The pitfalls of hiring your competitors’ employees – Beware accessorial liability and accounting for profits may be looming around the corner

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By Stephanie De Vere, Senior Associate

A recent decision of the Full Court of the Federal Court should cause boards of companies to think twice before embarking on a new venture with its competitors’ former employees.  Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Limited [2017] FCAFC 74 demonstrates the stark consequences of being embroiled in an employee’s dishonest use of confidential information.

Background

Mr Woff and Mr Corby were senior managers employed by Lifeplan Australia Friendly Society Ltd (Lifeplan), a business providing funeral funds management products.  In 2010, Mr Woff and Mr Corby developed a plan to establish their own funeral funds company in direct competition with Lifeplan.  While still employed at Lifeplan, the pair incorporated Funeral Planning Australia Pty Ltd (FPA), and began developing their fund and soliciting other businesses on behalf of FPA.  Relying heavily on the confidential information and business records of Lifeplan, Mr Woff and Mr Corby drafted a business concept plan designed to “attack the commercial base” of their employer.  Mr Woff and Mr Corby presented this plan to Lifeplan’s competitor, the board of Ancient Order of Foresters in Victoria Friendly Society Limited (Foresters).  In addition, Mr Woff and Mr Corby actively solicited the business of other funeral directors on behalf of themselves and Foresters, utilised for their new business a database of hundreds of funeral directors contact details maintained by third party company for Lifeplan, made arrangements with Lifeplan’s printer of customised pre-paid funeral contracts to utilise Lifeplan’s templates to produce customised pre-paid contracts branded for Foresters and copied Lifeplan’s disclosure documents, contracts, marketing and administrative documents for their new business with Foresters.  After numerous discussions, presentations, the provision of the plan and a further proposal, Foresters board of directors decided to move ahead with the new venture with FPA, Woff and Corby.

The proceedings

Lifeplan alleged that Mr Woff and Mr Corby breached their employment contracts and their equitable duties owed to their employer, as well as various sections of the Corporations Act 2001 (Cth) (Corporations Act). Lifeplan also argued that Foresters was liable for knowingly assisting in those breaches, and for inducing the pair to breach their employment contracts.

The decision

On appeal, the Full Court of the Federal Court held that Foresters through its board of directors knowingly assisted and induced Mr Woff and Mr Corby to breach their duties and obligations owed by each of them to Lifeplan.  This finding was made on the basis that:

  • Foresters knowingly assisted Mr Woff and Mr Corby to breach their fiduciary duties to Lifeplan by using Lifeplan’s confidential and valuable information in deciding whether to proceed with the proposed business;
  • Foresters knew that Mr Woff in breach of his fiduciary duties to Lifeplan, was soliciting business from funeral directors for the proposed business and was likely to continue to do so, in circumstances where Foresters was working towards the proposed business and it did nothing to discourage Mr Woff from soliciting funeral directors; and
  • Foresters knowingly assisted Mr Woff and Mr Corby to breach their fiduciary duties and induced them to breach their contractual duties to Lifeplan by playing an active role in the conduct of Mr Woff and Mr Corby taking impermissible steps towards establishing the proposed business by involving Mr Woff and Mr Corby in the changes to be made to the rules governing the Foresters’ fund and the preparation of the Foresters’ disclosure documents.

There was thus accessorial liability under both s 79 of the Corporations Act and the rule in Barnes v Addy concerning knowing assistance.

However, their Honours differed from the trial judge on the issue of causation. Instead, it was held that there was a sufficient causal connection to found a liability to account for profits, and Foresters were ordered to disgorge $6,558,495.  In considering the issue of causation, the Court focused on the causal relationship between Forester’s breach and the profit earned by the company following the arrival of Mr Woff and Mr Corby. Critical to their Honours’ judgment was the finding that without the business concept plan, the proposed business would not have gone ahead.  In essence, without the dishonest use of the confidential information and without the breaches of duty in which Foresters was involved, Foresters would not have made the profits it did.

The takeaways for company directors engaging with its competitors’ former employees

  1. Approach any proposal from former employees of your competitor with extreme caution. There is a real risk of accessory liability when dealing with confidential information knowingly and dishonestly obtained from former employers.
  2. Ignorance or turning a blind eye will not help your position. In the Foresters case, the court held that the information presented to Foresters was of such detailed specificity and commercial importance that “no honest and reasonable person, not shutting his or her eyes to the obvious, could conclude other than that the documentation was based on Lifeplan’s confidential information.”
  3. Review all business plans and proposals provided by former employees of competitors with a critical eye to ensure that they do not contain confidential or commercially valuable information of the former employer that has been dishonestly obtained. Ask yourself, would I be concerned if this information of my business was being disclosed by my employees to competitors?  If the answer is yes, its may be best to walk away rather than run the risk of a potential action being made against the Company.
For further information, please do not hesitate to contact us.

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