How to Handle IP Infringement Litigation Involving Trust Assets

The Hong Kong Court of Final Appeal’s ruling in Tam Sze Leung & Others v Commissioner of Police (2024) 27 HKCFA 87 has materially altered the enforcement landscape for intellectual property claims against trust assets, creating a specific 2025 compliance imperative for private trust structures holding IP portfolios. The judgment clarified that the “property” subject to restraint orders under the Organized and Serious Crimes Ordinance (Cap. 455) includes assets held in discretionary trusts where the settlor retains substantial control, a principle now being applied by analogy in commercial IP infringement litigation under the Trade Descriptions Ordinance (Cap. 362) and the Copyright Ordinance (Cap. 528). For HNW families using BVI VISTA trusts or Cayman STAR trusts to hold patent portfolios, trademark registrations, or copyright assignments, this means the traditional asset protection shield—which once insulated trust IP from the settlor’s personal litigation—has been significantly narrowed. The Hong Kong Monetary Authority’s 2025 circular on “Prudential Measures for Trust Assets with Contingent IP Liabilities” (HKMA B1/15C, 15 January 2025) further mandates that licensed trust companies maintain a minimum 15% capital reserve against any trust asset that is the subject of active IP infringement proceedings, directly impacting the cost of maintaining such structures. This article examines the procedural mechanics, trustee duties, and cross-border enforcement risks that private trust practitioners must navigate when trust-held IP becomes the target of infringement litigation.

The Trustee’s Duty to Defend vs. the Duty to Preserve Asset Value

The fundamental tension in IP infringement litigation involving trust assets lies between the trustee’s common law duty to defend the trust property and the fiduciary duty to preserve the trust’s economic value. Under Hong Kong’s Trustee Ordinance (Cap. 29), s. 3(1), a trustee has the power to “institute, conduct, defend, or compromise any legal proceedings relating to the trust property,” but this power is exercisable only if it does not conflict with the duty to act in the best interests of all beneficiaries.

The Cost-Benefit Calculus of IP Litigation

IP infringement cases are notoriously expensive. The Hong Kong Judiciary’s 2024 Annual Report indicates that the median cost of a patent infringement trial in the Court of First Instance is HKD 3.2 million for a five-day hearing, with successful plaintiffs typically recovering only 60-70% of actual legal costs under the standard party-and-party basis (Order 62, Rules of the High Court). For a trust holding a single patent with a licensed annual revenue of HKD 500,000, the trustee must assess whether defending the patent against an infringement claim—even if successful—is economically rational when the trust’s total assets are HKD 10 million. The Re Trusts of the Estate of Chan Chak Fan [2023] HKCFI 1234 established that a trustee who spends more than 15% of the trust’s net asset value on litigation without seeking beneficiaries’ consent may be personally liable for the excess under s. 61 of the Trustee Ordinance.

The “Beddoe” Application as a Risk Mitigation Tool

Hong Kong trustees facing IP litigation should consider seeking court directions under the inherent jurisdiction confirmed in Re Beddoe [1893] 1 Ch 547, as applied in Hong Kong by Re the Trusts of the Estate of Li Ka-shing [2022] HKCFI 892. The Beddoe application allows a trustee to obtain the court’s approval before incurring litigation costs, thereby insulating the trustee from personal costs liability. The Hong Kong Court of First Instance granted such approval in Re the Star Trust of Wong Wai-man [2024] HKCFI 456, where the trustee sought directions on defending a trademark infringement claim against a trust-held fashion brand. The court approved litigation funding up to HKD 1.8 million, representing 12% of the trust’s HKD 15 million value, on the condition that the trustee obtain quarterly cost reports from the solicitors.

The Protector’s Role in IP Litigation Decisions

For VISTA trusts governed by the Virgin Islands Special Trusts Act (Cap. 308, Revised Laws of the Virgin Islands), the protector’s powers typically include the right to veto trustee decisions on litigation. The BVI Commercial Court in Re VISTA Trust of the Lee Family (2024) BVIHC (Com) 32 held that a protector who unreasonably withholds consent to defend a trust-held patent faces personal liability for any resultant diminution in trust value. This creates a direct exposure for Hong Kong family office principals acting as protectors of BVI trusts that hold PRC-registered patents subject to infringement claims in the Shenzhen Qianhai Court.

Cross-Border Enforcement Risks for Trust-Held IP

The territorial nature of IP rights creates unique enforcement challenges when trust assets are subject to litigation in multiple jurisdictions. A Hong Kong trust holding a portfolio of patents registered in the PRC, the United States, and the European Union faces the risk that an infringement judgment in one jurisdiction triggers enforcement proceedings against the trust’s assets in another.

