ANN ARBOR – Limited

liability, separating owners from the debts and obligations of the company, is

a cornerstone of modern capitalism. But can a corporate officer be held

personally responsible for a case of patent or copyright infringement at his or

her company? Research by University of Michigan business law professor Lynda

Oswald finds case law is moving in that direction.

Smaller

companies where a person might wear multiple hats, such as corporate officer

and shareholder, are at particular risk of this piercing of the corporate veil.

“Limited

liability protects owners and shareholders personally from corporate

activities, but this is a distinction the Federal Circuit Court has blurred,

especially in the context of small, closely held businesses,” Oswald said.

Her new

article in an upcoming edition of the American Business Law Journal outlines

the problem and what could be done about it.

The Federal

Circuit is a specially designated court that handles all patent appeals. Minus

a Supreme Court reversal or Congressional action, its rulings set precedent for

patent case law. And copyright law takes cues from patent cases.

The mixup

started in 1986, when a company was found liable for a patent violation. Three

of the officers were also shareholders. The law states officers can be held

personally liable if they actively commit the wrongdoing. But the court erred

when it decided to pierce the corporate veil to evaluate the personal

liability, Oswald said.

Piercing the

veil is used to hold shareholders liable for the debts of the corporation and

is usually only done when a company wasn’t legitimate, like if it was a

fraudulent operation. It’s not supposed to apply to corporate officers.

“They didn’t

look at these individuals as owners; they looked at them as officers, but

applied the wrong doctrine to them,” she said. “The net effect is the owner

liability theory is being applied to corporate officers, and once we start

mixing that together it erodes the protection the law should provide.

Unfortunately, it has built since then and become the standard.”

Smaller

firms are more at risk of this misapplied doctrine because the owners and

officers are often the same people, making it harder for the court to distinguish

their separate roles.

But there

are steps small companies can take to help protect themselves, she said.

First, keep

records and be explicit about when you are acting as an owner, and when you are

acting as a corporate officer.

Second,

follow all the formalities outlined in your state’s corporate law, including

when to hold meetings and keep minutes of the meetings.

“A lot of

business people file the incorporation papers and assume they’re protected,”

Oswald said. “Many don’t understand the importance of following formalities to

keep that limited liability strong. It can be hard, especially for an

entrepreneurial venture, but it can protect you in the long run.”