In this post, Mark Chapman and Alisha Young (both associates within the Insurance Group at CMS) preview the decision awaited from the Supreme Court in Lifestyle Equities CV and Anor v Ahmed and Anor. The appeal was heard by the Supreme Court on 20 & 21 February 2023 and judgment is now awaited.
The issues appealed to the Supreme Court are the extent of the liability of a director, or senior executive employee, for causing a company to commit a civil wrong, for which a claim can be brought without a finding of fault by the wrongdoer (eg, a ‘strict liability tort’).
The claimants were the owners of several EU and UK registered trademarks in respect of logos themed around horse-riding polo players, which was branded on clothing, footwear and headwear.
In 2006, some of the defendants established the ‘Santa Monica Polo Club’ (“SMPC”) brands with similar logos. In 2016, the claimants brought proceedings against the defendants (who included the involved companies, two of the directors of those companies and third party retailers who sold SMPC branded items) on various grounds including trademark infringement and passing off. One of the defendant directors was the ultimate decision maker for the defendant companies. The other was head of sales for a division of one of the companies.
As two of the companies were in insolvent administration, one of the key issues in dispute was whether the directors of the accused companies would be jointly and severally liable for the acts of trademark infringement by the company (otherwise, they would only be liable to account for profits they had made personally).
The High Court Decision
The court held that the defendants’ signs infringed the claimants’ EU and UK trademarks and amounted to passing off. Further, the defendant directors were jointly and severally liable on the basis that they had procured and/or authorized the acts complained of and/or acted pursuant to and in furtherance of a common design to secure that such acts took place; but should only be liable for profits they themselves made personally, not profits made by the companies (ie the amount of any salary paid which could be directly linked or apportioned to the acts of infringement).
The claimants appealed, contending that the defendant directors should account for the whole profits made by one of the companies. The defendant directors also appealed, contending that the judge had been wronged in finding that they were jointly and severally liable with the companies, because they had no improper motive or intention to infringe.
The Court of Appeal Decision
The Court of Appeal dismissed both appeals. Dismissing the defendant directors’ appeal, the Court of Appeal held that, in strict liability torts (such as trade-mark infringement), there was no requirement for the accessory to have improper motive or knowledge that the activity may be an infringement. Also acting under legal advice was not a defense. They suggested that a court should consider whether: (i) the individual’s conduct would make them liable as an accessory irrespective of their status as a director; and then (ii) whether the fact that the individual is a director gives them a defense (see further MCA Records Inc v Charly  EWCA Civ 1441,  FSR 26 for details of possible such defenses). Here, the defendant directors’ level of personal involvement in the infringing conduct meant that they did have any defense under (ii).
Regarding the claimants’ appeal, the claimants contended that the High Court judge had erred in applying the principles of account of profit from fiduciary or dishonest assistance cases, which did not apply to IP cases. The Court of Appeal conceded that there was no binding authority on account of profit in IP cases but considered that the equitable outcome was that the liability to account for profits was a liability to account for the profits that the person liable derived from the wrongful conduct.
Both points have now been appealed to the Supreme Court.
It seems unlikely that the Supreme Court will release the defendant directors from liability – strict liability torts are intended not to have a mental element and the Supreme Court will be reluctant to extend the limited protections afforded by MCA Records to such torts.
Such an outcome may seem unfair on company directors, but this is the same unfairness inherent to any strict liability tort. It is therefore incumbent on company directors to make themselves aware of any strict liability torts which their company may be in breach of and/or obtain appropriate indemnities against loss from their company. Additionally, company directors could attempt to insure against such losses even though there is a strong risk that, depending on the seriousness of the conduct, they are uninsurable (it is generally accepted under common law that fines for deliberate or criminal conduct are uninsurable).
This unfairness would be mitigated if the Supreme Court also dismissed the claimant’s appeal and maintained that the defendant directors are only liable to account for profits which they personally derived from the wrongful conduct.