Lifestyle Equities CV and another v Ahmed and another [2024] UKSC 17 (on appeal from: [2021] EWCA Civ 675)
Summary
The UK Supreme Court has provided guidance on the circumstances upon which directors may be personally liable as an accessory to a tort (trade mark infringement is a tortious act) committed by their company. Our report on the Court of Appeal’s decision can be found here.
General principles
It is commonly accepted that directors of limited companies are immune from liability except where they have acted in breach of certain specified statutory enactments or outside their duties as directors.[1]
It is also well-established that trade mark infringement is a “strict liability” offence, at least for primary wrongdoers – i.e., there is no need to prove intention, knowledge or fault and it is not a defence to say that an individual acted in good faith.
However, if a director or senior employee arranges to display or sell items which infringe on another’s trade mark, they do so on behalf of their company and so they themselves are not considered liable as primary infringers[2]. Instead, the law describes such persons as having “vicarious”, “secondary” or “accessory liability” which is generally understood as the responsibility for the wrongdoing of somebody else.
The common law principles of accessory liability operate alongside any relevant statutory tort and, where applicable, impose liability on persons who have not committed any relevant statutory wrong.
Can directors be liable where their company infringes the intellectual property rights of others?
The Supreme Court has said to be liable as an accessory for procuring a tort or participating in a common design[3], a person must know the essential facts which make the act done wrongful, even if the tort is one of strict liability.[4] Knowledge also includes turning a blind eye to the facts.
Therefore, even where the company’s liability is strict, it does not follow that an individual’s liability as an accessory is also strict.
It is now (more than ever!) important to put defendants on notice as soon as a brand owner becomes aware of an infringing act so that directors may not avoid or escape from personal liability.
The full judgment may be found here: www.supremecourt.uk/cases/docs/uksc-2021-0147-0150-judgment.pdf.
Background
The claimants, “Lifestyle”, brought proceedings against 16 defendants (the Companies) claiming remedies for trade mark infringement and passing off. One of those defendants was a family-owned company, Hornby Street Ltd who arranged for the manufacture and sale of clothing, footwear and headwear bearing the words “SANTA MONICA POLO CLUB” with pictures of polo players on horses. Additionally, the defendants also included Mr Kashif Ahmed and Ms Bushra Ahmed (the Ahmeds) who were directors of Hornby Street at all relevant times.
Lifestyle, the owner of various trade marks including a logo with a picture of a polo player on a horse and the word mark “BEVERLY HILLS POLO CLUB”, sued, inter alia, Hornby Street and the Ahmeds personally, claiming they were jointly liable with the Companies for the infringing acts.
In the first instance decision, Hornby Street was found liable under sections 10(2) and 10(3) of the Trade Marks Act 1994 for infringing Lifestyle’s trade marks and also for passing off. There was no appeal to that finding.
The judge also found that the Ahmeds were jointly and severally liable as accessories to Hornby’s infringements on the basis that (1) they had procured the infringements of Lifestyle’s trade marks and (2) that the infringements were committed pursuant to a common design. Importantly, the judge made no finding that the Ahmeds knew or ought to have known that there was a likelihood of confusion or infringement. However, in that judge’s view, the absence of such knowledge was said to be irrelevant.
At this point in the legal proceedings, Hornby Street had dissolved and so Lifestyle sought an account of profits from the Ahmeds. The judge ruled the directors were only liable for profits they personally made, not for profits made by Hornby Street from the infringement, apportioning 10% of their salaries as profits along with a large loan made by Hornby Street to Mr Ahmed.
Both parties appealed and the Court of Appeal upheld the lower court’s decision, except regarding a loan to Mr Ahmed, which it held was not a profit.
Both parties then appealed to the Supreme Court.
Supreme Court judgment
The Supreme Court unanimously dismissed Lifestyle’s appeal and allowed the Ahmeds’ appeal. The court concluded that the Ahmeds could not be held liable as accessories for procuring the infringements or participating in a common design since they were not aware of the essential facts vis-à-vis making use of the “SANTA MONICA POLO CLUB” signs as wrongful. In any case, the Ahmed’s could not be required to account for profits made by Hornby Street and, on the facts, found that they had not themselves made any profits from the infringements.
