Court of Appeal confirms accessory liable to account only for own profits and not those made by principal

The Court of Appeal has held that accessories who were jointly and severally liable with a principal as joint tortfeasors were liable to account only for the profits which they themselves had made from the wrongful acts, and not those profits made by the principal: Equities CV v Ahmed [2021] EWCA Civ 675.

This gives helpful clarification on a point on which there was no previous Court of Appeal authority. Although this decision was in the context of claims for intellectual property infringement, in delivering the Court of Appeal's judgment Birss LJ said he saw no reason why the principles applicable to an account of profits in fiduciary or dishonest assistance cases should differ from those applicable to this remedy in intellectual property cases.

As for the calculation of the profits for which the accessories were liable to account, these did not include a loan which one of the accessories had obtained: since he was liable to repay the loan, it did not represent a profit in his hands. Further, where the profits included amounts payable as salary, there should be a deduction for sums due as income tax.

Background

The claimants brought proceedings for infringement of registered trade marks and passing off against various corporate defendants and two individuals, a brother and sister ("the Ahmeds"), who were directors of certain of the companies. The relevant trade marks included word marks for BEVERLY HILLS POLO CLUB and devices based on horse riding polo players.

The corporate defendants were found liable on both grounds, and the Ahmeds were each found to be jointly and severally liable with the companies of which they were directors.

The judge at first instance, Mr Recorder Douglas Compbell QC (sitting as a judge of the Chancery Division), found that the Ahmeds were liable to account for the profits they had made as a result of the infringement (calculated as a percentage of their salary), but were not liable to account for the profits made by the companies.

The judge also found that Mr Ahmed, who had taken a loan from one of the companies, was liable to account for the value of that loan as it had not been repaid at the time the judgment was handed down.

The claimants appealed the judge's finding that the Ahmeds were liable to account only for their own profits. The Ahmeds appealed the judge's findings on liability and the order for an account of profits.

This blog post focuses on the extent of an accessory's liability for an account of profits, and certain aspects of the calculation of the account of profits.

Decision

The Court of Appeal largely upheld the decision of the first instance judge (Birss LJ giving the lead judgement with which Nugee and Moylan LJJ agreed).

Birss LJ noted that there was no authority on the question of whether an accessory is liable to account only for their own profits, rather than those of the principal, but there were a number of first instance decisions to this effect.

Birss LJ said he agreed with the judge's conclusion on this issue, which followed from the nature of the remedy. He said: "The liability to account for profits is a liability to account for the profits that the person liable has actually derived from the wrongful conduct which has made them liable in the first place. That accords with the equity of the situation."

Further, to make the accessory liable for the profits which had been made by the principal would raise "conceptual problems". He distinguished cases where an accessory is made liable for the loss caused to someone else, saying that in these cases such conceptual problems do not arise because the extent of the loss limits the extent of the liability of all the defendants. In the case of an account of profits, he said, if each of the accessory and the principal have made distinct profits, it would not make sense if the claimant was always and only entitled to claim from the accessory a sum equal to the principal's profits, rather than the accessory's own profits. There was, similarly, no justification for a conclusion that the claimant could obtain from the accessory both the principal's and the accessory's profits, nor that the claimant should be entitled to choose between them. These difficulties did not arise if an account of profits was confined to the profits actually made by the person giving the account.

As for the calculation of the relevant profits, the Court of Appeal did allow one of the Ahmeds' grounds of appeal, in relation to the first instance decision that Mr Ahmed had to account for a loan from an infringing company as part of his profits. The court held that this was incorrect and that, as Mr Ahmed had a duty to repay the amount loaned, as at the time of the first instance decision, it could not have been a profit at that time. Although the company in question was dissolved between the first instance judgment and the Court of Appeal hearing, and therefore it could by that point be argued that it was a profit as the defendant did not owe an obligation to repay the loan, this did not justify upholding the judge's order which was incorrect at the time it was made.

Further, as the Ahmeds had been found liable to account for a portion of their salaries, Birss LJ raised the point that it seemed "at least doubtful" that they should have to account for the whole of that sum without taking account of income tax. As the point had not been raised on appeal, he invited the parties to make brief written submissions on the point. He concluded that,  when considering individuals' liability to account for a portion of their salary, it was right to deduct a sum equal to the income tax paid or payable on that portion. The defendants were therefore not liable to account for profits on the portion of their salary which was deducted for income tax.