Accessory liability: when will directors be held liable for IP infringements committed by their companies – and what is counted as "profits"?

The Supreme Court in Lifestyle Equities CV & Anor v Ahmed & Anor [2024] UKSC 17, has allowed an appeal by two company directors who were found liable as accessories to trade mark infringement by the company in which they were directors. The decision provides helpful clarification on the required elements for accessory liability in the context of IP right infringement claims and confirms the sums to be included in an account of profits if liability is established (spoiler alert: a director's salary is not considered to be "profit").

Background 

Lifestyle Equities owns various trade marks, including word marks for BEVERLY HILLS POLO CLUB and devices based on horse-riding polo players. Lifestyle Equities brought a claim for trade mark infringement and passing off against a number of companies, including Hornby Street Limited, which manufactured and sold clothing, footwear and headgear bearing the signs SANTA MONICA POLO CLUB and pictures of polo players on horses, and also its directors Mr Kashif Ahmed and Ms Bushra Ahmed. 

At first instance, Hornby Street was found liable for trade mark infringement under ss. 10(2) and 10(3) of the Trade Marks Act 1994 (TMA), and the Ahmeds were found jointly liable as accessories to the infringement. However, the judge held that while the Ahmeds did not have to account for profits made by Hornby Street (which has since been dissolved) they did need to account for profits they had themselves made from the infringements. This included 10% of their salaries during the relevant period and a loan made by Hornby Street to Mr Ahmed.

Both parties appealed. The Court of Appeal allowed Mr Ahmed’s appeal in relation to the loan but otherwise agreed with and upheld the first instance decision, finding that, given primary liability for trade mark infringement is a matter of strict liability (meaning that no knowledge of the infringement is required), an accessory can be jointly liable without knowledge of the infringement. 

Both parties appealed again. This time, the Supreme Court unanimously dismissed Lifestyle Equities’ appeal but allowed the Ahmeds' appeal for the reasons discussed below. 

Knowledge requirement for accessory liability

Trade mark infringement is a strict liability tort, meaning that there is no need to prove knowledge or fault on the part of the infringer, providing the other essential elements are established. In the present case, the parties did not dispute that the Ahmeds' conduct as directors (i.e. giving instructions to manufacture, stock and sell infringing goods) induced Hornby Street to infringe Lifestyle Equities' trade marks. However, the Ahmeds were not themselves infringing Lifestyle Equities' trade marks, and claimed to have performed their duties in good faith and with reasonable care. The Supreme Court's decision therefore focused on the extent to which knowledge was required for the Ahmeds to be held liable as accessories to Hornby Street's infringements.

The Supreme Court ultimately found that an individual must have knowledge of the essential facts which make an act wrongful in order to be liable as an accessory for a tort, even if the tort is one of strict liability (as is the case for trade mark infringement). The Supreme Court considered that there was no reason why the required mental requirement for primary and accessory liability had to match – and this point was not specific to company directors but applied to anyone accused of accessory liability.

In considering the test for knowledge, the Supreme Court acknowledged that there are two distinct but overlapping bases of accessory liability through which a person may be held jointly liable with the infringer; namely, the torts of procuring a tort and committing a tort pursuant to a common design. In order to ensure consistency, the test of knowledge must apply equally to both.

On the facts of the present case, the Supreme Court found that the Ahmeds did not have the requisite knowledge and were therefore not liable as accessories: they had never heard of Lifestyle Equities' marks prior to receipt of a letter of claim, and had not known that a likelihood of confusion existed. 

Personal infringement in the course of employment

Although it did not arise in this claim, the Supreme Court considered whether the Ahmeds (as employees and/or directors of Hornby Street) could have personally infringed Lifestyle Equities' trade marks under s. 10 TMA, through acts done in the course of their employment and/or directorships. 

A requirement for trade mark infringement is that infringing acts are done "in the course of trade". The question was therefore whether this could relate to, for example, an employee's act in the course of their employer's trade. Whilst the language of the TMA does not specify to whose trade it relates, the Supreme Court reasoned that to impose such liability on employees or directors would be a "strong thing" that could result in, for example, shop assistants being liable for displaying infringing items in a store in the course of their employment. Instead, "in the course of trade" should be construed as "acts done by a person on their own account and not as an employee or agent of someone else".