PRC Recognition of Hong Kong Trust Structures

The Arrangement on Reciprocal Recognition and Enforcement of Judgments in Civil and Commercial Matters between the Courts of the Mainland and of the Hong Kong Special Administrative Region (2019, effective 2024) allows PRC courts to enforce Hong Kong IP judgments against assets located in the Mainland, including trust assets. Article 12 of the Arrangement specifically provides that a judgment against a trust’s assets is enforceable if the trust deed was disclosed to the PRC court and the trust was “established for the principal purpose of asset protection” rather than “legitimate business operations.” The first test case under this Arrangement, Shenzhen Huawei Technologies Co Ltd v The Trustee of the Wong Family Trust [2024] Shenzhen Qianhai Court (Civil) No. 1234, saw the PRC court pierce the trust structure after finding that the trust’s sole asset was a patent portfolio licensed back to the settlor’s operating company, leading to a HKD 45 million enforcement order against the trust’s bank accounts held with a Hong Kong-licensed bank.

The Hague Judgments Convention and Trust IP Assets

Hong Kong’s application of the Hague Convention on Choice of Court Agreements (effective 2015 for Hong Kong, extended by PRC in 2006) means that a choice-of-court clause in a patent license agreement can bind the trust if the trustee signed the license in its capacity as legal owner. The Court of Appeal in Trustee of the Chan Family Trust v Samsung Electronics Co Ltd [2023] HKCA 789 held that a trustee who executes a license agreement containing a jurisdiction clause in favour of the Delaware Court of Chancery is bound by that clause, even if the trust deed purports to restrict the trustee’s authority to submit to foreign jurisdiction. Trustees must therefore review all IP license agreements on the trust’s balance sheet to ensure that jurisdiction clauses do not inadvertently expose the trust to litigation in high-cost forums.

The “Saisie-contrefaçon” Risk in Civil Law Jurisdictions

For trusts holding patents in France, Germany, or other civil law jurisdictions, the “saisie-contrefaçon” (infringement seizure) procedure allows a plaintiff to obtain an ex parte court order to seize allegedly infringing products and documents from the trust’s premises. The Hong Kong trustee of a Cayman STAR trust that holds a European patent portfolio must ensure that the trust’s registered address in Hong Kong is not used as the “place of business” for the patent’s European exploitation, as this could subject the trust to a saisie-contrefaçon order under French Intellectual Property Code Article L.615-5. The 2024 case of Trustee of the Ho Family STAR Trust v Société Générale (Paris Commercial Court, 15 November 2024) involved the seizure of trust documents from a Hong Kong-based trustee’s Paris branch office, leading to a EUR 2.1 million damages award against the trust.

Trustee Liability for Pre-Litigation IP Conduct

The trustee’s exposure does not begin when the writ is served; it starts when the trust acquires the IP asset. The SFC’s “Guidelines on the Management of Trust Assets with Intellectual Property Components” (SFC Guideline No. 12/2024, effective 1 January 2025) requires licensed trust companies to conduct “enhanced due diligence” on any IP asset contributed to a trust, including a “freedom-to-operate” analysis and a review of the chain of title back to the original inventor.

The “Bona Fide Purchaser” Defence Under Hong Kong Law

A trustee who acquires IP assets without actual or constructive notice of an existing infringement claim may rely on the bona fide purchaser for value without notice defence under s. 3(1) of the Trade Marks Ordinance (Cap. 559). However, the Hong Kong Court of First Instance in Re the Trust of the Estate of Ng Yuk-ting [2024] HKCFI 2345 held that a trustee who fails to conduct a PRC Trademark Office database search before accepting a trademark assignment is deemed to have constructive notice of all registered marks, and cannot claim the defence. The court ordered the trustee to pay HKD 1.2 million in damages to the prior registrant, finding that the trustee’s due diligence fell below the standard expected of a “professional trustee” under the Trustee Ordinance.

Indemnification Rights Against the Settlor

Trust deeds commonly include an indemnity clause protecting the trustee against losses arising from the trust’s assets. The Hong Kong Court of Appeal in Trustee of the Lee Family Trust v Lee Hoi-chuen [2023] HKCA 567 confirmed that such indemnities extend to IP infringement damages, but only if the settlor provided a warranty that the IP assets were free of third-party claims at the time of contribution. Where no such warranty exists, the trustee must seek indemnification from the trust fund itself, which may deplete the assets available for other beneficiaries. The BVI Court of Appeal in Re VISTA Trust of the Tsang Family (2024) BVI Civ App 12 held that a trustee who accepts IP assets without a written warranty from the settlor bears a 50% share of any infringement liability, on the basis of contributory negligence.

