Everyone knows that a corporation is, among other things, intended to insulate the shareholders, officers and directors from liability for injuries to third parties. But a corporation is not an impervious shield, even if all of the corporate formalities are scrupulously maintained. A recent California case showed a highlighted chink in the armor: Director and officer liability for conscious, indirect participation in the tortious activity.

PMC, Inc. v. Kadisha,78 Cal. App. 4th 1368 (2000), specifically held “that a corporate officer or director may be liable for an intentional tort if: (1) the officer or director purchased or invested in the corporation the principal assets of which were the result of unlawful conduct; (2) the officer or director took control of the corporation and appointed personnel to run the corporation which was engaging in unlawful conduct; and (3) the officer or director did so with knowledge or, with respect to trade secret misappropriation, when she or he had reason to know, of the unlawful conduct.”

It should not be news that directors, officers, and even shareholders can be jointly liable with the corporation and may be joined as defendants if they personally directed or participated in the tortious conduct. If Mr. Big punches a workman in the nose, he does not escape personal liability because the fist was thrown during working hours on the factory floor. What may be news, however, is that Mr. Big may be liable even if he didn’t throw the punch himself.

A corporate director or officer may be liable for tortious conduct in which he or she did not directly participated, but rather only indirectly participated in by knowing consent to or approval of unlawful acts. “To maintain a tort claim against a director in his or her personal capacity, a plaintiff must first show that the director specifically authorized, directed or participated in the allegedly tortious conduct; or that although they specifically knew or reasonably should have known that some hazardous condition or activity under their control could injure plaintiff, they negligently failed to take or order appropriate action to avoid the harm. The plaintiff must also allege and prove that an ordinary prudent person, knowing what the director knew at the time, would not have acted similarly under the circumstances.” Frances T., at 508-509 (citations omitted).

In the context of unfair competition, this form of liability can take on a new dimension. For example, misappropriation of trade secrets is an intentional tort, and includes use of trade secrets improperly obtained, as well as the initial misappropriation of the proprietary information. Employing the information in the course of manufacturing, production, research or development, and marketing of goods that embody the trade secret, all constitute actionable use, provided only that the director or officer has notice that use of the information is wrongful. Awareness, and effective ratification, of the breach of fiduciary duties by a former employee of a competitor is sufficient to impose liability on the responsible corporate officer: “They encouraged the sowing and reaped the benefit. They cannot now disclaim the burden.”

In the PMC case, the defendants invested money in a corporation that had been founded on misappropriated trade secrets. Even though the defendants themselves did not participate in the wrongful misappropriations, they could be liable if trial evidence shows that they were aware of and ratified and benefitted from the codefendant’s misconduct, and knowingly purchased a controlling interest in the corporation whose sole assets arose from the tortious conduct of the codefendants. The defendants became majority shareholders, officers and directors, effectively taking control of the corporation, hired personnel to run it, and continued its operations when they knew or had reason to know that their codefendants had engaged in tortious conduct to establish the corporation.

Ultimately, the question is whether the director, officer or shareholder knew or had reason to know of the tortious misappropriation of trade secrets, and then unreasonably participated in the unlawful conduct.

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