The Supreme Court today handed down its long-awaited judgment in the appeal / cross-appeals in Lifestyle Equities CV v Ahmed – on appeal from the judgment of Birss LJ in the Court of Appeal [2021] EWCA Civ 675. Lord Leggatt gave the judgment of the Court, with whom Lords Kitchen, Lloyd-Jones, Stephens and Richards concurred. A copy of the judgment can be found here.
The parties had each appealed on a number of grounds but the one that was of primary importance (and takes up the majority of Lord Leggatt’s judgment) was whether liability for joint tortfeasor liability / accessory liability was a matter of strict liability – as would be the case for the primary acts of infringement for strict liability torts such as trade mark infringement, patent infringement or copyright infringement – or required some further or additional knowledge of wrongdoing to establish liability. The judgment considering this question both in relation to accessory liability arising from the procuring of the primary tort and in relation to a common design to commit the primary tort.
The judgment also goes on to provide authoritative answers to the question of whether – as between the joint tortfeasor and the primary tortfeasor – there can be a joint and several liability to account for the profits arising from the acts of infringement. As well as considering whether salaries and loans obtained by a joint tortfeasor (from the primary tortfeasor) can ever properly be said to amount to profits that can be subject to an equitable account and an order for disgorgement. The only issue in the appeal that ultimately remained untouched was whether salaries subject to an account of profit should be paid gross or net of income tax.
The Liability Issue
Prior to the present decision, it had become an accepted principle that accessory liability (joint tortfeasorship) was a matter of strict liability – mirroring the strict liability test applied to the primary tort. However, as Lord Leggatt explains that is not the correct view of the law. Whilst his Lordship did not follow the Commonwealth judgments from Canada (in particular Mentmore Manufacturing Co Ltd v National Merchandising Manufacturing Co Inc (1978) 89 DLR (3d) 195) and Australia in formulating the correct test – he did express considerable sympathy for their underlying rational:
“[85] Despite my disagreement, however, with the analysis in Mentmore and other cases influenced by it, I share what I perceive to be their underlying sentiment: it is unjust to hold a director personally liable for acts done in the ordinary course of performing the director’s role which cause the company to commit a tort, if the director has not acted wilfully or knowingly. But I do not think that the injustice flows from any special feature of the role of company director. The objection is much broader than that. It seems unjust that anyone whose act causes another person to commit a tort should be held jointly liable for the tort as an accessory if the individual was acting in good faith and without knowledge of facts which made the act of the other person tortious.”
The judgment undertakes a careful analysis of the underlying principles that would inform the final decision of the Court, which are too complex to summarise in this short article. However, it should be noted that the Court was clear that there are no special rules applicable to company directors or senior employees that would save them from liability as joint tortfeasors. Instead, the answered turns on the knowledge of alleged accessory. Crucially, in the Court’s view, “[92] …There is no logical requirement that any mental element necessary to make them liable should be the same as any mental element which is a consistent of the tort.”
The Court was also equally clear that the test to be applied must be the same whether the accessory liability arose from an individual “procuring the tort” or acting in a “common design” with the primary tortfeasor.
The Court’s conclusion on the correct test for accessory liability was as follows:
“[137] Considerations of principle, authority and analogy with principles of accessory liability in other areas of private law all support the conclusion that knowledge of the essential features of the tort is necessary to justify imposing joint liability on someone who has not actually committed the tort. This is so even where, as in the case of intellectual property rights, the not itself require such knowledge.” (emphasis in bold added)
And knowledge in those circumstances will also include turning a blind eye to the likelihood of infringement (i.e. the primary tort).
Applying that test to the present case inevitably led to the conclusion that the Ahmeds could not be held liable as joint tortfeasors with their companies for the proven acts of trade mark infringement by those companies – as the Ahmeds’ relevant knowledge fell well short of that needed to establish liability as accessories.
Account of Profits
Whilst it was acknowledged by the Court that an equitable account of profits is a “well established remedy for infringement of intellectual property rights”, albeit a discretionary one to be exercised on clear principles. However, then noting that “[145] whether or when the defendant’s knowledge of the claimant’s rights is relevant in deciding whether to order an account of profits…is not as clear as might be expected.”
