Caught in the know: why knowledge (or lack of it) is power when it comes to UK directors’ accessory liability

It is well-established that strict liability torts, such as infringement of some intellectual property (IP) rights, do not require proof of intention or knowledge for a finding of fault against the primary wrongdoer (here the company). For many years, the orthodox approach of the English courts was to also apply this same standard to the assessment of accessory liability. Understandably, this caused some concern for company directors (and other senior executives): they feared that a finding of accessory liability against them personally was almost inevitable if their company was held liable for an actionable wrong, even where the directors did not knowingly induce or procure the company to commit the tort.

Given the prevailing backdrop, the Supreme Court’s pivotal ruling in Lifestyle Equities CV provides welcome respite to company directors who might otherwise have expected the floodgates to widen. In reversing the traditional approach, the decision specifies that a person will only be jointly liable as an accessory if they had knowledge of the “essential facts” that made the act tortious, whether by procuring the primary wrongdoer to commit the infringing act or pursuant to a common design.

The judgment also clarifies that even where a director is found jointly liable they are only required to account for any profits they have personally made. Salaries for legitimate work and loans from the company do not fall under the category of “profits” in this context.

Background

In this case, Lifestyle Equities CV (“Lifestyle”) had brought proceedings against a number of defendants for trade mark infringement and/or passing off. One of the defendants was a family-owned company, Hornby Street Ltd. (the “Company”). At trial, the Company was found to have manufactured and offered for sale various items of clothing and footwear that had infringed Lifestyle’s registered trade marks and/or amounted to passing off.

As the Company had since been dissolved, Lifestyle commenced separate action against the Company’s directors, Mr Ahmed and his sister, Ms Ahmed (the “Ahmeds”). Lifestyle argued that, by procuring the Company to commit the tortious acts or participating in a common design to that end, the Ahmeds were jointly and severally liable with the Company for the infringement of Lifestyle’s IP rights. Accordingly, Lifestyle considered that the Ahmeds should be ordered to account for any profits made by them as a result of the Company’s infringing acts.

On appeal, the Supreme Court was asked to decide on the following issues:

1. The basis on which company directors can be held liable as accessories for the infringing acts of their company. In particular, whether the mental state required for accessory liability mirrors that required for the strict (primary) liability.
2. If a director is held jointly liable as an accessory, the extent to which the director must account for any profits.

Decision

In unanimously allowing the Ahmeds’ appeal, the Supreme Court ruled that company directors could not be held liable as accessories if they had no knowledge of the essential facts that made the company’s primary act wrongful, even where the company’s infringement was a strict liability tort. In addition, a director who is found liable as an accessory is only required to account for the profits they have made, and not the profits of the company as a whole.

Accessory liability

On the liability issue, the Supreme Court considered that there is no general principle of English law that exempts directors, employees or agents from the ordinary principles of liability in tort. Moreover, the principles of separate corporate personality or limited liability also could not justify treating a director as free from personal liability for their tortious acts.

However, the court took the view that it would be unjust to hold a person who causes someone else to commit a tort  – director or otherwise – jointly liable as an accessory if that person was acting in good faith and without knowledge of the facts that made the primary wrongdoer’s act tortious. The required mental state for accessory liability thus could not correspond to that required for the strict (primary) liability. Accordingly, the correct test for accessory liability is knowledge of (or turning a blind eye to) the essential facts that made the underlying act unlawful. This is the case whether the claim is based on procuring the primary wrongdoer to commit the tort or on participation in a common design, both of which are distinct tortious bases for imposing accessory liability.

While the court clarified that knowledge of the law is not a required element, it also explained that a person could not be allowed to escape liability by relying on ignorance of the law. However, it stopped short of explaining how knowledge of the “essential facts” which would be sufficient for a finding of accessory liability may be exhibited in any given case. In this regard, the court applied the requirements for trade mark infringement under sections 10(2) and 10(3) of the Trade Mark Act 1994 to the Ahmeds: it held that there was room for argument and an honest difference of opinion about the extent of the similarity between the Company’s goods and Lifestyle’s registered trade marks. On this basis, the court was satisfied that there was no evidence to suggest that the Ahmeds (i) knew or ought to have known that there was a likelihood of confusion (such likelihood of confusion being required for infringement under section 10(2)) or (ii) deliberately intended to take advantage of the distinctive character or repute of Lifestyle’s trade marks, or were aware that their use would adversely affect the reputation of Lifestyle’s trade marks, and in either case that their use was without due cause (such taking advantage or damage to reputation without due cause being required for infringement under section 10(3)). This meant that neither of the Ahmeds had the knowledge required to make them jointly liable as accessories.

