The $6 million Cost of Misusing Confidential Information

A recent decision of the Appellate Division of the Federal Court of Australia has recently decided to award over $6 million dollars in damages to an ex-employer in relation to the misuse of its confidential information by two former employees. What is most interesting about this decision is the fact that the order was imposed on the new employer who had benefited from the breach. The decision illustrates that in circumstances where a new employer turns a blind eye to the wrongdoing of its new employees, it may find itself embroiled in costly litigation with possible significant financial consequences.

Messrs Woff and Corby were employees of Lifeplan Australia Friendly Society Ltd (“Lifeplan”) who were engaged in the business of funds management and providing services in relation to investment products, funeral bonds and pre-paid funeral plan contracts. In late 2010, both employees left the employment of Lifeplan and became employees of Ancient Order of Foresters in Victoria Friendly Society (“Foresters”). However, prior to the cessation of their employment with Lifeplan, they established a separate business named Funeral Planning Australia Pty Ltd (“FPA”). In particular, the employees used confidential information to create a business plan through their new business for Foresters. In late 2010, FPA entered into an agreement with Foresters whereby it provided promotional and marketing services to Foresters in return for the payment of a commission. The promotional and marketing services related to an investment product issued by Foresters known as funeral bonds. Lifeplan also issued funeral bonds and were a much larger competitor of Foresters. Accordingly, Lifeplan brought proceedings in the Federal Court of Australia against Messrs Woff and Corby individually, their new business (FPA) and also Foresters. Lifeplan were seeking declarations, an injunction, an order for delivery up of documents and an account of profits against each of the parties.

In the initial proceedings, Justice Besanko found that the employees’ actions amounted to a blatant breach of duty and thus had breached their contractual obligations, with respect to their duty of fidelity and good faith, but also of the confidentiality, intellectual property and technology usage. One of the employees was held to have also contravened the Corporations Act 2001 (Cth) (“Corporations Act”) through his breaches while an officer of Lifeplan. In this regard, the Court ordered the two managers to pay their former employer, Lifeplan almost $50,000 as an account of profits.

Even though at first instance Justice Besanko formed the view that Foresters were “open to” the use of the confidential information and thus had assisted in the breach, he was not satisfied that Foresters had the requisite knowledge required for the purposes of section 79 of the Corporations Act nor was there a causal link between the employees’ breaches and Foresters’ profits. As a result, Justice Besanko rejected Lifeplan’s claim for an estimated $30 million in damages based on the value of Foresters business.

Lifeplan appealed this aspect of the decision in the Full Federal Court with the decision handed down last week. The Full Court disagreed with the approach of the primary Judge and found that there could be no doubt that the board of Foresters had actual knowledge, of the taking and use, in breach of duty, of confidential information. It was held that the business plan created by the employees disclosed detailed information, some of which expressly, and plainly, came from Lifeplan’s records. The Full Court held that in relation to such information of detailed specificity and commercial importance, no honest and reasonable person, not shutting his or her eyes to the obvious, could conclude other than that the document was based on Lifeplan’s confidential information brought by the current employees of Lifeplan.

The Full Court further stated that the board members knew or ought to be taken to have known that they were being supplied with confidential business information of a competitor by the competitor’s employees and this would have commercial disadvantage to the competitor and have likely and intended commercial advantage to their company. Furthermore, the business plan made it clear that the employees were attempting to persuade the board of Foresters to make a decision to attack the business of Lifeplan for the joint future benefit of both the employees and Forester.

The Full Court was also required to consider the most appropriate approach to calculating the work of Foresters or its profits made as a result of the business plan. Lifeplan submitted that they were entitled to the value of the whole business, less any just allowances properly proved. The Full Court rejected this approach, but nonetheless found no reason why an order for the capital profit for Foresters’ competing business up to 30 June 2015 (representing four and a half years of the employees’ five year business plan) should not flow from the knowing involvement in the breaches of statutory duty. This value was assessed at $6,233,944.

Lessons for Employers

In light of this decision it is important to remember and understand both the risks posed to businesses by their former employees, and the risks in using confidential information from an employee or former employee, of a competing business. Furthermore, this landmark decision clearly demonstrates that any provable loss or damage flowing as a result of such conduct, may give rise to significant compensatory awards.

To avoid these kinds of issues, we recommend employers consider implementing the following precautionary measures:

  • Ensure your business has adequate post employment restraints and clauses that deal with confidential information in your employment contracts;
  • Implement appropriate workplace policies dealing with confidential information and intellectual property;
  • Ensure you have appropriate procedures for dealing with departing employees such as obtaining personal electronic devices and reminding employees of their contractual obligations;
  • If you are concerned that an employee may have taken confidential information, seek legal advice immediately and take urgent action to prevent the information being used or further disclosed;
  • Think twice about knowingly employing a person who may be in breach of their fiduciary and statutory duties or post-employment obligations with their former employer; and
  • Make enquiries of new employees to ensure they are not in breach of any post-employment restraints when commencing employment with you.

If you wish to discuss how to implement best practice contractual terms regarding these matters or have concerns regarding the use of confidential information by your employees, please do not hesitate to contact us.

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