18 October, 2018
Ancient Order of Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43.
What you need to know
The High Court has ordered that an employer account for the entire capital value of the business it acquired when it poached two former employees of a competitor and knowingly assisted them to breach their duties to their former employer.
By majority, the Court awarded an account of profits of $14.8 million to the former employer, plus interest and costs.
What you need to do
Be aware that even in the absence of post-contractual restraints, employees still have strict duties to protect business connections and confidential information for the benefit of their employer.
Ensure senior management employees, particularly those tasked with recruiting new talent, understand their obligations not to knowingly assist prospective employees in any breach of duty to a former employer.
The Case
The High Court has delivered judgment in relation to a long-running matter between Lifeplan Australia Friendly Society Limited (the Respondent) and the Ancient Order of Foresters in Victoria Friendly Society Limited (the Appellant).
Both entities are engaged in the pre-paid funeral products industry. While still employed by the Respondent, two employees surreptitiously proffered to a competitor, the Appellant, a business plan designed to entice away systematically their employer's funeral director clients for the benefit of the competitor. The plan embarked on, with which the competitor and ultimate new employer of the employees knowingly assisted, involved the wholesale plundering of their employer's confidential information and business records.
The employees targeted their employer's client base and diverted business to the new employer both prior to and after their change of employment. Following the implementation of the business plan, the new employer's funeral product revenue increased significantly while the old employer's revenue correspondingly fell.
Federal Court
At first instance, Justice Besanko of the Federal Court found the new employer had knowingly assisted the two employees in breaching their duties to their employer, but that the confidential information taken was not used to generate the profits earned in the business. No account of profits against the new employer was ordered.
Full Court of the Federal Court
On appeal, the Full Court of the Federal Court found that the primary judge's test for causation was too narrow. It ordered the new employer to account for its profits in the sum of $6,558,495, which represented profits derived from pre-paid funeral contracts in the first five years of the business plan.
The new employer sought special leave to appeal the judgment of the Full Court, contending that it was not liable to account for any of the profits of its funeral product business. The old employer sought special leave to cross-appeal, contending that the new employer was liable to account for the total capital value of the acquired business connections.
Decision of the High Court
The High Court unanimously dismissed the appeal. It found that because the new employer knowingly participated in the breaches by the two employees, and the profit would not have been made but for the dishonest wrongdoing, the new employer was liable to account for the profits dishonestly made.
The High Court by majority allowed the cross-appeal by the Respondent on the basis that there was no principled reason for requiring the new employer to disgorge anything less than the entire capital value of the business it had acquired through its participation in the employees' disloyalty. Importantly, the new employer had not demonstrated that any of its increased business in the relevant period could be explained by matters other than the business connections appropriated from its competitor. Further, the new employer adduced no evidence to show that those business connections expired after the effluxion of five years, rather than continuing on an ongoing basis.
Orders
The Court ordered the Appellant to account to the Respondent in the sum of $14,838,063 representing the net present value of the acquired business.
Ashurst acted for the Respondent in the proceedings.
The duty of loyalty
This decision is an important reminder of the strict duties that employees owe to their employer to protect their employer's business connections, not to divert opportunities away from their employer and generally to act in their employer's interests during their employment. These duties apply regardless of whether express contractual duties to this effect are contained in an employment contract.
The High Court emphasised that if the employees had become aware of the same business strategy devised by other employees, and they were loyal employees undistracted by their self-interest and the assistance provided by the competitor, they would have moved to ensure that their employer's business connections were "shored up and kept secure against the threat" posed. In this regard, the employees failed in their duties.
The duty to account
The decision by the Court requiring the new employer to disgorge all of the profits earned (and to be earned) as a result of its participation in the breaches of duty is an application of established principle. By providing the commercial vehicle to enable the employees to implement their strategy, the new employer received substantial benefits in terms of increased revenue and, for that reason, was obliged to disgorge those profits to the old employer.
The case acts as a cautionary tale for employers considering business opportunities being proffered by employees of competitors.
For further information, please contact:
Jane Harvey , Partner, Ashurst
jane.harvey @ashurst.com
