Poaching staff from competitors is not uncommon, but can be risky. Employers must be sure that new employees are not acting in breach of obligations to their former employers. In a recent High Court case, the new employer was ordered to disgorge the whole of its business, taken from the old employer, and to pay costs as well.
If you are taking on new employees hoping they will bring business with them, read on:
Lifeplan provided funeral products, selling funeral bonds through funeral directors.
Foresters was in a similar business, selling funeral products. Lifeplan had employed Mr Woff and Mr Corby as funeral fund manager and as national sales manager. Both employees had signed confidentiality agreements but neither had post-employment restraints.
Before leaving Lifeplan, the employees approached Foresters with a plan to divert Lifeplan's funeral products business to Foresters. The employees presented a five-year Business Concept Plan using Lifeplan's confidential information and business records. The business plan set out how Foresters could win Lifeplan's client base and business for Foresters. The new employer agreed and the employees resigned and started work with Foresters. Foresters implemented the business plan and its sales grew from $1.6 million $24 million over 2 years, while Lifeplan's sales fell in a corresponding amount from $68 million to $45 million.
Lifeplan and its related entity FPM sued Woff and Corby for breaches of fiduciary duties and contraventions of the Corporations Act 2001. They also sued the new employer, Foresters, and for knowingly assisting the breaches.
Lifeplan and FPM claimed an account of profits for the entire value of Foresters' funeral products business, that they said was worth $30M.
Federal Court – Single Judge – $50,000 for the old Employer
The first judge in the Federal Court found Woff and Corby had breached fiduciary and statutory duties and Foresters had knowingly assisted in those breaches. The judge ordered an account of profits in equity and under the Corporations Act against Woff and Corby. This account was limited to their receipts through the company they established to support the venture with Foresters – $50,000.
Lifeplan wanted $30 million as an account of profits, being their forensic valuation of the business taken based on the growth in its funeral fund business. The judge did not make an order against Foresters for an account of profits, because Foresters did not have the “requisite knowledge” under the Corporations Act and the confidential information was not itself "used to generate profits".
Federal Court – Full Court – $6 million for the Old Employer
On appeal, three judges of the Federal Court said requiring a direct connection between the confidential information and its use to generate profits was too narrow. The court said that Foresters had actual knowledge of the employees’ breach of duty. Foresters was ordered to account for past and projected profits for most of the 5 year Business Concept Plan $6,558,495.
Foresters appealed, Lifeplan cross appealed.
High Court – $15 million + for the Old Employer
The High Court held against Foresters and for Lifeplan. The court quoted a 1975 judgment and said:
“"a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation."
So described, the liability to account and to disgorge benefits encompasses "any benefit" received by the knowing participant in a breach of fiduciary duty "as a result of" that participation. The benefit of a business connection is such a benefit. “
The High Court said that that Foresters' knowing assistance of Woff and Corby's breaches had at least some bearing on the success of its funeral products business, rendering it liable to disgorge profits thereby generated.
“It is sufficient to show that the profit would not have been made but for dishonest wrongdoing. Further, whatever may be the position for wrongdoing that is not marked by dishonesty, a defendant cannot avoid liability to disgorge profits dishonestly made by showing that those profits might have been made honestly.”
The majority said that there was no reason in principle to restrict Foresters' obligation to disgorge less than the entire capital value of the business it acquired.
The Court held Foresters should account to Lifeplan and FPM in the sum of $14,838,063 plus costs.
What do we learn?
Employees while employed, can do some things, but not others, without breaching their duties. Each case will turn on the circumstances. In this case, while employed the employees could register a domain name, incorporate a company and set up a trust. They could not however help a competitor of their employer with its fund rules or disclosure documents.
After employment, even if not contractually restrained from approaching their old employer’s clients, employees cannot go into their employer’s old client base if they use their old employer’s confidential information. Most employers will do their due diligence and check if there are contractual restraints, but this is not enough where there is a plan to take business connections. The High Court said:
“It is also important that one not be distracted by the consideration, which seems to have weighed heavily with the primary judge, that once Woff and Corby had terminated their employment with Lifeplan they would be at liberty to solicit the business connections of Lifeplan and FPM for their own benefit and, should they so choose, for the benefit of Foresters. So much may be accepted. But with the benefit of hindsight it can be seen that the success of the Woff and Corby strategy was assured by the arrangements that were being put in place before their employment with Lifeplan came to an end. Those arrangements were put in place, as Foresters knew, with a view to their immediate implementation so as to maximise the likelihood that Lifeplan and FPM would not be able to respond effectively to protect their business connections. In this regard, it can be seen that the timing of the departure of Woff and Corby from their employment with Lifeplan was geared to the implementation of the sudden strike strategy. “
A new employer, to be “knowingly concerned” must do something, engage in an act or conduct. The Full Federal Court said that the board of Foresters was actually aware, had actual knowledge, of the taking and using confidential information and had used it to make decisions.
All employers should protect their businesses by having contracts that protect confidential information, and systems to that identify the key information that is confidential, key staff with access to it, and leakage of information from the organisation.
Employers that are the potential target of poachers, should look out for risks of this type of activity, and act early by getting information and getting legal advice about the prospects of getting court orders to unmask use of confidential information and to restrain its disclosure and use. There are many paths to take, and the remedies could range from injunctions to deliver up information or equipment to damages or an account of profits.
The case is yet another reminder that employers should ensure that new employees are not acting in breach of obligations to their former employers. Peter McNamara has previously warned that before offering employment, make sure you get full details about the prior employment, the post contractual obligations and what the employee has done with any ex-employer information or property. See: http://www.cml.com.au/poached-talent-fried-on-costs/
This poaching case is here : http://www.hcourt.gov.au/cases/case_a37-2017
Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited  HCA 43
Contact Peter McNamara for advice to protect your business from current employees, or where it is taking employees from a competitor.