Are Directors Personally Liable For Breaches Of Intellectual Property Rights By Their Companies?

It is a misconception that company directors enjoy the benefit of limited liability for their actions as directors. As a number of recent decisions in the IP field illustrate, the converse is actually true – directors 'enjoy' unlimited liability. Those clients holding the status of director need to make sure that they take appropriate precautions some of which are discussed below.

Introduction – the concept of limited liability

There are two well-known foundation concepts in company law:

first, that a company is a separate legal entity to its director(s)1; and second, that incorporation of a company provides limited liability. It isn't so well known that, except where a company's constitution provides otherwise, limited liability is strictly the preserve of shareholders, and then only:

in relation to a company's financial obligations; and provided those shareholders are not acting as de facto directors.2 Moreover, a shareholder does not enjoy limited liability to a company for any tort (civil wrong), or breach of fiduciary (good faith) duty, or other actionable wrong committed by the shareholder.3

Directors and shareholders, then, may still be found personally liable for civil wrongs they commit while working for the company. Company directors in particular have no more protection from liability than anyone else when they commit civil wrongs in the course of company business.4

Why is this important? Over 85% of New Zealand companies are companies with two or less shareholder-directors.5 There is consequently a significant danger that if company A somehow infringes the IP rights of company B, company B will decide to take issue not just with company A but also with one or more of company A's directors for their involvement in the alleged infringing activity.

Establishing directors' personal liability for breaches of IP rights

Civil wrongs (torts) are traditionally grounded in common law and include deceit6 and negligence. Less traditional are civil wrongs grounded in legislation (statutory torts). Statutory torts include misleading and deceptive conduct under the Fair Trading Act 1986,7 and infringement of intellectual property ("IP") rights established under, for example, copyright,8 plant variety rights, trade mark and patent legislation.

So how will a director be found liable?

There are two ways in which a director will be found personally and jointly liable with their company for breaches of IP rights:

Under the specific provisions of the relevant statute; and/or Under the principles of common law. The recent High Court decision in Inverness Medical Innovations, Inc and Anor v MDS Diagnostics Limited and Anor9 is an example of a director being found personally liable in both ways.

Inverness Medical Innovations, Inc v MDS Diagnostics Limited

Background facts In 1998, Dr Appanna (the second defendant) recognised an opportunity in New Zealand to sell pregnancy test kits to PHARMAC for a much cheaper...