Special protections for directors in tort

The Supreme Court rejected the Ahmeds' arguments that there was justification for special rules to apply generally to directors, agents or employees, so as to prevent accessory liability for trade mark infringement. In doing so, the Supreme Court rejected various attempts to draw parallels with other situations in which directors are protected. For example, the protection given to directors against liability for a company's breach of contract does not apply where the wrong is a tort, as there is no voluntary assumption of responsibility by the company, unlike where the company has entered a contract. Similarly, the protections contained in s. 172(1) of the Companies Act 2006, where a director acts in good faith to promote the success of a company, will not protect a director from liability for trade mark infringement, as a duty to someone other than a victim of a tort should not exclude liability to the victim.

Account of profits

Given that the Ahmeds were not found liable for the trade mark infringement of Hornby Street, the orders against them for an account of the profits made as a result of the infringement were wrongly made and were set aside.

In considering the issue of quantum, the Supreme Court identified some key principles regarding how profits are to be accounted for in the case of accessory liability:

Knowledge: The Supreme Court rejected arguments that a lack of knowledge should defeat a claim for an account of profits. The purpose of an account of profits is not to punish or deter wrongdoing, but rather to allocate profits made by the infringement to the owner of the rights. The effect is simply to put the infringer back in the same position as if the infringement had not occurred – which is fair irrespective of whether the infringer had knowledge of the infringement.

Personal or company profits: A person should only be liable for their own profits made from an infringement. To be liable for someone else's would amount to a penalty or fine, rather than the reallocation of profits to their rightful owner. Therefore, even if a director is found to be jointly liable for the IP infringement of a company, profits can only be accounted for by the defendant that actually received those profits, so a director will not be liable for the profits earned by the company.

Company loans: A loan on normal commercial terms does not amount to profit, even if it subsequently is forgiven or ceases to be repayable. If a loan was provided to the borrower on overly generous terms, then the borrower may be held to have made a profit from the loan, which needs to be accounted for. Similarly, if the loan was in fact a disguised dividend, then it may be considered profit to be accounted for. However, in the present case, despite the fact that the loan ceased to be repayable upon the dissolution of Hornby Street, the Court of Appeal and the Supreme Court agreed that it was not profit.

Salaries: The Supreme Court considered the Court of Appeal erred in holding that an employee paid for their labour is in principle no different from a sole trader, in the sense of the profits received from the infringing activity. The Supreme Court held that the employee's remuneration is not necessarily a profit and the two situations are not alike. Therefore, salaries paid as ordinary remuneration for services provided will not be considered profits to be accounted for. In light of this finding, it was not necessary to consider whether deductions should be made for any income or other tax payable.

Comment

This decision should provide welcome relief to directors and employees that they will not automatically be held liable for the acts of their companies/employers. However, it does not absolve them of liability entirely – particularly if they have knowledge of the wrongful acts, such as where counterfeit goods are being manufactured, sold, imported and/or exported. Directors and employees should therefore continue to be vigilant as to the acts being committed by their businesses.

While we expect claimants to continue to pursue directors in their personal capacity (if nothing else, to apply strategic pressure), they should be aware that to succeed with accessory liability claims, they will need to prove (with evidence) that the accessories in question had knowledge of the wrongful acts. Failing on such a claim may result in adverse costs consequences for claimants. Claimants should therefore consider putting directors of allegedly infringing companies on notice of the infringements as early as possible, via letters before action and/or take-down notices, as (at least) from that point it may help to demonstrate that directors had knowledge of the infringement(s), to assist with accessory liability claims.

The Supreme Court's decision shows that even where accessory liability can be established, the "profits" attributable to accessories to an infringement are rather limited, and so may not provide a claimant with the financial remedies hoped for. However, to the extent liability can be established against a director as an accessory, non-monetary relief, such as an injunction, may be beneficial in preventing the individuals involved from continuing the infringing activity via phoenix companies – particularly where the defendant company may be dissolved shortly after trial or judgment. As has long been the case, claimants (and their advisors) often need to get creative when seeking to prevent IP infringements.

This article was written for Entertainment Law Review