In a recent decision, a funeral fund, Lifeplan Australia Friendly Society Ltd (Lifeplan), successfully brought claims against two of its former employees for using confidential information they took during their employment and disclosing it to a competitor.
The Full Court of the Federal Court of Australia (Full Court) found that the senior managers of Lifeplan, Mr Woff and Mr Corby, breached their fiduciary obligations by using Lifeplan's confidential documents to create a business plan aimed to directly compete with the business of Lifeplan. They then disclosed that business plan to a competitor, the Ancient Order of Foresters in Victoria Friendly Society Limited (Foresters), which subsequently became their employer.
The case serves as a warning to new employers to take care when employing senior managers and not to use any confidential information that such employees may bring across with them from their former employer.
What were the employees' breaches of fiduciary duties?
During their employment with Lifeplan, Mr Woff and Mr Corby used Lifeplan's confidential information to create a business concept in relation to the funeral bond industry. Mr Woff and Mr Corby then presented this business concept to Foresters. Shortly afterwards, Mr Woff and Mr Corby resigned from their employment with Lifeplan and commenced employment with Foresters, where they implemented the business concept.
Amongst other things, during their employment with Lifeplan:
- Mr Woff emailed confidential documents containing business and financial intelligence to his private email accounts;
- Mr Woff and Mr Corby then used some of those documents to prepare a business concept and oral presentation to present to the board of Foresters; and
- Mr Woff and Mr Corby met with Tobin Brothers, a large funeral directors' business, with the view of securing the award of a renewed contract in favour of Foresters and themselves instead of Lifeplan.
After Mr Woff and Mr Corby left Lifeplan and commenced employment with Foresters, Lifeplan's business diminished and Foresters' business grew substantially.
Lifeplan claimed that Mr Woff and Mr Corby breached various fiduciary obligations and obligations of confidence that they owed to Lifeplan, including obligations that arose under their contracts of employment, in equity and under various sections of the Corporations Act. In particular, Lifeplan claimed that Mr Woff, who was Mr Corby's superior, breached his obligations under the Corporations Act:
- to exercise his powers and discharge his duties with a reasonable degree of care and diligence (s 180);
- to exercise his powers and discharge his duties in good faith in the best interests of Lifeplan and for a proper purpose (s 181);
- not to improperly use his position to gain an advantage or to cause Lifeplan detriment (s 182); and
- not to use confidential information improperly to gain an advantage or to cause Lifeplan detriment (s 183).
Lifeplan also claimed that Foresters was accessorily liable for Mr Woff's breaches of the Corporations Act by being knowingly involved in the breaches, in accordance with section 79 of the Corporations Act. Further, Lifeplan claimed that Foresters was vicariously liable for the equitable breaches of Mr Woff and Mr Corby.
As a result, Lifeplan sought an account of profits from Mr Woff, Mr Corby, and Foresters, amongst other things.
Foresters' liability was rejected at first instance
At first instance, the Federal Court of Australia found that Mr Woff and Mr Corby breached their fiduciary duties and obligations of confidence to Lifeplan under equity and the Corporations Act, and various provisions in their employment contracts.
However, the court found that Foresters was not vicariously liable for the breaches of fiduciary duties because Foresters did not have the requisite knowledge that Mr Woff was using confidential information of Lifeplan for his own benefit and to the detriment of Lifeplan.
The Full Court overturned the original decision
On appeal, however, the Full Court found that the board of Foresters was aware and had actual knowledge that Mr Woff and Mr Corby had taken and used Lifeplan's confidential information in breach of their equitable obligations of confidence. The Full Court held that a company will be "knowingly concerned" in a breach of confidence if there was some act or conduct on their part. In this case, the board of Foresters used Lifeplan's confidential information that was taken by Mr Woff and Mr Corby and used it in its decision-making and governance processes.
As a result, the Full Court ordered that Foresters' capital profit should be paid to Lifeplan, which amounted to over $6 million in profits.
Mr Woff and Mr Corby were also ordered to pay Lifeplan almost $50,000 in profits that they earned from their joint venture prior to commencing employment with Foresters.
Foresters has attained special leave to appeal the Full Court decision to the High Court of Australia (High Court).
Bottom line for employers
Notwithstanding the appeal to the High Court which is pending, this decision highlights the different ways in which companies can recover damages for breaches of duties by their former employees which go beyond the more common claim for breaches of post-employment restraints of trade.
The case also serves as a warning to new employers to take care when employing senior managers and not to use any confidential information that such employees may bring across with them from their former employer. A new employer may otherwise be liable for an account of profits to the former employer for any advantage that they gain as a result of using that confidential information for their own business.
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