Do employees owe fiduciary duties to their employer?

Overview:

Just as employers owe fiduciary duties to their employees’, employees owe fiduciary duties to their employer. These include the duty of loyalty and the duty not to profit. The recent High Court case, Ancient Order of Foresters in Victoria Friendly Society Ltd v Lifeplan Australia Friendly Society Ltd, also recognised that a third party who knowingly assists in a breach of fiduciary duty between an employee and employer, has too, committed an equitable wrong.

Background/ Facts

Lifeplan Australia Friendly Society Ltd (“Lifeplan”), through its subsidiary, Funeral Plan Management Pty Ltd (“FPM”), and Ancient Order of Foresters in Victoria Friendly Society Ltd (“Foresters”) were competitors involved in providing funeral investment products to customers. Lifeplan was considerably more profitable than Foresters, with Lifeplan’s inflow of funds form funeral products in 2010 being in the order of $68 million, while Foresters was $1.6 million.

Mr Woff and Mr Corby were employed by Lifeplan in managerial roles for FPM. In 2010, the two proffered a proposal to Foresters to develop the company’s funeral product business that would capture majority, if not all, of FPM’s existing business. The proposal was presented to Foresters board of directors and contained confidential information on Lifeplan, such as the company’s detailed business and financial intelligence. Mr Woff and Mr Corby claimed to be FPM’s ‘two key employees’ and proposed their plan would ‘replicate the success enjoyed by FPM’. The proposal was formalised in a five-year business concept plan (“BCP”), which detailed the strategy to ‘attack the commercial base’ of Lifeplan in order to win over as many clients as possible.

In accordance to the proposal, Foresters agreed to employ Mr Woff and Mr Corby, and established Funeral Planning Australia Pty Ltd (“FPA”) to distribute the funeral products. While still employed by Lifeplan, Mr Woff and Mr Corby took a database of hundreds of funeral directors’ contact details maintained by Lifeplan, and copied Lifeplan’s disclosure documents, contracts, marketing and administrative documents for FPA.

In two years, Foresters annual inflow had significantly increased from $1.6 million to $24 million in 2012, while Lifeplan’s dropped from $68 million to $45 million.

Law

Lifeplan brought proceedings against Mr Woff and Mr Corby for breaching their fiduciary duties, and argued Fosters was liable for knowingly assist in those breaches.

Employees owe their employer’s fiduciary duties in which they undertake a responsibility to act in the exclusive interests of their employer. Such duties include the duty of loyalty and duty not to profit, which Mr Woff and Mr Corby both breached against their employer, Lifeplan and FPM. The equitable remedy is an account of profits, where the defendant is required to pay to the plaintiff the monetary value of a benefit or gain to the defendant as a result of the breach of duty.

The High Court authority, Consul Development Pty Ltd v DPC Estates Pty Ltd, states that ‘a person who knowingly participates in a breach of fiduciary duty is liable to account to the person to whom the duty was owed for any benefit he has received as a result of such participation.’

Decision

The High Court found Foresters was in breach of an equitable wrong by knowingly assisting Mr Woff and Mr Corby in a dishonest and fraudulent design to breach their fiduciary obligations to Lifeplan and FPM. Further, the court held Foresters, too, was liable to account to Lifeplan and FPM. The High Court affirmed the appeal Judge’s decision that the Trial Judge had erred in finding no causal connection between the breached of fiduciary duty and the profits generated by Mr Woff and Mr Corby for Foresters. The court concluded that, without the breaches of fiduciary duty by Mr Woff and Mr Corby taking advantage of their positions and misusing Lifeplans confidential information, Foresters would not have made the profits. Because equity requires a knowing involvement in a breach of fiduciary duty to account for the profits gained, the Full Court ordered Foresters to account to Lifeplan for the profits made in the sum of $6,558,495. This sum represented majority of the net present value of profits made and projected to be made on contracts entered during the BCP. On Foresters appeal to the High Court, the court ordered Foresters to account for the entire capital value of the business it acquired to Lifeplan and FPM in the sum of $14,838,063.

Key Takeaway

Beware when hiring competitors’ employees! Ignorance is not bliss as the Full Court demonstrated in this case:

[N]o 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 current employees of Lifeplan who were seeking to persuade the board of Foresters to make a decision to attack the business of Lifeplan for the joint future benefit of the employees and Foresters.

If you believe the information provided to you by your new employee may be confidential to their previous employer, do not accept it as you may open yourself up to be sued and liable for an account of profits (plus all the expensive lawyer fees).