The received wisdom is that company directors can escape liability by sheltering behind the “corporate veil”. But is this really true in intellectual property cases? A recent case only decided in the last fortnight by the Court of Appeal has suggested that this might not be so, and directors might find themselves directly in the firing line so far as intellectual property law is concerned.
General position
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 (Section.176 Companies Act 2006 – civil consequences of breach of general duties).
Section 232(1) Companies Act 2006 provides that any provision that purports to exempt a director of a company (to any extent) from any liability that would otherwise attach to him in connection with any negligence, default, breach of duty or breach of trust in relation to the company, is void.
In the Companies Acts 2006, “shadow director”, in relation to a company, means a person in accordance with whose directions or instructions the directors of the company are accustomed to act (Section 251(1)).
Can directors be liable where their company infringes the intellectual property rights of others?
Whether directors, either legal or shadow, can be made personally liable for their companies’ infringement of another’s intellectual property rights has been discussed in a number of cases over the last few years. Recently, Lifestyle Equities CV and another v Ahmed and another (7 May 2021) put these issues beyond doubt (for the time being!). This case was an appeal to the Court of Appeal by the directors of a number of companies who had been sued for trade mark infringement of trade marks for clothing brands belonging to the “Beverley Hills Polo Club”, owned by Lifestyle Equities. The trial judge found not only the companies liable, but that certain directors were also jointly and severally liable.
In the Lifestyle Equities decision, the lead judge in the Court of Appeal (Lord Justice Birss) reviewed the decided cases to date, but in particular MCA Records, Inc v Charly Records Ltd [2002] FSR 26, the leading authority at the time on directors’ personal liability for intellectual property infringement.
The starting point in all of these cases was that a director could be liable as a joint tortfeasor (as lawyers who love legal jargon might call it) if he or she acted to a common purpose or joint enterprise with the company, that is, effectively acting as conspirators with the company, given it is a separate legal entity.
In MCA Records v Charly, the Court of Appeal reviewed the decisions on the question of a director’s liability as a joint tortfeasor (yes, I love jargon!) for the defendant company’s infringement of intellectual property rights. The Court held that a distinction had to be drawn between a company as a legal entity and its directors or shareholders. The Court of Appeal in that case formulated four general principles:
- A director will not be treated as liable with the company as a joint tortfeasor if he does no more than carry out his constitutional role in the governance of the company—that is to say, by voting at board meetings.
- There is no reason why a person who happens to be a director or controlling shareholder of a company should not be liable with the company as a joint tortfeasor if he is not exercising control though the constitutional organs of the company, and the circumstances are such that he would be so liable if he were not a director or controlling shareholder. In other words, if, in relation to the wrongful acts which are the subject of complaint, the liability of the individual as a joint tortfeasor with the company arises from his participation or involvement in ways which go beyond the exercise of constitutional control, then there is no reason why the individual should escape liability because he could have procured those same acts through the exercise of constitutional control.
- Whether the individual is liable with the company as a joint tortfeasor depends on whether the individual “intends and procures and shares a common design that the infringement takes place“.
- Whether or not there is a separate civil wrong (or tort) of procuring an infringement of a statutory right, actionable at common law, an individual who does “intend, procure and share a common design” that the infringement should take place may be liable as a joint tortfeasor. Procurement may lead to a common design and so give rise to liability under both heads.
These four principles trace their origins from a case in 1921 (Rainham Chemical Works Ltd v Belvedere Fish Guano Co Ltd) in which the House of Lords (now The Supreme Court) ruled that:
“Those in control expressly direct that a wrongful thing be done, individuals as well as the company are responsible for the consequences.”
“Procure” simply means to get someone else to do one’s dirty work! However, the courts have said that it must be something more than mere facilitation.
In essence, a director is liable if he or she ordered the infringing acts to be done.
In another case (PLG Research Ltd v Ardou International Ltd [1993] FSR 197), it was put another way – if A conspired with the company B to do an infringing act, would A have been liable if B had not been a limited company? This makes sense. After all, what is a company but the sum of the individuals who control it?
However, the court made it clear that each case turned on its own facts.
So, where does the case of Lifestyle Equities v Ahmed leave us?
The Court of Appeal in Lifestyle Equities confirmed that MCA Record v Charly represented the law of the land and represents a refocusing away from the joint-tortfeasor approach. Where this leaves us is that a director will not be held liable if he or she is merely carrying out their constitutional role in the governance of the company. Relevant actions would include voting at board meetings or exercising control through the constitutional organs of the company, such as by voting at general meetings and by exercising their power to appoint other directors. If a director does so, then the circumstances in which such a director might be held liable would be, to quote the lead judge in MCA Record v Charly, “rare indeed”.
To be liable, the director or shadow director must be shown to have ultimate control of the company, to be “the person to whom everyone at [the company] ultimately deferred” (MCA Records v Charly), or, as the judge put it, be (whether or not an actual legal director) “the ultimate boss”, or the person “in ultimate charge”.
In other words, ……
The lability of a director in any case is a matter of fact whether the director is in ultimate control and is recognised as being in ultimate control by the workforce.
Obviously, if the director was a one-person company, the company being, in essence the flip side of the same coin, then such a director is likely to be found by the Court to be in ultimate control. Such a director to protect him or herself should:
- Regularly hold Board meetings, even if only attended by themselves
- Create an agenda for such a Board meeting
- Keep minutes of decisions made and prepare copies of resolutions of the Board
- Hold AGMs and (if appropriate) EGMs and minute the meetings
- Make sure corporate letterhead is Companies Act 2006 compliant
- Don’t be the one who answers the phone!
The flip side of the coin…
If one is contemplating litigation against a company, it is therefore always worth looking at whether any director of the defendant company might be joined personally thereby imposing on the director a potential personal liability which cannot be ducked by winding up the company – this can significantly change the dynamics of any such litigation.
