HomeInsightsCourt of Appeal rules on joint and several liability and account of profits in trade mark infringement proceedings

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Facts

Lifestyle Equities CV issued proceedings against sixteen defendants for registered trade mark infringement and passing off in respect of its registered word marks for BEVERLY HILLS POLO CLUB and registered devices featuring horse-riding polo players. The defendants were associated with the use of the sign SANTA MONICA POLO CLUB along with devices based on horse-riding polo players. Most of the defendants were companies, but Mr Kashif Ahmed and his sister, Ms Bushra Ahmed, were also named as defendants. They were alleged to be jointly and severally liable for the torts committed by two of the companies of which they were directors.

At the first trial, eight of the corporate defendants, including the Ahmeds’ companies, were found to be liable for both trade mark infringement and passing off. Lifestyle elected to pursue an account of profits, but both of the Ahmeds’ companies subsequently went into insolvent administration.

At the second trial, the judge held that the Ahmeds were each jointly and severally liable to Lifestyle with their companies, but only in respect of profits that they themselves had made from the wrongful acts, rather than, as Lifestyle argued, for the whole profits made by their companies. A settlement was reached in respect of one of the companies. Lifestyle appealed the judge’s findings and the Ahmeds cross-appealed.

Decision

Lifestyle’s appeal

Giving the lead judgment, Lord Justice Birss said that the liability to account for profits was a liability to account for the profits that the person liable had actually derived from the wrongful conduct that had made them liable in the first place.

Further, Birss LJ said, making the accessory liable for the profits made by the principal raised certain conceptual issues. In the case of damages, the extent of the loss limits the extent of all the liability of all the defendants. However, there will be circumstances in which each of the accessory and the principal have made distinct profits. In that case, it was hard to see why the claimant should be barred from claiming the accessory’s actual profits from the accessory. There was no justification for concluding that a claimant could obtain from the accessory both the profits of the principal and those of the accessory and there was no good reason why a claimant would be entitled to choose which of the two profits to recover from the accessory. These difficulties do not arise if an account of profits is confined simply to being an account of the relevant profits actually made by the person giving the account.

Accordingly, Birss LJ dismissed Lifestyle’s appeal.

The Ahmeds’ appeal

Joint and several liability

The judge had found that the Ahmeds had each authorised or procured the acts of infringement of the company and that each had acted pursuant to and in furtherance of a common design to secure that such acts took place. The judge had rejected their defences that they had no improper motive or any intention to infringe and, in relation to Mr Ahmed, that he had acted on advice. The judge said that these were not defences at law.

On appeal, the Ahmeds said that the judge should not have rejected their defences. They also said that their acts had all been bona fide in their capacities as directors of the company, for the company’s benefit, and that they were acting within their authority as such. There was no allegation that either of them had caused the infringing acts to be done when they knew or should reasonably be taken to have known that they were infringements or were likely to be infringements. In those circumstances, they said, acts of company directors cannot be such as to make them liable as joint tortfeasors for torts committed by the company concerned.

Birss LJ said that it was clear from Fish & Fish v Sea Shepherd [2015] AC 1229 that there was no requirement for a tort of strict liability, such as the trade mark infringements in this case, that the accessory should have an improper motive or should know or have reason to believe that the activity is or may be an infringement. The Ahmeds’ conduct was clearly deliberate and intentional, which was enough.

As for directors’ duties, Birss LJ referred to the first two (of four) principles in MCA Records Inc v Charly [2002] FSR 26: (i) a director will not be liable with the company if he/she does no more than carry out his constitutional role in the governance of the company; and (ii) a person who happens to be a director or controlling shareholder of a company will not be liable with the company if he/she is not exercising control through the constitutional organs of the company and he/she would be so liable if he were not a director or controlling shareholder. In Birss LJ’s view, these principles explain that the grounds on which a company director may be found to be an accessory are not wider than those applicable to other people. Therefore, if the individual’s conduct makes them liable as an accessory in any event, irrespective of their status as a director, then the next question is whether the fact that person is a director of the company means they have a defence. They will only do so if the conduct which has made them potentially liable amounts to their doing no more than carrying out their constitutional role in the governance of the company.

In Birss LJ’s view, the close personal involvement by the Ahmeds in the acts of trade mark infringement meant that they did not come near to bringing themselves within the protection afforded by the first principle. As for defences, the fact that neither of them could be said to have had an improper motive or to have known or been on notice that the actions were likely to amount to trade mark infringement made no difference to their liability. Nor did the fact that Mr Ahmed had acted on advice. This ground of appeal was dismissed.

Ordering an account of profits

The Ahmeds said that the judge had erred when ordering an account of profits against the Ahmeds by failing to take into account that it was a matter of discretion.

