Making directors liable in Australia: what must be proved?

The current issue of the Allens Arthur Robinson Intellectual Property Newsletter features a good note by Trevor Davies and Rob Silberstein, "Patent infringement and company directors", on the 22 February 2010 ruling of Bennett J (Federal Court of Australia) in Inverness Medical Switzerland GmbH v MDS Diagnostics Pty Ltd and others [2010] FCA 108. Issues raised in this note include the liability of a director for an infringement performed by a company as well as liability for authorising the company's infringement.

In this case the third respondent (Dr Appanna) was recorded on the company website as being the managing director and founder of the first respondent, MDS; he also controlled the MDS companies as shareholder. but was he liable for the acts of MDS as a joint tortfeasor? Australian case law has developed three separate tests for establishing director's liability: Bennett J affirmed that, as the Full Court decided in Allen Manufacturing Co Pty Limited v McCallum & Co Pty Limited [2001] FCA 1838, it is not necessary to determine which test is the correct one, but had no doubt in concluding that Dr Appanna was liable. The following paragraph of the judgment, with key words highlighted, points to evidential targets:

"I am satisfied that Dr Appanna’s position as the Managing Director of MDS NZ and his participation in the procurement and distribution of the MDS devices in New Zealand and Australia are sufficient to establish that he deliberately, wilfully or knowingly pursued a course of conduct that resulted in MDS selling products that infringed the Inverness patents. Further, he was aware of competing products on the market and was indifferent as to whether or not those products were protected by patents. In taking part in the activities of MDS NZ and MDS Aus as a director and in the management of those companies, Dr Appanna directed or procured the obtaining of and the selling of the products that infringed Inverness ’ patents".

As to authorising infringing conduct under section 13(1) of the Patents Act 1990 (Cth), it is infringement of a patentee's exclusive rights not only to exploit an invention but also to authorise another person to exploit it. The judge agreed. Liability is established where it is shown that the alleged infringer authorised exploitation in that he sanctioned, approved or countenanced the act of infringement. Here it was shown that Dr Appanna knew that the infringing act of the sale of the products would occur, had the power to prevent those acts and was under a duty to interfere but failed to do so.

Foiled! A sad tale of boss and emboss

Boegli-Gravures SA v Darsail-ASP Ltd and Andrei Ivanovich Pyzhov [2009] EWHC 2690 (Pat), a decision handed down by Mr Justice Arnold in the Patents Court (England and Wales) today, took the regular form of an infringement claim met by a denial of infringement and a counterclaim for revocation. The technology in question involved the embossing of packaging foil for cigarettes.

Two interesting points arose from the judgment: one was that neither side's expert was entirely expert (one's experience was as a buyer of machines rather than as a designer of them, while the other lacked experience in the market in question). The other was as to whether the second defendant, Pyzhov, a director and shareholder of the first defendant company, was personally jointly liable with the company for any infringing acts.

The judge found the patent valid and infringed and held Pyzhov liable. After reciting the applicable principles as annunciated in the copyright infringement dispute of MCA Records Inc v Charly Records Ltd [2001] E5WCA Civ 1441, [2002] EMLR 1 he concluded that the case for the director's liability was established on the facts:

"136. The background facts include the facts that (i) Mr Pyzhov is one of three equal shareholders and directors of Darsail, (ii) Darsail is a small company which has had a total of 9-12 employees during the relevant period, (iii) Mr Pyzhov would know about anything important that happened within the company, (iv) Mr Pyzhov was the principal inventor of Darsail’s roller technology, (v) Mr Pyzhov personally registered the domain name darsail.com and controls the contents of the website and (vi) Mr Pyzhov was one of three named contacts on the website. In my judgment these facts are not enough in themselves to make Mr Pyzhov jointly liable [This must be right. They may reflect on the facility or the opportunity for Pyzhov to infringe, and on any benefit he might expect to derive from it, but none is part of a causal link to the infringements specifically alleged].

137. The facts relating to Mr Pyzhov’s involvement with the infringement are that (i) he personally dealt with Mr Green [the alias of a private investigator working for Boegli's client BAT] virtually throughout the negotiations, (ii) he together with his two co-directors made the decision to supply the Famous Flavor rollers to Mr Green and (iii) he made the decision to supply the Mayfair foil to Mr Green. In both cases he gave, or was involved in giving, the instructions to Darsail’s staff. In my judgment these facts are sufficient to make Mr Pyzhov jointly liable, since he was personally involved in committing the infringing act. He thus went beyond merely performing his constitutional role in the company".

A close call? Probably not, though claimants may have some tough calculations to make when determining whether it's worth pressing for joint liability -- particularly if the argument in favour is less strong and the likely benefits are unclear.