Piercing the Corporate Veil: Corporate Officers Are Liable for Their Own Torts

by Dennis Crouch

Hall v. Bed, Bath & Beyond, Inc. and Nachemin, __ F.3d __ (Fed. Cir. 2013)

This design patent decision is interesting and important on several levels and so I have divided the post into two sections. This section focuses on the Federal Circuit’s dismissal of the charges filed personally against a Bed Bath & Beyond employee who allegedly caused the infringement. In my view, the court arrived at the wrong conclusion in holding that the corporate veil protected the employee from patent infringement liability. In a separate post, I wrote about the court’s decision to maintain a low notice pleading requirement for design patent infringement litigation.

Set Up From the Complaint: Mr. R.J. Hall designed a new product known as a “Towel Tote” that is basically an absorbent scarf with pockets on the ends.  [See one here]. After filing his design patent application, Hall e-mailed with Mr. Farley Nachemin at Bed Bath & Beyond (BB&B) to see whether the company would retail his product.  Nachemin is a VP at BB&B and is employed as the General Merchandise Manager. Nachemin showed interest and two later met face-to-face. In the meetings and e-mails Hall made clear that the patent was pending. However, instead of moving forward with Hall, BB&B (with direct participation from Nachemin) mailed Hall’s product to Pakistan and had it copied and manufactured for retail distribution back in the US.

When Hall later sued BB&B, he also sued Nachemin for infringement and inducing infringement (as well as other federal and state business torts).

Corporate Veil Protecting Officers and Directors: In a recent opinion, the Federal Circuit agreed with the district court that the Corporate Veil shields Nachemin from liability under New York law (the law applicable to this case). The basic contention is that – as a Vice-President of the Company, Nachemin is an officer of the company and therefore cannot ordinarily be held liable for debts of the company unless the corporate veil is pierced. Under New York law, “the party seeking to pierce a corporate veil [must] make a two-part showing: (i) that the owner [or officer] exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil.” Quoting Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997). The appellate panel arrived at the reasonable conclusion that the complaint did not sufficiently allege domination by Nachemin.

Error: However, the error in the Federal Circuit’s decision is its seeming assumption that the corporate veil applies to protect an officer who personally committed the tort of patent infringement. It does not. The court wrote:

[Defendants] primarily argue that under New York law, “the party seeking to pierce a corporate veil [must] make a two-part showing: (i) that the owner exercised complete domination over the corporation with respect to the transaction at issue; and (ii) that such domination was used to commit a fraud or wrong that injured the party seeking to pierce the veil.” Am. Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997); see also Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 138 (2d Cir. 1991) (“[T]o pierce the corporate veil, the parent corporation must at the time of the transaction complained of . . . have exercised such control that the subsidiary ‘has become a mere instrumentality’ of the parent, which is the real actor.”). Applying the principles of New York law, we do not discern reversible error in the district court’s dismissal of the action against Mr. Nachemin.

The problem with the court’s conclusion is that the corporate veil does not liberate an individual from personally committed torts.

The Corporate Veil: Corporate law is, for the most part, a creature of state law. Each state has its own rules regarding the various corporate forms and their resulting limitations of liability that protect corporate owners as well as officers and directors of the corporation. However, all states follow the general principle that certain qualified parties will not be held liable for debts of a corporation unless the facts conform to a veil-piercing exception to the rule as suggested above.

Agents Personally Liable for Their Own Torts: One enormous caveat to the corporate veil protection is the general rule that corporate officers and agents are personally liable for their own tortious conduct. Thus, a bouncer who commits battery will be personally liable for the damage caused even if the improper action was at the behest of his nightclub employer. See Aguirre v. Paul, 862 N.Y.S.2d 580 (2008) (“A corporate officer is not held liable for the negligence of the corporation merely because of his official relationship to it; it must be shown that the officer was a participant in the wrongful conduct.”); Munder v. Circle One Condominium, Inc., 596 So2d 144 (Fla 4th DCA 1992); Messenger v. Frye, 176 Wash 291 (1934).

Agent Personally Liable for Their Own Torts Even if Act is On Behalf of Company: It is generally not an excuse that the tortious conduct was done on behalf of the corporate entity. Thus, a person is liable for his own tortious conduct even when acting for the benefit of another.

