Employees' confidentiality breach 'decimates' business

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Employees' confidentiality breach 'decimates' business

Two employees misused their former employer’s confidential information and effectively 'decimated' the business, the High Court has ruled. It ordered almost $15m in damages be paid by the company that benefited from the deception.

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Two former employees of a funeral plan business misused their employer’s confidential information, the High Court has ruled.

It ordered that more than $14.8m be paid to the previous employer by another funeral plan business that had benefited from the misuse of the confidential information.

The High Court ordered the appellant funeral plan business (Foresters) to pay damages to the competitor (‘previous employer’) that lost a third of its business after two former managers used inside information to effectively steal clients from their former employer.

In a 4-1 decision (Kiefel CJ, Gageler, Keane, Edelman JJ, and Nettle J dissenting) the High Court found the Ancient Order of Foresters in Victoria Friendly Society had profited from the dishonest conduct of former Lifeplan Friendly Society employees (Mr Woff and Mr Corby).

The High Court dramatically increased the damages over the award made in an earlier Federal Court hearing. The Federal Court had awarded Lifeplan and Funeral Plan Management $6.5 million, but the High Court, in dismissing Lifeplan’s appeal, ruled that Forresters should pay the total capital value of the business to LifePlan – ie $14,838,063.

The leading judgment of Justice Gagelar was broadly adopted by Kiefel CJ, Keane and Edelman JJ (who also handed down a joint judgment). Justice Nettle dissented, agreeing with the Federal Court.

Facts and background


Mr Woff and Mr Corby had approached Foresters board in 2010, outlining a five-year business plan to effectively steal Lifeplan clients. The plan was built around confidential information they held from their work at Lifeplan. Mr Woff and Mr Corby formed a company, Funeral Planning Australia (FPA), and signed a marketing agreement with Foresters.

The venture was successful. For example, in 2010 Foresters brought in more than $1.6 million from its funeral products, and over the following two years that figure had risen to $24 million. In the same period, Lifeplan's cash coming in to the business fell from $68 million to $45 million.

The Federal Court had ordered that Mr Woff and Mr Corby pay around $25,000 each to Lifeplan, but it declined to order Foresters to account for its profits. The Full Federal Court did order profits to be added, but the High Court went further in ordering Foresters to hand over the entire capital value of the business it acquired.

Both Foresters and Lifeplan were involved in retail investment contracts under which a customer would make payments (sometimes in a lump sum and sometimes by instalments) which were to be managed in a fund for a fee, and a capital-guaranteed sum was to be paid out on the customer's death to a funeral director to meet the expenses of a pre-arranged funeral. 

In September 2011, Lifeplan's parent company wrote to Foresters complaining that serious breaches of law and equity appeared to have been committed by Mr Woff and Mr Corby. Foresters did not then think that there was anything in the complaint. Nevertheless, Foresters took steps in an attempt to remove the cause of the complaint. Those steps included notifying funeral directors in September 2011 that existing documents should no longer be used and issuing replacement documents at the start of October 2011.

Foresters terminated the marketing and service agreement with FPA in March 2013. From that time, Foresters promoted the Foresters Funeral Fund itself. The marketing company, FPA, was placed in liquidation in June 2013.

In issue


The principal issue in this matter was whether the Full Court of the Federal Court erred in holding that the appellant, Foresters, was liable to account to the first respondent, Lifeplan Australia, for profits derived from funeral bond contracts written by Foresters during the financial years ended 30 June 2011 to 30 June 2015.

Foresters contended that the Full Court should have held, as the primary judge held, that Foresters was not liable to account for any of the profits of its funeral bond business. By way of cross-appeal, Lifeplan (and associated FPM) contended to the contrary that the Full Court should have held that Foresters was liable to account not just for the profits derived from contracts written up to 30 June 2015 but for the total capital value of Foresters' funeral bond business. 

The law 


The relevant law involved principles of equity.
 
Here there was a case of knowing assistance/participation by Foresters in breach of fiduciary duty by Mr Woff and Mr Corby. The High Court noted a passage in Consul Development Pty Ltd v DPC Estates Pty Ltd that was accepted as authoritative by both sides in the present case. Justice Gibbs (High Court) said that: ‘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.’

Justice Gagelar explained the relevant law pointing out liability in such cases saying: ‘More useful, to my mind, is the description of the amenability of a knowing participant in a dishonest and fraudulent breach of fiduciary duty to a personal order to account as an "ancillary liability", emphasising that it is the knowing participation in the dishonest and fraudulent breach by the defaulting fiduciary that renders the participant liable to account "as if" a fiduciary...

'The [High Court] reasoning in Warman makes explicit that where there is shown to exist a causal connection between a fiduciary's breach of fiduciary obligation and a benefit or gain to the fiduciary or knowing participant, the onus shifts to the defendant to establish that it is inequitable to order that the defendant account for the value of the whole of the identified benefit or gain.’

Application of the law


Justice Gagelar went on to say: ‘Importantly, it is the outcome of that ultimate evaluative judgment, and not merely the outcome of the initial inquiry into causation, which yields the "true measure" of the benefit or gain to be reflected in the order.

'Where the benefit or gain which has in fact been obtained by the errant fiduciary or knowing participant is the establishment of an ongoing business, the outcome might accordingly be that the fiduciary or knowing participant is liable to account "for the entire business and its profits, due allowance being made for the time, energy, skill and financial contribution that [the fiduciary or knowing participant] has expended or made". Depending on the circumstances, the outcome in the alternative might be that some lesser measure, more favourable to the fiduciary or knowing participant, is judged better to reflect the equities of the case.'

Justice Gagelar concluded: ‘To sum up, what Foresters obtained by reason of the breaches of fiduciary duty by Mr Woff and Mr Corby in which Foresters knowingly participated was a business. Foresters obtained that business to the cost of the business which Lifeplan operated through FPM. Foresters' business can be, and has been, appropriately valued in a manner which duly allows for all of Foresters' expenses and for all of Foresters' ongoing business risks. Foresters has failed to establish any reason for considering that an order that it account for the entirety of the business as so valued is inequitable.'

His Honour continued: ‘Lifeplan's own funeral products business, which could be expected to have continued along its previous trajectory had Foresters' business not expanded, was shown by the evidence to have been decimated.’

The bottom line: When a business takes advantage of information illegally obtained by persons in fiduciary relationships (like the employees in this case) liability to account can flow through to that business even though the information was not illegally obtained by the business.

Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43 (10 October 2018)
 
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