In order to answer that question, the Court looked first at the purpose of awarding an account of profits [151]. One basis for ordering an account was that of deterrence of cynical infringement – where damages would not sufficiently deter infringement but would be nothing more than an additional but worthwhile cost of infringement – as was the case in Colbeam Palmer Ltd v Stock Affiliates Pty Ltd (1968) 122 CLR 25. However, the Court did not consider deterrence to be the true basis for an award of profits. Rather the purpose of intellectual property rights is to reward creativity and innovation and that where those rights are infringed the right course of action was to redirect the profits from the infringer to proprietor of the rights. That being the case the judge found that “[156] …. ordering an account of profits against an innocent infringer is in fact easier to justify than awarding compensatory damages.” However, in the present case, with no finding of accessory liability against the Ahmeds they should not have been ordered to account to Lifestyle.
The general principle to be applied to accounts of profits was as therefore as follows “[157] In view of my conclusion that liability as an accessory for infringements committed by another person requires knowledge of the claimant’s rights, the possibility or ordering an innocent accessory to account for profits does not arise.”
Are Accounts of Profits Joint and Several?
The next importance issue to be considered was whether a party can only be made to account for profits from the infringement actually received by that party or are they liable to account for illicit profits in the hands of third-parties. The judge at first instance and the CA came to the view that a party (the Ahmeds) could only be made to account for sums that they actually received and regarded, applying the principle set out by Briggs J. in Hotel Cipriani SRL v Cipriani (Grosvenor Street) Ltd. [2010] EWHC 628 at [7]. A principle that the Supreme Court held to be incontrovertible. And therefore concluded that “[169] …if the Ahmeds had been personally liable for infringements of Lifestyle’s trade marks, they could only have been liable to account for profits which they had personally made from the infringements.”
What profits did the Ahmeds Make?
Having held that the Ahmeds were not jointly and severally liable to account for profits arising from the infringement of Lifestyle’s trade marks in the hands of others – essentially the Ahmeds’ Juice Corporation businesses – the Court then had to consider whether (i) the salaries obtained by the Ahmeds from their roles in their businesses could be treated as illicit profit for which they had to account, and (ii) whether a director’s loan in the hands of Kashif Ahmed, were both to be included within the account ordered at the conclusion of the infringement trial. The CA having found that a proportion of the salaries would be subject to an account (10%) but not the director’s loan.
The Supreme Court had no hesitation in upholding the CA’s decision that a loan was not as a matter of principle “profit” and therefore could not be subject to an account of profit. Moreover, the Court also concluded that “[172]…If, as a result of supervening events, a loan is forgiven or otherwise ceases to be repayable, that does not alter its character as a loan.”
However, the Supreme Court held that the CA had erred in approach to the Ahmeds’ salaries. Having noted that “173] … there was no allegation, evidence or finding that the salaries paid to the Ahmeds were anything but ordinary remuneration for their services.” and that the trial judge had found that the salaries were for work done and not dividends, the Court concluded that their salaries were not to be treated as illicit profits and made subject to an account. The Supreme Court also considered that Birss LJ was wrong to compare the Ahemds’ position as employees to that of a sole trader – trading on their own account – concluding that an employee’s remuneration is not profit for the purposes of an account.
The final question for the appeal was whether an account levied against a salary should be payable gross or net of income tax. In light of conclusions reached on the Ahmeds’ salaries, the court declined to address the tax issue.
Conclusions
The Supreme Court’s judgment comes to a number of important conclusions:
(1) Liability as an accessory (joint tortfeasor) to a strict liability tort will not also be treated as being subject to the same strict liability test.
(2) On the contrary an accessory must have “…knowledge of the essential features of the tort is necessary to justify imposing joint liability on someone who has not actually committed the tort.”
(3) The same test applies whether the accessory liability arises from an allegation of “procuring the tort” or as arising from a “common design with the primary tortfeasor”.
(4) Accounts of profit levied against an accessory will therefore never be applied to an innocent infringer – if the accessory has the necessary knowledge to make them liable as an accessory they cannot also be an “innocent infringer”.
(5) Accounts of profits can only be levied on illicit profits in the hands of an individual – that is to say there is no joint and several liability to account as between an accessory and a primary tortfeasor.
(6) Employees’ salaries are not to be made subject to account of profits were those salaries are nothing more proper remuneration for work carried out – although different consideration would apply if the salaries were in reality disguised dividends arising from the infringing activity.
(7) Loans are not profits and cannot be subject to an account of profits. That remains the case even if the loan subsequently forgiven or ceases to be repayable.
Dr Timothy Sampson
Lamb Chambers
15 May 2024