IP Infringement – What is the Liability of a Company’s Directors to Pay the Profits Made by the Company from the Infringement?

By Brian Whitehead, Partner

To what extent can the directors of a company, which has been held liable for infringement of an IP right, be personally liable to pay to the IP right owner the profits wrongfully made by the company as a result of its infringing acts? That was the issue before the court in the latest hearing in the long-running case of Lifestyle Equities v Santa Monica Polo Club & others. The dispute relates to the Defendant company’s sales of garments bearing the sign SANTA MONICA POLO CLUB, which were alleged to infringe the claimant’s registered trade marks and to constitute passing off. In 2017, the Defendant company was held to have infringed the marks and to be liable for passing off. In a second trial held in February 2020, the court was required to determine whether i) the directors, who had been included as defendants, were jointly and severally liable for the company’s acts of infringement, and ii) if so, what financial remedy should be ordered against the directors personally.

By way of legal background:

  • Whereas a company has a separate legal personality from its directors, a director can be held jointly liable for the company’s acts of infringement if i) he/she authorised or procured the company’s acts of infringement, or ii) he/she acted pursuant to and in furtherance of a common design to secure that the infringing acts took place;
  • Defendants who are held jointly liable for infringing acts are jointly and severally liable for the damage thereby caused. That mean that, for example, if two defendants jointly cause £100,000 worth of damage, the claimant can recover the full amount from either of them;
  • Following a finding of infringement, a rights owner can choose either damages (i.e. to reflect its own losses caused by the infringing acts), or an account of profits (i.e. to reflect the profits wrongfully made by the defendant by its infringing acts).

In practice, to establish joint liability by individuals operating a company, it is necessary to be able to point to one or more specific individuals who authorised the acts or engaged in a common design with the company. For that reason, it is usually only feasible with smaller defendant companies, as decisions in larger companies are more typically made by a committee or board.

Adding directors as personal defendants prevents them from avoiding liability simply by winding up the company. If a director takes such a step, and the company has insufficient assets on winding up to pay the damages, the rights owner can enforce against the director’s personal assets, including property and bank accounts. Perhaps surprisingly, though, the courts have not until now given a definitive ruling as to whether a director can be held jointly and severally liable for the profits made (as opposed to the damage caused) by the company through the infringing act, i.e. if the claimant chooses an account rather than damages.

In a decision handed down on 23 March 2020 (https://www.bailii.org/ew/cases/EWHC/Ch/2020/688.html), Douglas Campbell QC (sitting as a Deputy High Court Judge) held that the two directors, who were also shareholders, were on the facts liable for the company’s acts of infringement. However, he held that each director was liable to account only for the sums they received from the company, by way of loans and remuneration received. The difference was dramatic – the company was held to have made a profit of over £3.1 million attributable to the infringement, whereas the amounts received by the two directors attributable to the infringement were around £780,000 and £57,000 respectively. The company is now in administration – if the company in administration has insufficient assets to pay the full £3.1 million, the ruling will result in a shortfall of over £2 million even if the full amount ordered against the two directors personally is recovered.

In the author’s view, this decision is probably correct, because it is entirely in accordance with principle. In Hotel Cipriani v Cipriani Grosvenor Street [2010] EWHC 628 (Ch), Briggs J stated: “I must first deal with the relevant legal principles. By contrast with joint liability as tortfeasors for damages, including damages calculated on a royalty basis, an account of profits operates against each defendant separately, requiring him or it to disgorge such profits as are shown to have been derived by that defendant from the relevant infringements. In that respect, there is no difference between trademark infringement and passing off, even though the basis of liability for one is statutory and, for the other, based on the common law … The measure of liability is the profit derived by the defendant from the infringement”.

It was always understood, in accordance with that principle, that in a scenario where (say) one company imports and another sells infringing products, pursuant to a common design, the two companies will be jointly and severally liable for damages, but an account of profits is available separately against each company, in respect of the profits made by each company out of the infringing acts. In the author’s view, the judge has simply applied that principle to a different scenario. It remains to be seen, though, whether the claimant will appeal and if so whether the Court of Appeal will agree.