Birss LJ noted that the judge had never actually considered the issue as a free standing point because it was not put to him that he had to do so. The point should have been addressed at trial and it was not. Given that the appeal court has all the powers of the lower court, Birss LJ considered the issue himself.

Birss LJ noted that the rights holder is entitled to choose, as between damages and an account of profits, the remedy with the higher value. Assuming the rights holder is seeking an account then prima facie the court will exercise the power in the rights holder’s favour. Some good reason would be required to refuse. Proportionality was relevant. Therefore, if an account would be disproportionate, then that would be a good reason to refuse it.

The Ahmeds submitted that there should be some unconscionable or improper conduct by the defendant for an account of profits to be ordered in an infringement case. Birss LJ disagreed, referring to GSK v Wyeth [2017] EWHC 91 (Pat), in which, although the judge had said that a basic principle of accounts of profits was that there should be some unconscionable or improper conduct by the defendant, he had also said that this did not limit the remedy to cases of unconscionability. The acts that rendered the defendant liable were themselves improper conduct.

Birss LJ also said that it was not necessary to find bad faith or knowledge before an account of profits can be ordered.

In Birss LJ’s view, there was no good reason not to order an account of profits.

The loan to Mr Ahmed

Lifestyle also contended that Mr Ahmed was liable to account for the sum of £635,789, which represented a loan to him from the company. Lifestyle said that the loan had been caused, enabled or facilitated by the profits derived by the company from the infringement. The judge had found that the loan had not been repaid and that therefore he was liable to account for it.

The Ahmeds argued: (i) even if the loan had not been repaid, it remained a loan and Mr Ahmed’s obligation to repay it meant it could not be a profit; (ii) there was no allegation Mr Ahmed had acted dishonestly or improperly in taking out the loan; and (iii) the judge made no finding that the loan referred to the company’s infringement or, if he did, it was plainly wrong and inconsistent with his finding that only 10% of the salaries referred to the infringements.

Birss LJ rejected point (iii). The company had clearly made substantial profits from the infringements and the judge had correctly understood that he had to decide if the loan sum was derived from the infringements. The judge was right that, in his evidence, Mr Ahmed had not explained what the loan was for and he was therefore entitled to draw the (implicit) conclusion that the sum referred to the infringement.

Birss LJ also rejected point (ii) as irrelevant. The fact that Mr Ahmed had been found to be liable as an accessory for the trade mark infringements committed by the company was sufficient, in terms of improper conduct, to justify him having to account for a profit referable to the company’s infringement. If the loan was indeed such a profit, then he was liable to account for it.

However, Birss LJ allowed the appeal on point (i). At trial and at the date of the order following judgment the loan remained outstanding. Therefore, Mr Ahmed still owed an obligation to repay it to the company. Therefore, in his hands, it was not profit. To be a profit in Mr Ahmed’s hands, it would have to be established that it was not a loan, but a gift or disguised dividend. However, that was not established and there was no basis for making such a finding now.

Birss LJ therefore allowed the appeal on this ground.

The salaries

The Ahmeds also challenged the judge’s conclusion that they should account to Lifestyle for a portion of their salary as a profit. They said that salary could not be treated as profits, even if it was in part derived from infringing activities, because there was no allegation, evidence or finding that the salaries were artificially inflated over the market rate for the labour concerned. They were just the normal remuneration for the services rendered by the Ahmeds.

Birss LJ noted that the court’s task is to assess the profits actually made from the activity found to have been infringing. Allowances for direct costs and overheads are permitted, but they must be attributable to the relevant activity. Often the way forward is, as the judge had done, to make a fair apportionment.

Further, there was no need to show that the profit had been inflated by the infringement or was otherwise higher than it would have been if the goods had not been infringing the trade mark. The profit to be accounted for was simply the profit attributable to the act of infringement, which in this case was the sale of goods under the infringing sign.

In Birss LJ’s judgment it was clear that neither of the Ahmeds could be liable to account for the whole of their salaries as profits attributable to the infringements. It was not the case that all they ever did as employees was procure the infringements. On the other hand, there was no reason why some portion of their salaries might not be attributable as profits resulting from the infringements. The judge had to decide what, if any, portion of their salaries fell into that category and had held that 10% was the correct portion. That was a finding of fact that was open to him on the evidence.

Conclusion

Birss LJ dismissed Lifestyle’s appeal, allowed the Ahmeds’ appeal in relation to the loan and, subject to an income tax point, dismissed the remainder of the Ahmeds’ appeal on all other grounds. (Lifestyle Equities CV v Mr Kashif Ahmed [2021] EWCA Civ 675 (7 May 2021) — to read the judgment in full, click here).

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