By Simon Abraham

16 November 2018

In a ground breaking decision delivered on 10 October 2018, the High Court set out exactly what happens when employees and competitors set out to steal clients through reliance upon confidential information or improper insider knowledge. Short answer… the fraudulent use of confidential insider information for a competitive edge will see the Court come down hard!

The case of Ancient Foresters in Victoria Friendly Society Limited v Lifeplan Australia Friendly Society Limited [2018] HCA 43 involved two senior employees of Lifeplan, a funeral business, who secretly approached a much smaller competitor, Foresters, with a five year business plan to use insider information to ‘steal’ Lifeplan’s clientele. The Board of Foresters agreed to the proposal and the business skyrocketed in size from $1.6m revenue to $24m revenue in two years.

Meanwhile, Lifeplan lost $23m in revenue in the same period. The Court held the employees personally liable (as expected), however in a remarkable turn of events, the Court further extrapolated the liability to additionally encompass Foresters’ business in its entirety. This additional liability was on the basis that Foresters knowingly assisted the employees’ fraud through engaging in the dishonest business plan.

This serves a clear warning to those who engage with or participate in breaches of fiduciary, director or employee duties. We live in a competitive world – but a competitor assisting in ‘dishonest and fraudulent’ conduct can be classified as ‘knowingly assisting’ the furtherance of such fraud.

Employees wishing to engage in commercial competition with their employer must not take any steps towards that endeavour until all association with the employer has ceased. The High Court took this reasoning one step further and held that where a competitive business knowingly assists in such dishonest behaviour, they too will be held liable and stand to potentially lose the entire net present value of their business. The profits received from the competitor in encouraging the fraudulent acts are one thing; however, the Court emphasised that the business connections made throughout such an endeavour convey far-reaching future benefits on the company. These future commercial benefits must be accounted for too as they would not have been realised but for the direct relationship with the dishonest employees.

The Court emphasised the need to deter all future persons from facilitating or engaging in such dishonest behaviour as a matter of principle and legal policy. The message is clear – if a business is built on foundations of fraud or breach of contract, then the competitor benefiting from the fruit of this poison tree can suffer severe financial consequences.

 

If you require advice surrounding Employment Law, please do not hesitate to contact Simon Abraham or a member of our Litigation & Dispute Resolution team.

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