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The costs of knowingly misusing your competitors’ confidential information

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12 Oct 2018

It is unusual for me to write a case note on one particular case, but the recent High court decision in Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43 (10 October 2018) (“Ancient Order of Foresters”), merits such an article.

Is it acceptable for an employee to approach the clients and connections of their previous employer for the benefit of a new employer? The answer to this question depends on a number of matters including whether the employee is subject to restraints preventing such conduct, whether the approaches to the clients occurs before or after the employee leaves the employment and whether the employee uses their old employer’s confidential information. In many of our previous articles, we have discussed the enforceability of restraints of trade and the protection of confidential information. It is accepted that if the employee is bound by post-employment obligations prohibiting solicitation or competition and the restraint is reasonable and does no more than protect a legitimate business interest, then it will be enforceable. It is also clear that unless the employee is bound by a restraint of trade obligation or other contractual obligation regarding confidentiality, it is difficult if not impossible to prevent an ex-employee from competing with their old employer or in fact soliciting their clients. However, these actions can only be lawful if the employee does not breach its fiduciary duties owed to their employer or any obligations of confidentiality imposed by the common law and the Corporations Act 2001 (Cth), on employees.

Even in the absence of enforceable restraint of trade provisions or confidentiality clauses in a contract of employment, employees owe fiduciary duties to their employer. As such, they are not able to use their employer’s confidential information and business opportunities for their own benefit (or for the benefit of a third party) to the detriment of their employer, while still employees. If they do, the employer can sue them for damages or what is known as an account of profits. Essentially this means the ex-employer can claim all of the proceeds received by the employee as a result of their breaches. But what if the new employer, who has reaped the benefit of the employee’s wrongdoing? The answer is simple – if the new employer knowingly took advantage of the employee’s breaches so as to induce such breaches then it too can be liable to the old employer. These were the circumstances of the decision in Ancient Order of Foresters. The matter went all the way to the High Court, and the Court determined that Ancient Order of Foresters was liable to pay Lifeplan $14,838,063 as an account of profits of the entire capital value of its business. The High court held that Ancient Order of Foresters had indeed induced breaches of fiduciary duties owed by two former employees of Lifeplan and should therefore be equally liable to Lifeplan.

Facts and Circumstances

The facts of the case are a useful illustration of the manner in which a new employer may be implicated in the wrongdoing of its employees and pay heavily for doing so. Mr Woff and Mr Corby were employed by Lifeplan in management positions. In 2010 they approached Ancient Order of Foresters with a plan to divert the business of Lifeplan to it. Both Lifeplan and Ancient Order of Foresters sold funeral products by providing investment products to meet the cost of pre-arranged funerals. Mr Woff and Ms Corby had very good relations with Funeral Directors through whom the products were promoted. These directors were clients of Foresters. Mr Woff and Mr Corby created a 5 year business plan noting the details of the plan using confidential information belonging to Lifeplan. They provided the business plan to Ancient Order of Foresters for the purposes of securing their employment, with a view to carrying out the plan.  They took these steps while still employed by Lifeplan. Ancient Order of Foresters at two separate Board meetings considered the 5-year business plan and accepted the proposal. Mr Woff and Mr Corby then resigned from Lifeplan and commenced employment with Ancient Order of Foresters and commenced securing the business that was previously Lifeplan’s for the benefit of Ancient Order of Foresters.

Interestingly, when the matter was originally heard, the Court determined that no orders should be made against Ancient Order of Foresters but rather only against the two former employees of Lifeplan. Lifeplan appealed and the Court of Appeal found that there should be an order made against Ancient Order of foresters but only for the profits it had received over the 5-year period. Both parties then appealed this decision to the High Court. The High Court concluded that given Ancient Order of foresters knowingly induced the breaches by Mr Woff and Mr Corby, and as a result reaped the benefit to the significant detriment of Lifeplan, it was liable for the entire capital value of the business it acquired as a result.

Lessons for Employers

In light of the High Court’s decision in Ancient Order of Foresters, we recommend employers:

  • take care to ensure new employees are not bound by enforceable restraints;
  • take care to ensure new employees do not misuse confidential information of ex-employers for their benefit or that of their new employer;
  • make clear in their contracts of employment that employees warrant they are able to accept employment and are not bound by enforceable restraints to a previous employer; and
  • not be dismissive of claims by ex-employers regarding inappropriate conduct of their previous employees.

As the High Court has clearly demonstrated, the cost of getting this wrong can be significant.

If you wish to discuss any aspect of this article or require specialist advice or assistance in relation to an employment law matter, please do not hesitate to contact us.

This alert is not intended to constitute, and should not be treated as, legal advice.