24 Sep 2020

Following the departure of two other directors, the remaining sole director has been found personally liable for the company's acts of passing off in using the name "Turbo-K", despite the director believing that the company had permission from one of those ex-directors to use the name – particularly as the ex-director had applied to register the disputed name as a UK trade mark on the company's behalf.

At trial, it became apparent that the company had been set up and had entered into contracts with the aim of undermining earlier contractual arrangements with another entity with which the two ex-directors were involved, seeking to cut out the other shareholders.

Although the director explained that the company's incorporation had been instigated by the other ex-directors, the director's subsequent active involvement in running the company – which included advertising and selling product under the "Turbo-K" name, and signing the agreements for the appointment of a distributor (in which the director also had an interest) – led to a finding that there was a common design between the director and the company to carry out the acts of passing off.

The development of "Turbo-K"

Turbo-K Limited ("TKL") is a company involved in the sale of fluids used to clean the compressor blades of gas turbines. TKL was incorporated in January 1998 following a series of meetings between various parties who had an interest in the development and sale of a new compressor cleaning product. Although upon incorporation only two shares in TKL were issued to a sole shareholder ("KW"), these shares were to be held by KW beneficially for the interested parties:

  • 29.5% for each of FP Turbomachinery Consultants GmbH ("FPT") and Italproramar, both distributors of compressor cleaning fluids
  • 17.5% for each of KW and another individual, being an employee of another distributor; and
  • 6% for the chemist who formulated the new product ("PS"), who had his own company, Lach Dennis Consultants Ltd ("LDC").

In honour of its 'founder' KW, a director of FPT ("OP") had suggested "Turbo-K" for the company and product name. TKL commenced use of a logo version of "Turbo-K" in around September 1998 in relation to its new product. The "Turbo-K" product later received approval from various original equipment manufacturers (OP had explained at trial that operators were generally reluctant to buy a turbine cleaning product without OEM approval), as well as a 'gold' hazard quotient ranking from The Centre for Environment, Fisheries and Aqaculture Science (relating to its environmental impact).

All products sold were branded as "Turbo-K", packaged as TKL products, and sold with safety information identifying TKL as the manufacturer. In fact, the product was toll-manufactured by a chemical company called Midland Chemicals Ltd ("Midland"). Midland's director ("SP") was a friend of KW. TKL and Midland entered into a 'Secrecy Agreement', pursuant to which TKL was to provide the formulation and instructions in order for Midland to "manufacture and package… products as and when [TKL] requests and distribute them to such destinations as [TKL] shall decide". In due course, LDC (as an agent of TKL) provided Midland with the formulation for the cleaning product.

Discovery of "Turbo-K International" 

OP, who is now the only remaining director of TKL, only became aware of Turbo-K International Limited ("D1") following the death in January 2012 of KW. Upon the death of KW, OP had contacted PS with a view to securing the future of TKL and its relationship with LDC and others.

D1 is also a company involved in the sale of compressor cleaning products. It was incorporated on 18 May 2011, with its original shareholders being KW and PS/LDC (each with a 20% shareholding), along with SP (30%). The final 30% shareholding belonged to Roselli Chemicals Inc ("RCI")[1] a company based in Canada. Initially, RCI was appointed as a distributor of "Turbo-K" products appointed by TKL, with the approval of KW. RCI's director, who would later become the sole director of D1 (the "Sole Director"), had been told that KW was disappointed with TKL's sales of "Turbo-K" products and was looking to expand its market when TKL appointed RCI and, later, when D1 was incorporated.

A few days after D1's incorporation, D1 (through KW) applied to register the name "Turbo-K" as a UK trade mark for goods including gas turbine compressor cleaning fluid; the registration was completed on 9 September 2011. Shortly after D1's incorporation, on 17 June 2011, D1 entered into the following agreements:

  • with LDC, whereby LDC granted D1 an exclusive, worldwide licence to make, use and sell turbine cleaners based on LDC's formulation
  • with Midland, for Midland to manufacture the product for D1; and
  • with RCI, to appoint RCI as an exclusive distributor of Turbo-K products.

When contacted by OP on behalf of TKL and FPT, PS responded that D1 had been set up by KW, SP, him and the Sole Director – at the insistence of the Sole Director. PS also explained that the manufacturing contract with TKL had been "transferred" to D1, but that FPT would still be supplied, and recommended that it would be wise to wind up TKL at this point. PS also divulged that KW had taken steps to register the "Turbo-K" trade mark, on behalf of D1.

Passing off

TKL instigated the claim for passing off in June 2017. Although the claim was originally brought against other defendants, these claims were subsequently settled, and the trial proceeded against D1 and the Sole Director. 

The judge determined that the arrangements made by D1 (with LDC, Midland and RCI) were essentially an attempt to substitute D1 in place of TKL as the entity principally entitled to trade in the "Turbo-K" products – thereby seeking to cut out FPT and Italproramar – given that the grant of rights thereunder conflicted with TKL's rights under the 'Secrecy Agreement' with Midland, the licence arrangement with PS/LDC for its shareholding in TKL for grant of a licence to use the product formulation, and RCI's distributor agreement ith TKL.

In order to demonstrate passing off, TKL needed to prove three elements. 

  1. TKL owned goodwill in England and Wales, in the mind of the public, in connection with its goods

The judge found that the marketing undertaken by TKL, along with a substantial quantity of sales from 1998 onwards (albeit through distributors) and the accreditations that the "Turbo-K" products had received from official bodies, meant that TKL established that it had acquired goodwill by May 2011 (being the date of D1's trade mark application).