Personal Liability for Patent Infringement: A plain reading of the patent laws make clear that individuals can be held liable for patent infringement. 35 U.S.C. 271(a) (“whoever without authority makes … any patented invention, within the United States … infringes the patent”). That reading is supported by a long history of holding individuals personally liable for patent infringement. There have been a few Federal Circuit cases on point. In Orthokinetics, lnc. v. Safety Travel Chairs, Inc., 806 F.2d 1565 (Fed. Cir. 1986), the court wrote:

[I]t is well settled that corporate officers who actively aid and abet their corporation’s infringement may be personally liable for inducing infringement under § 271(b) regardless of whether the corporation is the alter ego of the corporate officer.

Id. See also Wordtech Systems, Inc v. Integrated Networks Solutions, Inc., 609 F.3d 1308 (Fed. Cir. 2010) (corporate structure does not shield officers from liability for personally participating in contributory patent infringement); Power Lift, Inc. v. Lang Tools, Inc.,774 F.2d 478 (Fed. Cir. 1985) and Manville Sales Corp. v. Paramount Systems, Inc., 917 F.2d 544 (Fed. Cir. 1990).

In a 2003 article, Professor Lynda Oswald foreshadowed the wrong-turn made by the court here. Oswald writes:

[Courts] tend to mis-apply the general principles of agency and tort law described above when evaluating the liability of an officer for the infringing acts of his or her corporation. Although courts purport to look for personal participation by the officer in the patent infringement of the corporation, courts typically gauge such personal participation by examining whether the corporate veil can be pierced to hold the officer personally liable for violating § 271(a)’s prohibition against ” making, using, or selling” the patented invention. In doing so, however, courts fail to recognize that piercing analysis is irrelevant to issues of officer liability.

See Lynda J. Oswald, The Personal Liability of Corporate Officers for Patent Infringement, 44 IDEA 115, 130 (2003).

Nachemin might not be liable in this case, but it is clear that the corporate veil does not serve as his shield.

Notes

  • The individual liability of Mr. Nachemin was something of an appendage to the decision as a whole. I suspect that the confused language that I note is most likely due to the light treatment given to the issue.

15 thoughts on “Piercing the Corporate Veil: Corporate Officers Are Liable for Their Own Torts

  1. Just because you think holding a corporate officer accountable is a “huge personal risk” doesnt mean the court reached the right decision. Officers can be liable. That is the law. End of issue.

    I dont think people should be held accountable for copyright law. Doesnt mean a court holding the same is in the right.

  2. Actually, I think the court gets it right here, not wrong. First, the idea that an employee/officer of a corporation that makes a decision to proceed infringing is now personally liable is a huge personal risk. People (on behalf of their employers make those decisions all of the time. What’s the purpose of having a corporate entity to shield liability for things like patent infringement if you can be liable for that decision. In-house lawyers advise their corporate board of the risks all of the time, but I doubt many would say “and, oh by the way, you’re going to be personally liable for inducing infringement if they do sue us.”

    Second, an executive making a decision of whether to knowingly infringe a patent is not like a bouncer who assaults someone. Arguably, the bouncer was not operating within the scope of his employment. Patent infringement, and risks thereof, are the cost of doing almost any kind of business.

    Third, I really dislike how patent infringement is analogized to other torts — I realize that there is a long history of this. But, patent infringement is a very peculiar tort. Direct infringement is strict liability, and (now) indirect infringement makes one liable for the acts of parties not under your control. Aside from the broad principle that they fall under the “civil harm” category, they share little in common with most other torts.

    Finally, permitting an officer or agent to be added personally seems gratuitous. Might there be circumstances that warrant adding the officer? Perhaps. But, in the cases I can think of, those would seem to be a claim the corporation should have, not the patentee.

  3. This seems to be a key point, and why there was no error in Judge Newman’s opinion (contrary to what the article contends). The opinion cited the appellant’s argument about an officer’s individual liability and even quoted Orthokinetics.

    The opinion then quoted the district court: “the facts alleged in the complaint make clear that any allegedly infringing activity by Nachemin occurred while the ’439 Patent was pending, and did not occur after the patent had issued for the Tote Towel.” Without any individual post-issuance infringing conduct, the officer could not be held liable individually under Orthokinetics.

    The opinion then turned to the only other possible way the officer could be held liable – piercing the corporate veil regarding conduct of the corporation after the patent issued – and held the district court did not err.