Account of profits

The Supreme Court also held that an account of profits will not be applied to innocent infringers i.e., accessories that do not have the requisite knowledge to make them jointly liable. The court confirmed that the Ahmeds were not liable to account for profits made by the Company, although they would be liable to account for any illicit profits they had personally made from the trade mark infringements. 

On the latter issue of personal profits, the court considered that neither loans from the Company to the Ahmeds, nor their salaries for legitimate services rendered, could constitute “profits”. Both elements should therefore be excluded from any account of profits (provided salaries are not a disguise to conceal dividends that originated from the infringing activity).

Implications

Accessory liability

In light of the increased scrutiny of their obligations over recent years, the imposition of a knowledge requirement for accessory liability provides some much-needed clarity and certainty to company directors. Although the true extent of its impact remains to be seen, it is clear that the ruling in Lifestyle Equities CV will transcend beyond just IP or corporate disputes, by having wider ramifications for the principles on which primary and accessory liability in tort are based. Directors are also bound to welcome the narrow interpretation of what constitutes “profits”, but they will want to ensure that all financial gains, such as salaries and loans, are properly documented and justified to avoid being classified as illicit profits.

Owners of IP rights

With that said, the concern for owners of IP rights is that the judgment introduces a significant hurdle: claimants will now have to look into a person’s state of mind to prove that they had the requisite knowledge for a finding of accessory liability. In relation to companies, directors could thus attempt to avoid liability by bringing about the liquidation of the company and arguing that they do not possess the necessary knowledge (though there is no suggestion that the Ahmeds did this in the instant case). However, directors whose companies routinely commit strict liability torts, such as a breach of some IP rights, may find it difficult to justify their purported lack of knowledge.

Wider implications on directors’ liability

It is important to note that ‘knowledge’ in any particular case will turn on the facts and all the circumstances of the case before the courts. This decision should be read in the context of the test for accessory liability for strict liability offences and remains distinct from situations where personal liability is imposed on directors by statute, for breach of their general fiduciary duties under the Companies Act 2006 (CA 2006), for wrongful trading under the Insolvency Act 1986, or where liability is based on fraud.

The decision in Lifestyle Equities only impacts on directors’ liabilities where the company has committed a tort. In situations where a company has breached the terms of a contract, the principle in Said v Butt can exempt directors from personal liability for such a breach (whether through the tort of inducement of breach of contract or unlawful means conspiracy) if their acts, in their capacity as directors, are not in themselves in breach of any fiduciary or other personal legal duties owed to the company. The principle in Said v Butt was expressly approved by the Supreme Court in Lifestyle Equities.

However, as set out above, it is only available where the directors are not in breach of their obligations to the company and recent caselaw highlights that where a Court finds that there have been serious breaches of section 172 of the CA 2006 (requiring a director of a company to act in the way that they consider, acting in good faith, will be most likely to promote the success of the company for the benefit of its members as a whole) liability will likely fall to the director personally. For example, in Antuzis v DJ Houghton Catching Services Limited [2019] EWHC 843 (QB), the directors were found to have breached section 172 of the Companies Act 2006 by failing to pay the company’s employees in accordance with the terms of their contracts, as the directors had “actually realised” that they were causing the company to breach its contractual obligations to its employees.

How Eversheds Sutherland can help

This decision is a reminder for companies and directors to reassess their legal and operational frameworks and for trade mark owners concerned about the potential infringement of their intellectual property to seek legal advice at an early stage. Eversheds Sutherland is committed to helping you adapt to these legal developments and implement the necessary changes, as well as assisting you in navigating any claims.