Court Ruling: Directors Can Be Held Personally Liable for Trademark Infringement
A precedent-setting ruling by the Tel Aviv District Court says directors and shareholders of Don Gilly, an underwear manufacturer, must personally disgorge profits for trademark infringement. The judge ruled that the executives, together with the company, must pay 1.06 million shekels to the owners of the Beverly Hills Polo Club brand, the international companies Lifestyle Equities and Lifestyle Licensing, after continuing to use the brand without a license after their agreement ended. The lawsuit against the directors was dismissed, and the businessman will pay 3 million shekels in legal costs. The Tax Authority had demanded 4.6 million shekels from Rafi Agiv. What did the court decide?
In addition, the local company was ordered to pay 1.6 million shekels for failing to report the volume of imports and indirect imports, as well as 350,000 shekels in attorneys' fees and court costs for the two proceedings that were conducted. Altogether, the manufacturer will pay close to 3 million shekels. The ruling was partly accepted after the original lawsuit was filed in 2020 for 7 million shekels, and it concludes an 11-year legal saga that began with a demand for company accounts and has only now ended, case no. 13315-08-20.
The personal liability of the directors Judge Michal Amit-Anisman imposed unusual tort liability on the company owners who served as directors, Shlough Jinli and Ilan Rosen, and held that, given their awareness of the license termination notices, they should have stopped using the trademark altogether. The court rejected one manager's defense that he was merely a "warehouseman," and ruled that as an equal partner in managing the company and an active director, he bears full tort liability for the infringement.
The Leigh Style group owns the brand bearing the familiar symbol of a polo player seated on a galloping horse and raising a mallet. Don Gilly manufactured clothing products with the brand, initially under license. The lawsuit alleged that the company violated the terms and concealed the true import volumes by millions of shekels in order to avoid paying full licensing fees. After the violations, the contract was canceled, but the company managers continued marketing the products.
Don Gilly's managers argued that the licensing mechanism set in the original agreement, 10 percent of total imports, was orally and through conduct changed to a fixed annual lump-sum payment, and therefore discrepancies between the reports were irrelevant. The court rejected the argument, finding that there was no evidence for it and no economic logic to it, and therefore the original license agreement terms remained in force. The judge ruled that because the directors continued using the trademark without a valid license agreement, they are liable for the tort of infringement. "From the point in time when the license agreement ended at the end of 2015, the nature of the plaintiffs changes from voluntary contractual creditors to involuntary tort creditors. This distinction does not justify piercing the corporate veil, but it does justify taking the moderate step of imposing personal liability on managers, if they themselves personally fulfilled the elements of tort liability."
It was also held that "despite these warning signs, the import and sale of the plaintiffs' brand products continued without a valid license agreement from 2016 onward. Therefore, personal liability should be imposed on all the defendants, jointly and severally, for infringement of the plaintiffs' trademark." The claim to impose personal liability under contract law was rejected.
The plaintiffs: "A clear and deterrent message" According to attorney Yossi Sivan, counsel for the plaintiffs, "The ruling has dramatic significance, because it presents a double and unprecedented achievement: it is both a principled ruling granting full disgorgement of profits for trademark infringement in favor of brand owners, and a firm determination that this significant compensation will be imposed personally and directly on the company's directors.
"The ruling sends a clear and deterrent message to the market: directors cannot hide behind the corporate veil in an attempt to evade responsibility for intellectual property torts. Willful blindness or disregard of explicit legal warnings will lead to full personal exposure and payment of disgorgement damages from their private funds."
The defendants: "The court did not address the facts" Attorney Ahikam Grady, counsel for the defendants, the company and the directors, said in response: "We dispute the legal basis for imposing liability on the directors and the court's reasoning. The ruling rejected the personal claims raised against the directors, both under contract law, due to breach of contract by the company, because there were no acts of forgery or fraud attributed to the directors, and under piercing the corporate veil, under Section 6 of the Companies Law.
"We also clarify that although the lawsuit against the directors was filed for 7 million shekels, the vast majority of the personal claim against the directors was dismissed, and the directors were ordered in the judgment to pay only about 1 million shekels.
"The only basis on which the directors were personally liable in the ruling was a tort claim, in the tort of trademark infringement, based on their personal responsibility due to the court's finding that the directors, supposedly, did not cease marketing and distributing the products bearing the plaintiffs' marks immediately after the agreement with the plaintiffs was canceled.
"With all due respect, the directors believe that the court made an error on this point. The company and the directors stopped all production and future orders of the products bearing the plaintiffs' marks immediately after the agreement was canceled, and merely depleted the inventory that had been produced and ordered before the cancellation, which was indisputably made at the time with the plaintiffs' consent. The court completely refrained from addressing these facts and also refrained from distinguishing them. The directors are considering an appeal."
