When are Directors and Officers Liable for Infringement?
A decision of the English High Court of Justice deals with the responsibility of officers and directors of a company for alleged infringement. Tangle Inc V One for Fun Limited  EWHC 217 (Ch)
The plaintiff owns the intellectual property rights in a toy product called the Tangle. The plaintiff claims infringement by the defendants. The First defendant is a Scottish toy wholesaler and retailer. It is a substantial and well-established company, with almost 100 employees and a turnover of around £16million. It planned to sell a toy called the Jumbly and displayed mocked-up packaging and products at a toy fair in London. Its orders of the Jumbly toys were sitting offshore, awaiting the resolution of the proceedings. The Second, Third and Fourth defendants are the three directors of the First defendant. The claim against them is asserted based on joint tortfeasance. The defendants moved to strike the claim against the directors.
The Position in the U.K.
In the U.K. a defendant will be liable as a joint tortfeasor if (i) they have assisted the commission of the tort by another person, (ii) under a common design with that person, (iii) to do an act which is, or turns out to be, tortious. In a corporate context whether a director should be liable with the company is a difficult question of policy and a balance must be struck between two considerations. The first consideration is the distinction between a company as a distinct legal person and its shareholders, directors and officers. The second is that everyone should be answerable for their tortious acts. In this context the court referred to four principles generally followed in the U.K:
A director will not be liable with the company as a joint tortfeasor if they do no more than carry out their constitutional role in the governance of the company—by voting at board meetings. The principal extends to a controlling shareholder if they do no more than exercise their power of control through the constitutional organs of the company—for example by voting at general meetings and by exercising the powers to appoint directors.
There is no reason why a person who happens to be a director or controlling shareholder of a company should not be liable with the company as a joint tortfeasor if they are not exercising control though the constitutional organs of the company and the circumstances are such that they would be liable if they were not a director or controlling shareholder.
An individual is liable with the company as a joint tortfeasor—at least in the field of intellectual property—if they intend and procure and share a common design that the infringement takes place.
Whether or not there is a separate tort of procuring infringement of a statutory right, actionable at common law, an individual who intends, procures and shares a common design that infringement should take place may be liable as a joint tortfeasor.
When the Judge considered the above principles, he said there was no allegation of involvement over and above being a director concerning the Third and Fourth directors. Being put on notice and being aware of pre-action correspondence do not create a level of involvement beyond being a director. There was nothing in the pleadings to suggest that the Third and Fourth Defendants co-operated in the alleged infringing acts and nothing to suggest they intended that their co-operation would help bring about the alleged infringing acts. The claim was struck against them.
As for the Second defendant, it was alleged that he authorized, procured, facilitated and otherwise assisted in concert to commit the allegedly infringing acts and he controls and operates the First Defendant. There was(just) enough on the pleadings to suggest that the Second Defendant co-operated in the alleged infringing acts and (just) enough to suggest that he intended that his co-operation would help bring about the alleged infringing acts. Based on this the claim was allowed to proceed.
The Canadian Position
The Canadian approach concerning the imposition of liability on a director or officer is set out in the Mentmore Manufacturing decision. To impose potential liability there must be circumstances from which it is reasonable to conclude that the purpose of the director or officer was not the direction of the manufacturing and selling activity of the company in the ordinary course of their relationship to it but the deliberate, wilful and knowing pursuit of a course of conduct likely to constitute infringement or reflected an indifference to the risk of it. Room must be left for a broad appreciation of the circumstances of each case to determine whether as a matter of policy they call for personal liability.
A judge of the Federal Court more recently said that to establish a cause of action against an individual as the directing mind of a corporation, a plaintiff cannot merely plead the facts of the defendant's capacity as a director or officer. The plaintiff must allege that the defendant knowingly and willingly authorized the infringing actions. A statement of claim must particularize the circumstances from which it is reasonable to conclude that the purpose of the director or officer was not the direction of the manufacturing and selling activity of the company in the ordinary course of their relationship to it, but the deliberate, willful and knowing pursuit of a course of conduct likely to constitute infringement or reflected an indifference to the risk of infringement.
Cases in which this issue arises are common and seem to invariably involve motions to strike the pleadings. From the plaintiff’s viewpoint there are two hurdles to overcome. First, getting the statement of claim correctly drafted and then proving the allegations.
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These comments are general in nature and not intended to provide legal advice as individual situations will differ and should be discussed with a lawyer.
A version of this article originally appeared in the Lawyer’s Daily published by LexisNexis Canada Inc.