Introduction

In the UK Supreme Court’s (“UKSC”) recent decision in Lifestyle Equities CV and Another v Ahmed & Another [2024] UKSC 17, the UKSC discussed various key issues such as whether knowledge was necessary when a director’s liability under tort was strict. The UKSC held that personal liability requires evidence of knowledge or intent, but this new ruling diverges significantly from the current approach in Hong Kong. This discrepancy prompts further exploration into how Hong Kong courts may assess director involvement in such cases in the future.

Background

The claimants (“Lifestyle”) brought a claim for infringement of registered trade marks and passing off against a group of sixteen defendants, including various family-owned companies as well as the directors of the family-owned companies, being Mr Ahmed and his sister, Ms Ahmed (“the Directors”).

The Directors were alleged to be legally responsible for the torts committed by companies of which they were directors, and were sued on the basis that they had authorized or procured the companies to do the acts complained of. At the first instance, the Court held that the Directors were jointly and severally liable with Hornby Street Ltd (“the Company”) for the acts of infringement. The Court did not find it necessary to decide whether the Directors had motive or intention to infringe, as these matters did not give rise to a defence in law. The Directors were further ordered to account for profits personally made by them in connection with the company’s acts of infringement.

Issue

The Directors appealed to the UKSC and the following were the key issues on the appeal:

1.       What is the extent of liability of a director or senior executive employee as an accessory for causing a company to commit a civil wrong, where there is no need to prove knowledge or fault (e.g. a “strict liability tort”)?

 

2.       Is it appropriate to order an account of profits against a director where there is no finding of unconscionability or bad faith? Does this include profits that were not personally received? Does this extend to the director paying back the portion of their salary that was attributable to the tort?

Decision of the UKSC

The UKSC unanimously allowed the appeal of the two Directors, finding that the two Directors were not liable as accessories to the Company’s infringement of Lifestyle’s trade marks.

1.       Knowledge is required for accessory liability. The UKSC found no evidence that the Directors knew or should have known about the infringement before receiving a complaint in 2014. Lifestyle’s attempt to argue that the Directors had knowledge of the infringement was rejected, and the UKSC concluded that they did not have the required knowledge for accessory liability, even though the company itself was involved in infringing activities.

 

2.       Any exemptions for the Directors? The UKSC rejected the argument that directors acting in good faith and within their duties under company law are exempt from ordinary principles of tort liability. Even if directors are fulfilling their responsibilities, they can still be personally liable if they directly infringe rights of others, and there is no general principle under UK law shielding them from tort liability simply because they acted in their capacity as directors.

 

3.       Account of profits: The rationale for ordering an account of profits is primarily to prevent infringers from profiting dishonestly by exploiting another’s rights, thereby deterring deliberate or cynical wrongdoing. This remedy aims to remove any financial incentive for such conduct. However, this reasoning alone does not justify applying the remedy in cases of innocent infringement. A broader justification is tied to the purpose of intellectual property rights, which is to allocate profits from the unauthorized commercial use of those rights back to the owner, regardless of intent. This restores the infringer to their original financial position without punishment, making it easier to justify against innocent infringers. The UKSC held that liability as an accessory for infringements committed by another person requires knowledge of the claimant’s rights. In the current case, since the UKSC did not find that the Directors’ had any such knowledge, it follows that the case on liability is not made out.

 

4.       Even if the Directors were found to be liable, they would only be held liable for profits made for themselves:

 

a.       In relation to a loan that was made by the Company to Mr Ahmed, the UKSC held that it is not a profit from Lifestyle’s trade mark infringement, as borrowing money does not constitute profit unless it is interest-free or a disguised dividend, which wasn’t the case. The UKSC dismissed Lifestyle’s argument that the loan became a profit after the Company’s dissolution as irrelevant.

 

b.       The UKSC also disagreed with treating part of the Directors’ salaries as profits, ruling that salaries for legitimate work are not profits from infringement. Unlike a sole trader who profits directly from sales, employees do not generate profits from their wages. The UKSC noted that profits should be tied to sales driven by the trade mark infringement, not overall business profits.

Hong Kong’s position

In Hong Kong, the courts take a different approach regarding director liability for trade mark infringement, focusing more on the director’s involvement in the wrongful acts rather than requiring proof of knowledge or intent.

Kabushiki Kaisha Yakult Honsha & Ors v Yakudo Group Holdings Ltd
 & Anor [2004] HKCFI 156

In this trade mark infringement case, the second defendant, a director, was held liable as a joint tortfeasor along with the company. The Hong Kong court applied the test of whether the director was so involved in the acts that he could be deemed a joint tortfeasor. Notably, it was not necessary to prove that the director knew or should have known that the acts were tortious. Instead, the court focused on the fact that the second defendant intended and procured the company to commit the infringement, demonstrating that the director’s active participation in steering the company toward wrongful conduct was sufficient for liability.

The court found that the second defendant’s actions, such as using the plaintiffs’ names and designs without legitimate business reasons, showed that he was intentionally leveraging the plaintiffs’ reputation. By acting in concert with the company and other associated entities, the director’s involvement was deemed extensive enough to establish joint tortfeasorship.

Tai Shing Diary Ltd v Maersk Hong Kong Ltd [2007] 2 HKC 23

Similarly, in the Tai Shing Diary case, the court held that a director would not be personally liable if he merely acted within his constitutional role in the company’s governance. However, when a director participates in the wrongful act beyond that capacity, they may be liable as a joint tortfeasor. The director’s liability hinges on their participation in a common design to commit the infringement, or if they procured the company to act tortiously through inducement or persuasion.

 

The court further emphasized that there was no need for an explicit agreement between the director and the company to commit the tort; a tacit understanding suffices. Moreover, as with the Kabushiki Kaisha Yakult Honsha case, the court held that the director did not need to know that the acts were tortious to be held liable.

Takeaway

In conclusion, Hong Kong courts appear to adopt a different approach to director liability in cases of trade mark infringement, focusing on a director’s involvement in wrongful acts rather than requiring proof of knowledge or intent.

While Hong Kong courts have not yet had the opportunity to address the principles set out in the Lifestyle case, it remains uncertain whether they would follow the UKSC’s knowledge requirements for director liability. Given Hong Kong’s existing case law, directors in Hong Kong should be aware that their actions and decisions could potentially expose them to liability for trade mark infringement, even in the absence of direct knowledge or intent.

 

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2024