A sigh of relief for company directors as the Supreme Court rules that accessory liability requires knowledge

The Supreme Court has handed down its keenly anticipated decision in Lifestyle Equities v Ahmed, ruling that knowledge is required in order to be liable as an accessory to trade mark infringement.  The decision is not limited to trade mark infringement, and applies to all torts, even where the tort itself is strict liability (i.e. does not require knowledge).

This is the most significant change to accessory liability in years.  The judgment includes an extensive discussion of the law of accessory liability and directors' liability, and is only peripherally concerned with trade mark infringement itself.  This article aims to simplify and summarise the academic discussion and provide practical learnings.

Background facts

The defendants were siblings Bushra and Kashif Ahmed.  Ms and Mr Ahmed were directors of Hornby Street Limited ("Hornby Street"), and Mr Ahmed was a director of Continental Shelf 128 Limited, together trading as Juice Corporation ("Juice").  Juice manufactured and sold to retailers clothing and footwear marked with the sign "Santa Monica Polo Club" along with logos featuring polo players riding horses.

Lifestyle Equities ("Lifestyle") is the owner of "Beverly Hills Polo Club" trade marks, which it has been busy asserting over recent years (see for example our articles here, here and here).  It brought an action for trade mark infringement against both Juice companies as well as against Ms and Mr Ahmed personally, on the basis they had either authorised or procured the alleged infringements, or engaged in a common design with each other and/or Juice to cause the alleged infringements.

High Court

The first instance trial was split into two parts.  At the first, Hornby Street was found liable for trade mark infringement (under s10(2) & 10(3) Trade Marks Act 1994) and passing off (that finding was not appealed).  At the second, Mr Ahmed was found jointly and severally liable with both Juice companies while Ms Ahmed was found jointly and severally liable with the "House of Brands" division of Hornby Street, for which she was head of sales. The judge also found that the House of Brands division represented 10% of Hornby Street's business.

As its remedy, Lifestyle chose an account of profits.  The judge calculated the relevant profits of Hornby Street to be roughly £3.1million.  Hornby Street had been dissolved, and Lifestyle claimed that the Ahmeds were liable personally to account to Lifestyle for its profits. The court rejected that, but agreed that the Ahmeds were liable to account for profits they had personally made, and apportioned 10% of their salaries during the relevant period (to reflect the finding that House of Brands represented 10% of Hornby Street's business).  Mr Ahmed had a loan from Hornby Street of around £635,000, and the court held that was a profit for which he was liable to account to Lifestyle.

Note that the court made no findings either that the Ahmeds knew or ought to have known that the acts of Hornby Street were trade mark infringements, or that they had no improper motive or intention to infringe; the judge did not believe these to be relevant to their liability.

Court of Appeal

Lifestyle appealed against the decision that the Ahmeds were not personally liable to account for the Hornby Street profits.  That was rejected.

The Ahmeds appealed against the decisions that they were jointly and severally liable for the infringements of Hornby Street, and that they had made profits from those infringements for which they were personally liable to account.  That was largely rejected, save that the Court of Appeal found that the loan was not a 'profit', and that income tax on the relevant portions of the Ahmeds' salaries should be deducted from the sums due to Lifestyle.

Supreme Court

Both parties appealed to the Supreme Court, which summarised the issues as follows:

The liability issue: 

• Was it right to hold the Ahmeds jointly liable with Hornby Street "in the absence of any finding that they knew or ought to have known that the company's use of the Santa Monica Polo Club signs infringed Lifestyle's trade marks"?  

Issues relating to the account of profits:

• If it was right to hold the Ahmeds jointly liable with Hornby Street, should the Ahmeds themselves be held liable to account for the profits of Hornby Street?
• If it was not right to hold the Ahmeds jointly liable with Hornby Street, but it was right that the Ahmeds had to account for profits they had themselves made from the infringements, were the loan and a proportion of their salaries such profits?
• If a proportion of the Ahmeds's salaries were such profits, should deductions be made for income tax?

1. The liability issue

• Was it right to hold the Ahmeds jointly liable with Hornby Street "in the absence of any finding that they knew or ought to have known that the company's use of the Santa Monica Polo Club signs infringed Lifestyle's trade marks"? 

No.  The Court considered in depth the legal principles around liability in tort, including directors' liability, joint and several liability, accessory liability, procuring a tort, inducing a breach of contract, pursuing a common design and so on.  The judgment (given by Lord Leggatt) is worth reading in full if these areas are of particular academic interest. For present purposes, the Supreme Court's conclusions on liability are as follows:

-  The Ahmeds did not themselves use the trade marks in the course of trade.  They were not therefore primary infringers and could only potentially be liable as accessories.

This was considered particularly with regard to Ms Ahmed, who in her role as head of sales for the House of Brands division chose what goods to stock and display and sold them to customers.  Despite being a director as well as an employee, these acts were not enough to amount to her using the trade marks in the course of trade.  As Leggatt LJ sets out at paragraph 25, "[t]he Court of Justice has repeatedly held that in [the EU trade mark directive and regulation] the phrase "in the course of trade" means "in the context of commercial activity with a view to economic advantage and not as a private matter".  Ms Ahmed's activities were carried out on behalf of the company, not herself. 

-  There are two main principles of accessory liability:

• Someone who knowingly procures another person to commit an actionable wrong is jointly liable with the wrongdoer for the wrong:
  • If the wrong is a breach of contract, they commit a tort themselves;
  • If the wrong is a tort, they are jointly liable for the tort committed by the wrongdoer;
• Someone who assists another to commit a tort, and whose assistance is more than trivial and is given pursuant to a common design between them, is jointly liable for the tort committed by the wrongdoer.

In either case, "knowledge of the essential features of the tort is necessary to justify imposing joint liability on someone who has not actually committed the tort … even where … the tort does not itself require such knowledge".

