Don’t Underestimate Your Own Personal Responsibility Under the Lanham Act6 Nov, 2012 By: John Waller, Jeffrey Richter
Although most people believe that they can avoid personal liability for acts of their corporation if they properly incorporate their entity and observe the requisite corporate formalities, this is not always true – especially when violations of the Lanham Act are involved.
Although the case remains in its infancy, a recent decision by a Northern California federal district court in a Lanham Act case (ADT Security Services Inc. v. Security One International Inc.) is instructive. The court denied a request to dismiss portions of the complaint filed by defendant Security One’s sole officer, director and shareholder (Claudio Hand) on the grounds that the operative complaint sufficiently stated causes of action against him under the Lanham Act in his personal capacity to survive a motion to dismiss.
The Second Amended Complaint (SAC) therein alleges three separate causes of action under the Lanham Act against Hand: 1) Unfair Competition and False Advertising; 2) Vicarious Unfair Competition and False Advertising; and 3) Contributory Unfair Competition and False Advertising. The SAC does not identify any specific acts by Hand, but instead seeks to hold him accountable based on his role as the sole officer, director, and shareholder of Security One, who allegedly was intimately involved in all aspects of its management, including its campaign of fraud and deceit.
Under the Lanham Act, a corporate officer or director is, in general, personally liable for all torts which he authorizes or directs or in which he participates, notwithstanding that he acted as an agent of the corporation and not on his own behalf. Because the SAC alleges that Hand either directs all of Security One’s six employees to engage in the fraud or remains willfully blind to the conduct of those six employees, and taking into account that Hand is the only director, officer, owner and shareholder of Security One, a company that has just six employees, the court held that alleging that Hand was intimately involved with the fraudulent scheme “is plausible” and states a claim under the Lanham Act.
The court also denied the motion with respect to the contributory liability cause of action. Contributory liability under the Lanham Act is based on the theory that one who intentionally induces another to directly violate the Lanham Act is contributorily liable for that offense. The court noted that the ability to pursue individuals for contributory liability for violations of the Lanham Act is well established.
Although Hand may ultimately be able to establish that ADT’s allegations against him are not supported by the evidence, the court’s ruling that corporate officers, directors and shareholders may be held personally liable under the Lanham Act for misdeeds of their corporations – especially where the corporate entity is closely held and operated – is a good reminder that individual officers, directors and shareholders need to be vigilant regarding what is happening in their companies and that they need to take reasonable measures to ensure that their companies to not violate the Lanham Act.