officers will not be personally liable merely because they hold that position in a company. They must have personally participated in the infringing acts for there to be liability.(1)
Existing UK case law provides that a director, or other officer, will be personally liable with the company as joint tortfeasor where they "intend and procure and share a common design that the [IP] infringement takes place".(2) Essentially, this means that the director must be so personally involved in the infringing acts for there to be a "concerted action to a common end"(3) on the part of the director and the company. The court will examine the fact evidence around what a director actually did and decide on the basis of that whether their involvement was sufficient to render them personally liable.
The Court of Appeal's judgment in Lifestyle Equities v Ahmed makes for uncomfortable reading. The conclusion is stark; that a director will avoid personal liability as joint tortfeasor only in the narrowest of circumstances.
Lifestyle Equities owned various registered trademarks for BEVERLY HILLS POLO CLUB and several horse-riding polo player logos. It brought trademark infringement and passing-off proceedings against 16 companies associated with the use of the sign SANTA MONICA POLO CLUB along with devices also based on horse-riding polo players. Mr and Ms Ahmed were also named as defendants. They were alleged to be jointly and severally liable for the infringements of two of the companies of which they were directors (D3 and D11).
At trial, D3 and D11 were found liable for trademark infringement and passing off. Lifestyle Equities elected to pursue the remedy of an account of profits against them. However, D3 and D11 went into insolvent administration. Subsequently, in a second trial, the Ahmeds were found to be jointly and severally liable for the infringements by D3 and D11. Lifestyle Equities also sought an account of profits from them. Crucially, Lifestyle Equities argued that the Ahmeds should not only be liable to account for the profits that they had each made personally from the infringements, but also the profits made by D11. At first instance, the High Court disagreed and held that they should be liable only for their personal profits, amounting to 10% of their respective salaries, and – in respect of Mr Ahmed only – a loan made to him by D11.
Lifestyle Equities appealed on this point. The Ahmeds also appealed, arguing that they should not have been found jointly and severally liable for the infringements. They also appealed the finding that they should account for their profits to Lifestyle Equities but, to the extent that they did have to account, any profits should not include a proportion of their salaries or the loan.
On Lifestyle's appeal, the Court of Appeal upheld the High Court's decision. It agreed that a director who was jointly liable for IP infringement need account only for the profits made by them personally and not also any profits made by the company.
The Court of Appeal also upheld the High Court's decision that the Ahmeds were jointly and severally liable with D3 and D11. The court confirmed the principle that a director will not be jointly liable with their company for IP infringement merely because of the position that they hold. It must be shown that the director personally participated in the infringement. This will be a question of fact based on an assessment of the evidence. However, if that is shown, a director will not have a defence to accessory liability merely because they acted within the scope of their authority as a director. Nor will it be a defence if the director acted on advice without improper motive, delegated the infringing acts or if they did not know that the acts in which they participated amounted to IP infringement. Any suggestion that they were merely acting in the interests of the company would also be rejected as a defence. The Court of Appeal confirmed that the only defence open to a director would be to show that they were doing nothing more than "carrying out their constitutional role in the governance of the company". This could include more than simply voting at board meetings, but the Court of Appeal confirmed that activities deemed to fall within this "constitutional role" would be limited.
The Court of Appeal was also satisfied that the Ahmeds should have to account for their personal profits. Lifestyle Equities had elected to pursue this remedy for trademark infringement and passing off (which was their right) and this was not generally open to challenge by a defendant. It was correct that a proportion of the Ahmed's salaries should be deemed to be profit (although such profit should be accounted for net of income tax). However, a loan (genuinely provided as such and so repayable to the company) was not a profit that need be accounted for.
What does this judgment mean for directors? On the positive side, it continues to be the case that merely being a company director (or other officer) will not render them jointly liable for IP infringement unless the evidence shows that they were personally involved. Further, if an account of profits is sought against them, they will be liable only for their own personal profits (and not those of the company as well), with genuine loans being taken out of the assessment and salaries being accounted for net of income tax.
On the negative side, it will be difficult for a director to show that they were not personally involved in an infringement. Only acts that fall squarely within the narrow remit of a purely "constitutional role" will avoid liability. This means that many of the usual day-to-day acts of directors and other company officers could result in joint liability for IP infringement, regardless of their honest, reckless or other state of mind. This judgment may also result in more instances of directors being named as defendants in IP infringement cases where the rights holder wishes to apply more pressure on the alleged infringer.
How should this risk be managed? Avoiding IP infringement by the company in the first place is key. Companies should identify which IP rights are key to their business and that of their competitors and ensure that everyone involved in the business is educated on what IP infringement is, what the consequences are and how to avoid it. Companies should also be alive to projects that may bring with them a risk of infringement and partner with IP specialist lawyers who will be able to help steer a course through remaining competitive and commercial as a business without colliding into third-party IP rights.
Endnotes
(1) See MCA Records Inc v Charly ([2002] FSR 26), particularly the judgment of Lord Justice Chadwick.
(2) See Lord Templeman in CBS Songs Ltd v Amstrad Consumer Electronic Plc ([1988] AC 1013), Page 1058E.
(3) See Lord Justice Scrutton in The Koursk ([1924] P 140), Page 156.