    So it seems Judge Newman’s opinion did in fact address both ways the officer could be held liable.

  4. The trial court and the Federal Circuit got it right. A broader reading of 271(a) liability would eliminate indirect infringement theories. Why would a greedy patentee try to prove 271(b) liability when it could just allege alter ego liability under 271(a). . .?

  5. Someone is, of course, responsible.

    However, is the notion of “personal” in the “personal tort” being misapplied?

    Inthe present case, did Mr. Nachemin actually personally do any specific action that counts as infringement, or – rather – did he act in the capacity of the corporation?

    Morever, from a deep pockets, legal realism sense, is it s bit too much belt and suspenders to go after both the corporation (which arguably is the sole transgressor) and someone within the organization? I could see the need to go after the person, if the organization can show the person was a rogue agent, but that situation is not evident in the facts as I am aware of them.

  6. There appears to be some confusion among the commenters that your post is asserting that the corporate veil should have been pierced, whereas my understanding is that you are saying the corporate veil did not need to be pierced, because the veil doesn’t protect officers from tort liability. It may sound like mere semantics but it is not; if a tort is at issue then the substantive piercing analysis can be skipped. I.e., even though you agree with the appellate panel’s analysis that the veil could not be pierced (last sentence under the heading “Corporate Veil Protecting Officers and Directors), the analysis was irrelevant. Perhaps the title of the post was misleading (if I understand what your post is saying, the fact that “corporate officers are liable for their own torts” is not a consequence of “piercing the corporate veil,” but an instance in which the veil need not be pierced) and folks are skimming the content.

  7. A couple of notes….

    First, the piercing the corporate veil” theory was raised as an issue of first impression on appeal.

    Second, I don’t believe that Dennis’s insertion of “[or officer]” is a correct statement of “piercing the corporate veil” theory. From my education and experience, the theory is generally applied to a corporation having one owner/officer who treats the corporation as his/her alter ego (i.e., pays corporate bills from a personal account, commingling corporate funds with personal funds, etc…) Given the size of BB&B, I doubt it is owned by a single individual. It seems improper to include “[or officer]” in a situation where there are multiple officers and not just a single owner/officer.

    Third, the opinion states that “the facts alleged in the complaint make clear that any allegedly infringing activity by Nachemin occurred while the ’439 Patent was pending, and did not occur after the patent had issued for the Tote Towel.” It seems that the pleadings did not allege that Nachemin’s conduct extended beyond the issuance of the patent.

  8. Rabbit – The alleged tort here by Nachemin was inducing infringement and the complaint alleges that he knew that the product was covered by a patent and that he then took steps that pushed BB&B into the process of importing and selling the product.  Now, as far as I know, there are no allegations that Nachemin was working outside of the scope of his employment or that he was personally benefiting from the infringement.  However, the point of this essay is to recognize that, under the law, those factors are irrelevant when the charges are that the officer or employee was the individual who personally acted in the commission of a tort (here inducement). 

  9. The error alleged in this article does not exist because there are no facts stated to support the position that Nachemin personally committed a tort. All his acts were in the course and scope of employment and performed officially on behalf of BB&B, which is so large that it could not possibly be an “alter ego” corporation subject to “domination” by this one officer. Nachemin did not personally make, use or sell anything; the corporation did. The patent owner should have been sanctioned for even raising this issue, which could not possibly have succeeded under any of the cited cases. The exceptions they recognize are exceedingly narrow.

  10. Remember that inducement requires that the accused act with knowledge and intent of causing infringement. Why should someone who chooses to take that action be able to hide behind the corporate form? 

  11. Under the above logic, whenever a corporate office makes a business decision (and therefore arguably induces an infringement of some kind), that person would now be personally liable for the infringement? I assume this would be so as infringement (copyright, patent) is an “individual” or personal tort, as specified above. That result does not make sense, however.

  12. Wow, the rare case where Judge Newman gets it wrong. Agree with your analysis, and I find it interesting that if the act in question were a criminal act (as some forms of copyright infringement now seem to be defined), then apparently the the so-called corporate veil would be of no consequence and the CAFC wouldn’t have gotten confused on this one. Which only goes to show how absurd the result is: according to this, if I can say I was acting as an agent of a corporation to commit a tort, then I’m off the hook, whereas if I act as agent for an individual I’m not.

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