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Supreme Court makes a lifestyle choice on directors' liability

Posted on 20 May 2024

Directors are often more than just the hearts and minds through which a company operates its business. To a lender, they can be a guarantor of their company's debts. To an IP owner, they can be the solvent alter ego of an infringer in financial difficulties. The first of these roles is assumed by a director knowingly and voluntarily. But what about the latter? In particular, will the law impose a financial liability on the humans through which an inanimate corporate entity infringes an IP right, or does the corporate veil provide those individuals with an impenetrable shield in all but the most flagrant circumstances?

Until now, these questions have usually been resolved before judgments have been handed down, reflecting, perhaps, an appreciation of litigation risk where each dispute is a product of different facts and circumstances from those which have gone before. The result is that parties' perceptions of their rights and obligations have been shaped by practice as much as by whatever line of judicial thinking can be discerned from the few cases on the issues that have been decided.

It is against this backdrop that the Supreme Court's decision in Lifestyle Equities v Ahmed has arisen. In a substantial judgment, stretching to nearly 200 paragraphs and 60 pages, the Court has reviewed international case law from Canada to Singapore to Australia on directors' liability and accessory liability, given their approval to a variety of academic papers on the topic, and criticised earlier domestic judgments, all in an endeavour to bring consistency to the fragmented body of law represented in those earlier decisions.

The basic facts underlying this particular dispute – a rightsholder alleges that company and directors are both liable for IP infringement – are familiar, even if large parts of the judgment are specific to the way the case was pleaded before the Court. In-house counsel, especially those in IP-rich businesses, should take note of three key themes emerging from the Court's judgment.

First and foremost, the Court makes clear that an individual's status as a director does not make them immune from liability for acts undertaken in and for that role, rejecting as fallacious the argument that because those acts can be attributed to a principal they should similarly be "dis-attributed" from the director. In other words, both a company and the directors who carry out its business can be liable:  a director's liability stands or falls on what he or she has done.

Secondly, however, the Court has suggested that, where a director is not primarily liable for a tort and is accused of being liable as an accessory, rightsholders will have to produce evidence that the director had knowledge of (or turned a blind eye to) the "essential facts" of the underlying tort even if that tort is one of strict liability (i.e., the primary tort itself has no knowledge requirement). A director who has knowledge merely of the actions which result in an infringement is unlikely to be an accessory; but, since ignorance of the law is no defence, such a director cannot plead ignorance of the legal ramifications of those actions in order to escape liability. The test for accessory liability therefore requires something in between, namely an appreciation not just of the actions themselves but also of the additional "essential facts" which make those actions unlawful. Not only does this have a real practical consequence for how claims against directors must be pleaded and proved, but it also means that a director's financial liability may cover a much shorter period of time than the company's liability if, for example, the director ceased participation in the infringing acts upon becoming aware of the requisite "essential facts" or only became aware of them long after they had commenced.  Rightsholders should not be overly dismayed by this development though, as claims against directors are very much still available in appropriate circumstances.

Lastly, the Court has reversed the Court of Appeal's finding that in this case a portion of the directors' salaries should be treated as "profits" of the infringing acts for which the Court of Appeal had judged them to be liable. Since the Supreme Court had found that the directors were not liable, it was not strictly necessary for the Court to address this issue but since it has done so it will expect its reasoning to be followed.

The immediate reaction to aspects of the Supreme Court's judgment has been pronounced, with some commentators describing it as a major change in the law and others predicting litigation over what the "essential facts" are for different torts. But, in addressing this decision, and if necessary adapting practices in light of it, lawyers' responses should be less of a despairing "Who knows?!" and more of an inquisitive "Who knows what?".  To the extent that existing IP enforcement strategies need to be revised in the light of this judgment, those amendments should be relatively minimal in order to maintain a sufficient deterrent against directors trying to abuse the corporate veil.

That being said, the requirements for liability are only tolerably clear where actual knowledge is concerned. It is far less clear, especially for SMEs who are on multiple levels more likely to be impacted by this decision than larger enterprises, as to what counts as "turning a blind eye" to a tort's essential facts. For example: directors of smaller businesses cannot attend all the training and update sessions offered to them, and they are likely to have, to borrow a phrase from trade mark law, an imperfect recollection of the multiple presentations they do attend. That is neither new nor should it arouse suspicion. But, if the result of the competing demands on their time means that they do not prioritise certain types of training or business updates, or elect to spend time focused on some other aspect of their business, will they be criticised for that decision?

For the time being, therefore, businesses and their directors, whether in IP-rich industries or otherwise, should take this opportunity to review their internal processes to mitigate the risk that their directors could be criticised for not giving sufficient attention to how their own acts and omissions fit into the broader operation of their businesses. Rightsholders should update their enforcement strategies to make certain that directors cannot deny knowledge of the "essential facts" of the primary infringements.

Our team has a range of products and services designed to achieve these objectives and to help companies navigate the growing bodies of law and regulation that apply to them, and will be happy to have an introductory conversation to discuss your needs.

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