Employees and directors of businesses are often exposed to confidential information and company records that could, if used for the wrong purposes, cause significant damage to the company.
All too often, business owners are faced with an employee taking confidential information and moving to a competitor. Those employers will be relieved to hear that last month the High Court delivered a stern warning to competing businesses that are knowingly involved in a former employee’s breach of their duties.
A cunning plan
Woff and Corby were key management employees of Lifeplan Australia Friendly Society Ltd (Lifeplan). Lifeplan provided a service for making payments towards pre-arranged funerals. Lifeplan was highly profitable in this market.
Back in 2010, Woff and Corby approached a competitor of Lifeplan, Ancient Order of Foresters in Victoria Friendly Society Ltd (Foresters) with a proposal: They would use Lifeplan’s business records and confidential information to divert its business to Foresters. At the time Foresters had a significantly smaller portion of the market, and was unprofitable.
Whilst employed by Lifeplan, Woff and Corby established their own separate marketing company, Funeral Planning Australia Pty Ltd (FPA). They then developed a plan for targeting Lifeplans’ funeral director clients using a significant amount Lifeplan’s confidential information. The plan was highly successful, and in two years Forester’s inflows increased from $1.6 million to $24 million, whilst Lifeplan’s fell at an almost identical rate, from $68 million to $45 million.
The causal link
At first instance, the Federal Court of Australia found that Woff and Corby had breached their obligations of confidence and their fiduciary duties of loyalty to Lifeplan, and that Foresters had knowingly participated in these breaches whilst Woff and Corby were employees of Lifeplan.
On the question of what remedy to grant, the Federal Court ordered that Woff and Corby account for their profits to Lifeplan. However, the Court refused to order that Foresters account for any profits to Lifeplan.
The primary judge’s reasoning for this was a lack of causation. That is, whilst Woff and Corby breached their duties whilst they were employees of Lifeplan, their actions (and accordingly the profits generated) could have been done after they left Lifeplan with the same result. Accordingly, the Court found that their breaches did not result in Forester’s profits.
Lifeplan appealed this decision to the Full Court of the Federal Court, which agreed that this approach to causation was too narrow. The Full Court agreed, and held that without Woff and Corby’s breaches of their duties of which Foresters was knowingly involved, Foresters would not been able to make the profits it did.
On the question as to the amount of profits that Foresters should account for, the Full Court held that it was to be the net present value of the profits, plus anticipated profits for the next four and a half years, for a total of $6,558,495.
The appeal to the High Court
Foresters appealed the decision to the High Court, seeking to argue that they should only account for profits that were the result of their direct assistance to Woff and Corby, and that they should not have to account for future anticipated profits. Lifeplan also cross-appealed to the High Court, arguing that Foresters should account for the entire capital of its funeral business.
The High Court agreed with Lifeplan, allowing their cross-appeal and dismissing Foresters’ appeal. The Court categorically shut down Forester’s argument that an account of profits should only be ordered against them when they were directly involved.
The plurality of Kiefel CJ, Keane, and Edelman JJ emphasised the Court’s power to order an account of profits as being “prophylactic” rather than “restitutionary”. That is, it has a role of deterrence. On the question of causation, they stated:
“It is sufficient to show that the profit would not have been made but for dishonest wrongdoing … a defendant cannot avoid liability to disgorge profits dishonestly made by showing that those profits could have been made honestly … courts do not reduce the profit by reference to opportunity cost, that is, the revenue that would have been received by a lawful alternative.”
Accordingly, the test is a wholistic one which looks at “the overall effect of Foresters’ wrongful conduct”, rather than looking at each act and its consequences. Importantly, a defendant cannot avoid liability by stating that the profit could have been made honestly. Their involvement in the dishonest acts are enough.
Once the question of causation was satisfied, the Court then considered the quantum that Foresters should account for. The Court held that it is on the defendant to establish why it should not account for the full value of the benefit it gained.
The Court noted two methods by which Foresters could do so. The first is an allowance for labour and skill, and the second is to establish that it would be inequitable to do so because it would be “beyond the scope of the liability”. Foresters was unable to establish either. Accordingly, as summarised by Gageler J:
“To sum up, what Foresters obtained by reason of the breaches of fiduciary duty by Mr Woff and My Corby in which Foresters knowingly participated was a business. Foresters obtained that business to the cost of the business which Lifeplan operated through FPM. Foresters’ business can be, and has been, appropriately valued in a manner which duly allows for all of Foresters’ expenses and for all of Foresters’ ongoing business risks. Foresters has failed to establish any reason for considering that an order that it account for the entirely of the business as so valued is inequitable.”
Therefore Foresters had to account for the full value of the business, being $14,838,063.
What does this mean for you?
This is a positive result for business owners looking to protect their confidential information against the actions of both employees and the competition who may be knowingly seeking to assist those employees from breaching their duties.
It is important to keep in mind that the ordinary principles regarding former employees are distinguished from this decision. That is, the quantum of an account of profits is to be adjusted keeping in mind that the benefit that a former employee can bring to a competitor will diminish over time. However, in this case the breach occurred during Woff and Corby’s employment, and Foresters’ benefit could continue indefinitely as it had obtained the advantage of misappropriated business connections.
The Court has made clear that if a competitor is involved in such a breach, unless the competitor can establish reasons why it should not, the full benefit resulting from the breach should be accounted for.