Will Your LLC Always Protect You?

One of the main gospels of running a business is that having a business entity (e.g., a LLC or Corp.) will shield the officers and shareholders from personal liability in the case of a lawsuit. 

And as with most things that are gospel, this premise is mostly true.  In other words, there are always exceptions. And in a world where intellectual property is increasingly the name of the game for many businesses (think: software code, business copy, etc.), copyright infringement is on the rise.

Moreover, copyright infringement has joined a small cadre of causes of action that may sidestep (or “pierce the veil”) of a corporation or LLC (these other causes include: fraud, gross negligence, or criminal acts.) Hence, the fact that a copyright infringement claim can sometimes bypass the entity to get at the officers and shareholders of a business entity should be of interest to all. 

A case from this soon to close decade, Riverdeep Interactive Learning, Ltd. v. MPS Multimedia, Inc. illustrates the point well. In that copyright infringement action, the Plaintiff named one of the corporate officers of the defendant corporation, alleging that "damages against MPS and Chen for their knowing and willful infringement of RIL's copyrights" was warranted. To substantiate the claim, the Plaintiff further alleged: "Chen, as MPS' President and CEO, directs, controls and ratifies the actions of MPS including the unlicensed and unauthorized replication and distribution of Riverdeep software."

Logically and predictably, Defendant Chen tried to get removed from the case under the corporate limited liability doctrine though a so called “motion to dismiss.” And what happened?  The court denied the motion and kept Chen on the leash, so to speak.

The court reasoned that the Plaintiff’s argument that corporate officers "are personally liable for the corporation's copyright and trademark infringements when they are a 'moving, active conscious force' behind the corporation's infringement" had merit. The court even went so far to shoot down the Defendant’s other motions aimed at derailing the copyright claim against Chen. 

So the moral of the story is that if you are an office of a company that routinely deals with copyrighted materials (e.g., software, photos, music, business copy, etc.), you should beware that the corporate entity may be sidestepped to get to you personally. Hence, the best course of action is to be very vigilant about how copyrighted materials are licensed and exploited by your company.