Accessorial liability, IP and company directors

Answer

In short, not without knowledge of the facts that mean infringement has occurred. Inevitably, this means that IP-holders, in order to pursue directors, will need to show that the director at least knew of the mark that was being infringed.

An allegation of trademark infringement, if proven, can have quite catastrophic consequences for a previously successful company. One available remedy for infringement is an account of profits; requiring the defendant to pay over any net gains derived from the infringement to the claimant. Combine this with an inability to continue product lines found to be in breach, and suddenly you have a company with a (potentially) enormous liability and shuttered revenue streams.

This much was the case for Hornby Street Ltd and Continental Shelf 128 Ltd (the group companies). Both entered administration within two months of the former being found liable in a judgment of 21 December 2017; the use of ‘Santa Monica Polo Club’ branding infringing the claimants' marks for ‘Beverley Hills Polo Club’.

The claimants, Lifestyle Equities, had sought to allow for this contingency by obtaining judgment against a number of directors of those companies as well. It argued that:

• in taking steps that led to the group companies offering infringing articles for sale in their capacities as directors, they’d personally infringed the claimants' marks; and
• they were jointly and severally liable as accessories to the tort of infringement.

When the case got to the Supreme Court (Lifestyle Equities CV v Ahmed [2024]), the only outstanding issue was whether the directors could be held liable in addition to their companies.

Why is this important?

As alluded to above, when a company's business consists substantially of the use of a particular brand, a finding that said brand infringes upon a third-party's trademark is likely to spell the end for that company. Claimants are likely, therefore, to have substantial interest in what rights they may have to enforce against directors, as well as the company itself.

However, companies' limited liability exists for sound economic reasons. In the context of directors, it limits the extent to which their personal interests are drawn into every decision they make in their capacity as directors. This is useful because people have difficulty putting their own interests second, even when legally obliged to do so (it's essentially why the profession has conflict of interest rules).

Defendant directors

It follows that decisions relating to the potential expansion of causes of action against directors can have quite a sharp economic impact. The Supreme Court could’ve determined in Lifestyle Equities that directors could be liable irrespective of knowledge, and to the same extent as the company as principal. This would’ve led to directors of brand-driven companies immediately being incentivised to apply more resources to investigation of IP risk than the company and its owners would want them to. The upshot of this could well have been a substantial freezing effect on innovation in brand-driven industries like fashion and beauty.

Claimant rightsholders

On a claimant side, the issue this presents is more obvious. If an IP claim is pursued against an impecunious company, pursuing independently wealthy directors is a way to secure a remedy. However, proving that someone knew something is often extremely difficult. There might be a smoking gun somewhere, but pursuing a claim until disclosure takes place costs a lot of money, and orders for pre-action disclosure are challenging to obtain. If you don't find something that supports a claim against the directors in these situations, you might just have thrown good money after bad.

What did the court decide?

Liability as principal

The court, led by Lord Leggatt, rejected the idea that steps taken in their capacities as directors resulted in personal infringement of the marks. To do so would, according to the legislation, require that they had themselves been acting 'in the course of trade'. Drawing a comparison with a shop assistant stocking shelves, his Lordship concluded that this language wasn’t sufficiently unequivocal to reach such a conclusion.

Liability as accessory

A key point to understand here is that liability for trademark infringement itself is strict. If a person happens to carry out actions that constitute a breach of a registered mark, there’s no need to prove knowledge of the mark, or any sort of bad faith or improper motive.

Lifestyle had successfully argued before the High Court and Court of Appeal that the directors had been liable as accessories, both for having authorised or procured the infringement, as well as having participated in a common design to commit infringement. Both lower courts had found that neither kind of accessorial liability required knowledge that the acts of the primary actor either were, or were likely to be, infringements. Instead, it sufficed that the directors intended that the actions amounting to infringements were carried out.

Procuring

Before the Supreme Court, the directors argued that the prior case of Said v Butt [1920] should be read as also immunising such people against liability as an accessory to torts. Said had decided that if a servant (read: employee/director/agent), acting in good faith and in the scope of their authority, causes the breach of a contract between their employer and a third party, they were not to be personally liable for the tort of procuring breach.

Lord Leggatt didn't accept this. Said was best explained as reflecting a 'cooperation principle' in tort, where parties that had chosen a voluntary allocation of risk (which didn’t involve directors accepting personal risk) ought not be allowed to circumvent this. No such relationship existed between directors and third parties that were strangers to the company.

However, this didn't mean that the directors were liable. Leggatt drew together threads spanning across all forms of civil accessorial liability to reach the conclusion that, generally, "what is required [to procure a tort] is that the defendant acted in a way that was intended to cause another party… to do an act which the defendant knew was a wrongful act… which mean[s] not that knowledge of the law is required, but that the defendant must know the essential facts which make the act unlawful".

Common design

Likewise, while clearly a separate means of being liable as accessory, the same level of knowledge of the essential facts was necessary to establish liability by common design. Common design required some kind of mental concert between tortfeasor and accessory. Being 'brought along for the ride' isn’t enough – there had to be a meeting of minds to reach a common aim.

Essential facts

In both cases, for trademark infringement, the 'essential facts' referred to differed slightly depending on the exact nature of infringement but essentially boiled down to trading with the benefit of, or causing damage to, the reputation of the infringed mark. Lifestyle had at no point pleaded the requisite knowledge of infringement on the part of the directors. Consequently, they failed to establish accessorial liability as well.

Account as a remedy

Because of the above, Leggatt's views on an account were obiter. He saw no problem with ordering an account against an innocent infringer (or indeed an accessory). Indeed, it was the most sensible remedy, since it treated the infringer as though they’d conducted the infringement on the claimant's behalf.

However, since, as a remedy, its role was to require disgorgement of profits that the defendant had personally made, it wasn't permissible to award the profits made by the companies as accounts due from their directors. Moreover, salaries ordinarily payable to directors couldn’t be taken to represent profits they derived from infringement so much as "ordinary remuneration for their services".

Concluding thoughts

This decision will come as a major relief to directors, especially those in IP-heavy industries. Companies will often appoint several directors with different functions and different levels of day-to-day involvement. One might expect a director of a small family company to have a sound working knowledge of all of its product lines and the markets for those products – and therefore be able to be reasonably assured of non-infringement. However, this becomes less and less the case as the company grows, and especially if a company takes external investment: it’s common for investment to come with a condition of the investor being able to nominate one or more board members to ensure the company is run in a suitable way.

The decision will also have broader legal impacts. Because the reasoning Leggatt applied wasn't specific to trademarks or intellectual property generally, knowledge of the core facts that establish a cause of action is likely to be applied as a general requirement for civil accessorial liability. Again, for directors, this will reduce the extent to which they feel the need to be aware of all aspects of their companies for personal reasons, beyond the knowledge required to discharge their responsibilities.

Joe Towse is a trainee solicitor at RPC.