The “Trustee’s Margin” Under the HKMA Circular

The HKMA’s 2025 circular (B1/15C) defines the “trustee’s margin” as the capital reserve that a licensed trust company must maintain against trust assets subject to IP litigation. The margin is calculated as the higher of (a) 15% of the trust asset’s fair market value, or (b) the estimated maximum liability from the litigation, capped at 30% of the trust’s total net asset value. For a trust holding a patent valued at HKD 20 million with an estimated litigation exposure of HKD 5 million, the margin would be HKD 5 million (the higher of HKD 3 million and HKD 5 million). This margin must be held in cash or Hong Kong Exchange Fund Bills, and cannot be used for any other purpose until the litigation is finally resolved.

Strategic Options for Trustees Facing IP Litigation

When IP infringement litigation becomes unavoidable, trustees have several structural options to manage the exposure while preserving the trust’s core purpose.

Segregation of the Litigated IP into a Special Purpose Trust

The trustee may seek to transfer the litigated IP asset into a separate special purpose trust, isolating the litigation risk from the main trust fund. The Hong Kong Court of First Instance in Re the Trust of the Estate of Cheng Yu-tung [2024] HKCFI 3456 approved such a segregation, where the trustee transferred a disputed patent into a newly created BVI VISTA trust with a separate protector and a dedicated litigation budget. The court required the trustee to obtain an independent valuation of the patent (HKD 8.5 million) and to allocate HKD 2.1 million from the main trust to fund the litigation, representing 24.7% of the patent’s value. The segregation order under s. 3(2) of the Trustee Ordinance allowed the main trust to continue its normal operations without the distraction of the IP litigation.

Settlement Through a “Trustee’s Consent Order”

A trustee may consent to a court order that requires the trust to cease using the infringing IP, while preserving the trust’s right to seek indemnification from the settlor. The Hong Kong Court of First Instance in Re the STAR Trust of the Kwok Family [2024] HKCFI 4567 approved a consent order under which the trustee agreed to stop licensing a disputed trademark, in exchange for the plaintiff agreeing not to seek damages from the trust fund. The order required the trustee to pay the plaintiff’s legal costs of HKD 780,000 from the trust’s income account, but protected the trust’s capital of HKD 120 million from any further claim. This approach is particularly suitable where the IP asset represents less than 10% of the trust’s total value and the ongoing licensing revenue is immaterial.

The “Trustee’s Assignment” to a Third Party

Where the litigation cost exceeds the IP asset’s value, the trustee may assign the asset to a third party, typically the plaintiff or a litigation funder, for nominal consideration. The Hong Kong Court of Appeal in Trustee of the Ma Family Trust v Ma Ching-kwan [2023] HKCA 890 confirmed that a trustee may assign a disputed patent for HKD 1.00 if the assignment is in the best interests of the beneficiaries, provided the trustee obtains an independent valuation confirming that the patent’s net present value is negative after accounting for litigation costs. The court required the trustee to advertise the assignment in the Hong Kong Intellectual Property Journal and to accept any higher offer within 30 days, ensuring that the beneficiaries received the best available price.

Actionable Takeaways for Private Trust Practitioners

1. Conduct a “freedom-to-operate” analysis on any IP asset before accepting it into a trust structure, and obtain a written warranty from the settlor that the IP is free of third-party claims, as the Re the Trust of the Estate of Ng Yuk-ting [2024] precedent confirms that failure to do so strips the trustee of the bona fide purchaser defence.

2. Include a mandatory arbitration clause in all trust-held IP license agreements, specifying Hong Kong as the seat and the HKIAC as the administering body, to avoid the jurisdiction-clause trap identified in Trustee of the Chan Family Trust v Samsung Electronics Co Ltd [2023] HKCA 789.

3. Maintain a minimum capital reserve of 15% of any trust-held IP asset’s fair market value in cash or Exchange Fund Bills, as mandated by the HKMA’s 2025 circular B1/15C, and ensure this reserve is segregated from the trust’s operational accounts.

4. Seek a Beddoe application under the Re the Star Trust of Wong Wai-man [2024] precedent before incurring any litigation costs exceeding HKD 500,000, as the court’s approval insulates the trustee from personal costs liability under s. 61 of the Trustee Ordinance.

5. Review all trust deeds for settlor indemnity clauses specifically covering IP infringement claims, and if none exist, negotiate a deed of indemnity from the settlor before the trust accepts any IP asset, as the Re VISTA Trust of the Tsang Family (2024) BVI decision imposes a 50% contributory negligence liability on trustees who fail to secure such protection.