Director accessory liability examined: Supreme Court unanimously finds directors not liable for the company’s trademark infringement

The Supreme Court has unanimously allowed the appeal of two directors who had been ordered to account for profits as accessories to trademark infringements committed by their company.

From a thorough examination of the law, the Supreme Court held that in order for persons to be held jointly liable with a company for the tort, they must have knowledge of the essential facts which make the acts wrongful and that is the case whether or not the primary tort in question (here the trademark infringement) was a strict liability offence and whether or not the accessory liability arises from procuring a tort or by common design.

Facts

In Lifestyle Equities CV and Another v Ahmed and Another [2024] UKSC 17, two companies, which both traded under the names Juice Corporation (the Companies), were sued for trademark infringements by the Lifestyle companies (Lifestyle) after the Companies used a similar design to Lifestyle’s trade-marked design on items of clothing. In addition, Lifestyle sued the directors of the Companies (siblings Mr Ahmed and Ms Ahmed – the Directors) personally, claiming that they were jointly liable with the Companies for the infringements, specifically, that they had authorised or procured the companies to do the acts complained of or had engaged in a common design with each other or the Companies to cause them so to act.

At the first trial, the Companies were found liable under the relevant trademark legislation (Trade Marks Act 1994). There was no appeal from that decision.

At the second trial, the Judge found the Directors jointly and severally liable with the Companies for the infringement on the grounds of procurement and common design. No finding was made that the Directors knew or ought to have known that there was a likelihood of infringement; this was said to be irrelevant to their liability.

The Companies by now insolvent, Lifestyle sought an account of profits from the Directors and the Judge found the Directors liable to account to Lifestyle for profits they had personally made (rather than profits the Companies had made) from the infringement, apportioning 10% of their salaries as profits along with a large loan one of the Companies had made to Mr Ahmed.

Lifestyle appealed against the decision not to find the Companies had to account for their profits and the Directors cross appealed the findings made against them personally. The Court of Appeal largely upheld the lower court’s findings (with the exception of treating the loan as profit). Both appealed to the Supreme Court.

Supreme Court decision

The main question for the Supreme Court was whether the Directors’ liability was strict – in line with the strict liability imposed on the Companies under trademark legislation – or whether it was necessary to show that the Directors had the requisite knowledge of wrongdoing in order to be found liable.

Lord Leggatt, giving the leading judgment with which the other Justices all agreed, initially considered whether the relevant trademark provisions applied directly to the Directors such that strict liability should apply to them but found that they could only be liable in this way if they had committed the infringements on their own account. As the infringements had been done on account of the Companies, strict liability could not apply to them.

As to their alleged joint liability as accessories to the tort (infringements of trade marks are tortious acts), the Directors did not dispute that their actions induced the Companies to infringe the trade marks (having instructed the items to be made, stocked and sold) but disputed that they had the required mental state to be held liable and that the lower courts were wrong to say that it was enough that the Directors intended the Companies to act in such a way that caused the infringements to occur.

Starting from the position, as had been confirmed in Standard Chartered Bank v Pakistan National Shipping Corpn (Nos 2 and 4) [2002] UKHL 42, that there is no rule of company or agency law which excepts directors from the general principles of tort law such that they could not be held personally liable (as Counsel for the Directors had contended), Lord Leggatt saw no reason why the position should be different if the liability of the director is as an accessory rather than the primary tortfeasor. But, referring to an influential Canadian case - Mentmore Manufacturing Co v National Merchandising Manufacturing Co Inc (1978) 89 D.L.R. (3d) 195, which had been cited with approval in English cases, he stated that “it is unjust to hold a director personally liable for acts done in the ordinary course of performing the director’s role which cause the company to commit a tort, if the director has not acted wilfully or knowingly. But I do not think that the injustice flows from any special feature of the role of company director. The objection is much broader than that. It seems unjust that anyone whose act causes another person to commit a tort should be held jointly liable for the tort as an accessory if the individual was acting in good faith and without knowledge of facts which made the act of the other person tortious.”

Lifestyle had sought to argue that the knowledge or state of mind required for accessory liability should be the same as that required to incur primary liability for committing the tort in question – for trademark infringements, this was strict liability i.e. knowledge would be irrelevant. Having reviewed the authorities, Lord Leggatt did not agree that, generally, the mental element for accessory and primary liability need be mirrored. Specifically in relation to infringements under the Trade Mark Act 1994, acts amounting to an infringement are confined to various ways of using an offending sign and do not include procuring or authorising another person to use such a sign – such persons would fall outside the Act. As such, it did not follow that strict liability applied to accessories, only the primary tortfeasor. This conclusion was strengthened by the fact that the law of contract and equity do not prescribe that the mental element required for accessory liability must correspond to that required to commit the primary wrong.

Therefore, to determine whether accessories should be held jointly liable with the primary tortfeasor, one needed to ask – did the defendant act in a way that was intended to cause another party (the primary wrongdoer) to do an act which the defendant knew was a wrongful act (turning a blind eye being sufficient for this purpose)? That is not to say that the defendant needs to have knowledge of the law but the correct test to apply, the Supreme Court held, is that the defendant must know the essential facts which make the act wrongful, even if the tort was one of strict liability. This is the case whether or not the claim is based on procuring the infringement of a trademark (or other wrong) or on participation in a common design (each being separate principles of accessory liability on which a person may be held jointly liable with the infringer for damage caused by the infringing act).

Applying that to the Directors, the Judge at first instance had not made any finding that the Directors knew of Lifestyle’s design before Lifestyle’s Letter of Claim was received or knew, or should have appreciated, that there was a likelihood of confusion between their design and Lifestyle’s design. The Directors could not be said, therefore, to have had the requisite knowledge of the essential facts which made the Companies’ actions wrongful. As a consequence, the Directors were not held to be jointly liable for the infringements either by way of procurement or common design.

As to the account of profits, Lord Leggatt noted that the purpose of this remedy over damages was to align with the purpose of intellectual property rights – which is to encourage and reward creativity without fear of those labours being exploited by others. Requiring an individual who profits from using a trademark without the owner’s consent to pay those profits to the trademark owner serves the purpose of redirecting the benefits to the rightful party. For this purpose, it does not matter whether the infringement is deliberate or innocent. However, crucially, the Directors in this case had not done the infringing, the Companies had. Therefore, given the Supreme Court’s findings that the Directors were not liable as accessories, the point did not arise for consideration whether the Directors should account for profits personally. However, the Supreme Court noted that if the Directors had personally committed the infringements, they could only be liable to account for profits which they had personally made from the infringements. The Court of Appeal had, therefore, erred in upholding the Judge’s decision that part of the Directors’ salaries were profits. Further, dismissing Lifestyle’s appeal, the Supreme Court upheld the Court of Appeal’s decision that a loan was not as a matter of principle “a profit” and therefore could not be subject to an account of profit. 

Comment

Directors who find themselves to be innocent accessories to a strict liability tort can now breathe a sigh of relief as the Supreme Court has made it quite clear that director liability will not simply follow on where the company has committed a tort and that the burden of proof on establishing that the directors had the required knowledge and state of mind rests on the claimants. We anticipate that cases will continue to be brought and the battleground will be what knowledge is sufficient to justify imposing liability on directors.