Madeleine Smith and Dominique Hartfield

In the recent decision of Lifeplan Australia Friendly Society Ltd. v. Ancient Order of Foresters in Victoria Friendly Society Limited [2017] FCAFC 74; [2017] FCAFC 99 (Lifeplan), a Full Federal Court has found a new employer was knowingly involved when two employees used their former employer's confidential information to its advantage. The court ordered the new employer to account for profits of more than AU$6.5 million, which it made from using the confidential information to establish a business venture.

In this case, a senior manager and his subordinate conducted an "orchestrated plan" to take the appellant's business. While still in the employment of the appellant, the pair relied on the appellant's confidential financial information and business records to prepare a business plan, which they presented to the respondent company's board to convince it to enter into a commercial venture with them.

The respondent was deemed an active participant in the fiduciary breaches by the employee pair. The court found board members: "knew or ought to have known (by the standards of honest and reasonable people) that they were being supplied with confidential business information of a competitor by the competitor's current employees, in order to have them make a decision to enter into a business relationship with the current employees of the competitor to the likely commercial disadvantage of the competitor, and the likely and intended commercial advantage of their company".

Further, the respondent knew the employees were soliciting clients for them while still employed by the appellant and was acting in concert with the employees to facilitate this.

The court found that while the employees did not directly generate profits as a result of their breaches, the business venture would not have gone ahead without them. Without the dishonest advantage of the confidential information, the respondent would not have employed the employees and would not have made the profits it did from the business plan. Accordingly, the court overturned the decision of the primary judge to find that the respondent was liable to pay the appellant almost five years' worth of profits from the business plan.

The Lifeplan case is a warning to employers of the costly risks of taking advantage of a competitor's confidential information when recruiting or entering into business ventures with their competitor's current or former employees. Employers should be proactive in undertaking due diligence when hiring employees from competing companies. Employers may wish to consider including a warranty in the employment agreement, whereby the new employee undertakes that they have the legal right to enter into the agreement and in performing their duties they will not be in breach of any obligation to a third party.

The case is also a reminder that employers need to take care in guarding their own confidential information from departing employees by ensuring that they have adequate confidentiality agreements and restraints in place. Where an employer suspects an employee may be taking or have taken confidential information, it may consider undertaking a forensic investigation with a view to obtaining relevant evidence.