23 May 2024

Supreme Court widens door for directors to argue no liability for trade mark infringement: Lifestyle Equities v Ahmed

In-depth analysis

What has happened?

The UK Supreme Court has introduced a new knowledge requirement into accessory liability for trade mark infringement and other torts (including strict liability torts). From now on, as well as demonstrating that an accessory has procured an infringement or joined in a common design to infringe, it will be necessary to show that they had "knowledge of the essential facts which make the act done wrongful".

Knowledge includes turning a blind eye to the facts.

In the case of trade mark infringement based on a likelihood of confusion, this would mean knowledge of the existence of the trade mark alleged to be infringed and a likelihood of confusion. For a reputation-based claim, it would mean knowledge (a) that the claimant’s trade mark has a reputation in the UK, (b) that the use of the sign complained of gives rise to a link, (c) that such use results in unfair advantage or detriment and (d) that such use is without due cause.

The decision applies to all torts and all persons who are potentially liable as accessories but will have particular impact in the case of directors where their companies commit a wrong. It now may be easier for them to avoid all liability (whether personal or otherwise) by liquidating the company and arguing no requisite knowledge. This is particularly so in cases of less clear-cut infringement where there is more scope to argue no knowledge. Putting potential infringers on notice of your rights early and fully will now be even more key.

The decision also contains a useful synopsis of the law on procuring an infringement and joining in a common design to infringe and confirms that these are separate principles of accessory liability.

It confirms that an infringer (whether primarily or jointly liable) can only be required to pay over any profits which they have made from the tort (not which others have made), with what constitutes profit being construed narrowly. The position is different for damages.

The decision does not change the law on primary liability for torts, with trade mark infringement still obviously being a strict liability tort as far as primary infringers are concerned. However, the court did take the opportunity to state that a person is only "primarily" liable for trade mark infringement if they "use the sign in the course of trade" and the "trade" in question is carried on by the person who uses the sign. This means that employees and directors who put on display - and sell - infringing items for their employer companies are not themselves liable as primary infringers. These comments are significant and will no doubt be picked over by litigants keen to avoid primary liability.

Background to the dispute

The appeal arose in the context of a successful claim by Lifestyle Equities that two companies had infringed its Beverly Hills Polo Club trade marks (which include the words Beverly Hills Polo Club and the image of a polo player on horse-back and are registered for clothing) by offering for sale various items of clothing with logos displaying the name “Santa Monica Polo Club” and pictures of polo players on horse-back. One defendant company later went into administration at the instigation of its bankers and was then dissolved.

In a separate hearing, the directors of the two companies, siblings Kashif and Bushra Ahmed, were held liable as accessories to trade mark infringement on the basis that they had procured the companies to commit the infringements and joined in a common design with the companies to infringe. Arguments that the Ahmeds had acted in good faith and without knowledge of the infringements were dismissed.

The Ahmeds were ordered to account for the profits they had personally made as a result of the infringements, amounting to 10% of their respective salaries. The Court of Appeal deducted income tax from those amounts of its own volition. A loan made from the company to Mr Ahmed was held to constitute profit by the trial judge, a decision overturned by the Court of Appeal.

Questions before the Supreme Court

Is proof of knowledge or any other mental element required for accessory liability for a tort?

Is an accessory liable to account for the profits made by those with whom they are jointly liable?

Was the trial judge right to regard the loan made to Mr Ahmed and a proportion of the Ahmeds’ salaries as profits? If so, was the Court of Appeal entitled and correct to hold that, in calculating profits made from the salaries, deductions should be made for income tax?

Key findings on the new knowledge requirement

To be liable as an accessory for procuring a tort, a person must know the essential facts which make the act done wrongful, even if the tort is one of strict liability. That knowledge includes turning a blind eye.

There is no logical reason why the mental element necessary to make an accessory liable should be the same as the mental element which is a constituent (or not) of the tort. The accessory is not liable because all the elements of the tort are established in relation to them; they are liable even though they do not satisfy all the elements of the tort.

There is support for this approach in other areas of private law including inducing a breach of contract/trust.

It is 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 without knowledge of facts which made the act of the other person tortious.

There is no reason to treat accessory liability in the case of directors differently from accessory liability generally.

The previous approach – of holding that a director is not liable as an accessory if all they have done is carry out their constitutional role in the governance of the company eg by voting at board meetings – is narrow and arbitrary. It says nothing about the particular director's knowledge of any potential wrongful act. A test based on the “degree and kind of personal involvement” of the director is unclear.

The need for consistency means that the same test of knowledge must apply whether accessory liability is based on procuring an infringement or pursuing a common design to infringe.

Application to IP

For a confusion-based trade mark infringement claim, knowledge would mean knowledge of the existence of the claimant's trade mark and of a likelihood of confusion. For a reputation-based claim, it would mean knowledge (a) that the claimant’s trade mark has a reputation in the UK (b) that the use of the sign complained of gives rise to a link, (c) that it results in unfair advantage or detriment and (d) that it is without due cause. (Presumably, by analogy, for a double identity claim, it would involve knowledge of the existence of the claimant's trade mark and knowledge that the use of the allegedly infringing sign results in an adverse effect on one of the functions of that trade mark.)

In the case of copyright infringement by a company, it would mean, for example, that the director not only knew and intended that the works should be copied and issued to the public (procuring/common design) but also that the director knew of the fact that the company did not own the copyright or have permission to copy it or to issue copies to the public (obiter).

In a simple case where, for example, a company offers for sale counterfeit goods, it may be obvious that a director who arranged for the manufacture and sale of the goods must have known the facts which made the company’s acts infringements of the claimant’s trade mark (obiter).