The judge rejected arguments made by the Sole Director on D1's behalf[2] that the goodwill generated by TKL had been dissipated or abandoned, or that the goodwill in the mark, or rights to use the name, was shared or owned by other parties, including Midland and/or LDC (as none of these claims were supported by the evidence). Despite having not been pleaded in the Defence, at trial the Sole Director also sought to argue that he believed that the right to use the name (and, presumably, logo) vested in KW as "the key player" responsible for setting up various entities and arrangements, and applying for the trade mark registration, which 'superseded' TKL's rights; however, the judge also rejected these arguments as legally unfounded.

  1. Misrepresentation by D1 that the source of its goods was the same as those of TKL

The judge cited a number of actions taken by D1 which amounted to threatened or actual misrepretations:

  • Its incorporation under a corporate name including "Turbo-K" with the intention of trading in the same product
  • Its offering or exposing for sale and selling of the product under the name "Turbo-K", using the logo (or substantially similar logos)
  • Its entry into the arrangement with Midland for the manufacture of the product
  • Its application to register "Turbo-K" as a UK trade mark[3] (and subsequently an EU trade mark)
  • Its marketing of the product using the name "Turbo-K" and/or the logo (or substantially similar logos)
  • Its reference to the industry approvals obtained for the product by TKL.
  1. TKL has suffered loss or damage to its business or goodwill as a result of the erroneous belief brought about by D1's misrepresentation

The judge stated that "there can be no doubt" that TKL would have suffered damage to its business and goodwill as a result of D1's misrepresentations, having been satisfied that the ultimate customers of the product were likely to be deceived by the goods which D1 was putting on the market under the "Turbo-K" name and its logo.

Personal liability of the Sole Director

TKL alleged that the Sole Director should be held personally liable for D1's acts of passing off. This was on the basis that the Sole Director had carried out the acts, and/or had procured or induced D1 to do the acts, and such had been part of a common design with D1 to carry out the acts which the judge had held constituted the misrepresentations required for passing off (as listed above).

The judge noted that the Sole Director's position together with his 30% shareholding of D1, did not by itself mean that the Sole Director is jointly liable with the company. He reiterated the test set out by the Supreme Court by Lord Neuberger in Fish & Fish Limited v Sea Shepherd UK[4]:

"… three conditions must be satisfied. First, the defendant must have assisted the commission of an act by the primary tortfeasor; secondly, the assistance must have been pursuant to a common design on the part of the defendant and the primary tortfeasor that the act be committed; and, thirdly, the act must constitute a tort as against the claimant."

In reply, the Sole Director presented his version of events which led to his involvement with D1, namely:

  • KW and SP informed the Sole Director, at a meeting in April 2011, that they had decided to form a new company due to their dissatisfaction with TKL's performance
  • It had been KW and SP who had suggested that the Sole Director become a director of D1, rather than at his insistence – which version of the facts the judge accepted, given the limited documentary evidence that could indicate otherwise
  • KW was responsible for D1's application to register the "Turbo-K" name as a trade mark, and the Sole Director (who only came to know about the application later) believed the registration "trumped" whatever rights TKL had in the name – not least because he believed KW was entitled to decide what to do with the name and it did not occur to him that a wrong against TKL was being committed.

The difficulty faced by the Sole Director and the court, was that – whilst this account of his involvement was accepted – the Sole Director's state of mind did not help his defence.

From its incorporation until January 2012, the Sole Director had been a director of D1 with KW and SP. On KW's death, SP and the Sole Director had continued as directors until SP resigned in November 2019. The Sole Director was an active participant (even if not an instigator) in the incorporation of D1, and played a significant role in D1's manufacture, marketing and selling of products under the "Turbo-K" name. The judge pointed to the facts that (a) D1 had no employees, so its business was conducted by its directors; (b) the Sole Director signed D1's agreement with Midland for manufacture of the product, and had kept the minutes for D1's meeting at which it was agreed that future orders from his other company, RCI, would be sent to D1 in place of TKL, subsequently signing a letter of exclusive appointment by D1 of RCI; and (c) the Sole Director admitted creating and/or amending marketing brochures and D1's website, as well as making alterations to a "Turbo-K" logo for use by D1.

Even though KW and SP were responsible initially for the day-to-day running of D1, the Sole Director was also active in relation to the acts which the judge found to constitute passing off. In finding the Sole Director personally liable, the judge noted the Sole Director's "…involvement was pursuant to a common design whereby [D1] would carry out those acts… [D1's] very raison d'etre was to manufacture, market and sell the Turbo-K Cleaner..".

Comments

Findings of liability in passing off (and trade mark infringement) cases do not require specific knowledge or intent by the company defendant or its directors. For directors to be held jointly and personally liable, it is sufficient to demonstrate that they were responsible for procuring or acting in common design with the company to undertake the relevant acts.

A director's ignorance of the legal position will not act as a defence in circumstances where there has been a common design justifying them to be joined as defendants in the proceedings. Accordingly, directors should take time and care by conducting appropriate enquiries into how the company actually trades and the basis upon which the company alleges it owns any relevant intellectual property rights.

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[1] Crucially, in contrast to TKL, FPT and Italproramar were excluded from owning any interest in D1

[2] The Sole Director appeared on his own behalf and on behalf of D1 at trial

[3] The judge also held that D1's UK trade mark registration was invalid on the ground of TKL's earlier rights in the name, and on the ground that the application had been made in bad faith

[4] [2015] UKSC 10