The Perils of Being a Director of a Small Company

These days it is quite common in intellectual property actions for claimants to join one or more directors of the defendant company as jointly liable for the infringement. As in the present case it tends to be something a large company does to a much smaller company. This case suggests that a director of a small company who is basically responsible for the company’s trading operations may find it very difficult to escape liability.

Philips owned a patent relating to recordable compact discs (CD-Rs). CD-Rs have a servo track which performs the function of guiding the writing head while the CD is recorded. Prior systems used a servo track divided intermittently into information areas and synchronisation areas. The system of the patent allowed the CD-Rs to have a continuous servo track while at the same time being usable on existing CD players.

Princo Digital Disc GmbH ("Princo Germany") was a German subsidiary of Princo Corporation, a Taiwanese manufacturer of CD-Rs. Princo Corporation was, until March 2000, licensed under the patent and its various equivalents in other parts of the world. After the expiry of the licence Princo Corporation continued to supply CD-Rs using the system to Princo Germany.

Princo Germany supplied them to a UK company, Aventi Limited, on the basis, as found by the judge, that property in the goods passed in the UK. In a judgement dated 7 July 2003, Pumfrey J. found the patent valid and infringed; infringement had never been in issue.

Mr Kuo was the ‘Geschaeftsfuehrer’ of Princo Germany. He ran the business on a day-to-day basis. It was his job to develop the European market. He took orders from Aventi, signed invoices and arranged delivery of stock to the UK. The specific actions on which it was alleged his personal liability was based were :-

• He negotiated an exclusive supply agreement with Aventi

• He arranged for his assistant, Ms Huang, to take samples to Aventi

• He telephoned Aventi to negotiate sales

• He arranged for the importation of CD-Rs into the UK (being the only person with authority to do this)

• He signed the invoices

• He was responsible for Princo Germany giving Aventi an indemnity for damages and costs in the litigation.

The main issue was whether Mr Kuo was personally liable for the infringements committed by Princo Germany. To resolve this, the judge needed to review the basis on which directors will be held personally liable for infringements committed by their companies.

Pumfrey J. based his judgement largely on the Court of Appeal decision in MCA Records v. Charly Records [2002] FSR 401. In that case the Court of Appeal identified five propositions which appear to be supported by the authorities :-

1. A director will not be held liable merely for carrying out his constitutional role in the company, for example by attending board meetings
2. Conversely, there is no reason why a director or shareholder should not be held jointly liable just because the act complained of were carried out as part of his duties as director.
3. The principles to be applied in each case are those set out in CBS Songs v. Amstrad and Unilever v. Gillette. In particular as Lord Templeman said in the CBS Case the question is whether the individual intends and procures and shares in a common design that the infringement takes place.
4. Whether or not there is a separate tort of procuring an infringement of a statutory right, an individual who does intend, procure and share in a common design that an infringement take place may be held liable as a joint tortfeasor.
5. For a director to be held liable as a joint tortfeasor for of acts of infringement in respect of which the company is the primary infringer, it is necessary and sufficient to find that he procured or induced the acts done by the company, or that, in some other way, he and the company joined in concerted action to secure that the relevant acts were done.

Mr Kuo’s counsel submitted that Mr Kuo had done nothing that went beyond the normal arm’s length relationship that a managing director may be expected to have with a good customer. Pumfrey J accepted that might well be right, but was not conclusive In the end, Pumfrey J decided it was a close run thing but that Mr Kuo sufficiently worked to bring about the continued importation of the CDs into the UK to make him a joint tortfeasor.

The judge emphasised that Mr Kuo had a close involvement with the day-today actions of Princo Germany and had independent authority in respect of these action.

Mr Kuo does not appear to have done anything that a director of a modest sized company, particularly a director with overall executive responsibility, would not do. It may seem somewhat unfair, but it is hard to envisage circumstances where a director of a company, particularly the sole working director, who is also responsible for the day-to-day running of the business will not be personally liable for infringements carried out by the company.

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