IP disputes and the corporate veil

A recent Scottish IP case serves as a useful reminder that the courts will not lift the corporate veil and impute personal liability to a director, simply because they are the sole director and shareholder of a company. Only in limited circumstances will the court look beyond the corporate structure.

Defenders comprising one-person companies are not uncommon in IP disputes. This case clarifies that in such circumstances, personal liability for such directors may prove to be the exception, rather than the rule.

In Tartan Army Ltd v Sett GmbH [2015] CSOH 141, the pursuer provided a range of goods and services under the trade mark “TARTAN ARMY”, through its online shop, including travel promotions, and a monthly newsletter. It also licensed third parties to use its trade marks. The pursuer purchased UK trade marks for “TARTAN ARMY”, registered for clothing, textiles etc, from Iain Aide in 2006, and was granted a Community trade mark in a number of classes including “printed matter and magazines” and “travel agency services” in May 2009.

In 2005 a company, SFM, published The Famous Tartan Army Magazine. SFM’s directors were Iain Emerson (the third defender) and his then business partner. Emerson averred that the magazine used the trade marks with Aide’s consent, and that the pursuer acquired the trade marks in the knowledge that SFM used them on the magazine.

After SFM went into liquidation, Emerson incorporated the fourth defender (“Alba”) to carry on SFM’s business. Alba acquired SFM’s IP and other assets and continued publishing the magazine.

The pursuer alleged that the defenders had infringed its rights in the trade marks by publishing the magazine and offering other services. The defenders raised a number of defences and counterclaimed for invalidity of the trade marks. A debate was fixed to determine whether Emerson had been properly convened as a party.

Emerson admitted that he was Alba’s sole employee and shareholder. He took Alba’s day-to-day decisions and provided editorial content for the magazine. The pursuer argued that Alba was simply a vehicle for Emerson’s activities. Alba was incorporated to continue publication of the magazine. Emerson was the only individual involved. He had not simply assisted or facilitated the infringement; rather he was the only actor.

Cases of abuse

It was not in dispute that a company is a legal entity distinct from its shareholders, with its own rights, liabilities and property. Lord Glennie noted those principles apply to a one-man company as to any other, as was held in Salomon v Salomon [1897] AC 22 and more recently in Prest v Petrodel Resources [2013] 2 AC 415.

Essentially, the court will only allow the corporate veil to be pierced in limited situations where it is necessary to prevent abuse of the corporate legal personality, and no other remedy is available. Two examples, taken from Prest, are: 

• where it is clear from a shareholder’s relationship with the company that in a particular transaction he is the true actor, and the company is being used to conceal that fact (“the concealment principle”); and
• where a person is under an existing legal obligation or liability, or subject to an existing legal restriction, which he deliberately evades/frustrates by interposing a company under his control (“the evasion principle”).

Lord Glennie considered that neither situation applied. The present case was no different to the relationship between director and company in every one-man company. There were no averments to suggest Emerson had used Alba for any improper concealment or evasion. Thus there was no basis for holding Emerson personally liable for Alba’s acts.

The pursuer also argued that Emerson was jointly liable with Alba. Lord Glennie noted that the cases supported two circumstances in which a person may incur joint liability:

• where they have procured the commission of the wrongful act by the other person, by inducement, incitement or persuasion (CBS Songs v Amstrad [1988] AC 1013);
• where they have assisted the principal wrongdoer in the commission of the wrongful act, pursuant to a common design with that person (Fish & Fish v Sea Shepherd UK [2015] UKSC 10).

The authorities also suggested that where a director or controlling shareholder had acted within their powers, the situations in which they could be held jointly liable would be limited. Here, there were no specific averments that Emerson procured any of Alba’s acts, or assisted in the commission of any infringing act. Again, the pursuer’s case rested on Alba being a one-man company. However, that was not enough. If it were, the rule in Salomon could be easily sidestepped. As Lord Glennie observed, “the ‘corporate veil’ would not only be pierced; it would be left in tatters”.

Although IP is a distinct specialism with its own substantive law and Court of Session Rules, general legal principles such as this apply to IP disputes, and should always be borne in mind.