Intellectual Property infringement and director’s liability

Summary

A well-recognised benefit of establishing a limited liability company is that it offers a degree of protection from third party claims to directors (and shareholders) with responsibility for running the company. However, in IP infringement actions, a tactic frequently deployed is to make directors co-defendants on the basis of a joint tortfeasorship claim. Naturally, this begs the question: how much protection does a company structure really offer?

There is a fine balance to be struck between, on the one hand, ensuring that a company’s separate legal identity is properly recognised and, on the other, precluding directors from committing tortious acts and avoiding liability by hiding behind the so-called ‘corporate veil’.

This decision considers directors’ liability in the context of a copyright infringement claim, and provides an indication as to what might be regarded as sufficient to ‘lift’ or ‘pierce’ the corporate veil in these circumstances, and what likely will not.

Written by Lauren Palmer, Legal Assistant at Dehns.

Tangle Inc v One for Fun Ltd & Ors [2023] EWHC 217 (Ch)

Case background

The Claimant (‘Tangle’) owns intellectual property rights in its toy, the Tangle (which is a ‘fidget’ toy), the design of which is based on a wooden sculpture created by Richard Zawitz in or around 1975, which in turn was based on his earlier drawings. The Defendant company (‘OFF’) is a well-established Scottish toy wholesaler and retailer.

Tangle brought an action alleging that a toy OFF planned to market – the Jumbly – infringed their copyright in the Tangle.  It was contended by Tangle that OFF had previously been involved in selling the Tangle, a product well-known in the marketplace, and on the basis that the Jumbly bears such a strong resemblance to the Tangle, it must be a copy.

A joint tortfeasorship claim was also brought against OFF’s three directors. The claim against the first director (who was the Second Defendant) was because he was also the principal shareholder. Tangle alleged that if unrestrained, the directors would engage in ‘phoenixing’ i.e. they would set up another company behaving in the same way. The evidence of the Second Defendant’s personal involvement was based on an email he sent in pre-action correspondence, in which he used ‘we’ in the context of a decision to make the Jumbly and upon what that toy was based on. Nothing was specifically relied on to support the claim against the Third and Fourth Defendants, who were the other directors.

An application was brought by the Second to Fourth Defendants to strike out the joint tortfeasorship claim as against them as directors, on the basis that it was specious and unparticularised.

Decision

The Deputy Judge considered the law surrounding joint tortfeasors starting with the Supreme Court’s decision in Fish & Fish Ltd v Sea Shepherd UK [2015] UKSC 10, in which to be liable, a person must (i) assist the commission of the tort, (ii) have a common design, and (iii) conduct an act which is tortious. He next considered the Court of Appeal’s decision in Lifestyle Equities CV v Ahmed [2021] EWCA Civ 675 (which has been appealed to the Supreme Court on this issue), and that court’s reference to Chadwick LJ’s four principles arising in MCA Records Inc and anor v Charly Records Ltd and ors [2001] EWCA Civ 1441, as they affect intellectual property infringements.

It was conceded that if the pleaded allegations were no more than stating the individual defendants were directors, this was not enough to impose liability. The Deputy Judge concluded that this was all that was alleged against the Third and Fourth Defendants. Accordingly, the claims against them were struck out.

However, as against the Second Defendant, the pleaded case of him controlling and operating OFF, was supported by some ‘very limited’ evidence; in other words, more than conducting himself within the constitution of the company. The Deputy Judge stated this ‘gets the case across the line, but only just’. This was because the Deputy Judge followed Mellor J’s approach in Au Vodka Ltd v NE10 Vodka Ltd and anor [2022] EWHC 2371 (Ch), in that a judge’s task was to consider whether the allegation was sustainable at law, not simply weigh competing evidence on the issue. He could not conclude that as against the Second Defendant, the joint tortfeasorship claim had no real prospects of success, so the matter needed to be tried. However, Tangle had offered to have the case against the Second Defendant stayed pending consideration of liability of OFF’s acts of infringement, and this was accepted.

Implication

What this decision reiterates (at least until the Supreme Court opines in the Lifestyle Equities v Ahmed case) is that where a director acts within the confines of his constitutional duties to the company, and there is no other separate tort that is committed, the director will have a defence to being a joint tortfeasor. However, whether the acts of the director go beyond that ‘constitutional role’ is invariably fact-sensitive. The reluctance of the courts to set hard-and-fast rules bears testimony to this point. This is perhaps all the more so in the context of intellectual property rights.

In the present case, there were three directors. Where, as frequently happens, the allegation is made against a sole director, it is likely arguing that his/her actions were merely those within the constitutional role of a director, will be a more difficult task. While the burden of proof lies on the claimant, inevitably, the director defendant will need to show any actions were merely duties as a director, and not otherwise.