Accessory Liability
Trade mark infringement is a strict liability offence. However, the Ahmeds did not personally infringe Lifestyle’s trade marks; the infringements were committed by Hornby Street. The case against the Ahmeds was based on accessory liability, either for procuring the infringements or participating in a common design.
The Ahmeds raised an interesting argument that company directors acting in good faith and with reasonable care are immune from liability, however this was rejected. The Supreme Court made clear that under English law, there is no general principle which exempts a director from the ordinary principles of tortious liability and there was nothing in company law which contradicted that position. Normal tortious principles apply to directors of companies in relation to civil wrongs.
Nevertheless, the court said it is unjust to hold someone jointly liable as an accessory if the individual acted in good faith and without knowledge of the facts making the act wrongful. This point is not particular to company directors and does not depend on any special feature of their role.
Instead, the key question was: if the primary liability is strict, is liability as an accessory also strict? Prior to this appeal, it was an accepted principle that joint tortfeasorship mirrored the strict liability test to the primary tort.
The Supreme Court held that strict liability only applies to directors if they had committed the infringements on their own account. Since the infringing acts were undertaken by the Companies, and not the directors, strict liability could not apply to them.
The Supreme Court’s conclusion on accessory liability was as follows:
“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. This is so even where, as in the case of intellectual property rights, the tort does not itself require such knowledge.”[5]
The Supreme Court made equally clear that the test to be applied must be the same whether or not the accessory liability arose from an individual procuring the tort or acting in a common design with the primary tortfeasor.
Applying this to the facts, it was held that, even though the Ahmeds induced the company to commit the infringing acts, they could not be held jointly liable because they did not have knowledge of the essential facts which made the acts of Hornby Street’s use of the “SANTA MONICA POLO CLUB” signs wrongful.
Account of Profits
Only profits made by the wrongdoer can be claimed, not profits made by someone else. Thus, the Ahmeds could not be ordered to account for profits made by Hornby Street since they did not commit the infringing acts. The Court held that such an order would amount to a penalty which is not within the purpose of this remedy.
The Supreme Court then considered what the position would be if the Ahmeds had hypothetically committed the infringements personally. It said the loan to Mr Ahmed was not a profit, as borrowing money does not constitute making a profit. There was no evidence that the loan was at an artificially low rate of interest or otherwise profitable. Additionally, it was wrong to treat the Ahmeds’ salaries as profits because there was no evidence or finding that their salaries were anything but ordinary remuneration for their services as employees.
Therefore, the Supreme Court said that the Court of Appeal erred because the order for an account of profits had been wrongly made.
Our comments
The imposition of a knowledge requirement for accessory liability is likely to shift litigation dynamics, particularly against smaller companies, where the cost of court proceedings could result in insolvency. Here, directors may seek to avoid liability by liquidating their company and disputing the required requisite knowledge for joint tortfeasorship. The Supreme Court’s decision arguably makes it more challenging to “pierce the cooperate veil”[6]. Brand owners will now need to establish that the director(s) in question did have knowledge of the essential facts which made the act wrongful to successfully establish joint liability.
The question of accessory liability is often fact specific, particularly around the parameters of the requisite knowledge required by a director. For example, in a simple case, where a company offers for sale counterfeit goods, it may be easier to demonstrate that a director must have known the facts which made the company’s infringing acts wrongful. The lines become blurred however where there is room for argument and honest difference of opinion about the extent of the similarity between two trade marks.
[1] Section 176 Companies Act 2006 – civil consequences of breach of general duties
[2] It is the company rather than its directors which uses a sign in the course of trade pursuant to section 10 of the Trade Marks Act 1994
[3] Procuring a tort involves causing or encouraging another person to commit a tort. Participating in a common design involves joining with others in a plan to commit a tort, with all parties being collectively responsible.
[4] Paragraph 131, Lifestyle Equities CV and anor v Ahmed and anor [2024] UKSC 17.
[5] Paragraph 137, Lifestyle Equities CV and anor v Ahmed and anor [2024] UKSC 17.
[6] A situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts.
