Australia - What new employers need to consider when hiring competitor's employees

13 September 2017

Kristy Peacock-Smith, Leila Moddel

In this case, the Appellant, a friendly society, which through its subsidiary, Funeral Plan Management Pty Ltd (FPM) engaged in the business of funds management and investment relating to funeral plans and products. The Appellant employed Mr Woff, a senior manager responsible for the marketing and distribution arm of FPM, and Mr Corby, the national sales manager.

Throughout their employment with the Appellant, Messrs Woff and Corby engaged in a range of conduct which culminated in them developing, together with the Respondent, a new business similar to that of the Appellant's business.

At first instance, three breaches of the duties owed by Messrs Woff and Corby to the Appellant were found. The breaches included using the Appellant's confidential information in the concept of the new business, soliciting business from the Appellant's funeral directors and copying the Appellant's documents for use in the new business.

In addition, having established that Mr Woff breached various duties under the Corporations Act, the primary judge considered whether the Respondent was 'knowingly concerned' in each of the various contraventions. Regarding Mr Woff's use of confidential information, the primary judge found that the Respondent was not knowingly involved. It was said that 'more active involvement or conduct' was required. This was one of the primary matters on appeal.

Being knowingly concerned in a contravention pursuant to section 79(c) of the Corporations Act 2001 (Cth) requires that a person has actual knowledge of the essential facts which constitute the contravention (Yorke v Lucas 158 CLR at 670). Whether such knowledge exists will be a question of fact, however there are five circumstances in which this requirement may be proved (Consul Development Pty Ltd v DPC Estates 132 CLR 373):

  1. Actual knowledge ;
  2. Wilfully shutting one's eyes to the obvious;
  3. Wilfully and recklessly failing to make such inquiries as an honest and reasonable man would make;
  4. Knowledge of circumstances which would indicate the facts to an honest and reasonable man;
  5. Knowledge of circumstances which would put an honest and reasonable man on inquiry.

The fifth category clarifies that a person cannot avoid responsibility where any such impropriety would have been apparent to an ordinary person in that same position (Farah Constructions Pty Ltd v Say-Dee Pty Limited [2007] HCA 22).

On appeal, the Court found there was ample evidence that the Respondent was knowingly involved in the contravention of ss 181, 182, and 183 of the Corporations Act, which are civil penalty provisions. In particular, the Respondent was told that confidential information was being presented to it, although not necessarily that it was the Appellant's confidential information. The contents of the documents used to persuade the Respondent to join the new venture were clearly and specifically based on the Appellant's confidential information. Further, the Respondent knew that Mr Woff was soliciting business while still employed by the Appellant. 

The Full Court found, "This was not mere knowledge gained in a role of spectator to another's wrong" but was "active participation in a dishonest breach of fiduciary duty".

The board members "knew or should be taken to have known (by the standards of honest and reasonable people) that they were being supplied with confidential business information of a competitor by the competitor's current employees, in order to have them make a decision to enter into a business relationship with the current employees of the competitor to the likely commercial disadvantage of the competitor, and the likely and intended commercial advantage of their company and the employees".

Likewise the Respondent's chief executive also "knew of the clearly wrongful solicitations of funeral directors as the business venture was being agreed", the Full Court said, adding that it perceived the knowing concern and participation in the breaches of equitable duty as running together.

In determining the profits made by the Respondent as a result of the knowing involvement in the breaches of statutory duty, the Full Court found "no reason why" an order for the capital profit on the Respondents' competing business up to June 30, 2015 – representing four and a half years of the managers' five-year business plan – "should not also flow". This value was put at $6,233,944.

Implications for employers

Employers need to ensure that their employment contracts sufficiently protect the business' legitimate interests upon the departure of employees.

For prospective employers that have employed or are considering employing persons from a competitor, this case is a timely reminder that they may be found to be knowingly involved in any employee's contravention of obligations, and if they are found to be, the financial impact can be devastating.

Authors

Leila Moddel photo

Leila Moddel

Associate
Australia

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