The Supreme Court has rewritten the litigation playbook with relief for directors and employees of infringing companies, writes Alastair Shaw, counsel at Hogan Lovells.
The Supreme Court’s decision in Lifestyle Equities v Ahmed has recast principles established by the lower courts, and will have implications not only for IP infringement litigation, but also for other tort cases.
The court held that a person who causes another person to do a wrongful act will only be jointly liable as an accessory for the wrong done if they have knowledge of the essential facts which make the act done wrongful.
Lord Leggatt, giving the judgment of the court, explained that: “Considerations of principle, authority and analogy with principles of accessory liability in other areas of private law all support the conclusion that knowledge of the essential features of the tort is necessary to justify imposing joint liability on someone who has not actually committed the tort.”
He went on to say that this was the case even where, as in the case of infringement of intellectual property rights, the tort does not itself require such knowledge.
The new IP litigation playbook
In this case the Court of Appeal and the High Court had held that two directors of a trademark infringing company (the Ahmeds) were jointly liable with the company (Hornby Street).
Overturning those decisions, the Supreme Court has in effect rewritten the playbook for IP rights owners bringing claims against companies and against the individuals who are their ‘controlling minds’.
This is a strategy which is not uncommon, where the infringing company appears unlikely to be able adequately to financially compensate the IP owner, but the individuals involved may have skimmed off unlawful profits for themselves. Or there may be a concern that the individuals may simply fold the company and set up shop in the guise of a new corporate entity.
Until now, claimants have only needed to establish that, as a matter of causation, the individual defendant’s conduct has induced a defendant company to infringe. In Lifestyle v Ahmed, that conduct was the giving of instructions to manufacture, stock and offer for sale goods bearing the offending signs.
The judge and the Court of Appeal had taken the view that for a tort of strict liability like trademark infringement, accessory liability does not depend on knowledge that the acts of the primary actor (here the company) were or were likely to be infringements. Rather, they viewed it as enough that the defendant intended that the primary actor should do the things which have been held to be infringements.
Applying its conclusions on the law on accessory liability, the Supreme Court noted that the judge had not found that the Ahmeds knew of, or should have appreciated that there was, a likelihood of confusion between the ‘Santa Monica Polo Club’ signs used by their company and Lifestyle’s ‘Beverly Hills Polo Club’ marks (or that they even knew of them before action some six years after commencing use).
Further, the Ahmeds have not been found to have known (or that they should have known) that the reputation of Lifestyle’s marks would be adversely affected by the use of the ‘Santa Monica Polo Club’ signs.
Since these were ‘essential features’ of the statutory torts under sections 10(2) and 10(3) of the Trade Marks Act 1994, neither of the Ahmeds had the knowledge required to make them jointly liable for the infringements of the company, either on the basis of the ‘procuring of an infringement’ or the ‘participating in a common design’ principles of accessory liability.
No more MCA Records directors exception
In formulating the law of accessory liability for strict liability torts, the Supreme Court has quashed the narrow exception from liability for company directors doing no more than exercising their functions as directors through the constitutional mechanisms of the company, which was set out by the Court of Appeal in the well-known 2001 MCA Records case.
That exception was rejected by the court because the general rule is that individuals are answerable for their tortious acts, and the onus is on someone who seeks to argue that directors should be excepted from this general rule to identify a principled basis for such an exception. Lord Leggatt held that there isn’t one.
‘Use in the course of trade’: The Supreme Court view
In analysing the issues on appeal, the Supreme Court had first considered whether the Ahmeds were themselves (directly) liable for the infringements and concluded that they were not, because it was only the company that was using the infringing signs in the course of trade.
The court referred to the repeated explanation by the Court of Justice of the European Union (CJEU) that “use in the course of trade” in its decisions mean “in the context of commercial activity with a view to economic advantage and not as a private matter”.
Commenting on this in the judgment, the Supreme Court explained that it was more naturally understood as referring to persons who are trading on their own account and for their own economic advantage, rather than to persons who are simply performing duties for their employer which involve acts of stocking, offering for sale and sale.
Can employees infringe?
In finding that the Ahmeds themselves had not infringed, the court roundly rejected Lifestyle’s argument that an employee can personally infringe a trademark by acts done in the course of their work.
It would, said the court, be unjust to make such individuals personally liable (such as shop assistants who, in the course of their employment, put on display goods to which an offending sign is fixed or complete sales of such goods to customers over the counter).
This would expand “the net of strict liability more widely than is necessary or reasonable to protect the rights of trademark owners”.
Section 10 of the Trade Marks Act did not have sufficiently unequivocal language to have this effect, whereas the more natural and reasonable interpretation is that section 10 refers to acts done by a person on their own account, and not as an employee or agent of someone else.
Impact on other IP litigation
In counterfeiting and some copyright cases, the necessary knowledge may be relatively easy to establish.
For example, where a company is communicating sound recordings to the public in circumstances where the individual defendant knows (or closes their eyes to the fact) that the company does not own the copyright or have a licence from the owner to do so, the accessory liability may be clear-cut.
On the other hand, in trade secrets cases and, as Lifestyle v Ahmed demonstrates, in trademark cases, an individual’s knowledge of the requisite facts may be difficult to establish before commencing proceedings, and potentially right up to trial.
In trade secrets cases, for example, in order to fix an individual with accessory liability on the basis of a common design with another person, a claimant will have to establish that the individual had knowledge of the misuse of the claimants’ trade secrets in a given project.
In all cases, comprehensive letters of claim prior to commencing proceedings, aimed at establishing the necessary knowledge in the minds of the individuals concerned, may now become the focus of greater attention. This is for substantive liability reasons on top of the obligations with regard to pre-action behaviour required by the Civil Procedure Rules.
Reach-through to salaries?
Although the Supreme Court found that the Ahmeds were not jointly liable, it went on to consider, if they had been liable, whether they would have been required to pay to Lifestyle some of their salaries by way of an account of profits arising from the company’s infringements.
The High Court and Court of Appeal had held that 10% of their salaries should be so-treated, but the Supreme Court disagreed.
It observed that, while payments made ostensibly as remuneration in some cases could in some cases be a way of extracting profits from a company, in this case there was no allegation, evidence or finding that the salaries paid to the Ahmeds were anything but ordinary remuneration for their services.
They were therefore not to be treated as profits arising from the company’s infringements.
Impact outside IP
A detailed review of the earlier authorities and the reasoning which led to this decision is beyond the scope of this commentary, but will be covered in a future report.
Suffice now to say that the court’s comprehensive judgment will be of significant importance and impact across a number of causes of action, and of particular interest to directors, employers, employees and their advisers.
Alastair Shaw is counsel, intellectual property, at Hogan Lovells.