Employer ordered to disgorge the total capital value of its business as a result of employees’ breach of duties they owed to their former employer

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Employees owe certain duties to their employer known as fiduciary duties. These are, put broadly, the duty of loyalty and the duty not to profit. One who knowingly assists another to breach their fiduciary duties may also be held to account for gains made as a result.

A recent example where employees dishonestly and fraudulently breached their fiduciary duties, and a third party was found liable for knowingly assisting the breach, is the recent High Court of Australia case of Ancient Order of Foresters in Victoria Friendly Society Limited (Foresters) v Lifeplan Australia Friendly Society Limited (Lifeplan) [2018] HCA 43.

The key issue in this case concerned the extent to which an employer (Foresters), which had been found to have participated in a breach of fiduciary duty by employees vis-à-vis their former employer (Lifeplan), should be required to account to that former employer for profits it made in connection with the breach.

Background

Lifeplan was in the business of selling funeral bonds to people to help them pay for their funerals upon death, and was the biggest funeral bond provider in the Australian market.

Noel Woff and Richard Corby were senior employees of Lifeplan. In 2010, they pitched to Foresters a plan to assist it to turn around its funeral products business, which up until that point, had not been profitable.

Foresters accepted their business plan, which was largely based on the confidential information and business records of Lifeplan, and appointed Woff and Corby as managers of their funeral products business. Woff and Corby then embarked on a course that involved diverting as much as possible of Lifeplan’s existing funeral bond business to Foresters. As a result, the value of the Foresters appreciated significantly, while Lifeplan’s business, in the words of the High Court, was “decimated”.

Lifeplan subsequently commenced proceedings in the Federal Court, claiming that Woff and Corby had breached their fiduciary and statutory duties owed to Lifeplan, and that Foresters had knowingly assisted in those breaches.

Rather than opting for damages, Lifeplan sought an account of profits against Foresters for the entire value of Foresters’ funeral products business. The Federal Court agreed to order an account of profits against Woff and Corby in relation to their use and disclosure to Foresters of Lifeplan’s confidential information, but declined to make an order against Foresters.

Lifeplan appealed to the Full Federal Court seeking an order that Forester also be held liable for the breach by Woff and Corby. The Full Court agreed to extend the order of an account of profits to Forester, but considered that making Forester disgorge all of its profit to Lifeplan would be excessive. Instead, the Full Court made Forester account for the net present value of the profits made by it over a five-year period ($6,558,495).

Foresters then appealed to the High Court and contended that not all of the actual and projected profits in the relevant period would have resulted from the breach. Lifeplan cross-appealed arguing a full account of profits should have been granted without limitation.

The wrongdoing – breach of fiduciary duty

An employee and employer have a fiduciary relationship which means that the employee, one, must avoid any conflict between their duties to their employer and any duties owed to a third party (duty of loyalty) and, two, not use their position vis-à-vis its employer to gain a personal advantage (duty not to profit).

Where a person in the position of fiduciary acts dishonestly or fraudulently, they will face sterner consequences for breaching their duties, and so may anyone else who knowingly participated in the breach.

In this case, Full Court had already correctly concluded that there had been a breach of fiduciary duty by Woff and Corby, with the assistance of Foresters, resulting in the wholesale acquisition or “plundering” by Foresters of the business connections that Lifeplan had developed.

The remedy – account of profits

If a person has breached their fiduciary duties, they may be required to disgorge (or forfeit) any unauthorised gains by means of an account of profits. This remedy is based on the principle that a person should not be permitted to gain from their wrongdoing.

Causation – whether it is necessary to separate acts that caused the benefit from those which did not

For an account of profits to be granted, the breach of fiduciary duty must have caused the gain to be derived.

On appeal, Foresters argued that the Court needed to look at whether there was a causal connection between each of the particular acts of Foresters that helped instigate the breach, and the overall benefits or business that it was able to subsequently generate.

Chief Justice Kiefel, Justice Keane and Justice Edelman said this submission was misguided, and that the entire circumstances surrounding Foresters’ participation in the breach of fiduciary duty by Woff and Corby could not be separated from the benefits received by Foresters because of the breach.

Accordingly, it was not necessary to analyse each particular act alleged to have caused a gain to be derived by Foresters.

Quantification – whether there are circumstances that reduce the profits to be accounted for

According to the High Court, where causation is established, the onus is then on the wrongdoer to show that they should not account for the full value of the advantage obtained by the breach of fiduciary duty.

There are two ways in which a wrongdoer may do this. First, by showing that they are entitled to an allowance for their time and labour and costs incurred in generating the profit. Second, by demonstrating that some part of the benefit gained has no reasonable connection with the wrongdoing.

In the opinion of the majority, there was no basis for reducing the extent of the liability of Foresters on the facts of the case.

The accounting – whether present and future profits are to be disgorged

Foresters’ final argument was that future profits, as distinct from actual profits, were irrecoverable. The High Court held that this argument had no basis in principle, and that Foresters had to account for all profits actual and future.

Takeaway

Foresters’ decision to file the appeal ultimately backfired, as the High Court ordered Foresters to account to Lifeplan for the total capital value of its business, assessed at $14,838,063, which was more than double the amount granted by the Court below.

The case provides a stark warning to all employees who are thinking of ‘jumping ship’, that firstly, they owe a duty of loyalty to their employers and a duty not to use their position to gain a profit and, secondly, that anyone who facilitates a breach of these duties, such as a prospective employer, may also face crippling penalties.

This is because the law places a heavy premium on adherence to the duties owing in the context of an employee-employer relationship, as well as any other type of fiduciary relationship, and it also treats the protection of confidential information as paramount.

A third party that knowingly benefits from a breach of fiduciary duty, may need to repatriate the entire profits they have made following the breach, to the wronged party.

Please do not hesitate to contact Nicholas McCarthy or Michael Bishop on (03) 9614 7707 in relation to any queries about this article.

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2018-12-05T10:31:02+00:00December 5th, 2018|Categories: Employment Law, Litigation|Tags: , |