To save research and development (R&D) or marketing expenditure businesses may be tempted to benefit from the innovation, creativity or efforts of others. Sometimes this is perfectly legitimate. However, those businesses that overstep the line and infringe IP rights face the prospect of litigation.
IP owners need to enforce their IP rights to maintain their monopolies, preserve the value of their IP and maximise income. The costs of IP litigation in the UK are widely recognised as being high.1 Therefore, IP owners need to consider carefully which parties to sue to maximise their chances of costs recovery and damages if they are successful in litigation.
Going into liquidation or administration is now more attractive than ever for companies seeking to avoid their financial liabilities. While this usually addresses the threat of continuing infringement, it can leave IP owners with significant unrecoverable costs. IP owners should therefore look carefully at whether to sue relevant individuals such as directors, as well as corporate entities, for infringing their rights.
Joint tortfeasorship
The test for joint tortfeasorship in IP infringement was formulated following two cases in the late 1980s.2 Joint infringers are ‘two or more persons who act in concert with one another pursuant to a common design in the infringement’.3 This is an elusive question and a fact-sensitive issue. For a very recent exposition on the subject, see Arnold J’s judgment in L’Oreal SA & ors v eBay International AG & ors [2009].
The application of this test to individuals was examined closely in MCA Records Inc v Charly Records Ltd & ors[2001]. In this case the individual was not a director de jure of the corporate defendants but was the de facto or shadow director. The Court of Appeal held that an individual needed to do more than merely carry out their constitutional role as an officer or majority shareholder of the company to be jointly liable for the company’s torts. However, an individual who goes beyond that cannot escape liability by saying that all they have done is exercise their constitutional control. The test for joint tortfeasorship above was confirmed as applying to directors or shadow directors and, finally, the court held that an individual’s procurement of their company’s infringing activities can lead to liability by virtue of a common design.
To put this into context, in Charly Records, the corporate defendants were conducting the specific acts of infringement, ie copying the infringing material and issuing it to the public. The de facto director, Jean Luc Young, had not committed or participated directly in those acts but was found jointly liable because he had procured or induced those acts to be done and had joined the corporate defendants in a concerted action to secure that those acts were done.
Young was behind the business model of the company to re-issue sound recordings, he fully and publicly supported the company’s activities (which he knew to be infringing), and he did not stop them although he had authority to do so. Other background factors, like the flagrancy of the infringement, the murky company structures and the unreliability of the individual as a witness, may have played a prejudicial part.
Individual’s knowledge and intentions
The depth of the analysis that must be conducted to establish personal liability in IP infringement is evident from the Court of Appeal’s decision in Glaxo Group Ltd v Dowelhurst Ltd & anor[2004].
In the High Court the defendant company and its director, Richard Taylor, were held jointly liable on summary judgment for trade mark infringement for importing certain infringing medicinal products. The Court of Appeal directed that the matter of personal liability should go to trial. It indicated that if Taylor had dealt with a legitimate supplier and there was no reason he should have known that the supplier was dealing in infringing products, it would be less likely that he would be personally liable.
If, however, Taylor was shown to have dealt with a less than reputable supplier whom he knew to be unlicensed, this would point the other way. This demonstrates the court’s need to conduct an analysis of the individual’s knowledge and subjective intentions. The case settled before trial so further elucidation was not forthcoming.
Is an omission to cease the infringing activity enough?
Earlier this year, the High Court had another chance to apply the approach in Charly Records in the case of Societa Esplosivi Industriali SPA (SEI) v Ordnance Technologies (UK) Ltd (OTL) & ors[2007].
SEI’s design infringement claim against OTL succeeded and the court considered the joint liability of the sole shareholder and director of OTL, who was also held out as the managing director.
The court looked at the director’s role in the development of the infringing product that had been derived from an earlier product developed jointly by OTL and SEI. The director, Stephen Cardy, claimed that he did not tell any of OTL’s employees to base the infringing product on the one previously developed with SEI. Cardy argued that any failure on his part to stop the design infringement occurring by ordering his employees to go with another design was an omission, rather than an action from which joint liability could be deduced.