Here, at first instance there was no evidence that the Ahmeds knew of Lifestyle's marks before Lifestyle wrote to them in March 2014, and without specifically considering the point, the first instance judge made no finding that the Ahmeds knew or should have known that there was a likelihood of confusion, or that the reputation enjoyed by Lifestyle in its trade marks would be adversely affected by their use of the signs.

Neither Ms nor Mr Ahmed had been "found to have had the knowledge required to make them jointly liable for the infringements on either principle of accessory liability".  Note that Lifestyle had tried to amend its particulars of claim to allege that the Ahmeds knew or had reasonable grounds for knowing that the Juice companies were engaged in infringing activity, and that had been refused.

2. Issues relating to the account of profits

Although it was irrelevant as the Ahmeds had been held not to have the requisite knowledge to make them liable as accessories to the trade mark infringement (which was enough to dispense with the proceedings), the Supreme Court still considered the issues relating to the account of profits in depth, as if they had been liable.

a.  If it was right to hold the Ahmeds jointly liable with Hornby Street, should the Ahmeds themselves be held liable to account for the profits of Hornby Street? 

No.  An account of profits is an equitable remedy and therefore the court has discretion as to whether to grant it.  The Supreme Court did not feel that it was completely clear as to whether or when the defendant's knowledge of the claimant's rights should be taken into account when deciding whether to order an account of profits.

In patents, neither damages nor an account of profits may be awarded against a defendant "who proves that at the date of the infringement he was not aware, and had no reasonable grounds for supposing, that the patent existed" (s62(1) Patents Act 1977). 

In copyright, a similar provision relates to damages, but not to an account of profits, suggesting that innocent (i.e. without knowledge) infringement of copyright may lead to an award of account of profits (ss 97(1), 191J(1) and 233(1) Copyright Designs and Patents Act 1988). 

In trade marks, while nineteenth century cases refused to award either damages or an account of profits for innocent infringement, since 1924 it has been clear that damages could be awarded for innocent infringement, but unclear whether the same applies to an account of profits. 

The Court looked at the rationale for the remedy of an account of profits, deciding that it must exist in order to allocate profits made from an intellectual property right to the rightsowner, and that accordingly whether infringement was innocent or not was irrelevant.  A defendant accounting for profits is giving up their gain in favour of the rightsowner.  However, only the defendant who received those profits can give them up; it would be inequitable to put them in a worse (rather than the same) financial position as if the infringement had not occurred.  This is distinct from a claim for damages, where co-defendants are jointly responsible for the loss caused to the claimant, who can therefore seek compensation for that loss from any of the co-defendants (subject to questions of apportionment and similar).

The Supreme Court examined the authorities and concluded that "if the Ahmeds had been personally liable for infringements of Lifestyle's trade marks, they could only have been liable to account for profits which they personally made from the infringements".  They would not have been liable for the company's profits.

b.  If it was not right to hold the Ahmeds jointly liable with Hornby Street, but it was right that the Ahmeds had to account for profits they had themselves made from the infringements, were the loan and a proportion of their salaries such profits? 

No.  The Court of Appeal had been right to conclude that a loan is not a profit.  There was no evidence or finding to the effect that the loan was a disguised dividend or that Mr Ahmed had somehow generated a profit from the loan, and it was irrelevant that Mr Ahmed was not pursued to repay the loan after Hornby Street went into administration; that did not alter its character as a loan.

Similarly, the salaries paid to the Ahmeds could not be viewed as profits.  There may be occasions where remuneration could be a way of extracting profits from the company, but this had not been found here.  Furthermore, while an employer may make profit from his employee's work, an employee who receives fair market remuneration for that work does not make a profit.  It was "not suggested that the Ahmeds were paid more for their services to Hornby Street than their services were worth".

As an aside, whilst the Court of Appeal had considered that 10% of the House of Brands's sales formed the profits which should be accounted for, it had not considered that "the profit for which the infringer of a trade mark must account is not the profit made from selling the article itself but the profit made from selling it under the trade mark".  It should have asked whether and to what extent the sales of infringing goods would have been made had the infringing signs not been used.

c.  If a proportion of the Ahmeds's salaries were such profits, should deductions be made for income tax?

The Supreme Court declined to comment on whether income tax should or should not be taken into account when calculating what profit was made by the Ahmeds from their salaries, as their salaries were not in fact profits.

Comments

The Supreme Court has made it very clear that for someone to be liable for a tort as an accessory, they must know the essential facts which make the tort wrongful; they must know that 1) the acts will be done and 2) they are an infringement. 

What remains unclear however is what will constitute knowledge.  Who needs to know?  Where a business carries out trade mark clearance searches, would an in-house employee involved with those searches count?  Would it make a difference if they were a qualified trade mark professional?  Or must there be knowledge at a more senior level, for example the marketing director, or even the board?  What level of knowledge is required?  Is any risk enough to fix someone with knowledge?  Or does it have to be certain?  Or somewhere in between?  And does it make a difference who is assessing or advising on the risk?  What happens where businesses do not carry out trade mark clearance searches?  Are they automatically lacking knowledge, or 'should' they have carried out searches?  And how does a claimant know whether or not the defendant's directors had that knowledge at the time of issuing proceedings – or realistically at any time before disclosure and/or evidence?

These tricky but significant questions are still to be worked out.  Some commentators view this decision as allowing directors to get of liability easily; however if knowledge is found, this decision has likely made it easier for directors (and others) to be held liable for intellectual property infringement along with the business.  Whether this is helpful clearly depends on what side of the line you sit.  If we can help you understand your own risks and options, please get in touch.

With thanks to Jessica Gurzynski, Solicitor Apprentice, for her contribution to this article.