An Employer’s Liability as an accessory for misuse of confidential information by its own employees

It is commonly the case that executives and senior managers seeking to jump ship from one employer to another either by themselves or through recruitment agents, actively promote themselves with promises that they can bring significant business with them thereby adding to their value and increasing their worth to a prospective employer.

The recent decision of Lifeplan Australia Friendly Society Limited v Ancient Order of Foresters in Victoria Friendly Society Limited [2017] FCAFC 74 is a stark reminder of the risk to not just those employees who take and purport to misuse confidential information of former employers but also to the new employer.

In the Foresters decision, the court ordered that the new employer (Forester) should account for profits generated by business developed and managed by two former employees of Lifeplan.

The former employees of Lifeplan that joined Foresters in senior roles implemented business plans and drew clients away from their former employer. The court found that they did so whilst still employed by Lifeplan and had used and misused highly confidential information to do so.

On appeal, the court found that there was a causal relationship between the breach of the employee’s duties and the profits generated in their new employer. Further, the court found that Forrester’s as the second employer had knowingly acted upon the information, were implicated in the steps taken by the employees before jumping ship to join their company. As a consequence, the profits made by Forrester’s relied entirely upon the employees misusing the confidential information taken from their former employer and with the assistance and complacency of the new employer. Accordingly, the court ordered that Forrester’s pay damages in the sum of $6,200,000.00 representing profits made from the breaches of their employees against the former employer.

The court also discussed the provisions of section 79 of the Corporations Act 2001 (Cth) (“the Corporations Act”) which provides that a person may be involved in a contravention if and only if the person:

  1. has aided, abetted, counselled or procured the contravention; or
  2. has induced, whether by threats or promises or otherwise, the contravention; or
  3. has been in any way, by act or omission, directly or indirectly, knowingly concerned in, or party to, the contravention; or
  4. has conspired with others to effect the contravention.

The importance of this section lies in the fact that the former employees were claimed to have breached various provisions of the Corporations Act as officers of their former employer and they had been obliged in their capacity to exercise their powers and discharge their duties with a reasonable degree of care and diligence in good faith and in the best interests of the corporation and for proper purposes without improperly using their position to gain advantage or cause the corporation detriment and as officers they had obtained information that they were obliged not to use improperly or to gain advantage or to cause the corporation detriment. Those were civil penalty provisions of the Corporations Act section 180, 181, 182 and 183 and by section 79 of the Corporations Act, accessorial liability was established.

In fact, the court found that on the facts before it, “there was no doubt that the board of Forrester’s was actually aware, had actual knowledge, of the taking and using in breach of duty of confidential information. The board was not a passive observer of this; it did not prepare it but it used it in its decision-making process and after employing FPA in the governance process of checking performance. Likewise, Mr … knew of the clearly wrongful solicitations of funeral directors as the business venture was being agreed”. The court found that given the actual knowledge of the Forrester’s board in its participation of breached of the Corporations Act by the former employees, it would “not draw back from a conclusion that Forrester’s was knowingly concerned in those breaches”.

The decision is a stark and practical reminder of the risk in taking on new employees who promise to bring business and work from their former employer. Often, the promise of such new work proves irresistible to the new prospective employer, and the risks are either overlooked or ignored. The decision dealt with above clearly shows that the risk of damages is real.

If you have any queries in respect of these matters please do not hesitate to contact us for timely advice which may save expensive and troublesome litigation.

Michael Sing

Michael Sing

Special Counsel

Brisbane 07 3009 8444
Email m.sing@rclaw.com.au

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