The facts did not support this. Cardy accepted that, without being given contrary instructions, his design team would base the infringing product on SEI’s design because it was more commercially efficient to do so. While there was no cogent evidence that Cardy had given his design team any direct instructions to base the infringing product on that of SEI, the design team would have assumed that they should do this from their discussions with him.
In addition, Cardy admitted it was part of his job, and not that of the design team, to worry about whether his company was infringing a third-party’s IP rights and he gave no instructions that OTL’s product should not be adapted from SEI’s product.
Cardy acknowledged that the customer for whom OTL was developing its infringing product would not have been happy to know that it was derived from a similar product in which SEI had rights. He had also avoided telling the customer about a breakdown in the relationship between OTL and SEI. Furthermore, Cardy had misrepresented to OTL’s employees that SEI approved of OTL’s independent continued development of the new product. The court concluded that he had gone beyond a mere omission and moved into encouraging the company to infringe SEI’s design.
The court has always made it clear that knowingly standing by and doing nothing about another’s infringing activity is not sufficient to find joint liability.4 However, those individuals who exercise a greater control over the company, are aware of the infringement and have a duty or obligation to prevent the infringement are at a greater risk of being found liable.5
Liability of consultants
The court has recently looked at the question of whether people in other key decision-making roles can be held personally liable for infringement together with a corporate defendant.
The decision occurred earlier this year in MMI Research Ltd v Cellxion Ltd & ors[2009]. MMI brought an action for patent infringement in respect of the sale of a product whose operation infringed MMI’s patents. The personal defendant, Anthony Timson, was a consultant to MMI but had been a former employee, director and shareholder of MMI. He had developed the product while acting in a consultancy capacity for the corporate defendant.
Although the point was not fully argued by the parties, the court concluded that, notwithstanding his capacity as a consultant, he shared a ‘common design’ with the corporate defendant in the commission of the infringing acts because he actively participated in the defendant’s sales effort and he knew more than anyone else in the company about how the product operated. The case confirms that the scope for personal liability stretches beyond the company’s shareholders and directors (shadow or otherwise) to include anyone with sufficient involvement in and responsibility for the company’s commission of the tort.
Conclusion
Including a personal defendant in an IP infringement action against a company without due cause is generally frowned on by the IP judiciary. Therefore IP owners should not take this step lightly and must do their homework to ensure they have sufficient evidence to support such a claim before enforcing their rights.
A corporate officer with no involvement beyond performing their constitutional role in a company is unlikely to attract personal liability for infringement. However, if the individual is actively involved in the infringing activities of the company, they could be jointly liable. Further, the prospect of personal liability can encourage a quick resolution of the dispute.
Conversely, key individuals in a company who are involved in the activities of the company that may result in it incurring liability for IP infringement should take care not to encourage infringing activities, particularly if the company could find itself unable to satisfy a costs and/or damages award if sued.
Consultants should be particularly careful not to expose themselves to liability and, if possible, ensure their consultancy agreements contain the appropriate indemnities. However, in reality it will be the consultant who will be giving indemnities to their corporate client. If so, they should take care to protect their position if they become aware of the company’s infringing activities, at the very least by stating in writing that they do not condone them.
By Arty Rajendra, executive, and Simon Corke, junior associate, Rouse. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it ; This e-mail address is being protected from spambots. You need JavaScript enabled to view it .
Notes
1) See Gowers Review of Intellectual Property, November 2006 and The Cost of Patent Litigation: A Historical Perspective by Arnold J, a paper presented to the Midlands Intellectual Property Society on 26 February 2009.
2) CBS Songs Ltd v Amstrad Consumer Electronics Plc [1988] UKHL 15 and Unilever Plc v Gillette (UK) Ltd [1989] RPC 583.
3) CBS Songs Ltd(supra) at 1055E.
4) Credit Lyonnais Nederland NV (now known as Generale Bank Nederland NV) v Export Credits Guarantee Department[1999] UKHL 9.
5) L’Oreal SA v eBay International AG & ors(supra) at 360-382.