Looking Past The Corporate Veil in IP Infringement

Joshinae Wong discusses the liability of directors and officers for corporate infringement of intellectual property rights

 

The concept of a company as a distinct entity separated from its members and officers by a "corporate veil" is a well entrenched principle of company law.

 

More than a century ago, the House of Lords in Salomon v A Salomon & Co Ltd [1897] AC 22 firmly established that an incorporated company is a separate legal entity from its members and controllers. Hence, the law will usually hold that the acts of a company, including any wrongful acts, are attributable to, and liability therefore rests with, the company as a distinct entity and not with its members or controllers.

 

There are exceptions to the separate legal personality of a company. From a statutory perspective, a company is a creature of statute and therefore statutory provisions may qualify or limit the "corporate veil" such that liability may attach on some other party aside from the company. At common law, the Courts may look behind the "corporate veil" in a situation where the company is being used as a vehicle by a person to evade his legal obligations or to commit fraud. This is merely one example of the approach taken by the Courts and the categories are not exhaustive.

 

This article discusses the imposition of liability on directors or other officers of a company for infringement of intellectual property rights by a company.

 

 

STATUTORY PROVISIONS

Certain statutory provisions may allow for the imposition of liability directly on directors or other officers of a company where the necessary requirements are made out.

 

Section 36 of the Copyright Act 1987 provides that:

 

"Copyright is infringed by any person who does, or causes any other person to do, without the licence of the owner of the copyright, an act the doing of which is controlled by copyright under this Act." (emphasis added)

 

Arguably then, if the director or officer of a company ‘causes’ the company to carry out the infringing actions, liability may be founded. However, the application of this provision in the context of the personal liability of directors or officers for infringement of copyright has yet to be tested in the Malaysian Courts.

 

It is unclear what actions would be sufficient to ground liability under section 36 – if the director or officer has strong control and directed the actions of the company which amounted to infringement, is this enough to establish the requisite ‘causation’? Arguably so, most would say.

 

Further, under section 37 of the Copyright Act 1987, any person who is found to have personally conducted the acts of infringement, shall be guilty of an offence and on conviction, shall be liable to a fine or to imprisonment. The penal provision may not cover a situation where the directors or the officers did not personally carry out or participate in the infringing acts, but merely directed or procured them to be carried out.

 

The Trade Marks Act 1976 and the Patents Act 1981 do not contain provisions similar to section 36 of the Copyright Act 1987 discussed above.

 

 

THE COMMON LAW POSITION

Notwithstanding the principle that a company is a separate legal entity, a company director or officer cannot escape liability under the common law for acts of infringement committed by the company, where he is found to have acted as a joint tortfeasor with the company. A series of English cases illustrate this principle.

 

The first of these cases is MCA Records Inc v Charly Records [2002] FSR 401 where the English Court of Appeal held that for a director or officer of a company to be personally liable as a joint tortfeasor for infringement of copyright by a company in circumstances where he was not himself a person who had committed or participated directly in those acts, it must be shown that the director or officer procured or induced the infringing acts to be done by the company, or that in some other way, he and the company had joined together in a concerted action to bring about those acts.

 

For example, in MCA Records, although the fourth defendant was not an actual director of the company, it was alleged that he was the directing mind and will of the corporate defendants and had personally authorized, procured and directed their acts. Hence, the fourth defendant was essentially a shadow director. The Court of Appeal affirmed the finding of liability on the part of the fourth defendant. The Court was of the view that to be liable, the director or officer needed to do more than merely carry out his constitutional role as an officer or shareholder of the company.

 

The principles expounded in MCA Records were applied in the context of a patent infringement in Koninkijke Philips Electronics NV v Princo Digital Disc GmbH [2004] 2 BCLC 50. In that case, the company’s managing director was held personally liable for the acts of infringement carried out by the company. The Judge reiterated the principle in MCA Records that for a finding of joint liability, it was ‘necessary and sufficient’ that the director or officer procured or induced the acts of infringement, or that he joined together with the company in a concerted action to secure that those acts are done.

 

The same principles also apply in the case where trade mark rights are infringed. Two cases clearly illustrate this. In WebsSphere Trade Mark [2004] FSR 796, Mr De Serville was the sole director of Web-Sphere while Mr Markson was the ‘sales manager’. The High Court held that there was no evidence of control of the company being exercised through its constitutional organs and that Mr De Serville and Mr Markso were the controlling mind and will of Web-Sphere. The Court noted that in reality, the company did whatever Mr De Serville and Mr Markso wanted it to do.

 

More recently, in Tubzee Ltd v Safron Foods Ltd [2008] EWHC B15 (Ch), former directors were also held to be liable for trade mark infringement committed by the company during their term of office. In this case, the Court found that the defendant company had passed off and infringed the plaintiff’s registered trade mark.

 

The Court further found that the former directors had, during their term of office, been involved in the choice of the infringing product’s get up and had instructed and approved the design created for the company by the designers despite being aware of the similarities with the plaintiff’s get-up. In addition, both the former directors were involved in the decision to continue trading with the new get-up in the face of claims made by the plaintiff.

 

The Court therefore concluded that the former directors could not escape personal liability in respect of the defendant company’s passing off and infringement of the plaintiff’s trade mark.

 

Thus, it appears that a director or officer who exercises exclusive or substantial control over a company’s activities and played a key role in the activities which constituted infringement may be vulnerable to attempts to ground personal liability as a joint tortfeasor with the company. This may suggest that directors of small companies who exercise substantial control over, and dictate, a company’s operations may be in a particularly susceptible position.

 

That being said, it is not correct to state that in all cases where a sole, or where only few individuals control a small private company, personal liability will be founded. Ultimately, while the law allows for it, what is clear is merely that whether or not a director or officer may be liable with the company as a joint tortfeasor is a question of fact to be answered by the Court based on the evidence before it.

 

 

THE MALAYSIAN POSITION

Although there are no reported Malaysian cases which apply the principle in MCA Records, the English authorities may be persuasive authorities should the relevant matrix of facts be brought before the local courts.

 

In a recent significant development, the High Court allowed two sole directors and shareholders of two defendant companies to be joined as defendants, together with the company, to an action for infringement of trade mark and passing-off. Admittedly, this is merely a first step and the necessary evidence will have to be adduced at trial for a successful finding of personal liability against the directors for the role played by them. The decision allowing the joinder of parties is currently under appeal.

 

 

CONCLUSION

 

Despite the concept of the “corporate veil”, it is submitted that avenues do exist under Malaysian law to hold directors or officers of a company liable for infringement of intellectual property rights committed through the company. Such liability would be founded on the basis of tortious liability as joint tortfeasors and in the case of copyright infringement, direct statutory liability under section 36 of the Copyright Act 1987. Hence directors and officers should not be lulled into a false sense of security that they can always seek refuge behind the “corporate veil”.

 

 

 

JOSHINAE WONG ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

 

 
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