Six million under - The dangers of accessorial liability

A recent Federal Court decision serves as a timely reminder of the repercussions of companies employing new executives and senior managers who bring with them confidential information obtained dishonestly from their former employer.

On 12 May 2017, the Full Court of the Federal Court of Australia handed down its decision in Lifeplan Australia Friendly Society Ltd v Ancient Order of Foresters in Victoria Friendly Society Limited [2017] FCAFC 74, finding that the Ancient Order of Foresters in Victoria Friendly Society Limited (Foresters) should account for profits generated by their funeral bonds business which was developed and managed by two former employees of rival Lifeplan Australia Friendly Society Ltd (Lifeplan).

Mr Woff and Mr Corby were both employed by Lifeplan in senior roles and prepared a Business Concept Plan (BCP) for the CEO of Foresters for the development of Foresters’ comparatively small funeral bonds business.  Over the course of a number of months, Mr Woff and Mr Corby solicited the clients of Lifeplan on behalf of Foresters and developed and refined the BCP utilising the information of Lifeplan, including highly confidential rates of return and bonuses paid in the marketplace.  Mr Woff and Mr Corby then resigned from their positions and jumped ship to Foresters.

The matter, which was heard on appeal, centred on whether the board of Foresters had merely observed or knowingly taken advantage of the business opportunity which arose due to a breach by Mr Woff and Mr Corby of their duties to their former employer.

The Court found that there was a causal relationship between the breach of duties and the profit generated, that Foresters had knowingly acted upon the information and done so because of the unique opportunity it presented, and that they were complicit in the steps taken in preparation for the employees jumping ship to pursue the opportunity with Foresters.
 
As a result, the court held Foresters would not have made the profits without Mr Corby and Mr Woff taking advantage of their previous positions and without the confidential information taken from Lifeplan.  The Court ordered Foresters to account for the capital profit during the period covered by the BCP (less 6 months) which was assessed to be $6.2 million.

This decision serves as a timely reminder for company directors and officers of the ramifications of accessory liability in equity and under section 79 of the Corporations Act 2001 (Cth) when dealing with confidential information knowingly and dishonestly obtained from an employee’s former employer.

Aaron Dahl and  Jeremy Harrison