Key findings on procuring and common design to infringe (obiter)

Procuring an infringement and participating in a common design to infringe are two separate principles of accessory liability. They are overlapping and many (but not all) cases will qualify under both heads.

A common design can be taken to mean a concerted action in pursuit of a shared aim. The assistance given need not be significant but must be more than trivial. The parties must have interrelated intentions which each understands the other to share. Some form of communication between the parties is required, but it need not even involve words. Conditional intent is sufficient.

A person may procure a tort by simply issuing instructions on which others subsequently act, without acting in concert to a common end (ie without a common design). The accessory must intend or authorise the act.

Key findings on account of profits (obiter)

A central purpose of IP rights is to encourage and reward creativity and innovation by enabling the owner of the right to enjoy the fruits of its exploitation. That purpose is promoted by allocating profits made from exploiting the right to the owner, including where the right is infringed by commercial use made without the owner’s consent. The effect is simply to put both parties back in the same position financially as if no infringement had taken place.

Applying the above, a person should only be ordered to account for profits which they have made, and not profits made by someone else. A person ordered to account for someone else’s profits would not be giving up a gain but paying a penalty or a fine. The only place for relief of that kind in the law of tort is an award of punitive damages.

The position is different for damages where two or more defendants have combined to cause loss to the claimant. There is no difficulty or inequity in holding that, as each has caused the claimant’s loss, the claimant can recover compensation for that loss from any of them, leaving questions of relative responsibility and apportionment to be addressed in contribution proceedings.

Lack of knowledge is no defence to a claim for damages for infringement of a trade mark, and it should not defeat a claim for an account of profits.

A loan (on normal commercial terms) is not profit. A person does not make a profit just by borrowing a sum of money. If the loan is interest-free or at a rate of interest lower than a commercial rate, this difference might generate a profit for the borrower. Equally, where it is shown that a loan is not really a loan at all but a disguised dividend, the position would be different. If, as a result of supervening events, a loan is forgiven or otherwise ceases to be repayable, that does not alter its character as a loan.

Ordinary remuneration for work done is not profit. However, payments made ostensibly as remuneration may in reality be a way of extracting profits from a company.

The profit for which a trader who sells infringing goods is liable to account is not necessarily the difference between the proceeds of sale of such goods and the costs attributable to those sales. It is not the profit made from selling the article itself, but the profit made from selling it under the trade mark (eg arising from the confusion).

It was not fruitful to consider whether income tax should be taken into account in calculating profits.

Other notable comments by the court (obiter)

A person is only "primarily" liable for trade mark infringement if they "use the sign in the course of trade" and the "trade" in question is carried on by the person who uses the sign. This means that employees such as shop assistants who put on display - and sell - infringing items are not themselves liable as primary infringers. The same is true of directors who do those things.

The position is different for copyright infringement where "authorising" is an act of primary infringement.

Application to the Ahmeds

The Court held that the Ahmeds were not "primarily" liable for trade mark infringement.

It also held that it had not been proven that the Ahmeds had the requisite knowledge to make them liable as "accessories" to the infringements committed by the two companies. The Santa Monica Polo Club signs used by these companies were different in various ways from Lifestyle’s registered trade marks and the court held that there was room for argument and honest difference of opinion about the extent of the similarity and whether it gave rise to a likelihood of confusion or otherwise resulted in infringement. Furthermore, there was not finding that the Ahmeds were even aware of Lifestyle’s trade marks before March 2014, when Lifestyle sent a letter of complaint.

What does the decision mean for you?

The decision will make it harder for trade mark owners and others to argue that directors are liable for infringements committed by their companies. As well as demonstrating that an accessory has procured an infringement or joined in a common design to infringe, it will now be necessary to show that they had "knowledge of the essential facts which make the act done wrongful".

It will presumably be for the claimant to show the requisite knowledge or at least a prima facie case of knowledge which the defendant would then have to rebut.

The threat of personal liability against directors has always been seen as a useful source of leverage to encourage defendants to engage in dispute resolution. That threat has arguably diminished. It now may be easier for defendants to avoid all liability (whether personal or otherwise) by liquidating the company and arguing no requisite knowledge. The risk is particularly significant in the case of smaller companies (which are often easier to liquidate).

The risk is also particularly significant in the case of less clear-cut infringements (where directors will have greater scope to argue no requisite knowledge). It is not completely clear from the judgment, but one interpretation is that the knowledge requirement might not be made out where there is room for reasonable differences of opinion on whether the use complained of is infringing.

For clear cut or fragrant infringements, including counterfeiting, the ruling suggests that it might be obvious that a director who arranged for the manufacture and sale of the goods must have known the facts which made the company’s acts infringements of the claimant’s rights. In other words, knowledge might be implied. Presumably, where there have been repeated infringements of different rights, that might also be sufficient to imply knowledge.

The decision is another in a long line of reasons why claimants should not delay in putting defendants on notice of potential IP infringements (thereby giving directors the requisite knowledge).

Having said that, it is not clear how the new knowledge requirement will interact with the law of unjustified threats. Threats are not actionable where the allegedly infringing use involves the application of the mark to – or import of - the allegedly infringing goods. The question now arises whether the same is true for threats against directors of companies where the company does those acts. Care should be taken in this regard.

The court's comment that a person is only "primarily" liable for trade mark infringement if they "use the sign in the course of trade" and they carry on the "trade" in question was obiter and will no doubt be controversial. Litigants will no doubt pick over this aspect of the ruling to see if it applies in all scenarios, for example, to intermediary liability.

The decision confirms what most commentators already knew about an account of profits. It is a remedy which should be elected with care. Parties are only liable to account for any profits they made and what counts as profits is construed narrowly. Conversely, damages are not subject to the same constraints.