Corporate officers are often under the mistaken belief that the corporate veil will protect them from individual liability for intellectual property infringement. While that generally can be true, it is not without exceptions. Patent, trademark and copyright infringement are all torts, so corporate officers can be personally liable for tortious conduct they personally direct. Corporate officers can also be held responsible for tortious activities of the company where the corporate veil can be disregarded, regardless of the officer’s personal involvement in the infringing activity. Because IP infringement can lead to significant damages, corporate officers should know and guard against these risks that can lead to personal liability.
Officer liability for patent infringement
Historically, in cases of direct patent infringement, courts have split over whether the corporate veil must also be pierced to hold an officer liable, even where that officer engaged directly in the infringing acts. In many instances, unless the plaintiff could establish that the corporate veil should be disregarded for lack of formalities, fraudulent purposes, commingling of funds, etc., the corporate officer could not be held to account for their own participation in authorizing or directing the infringement. California Expanded Metal Prod. Co. v. Klein, 426 F. Supp. 3d 730, 753 n.9 (W.D. Wash. 2019). For example, the Northern District of Indiana ruled in 2018 that no personal liability for any sort of infringement can occur absent piercing the veil, regardless of the officer’s participation in the infringement. See MercAsia USA, Ltd. v. Jianqing Zhu, 2018 WL 3833520, *2 (N.D. Ind. 2018). Other courts have held differently. Because of the differing approaches, veil piercing standards have not always been reliable to govern the separate issue of direct liability for one’s own wrongful acts.
The Federal Circuit Court of Appeals revisited this issue last year in an effort to resolve, or at least clarify, the split in authorities as to what is required to hold a corporate officer personally liable for direct infringement under patent laws. Lubby Holdings LLC v. Chung, 11 F.4th 1355, 1358 (Fed. Cir. 2021).
In Lubby, the corporate officer was personally engaging in the sale and offer for sale of the infringing products. Id. at 1358. He argued that he could not be personally liable for infringement without piercing the corporate veil, and because the plaintiff had offered no evidence on which to disregard that veil, the claim should be dismissed against him. Id. In making this argument, the officer relied on the Federal Circuit’s previous holding that “the ‘corporate veil’ shields a company’s officers from personal liability for direct infringement that the officers commit in the name of the corporation, unless the corporation is the officers’ ‘alter ego.’” Id. (quoting Wordtech Systems, Inc. v. Integrated Networks Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010)).
Noting that courts have often misinterpreted this sentence to require piercing the corporate veil to hold corporate officers liable for direct infringement, the Federal Circuit made clear this was not the intended standard. In doing so, it confirmed the traditional rule that “a person is personally liable for his own tortious actions, even if committed as a corporate officer.” However, for derivative liability, it remained that “a corporate officer — or perhaps only a corporate owner — cannot be found derivatively liable for the corporation’s infringement without piercing the corporate veil.” Id.
Personal liability for trademark infringement
Like patents, officers can also have individual liability for trademark infringement. The 7th Circuit Court of Appeals has long held that while corporate officers are not ordinarily liable for the infringement of their corporation, that only existed “in the absence of some special showing.” Dangler v. Imperial Mach., Co., 11 F.2d 945, 947 (7th Cir. 1926). Although almost a century old, this “special showing” is still required today. Texas Roadhouse, Inc. v. Texas Corral Restaurants, Inc., 2017 WL 1197262, *3 (N.D. Ind. 2017). What qualifies as a special showing has not always been consistent or clear, but we do know that an officer is personally liable for the torts in which she has participated or which she has authorized or directed. 4SEMO.com Inc. v. S. Illinois Storm Shelters, Inc., 939 F.3d 905, 912 (7th Cir. 2019); Dwyer Instruments, Inc. v. Sensocon, Inc., 873 F. Supp. 2d 1015, 1023 (N.D. Ind. 2012). Additionally, a corporate officer is individually liable if he personally participates in the manufacture or sale of an infringing article, uses the corporation as an instrument to carry out his own willful and deliberate infringements, or knowingly uses an irresponsible corporation with the purpose of avoiding personal liability. 4SEMO.com Inc., 939 F.3d at 912–13.
A prime example of making a “special showing” is provided in Texas Roadhouse. Among other claims, plaintiff Texas Roadhouse sued the owner of Texas Corral, Paul Switzer, in his individual capacity for trademark infringement. Texas Roadhouse, Inc., 2017 WL 1197262 at *3. But Texas Roadhouse did not simply allege that Switzer owned Texas Corral restaurants or exercised control over them — this likely would not have met the “special showing” requirement. Rather, Texas Roadhouse alleged Switzer was the domain name registrant for the Texas Corral website, created or directed the creation of that website, was responsible for the content found on the website that included the accused logos, and was responsible for adding and updating the website. Thus, the court determined Texas Roadhouse had pleaded the facts necessary to make a “special showing” in support of the individual liability claim, and the claim survived a 12(b)(6) motion to dismiss. Id.
On the other hand, the “special showing” requirement was not met when a plaintiff based liability solely on the corporate officer’s role or ownership interest in the company. Century 21 Real Est., LLC v. Destiny Real Est. Properties, 2011 WL 6736060, at *7 (N.D. Ind. 2011). In Century 21, plaintiff made the bare assertion that defendant was the moving, active and conscious force behind the misconduct and alleged defendant was the president of the company and, as an owner of the company, had authorized and approved the misconduct. Although courts have consistently held corporate officers liable for authorizing or approving infringement, the court interpreted these allegations as nothing more than “a general allegation that (defendant) was an officer and an owner of the company.” Id. (cleaned up). In fact, there were no allegations that defendant was the president at the time of the infringement, much less that as president he was even knowledgeable of the infringement. Neither officers nor owners are personally liable based solely on their role or ownership interest. Id.
Courts will continue to recognize individual liability of corporate officers for IP infringement. Where the corporate officer engages in the infringement acts themselves, either directly or in the specific oversight of the infringement, the risk of individual liability is real. For derivative liability, at least in the instance of patents, individual liability is less certain absent an ability to disregard or pierce the corporate veil.
It is good practice for general counsel to advise corporate management on these potential risks while looking for compliance with corporate formalities. Surely where executive management is involved in decisions around the infringing products or services, care should be given to examine the potential for personal liability.•
Jonathan Polak is a partner and chair of Taft’s intellectual property group and Matthew Metzger is an attorney in Taft’s intellectual property group. Reach them at [email protected] and [email protected] Opinions expressed are those of the authors.