The case of Lifestyle Equities CV and another v Ahmed and another was heard by the Court of Appeal (Civil Division), and judgment was given by Birss LJ on 7 May 2021.
The matter arose from a trademark dispute. The claimant brought proceedings for infringement of registered trademarks and passing off against several defendants. Several of the defendants were companies but Mr and Ms Ahmed were also named as defendants. They were directors of two of the defendant companies.
The claimants were successful in their claim for infringement. The first trial was mainly concerned with the liability of the corporate defendants, and took place in October 2017.
Following the first trial, the defendant companies went into insolvent administration. The second trial took place in February 2020, and addressed the liability of Mr and Ms Ahmed as accessories. The second trial was largely for an account of profits against Mr and Ms Ahmed. Both the first and second trials were held before Recorder Douglas Campbell QC.
At the second trial the claimant contended that there must be a finding that Mr and Ms Ahmed were joint and severally liable for the losses sustained by the claimant and that they should be liable for the full extent of the profits gained by the wrongful acts complained of.
The judge held that this was not correct, and that accessories should only be liable for profits they themselves made from wrongful acts. The claimants appealed this ruling.
Mr and Ms Ahmed defended the claimants’ appeal and cross-appealed on several grounds.
The Court of Appeal carefully referenced case law in deciding both appeals.
The claimants’ appeal
“54. A Claimant who has succeeded in an action for infringement is entitled to damages as of right. If it seems the Claimant may have suffered more than nominal damage then he will generally be entitled to an enquiry the central purpose of which is to exert the extent of his losses and so restore him to the position he would have been in if the infringement had not been committed.
55. Alternatively a successful Claimant may seek an account of the profits made by the infringer. This is an equitable remedy and the Court has a discretion whether to order it it may be refused if for example the infringer was entirely innocent of the trademark owner has delayed in bringing proceedings. The purpose of an account is very different from an enquiry as to damages it is to advise the infringer of the profits he has made by the infringement he is treated as if he has conducted the infringing business on behalf of the Claimant the losses the Claimant has suffered by reason of the infringement are therefore not relevant.”
The case of Hotel Cipriani v Cipriani Grosvenor Street was also considered, and Birss LJ referred to Briggs J’s judgment:
“I must first deal with the relevant legal principle. By contrast with joint liability s tortfeasors for damages, including damages calculated on a royalty basis an account of profits operates against each Defendant separately requiring him or it to disgorge such profits as are shown to have been derived by that Defendant for the relevant infringement. In that respect there is no different between trademark infringement and passing off, even though the basis of liability for one is statutory and for the other based on the common law. The measure of liability is the profit derived by the Defendant from the infringement.”
He then went on to discuss Ultraframe (UK) Ltd v Fielding where Lewison J held:
“I cannot take the next step to the conclusion that a dishonest assistant is also liable to pay to the beneficiary an amount equal to a profit which he did not make and which has produced no corresponding loss to the beneficiary.”
The case law on this principle was clear, and the Court of Appeal dismissed the claimant’s appeal. Accordingly, Mr and Ms Ahmed, although jointly and severally liable for the liability, were only liable for the portion of profits they had directly benefitted from.
(b) the cross appeal by Mr and Ms Ahmed
There were a number of appeals made on behalf of Mr and Ms Ahmed, but the most interesting appeal, for the purposes of this blog, were the final two grounds of appeal.
Mr Ahmed had received a loan from one of the defendant companies and both Mr and Ms Ahmed had received salaries from the defendant companies.
The original judgment suggested that the loan to Mr Ahmed should be seen as a profit to him, and that a proportion of the salaries paid to both Mr and Ms Ahmed should be seen as a profit that was unfairly obtained.
In relation to the loan, Mr Ahmed’s case was that if the loan had not been repaid by him, it remained a loan and Mr Ahmed’s obligation to repay it meant that it could not be a profit. There were no allegations that Mr Ahmed had acted dishonestly or improperly by taking out the loan. It was also of note that the original trial judge made no finding that the loan was referable to the infringement.
In relation to the fact that the loan was unpaid, the Court of Appeal found that Mr Ahmed still owed an obligation to repay it to the defendant company. If Mr Ahmed still owed an obligation to pay that sum then it was, not a profit at all. Further, the Court of Appeal held that, for the money to represent a profit in Mr Ahmed’s hand, one way that could be established would be to show that it was not a loan at all, but something like a gift or a disguised dividend. Birss LJ conceded that this had not been established and there was no basis for making such a finding in the court. Therefore, Mr Ahmed’s appeal was allowed on the basis of the loan not being a profit made by Mr Ahmed.
In relation to the salaries, Mr and Ms Ahmed appealed the original finding that they had to account to the claimant for a portion of their salary.
The Court of Appeal did not agree with their argument but did bring the point up that income tax would have been paid on that salary and therefore only the taxed portion of the salary should be treated as profit.
The Court of Appeal revisited clearly stated previous case law on this issue. Its judgment is very useful when considering remuneration for any kind of nefarious activity where profits have been wrongfully received by the wrongdoer. It is a succinct precis of the current state of the case law.
It would be wise to advise anybody pursuing a claim for secret profits to consider this case carefully. The case examines the limits of various parties’ liability. A claimant may expect a full payment when a loss has been suffered. In this case, where the defendant companies went into administration, only a proportion of the profits were recovered by the claimants in this matter.
It is worth noting that individual directors, although severally and jointly liable for such payments are not to be seen as the answer to recovering every last penny.