Labelmakers Group Pty Ltd v LL Force Pty Ltd

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FEDERAL COURT OF AUSTRALIA

Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 2) [2012] FCA 512

Citation: Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 2) [2012] FCA 512
Parties: LABELMAKERS GROUP PTY LTD (ACN 114 717 814) and LABELMAKERS GROUP WA PTY LTD (ACN 061 909 788) v LL FORCE PTY LTD (TRADING AS LABELFORCE) (ACN 136 603 891), ERNEST SAMPSON COOLEY, JASON ERNEST COOLEY, PAUL RICHARD DEVENEY, SCOTT SWEENEY and CHLOE LEECH
File number: VID 555 of 2009
Judge: TRACEY J
Date of judgment: 18 May 2012
Corrigendum: 3 December 2012
Catchwords:

CONTRACT – breach of contract– express and implied terms – breach of confidence

CORPORATIONS – breach of statutory fiduciary duties

EQUITY – breach of equitable fiduciary duties – breach of confidence

Legislation: Corporations Act 2001 (Cth) ss 9, 179, 182, 183
Cases cited: Able Tours v Mann (2009) 187 IR 1 cited
AMP Services Limited v Manning [2006] FCA 256 cited
Attorney-General v Guardian Newspapers Limited (Spycatcher Case) [1987] 3 All ER 316 cited
Barnes v Addy (1874) LR 9 Ch App 244 cited, applied
Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1 cited
Chan v Zacharia (1984) 154 CLR 178 cited, discussed
Chew v R (1992) 173 CLR 626 cited
Concut Pty Ltd v Worrell (2000) 176 ALR 693 referred to
Co-ordinated Industries Pty Ltd v Elliot (1998) 43 NSWLR 282 cited
Cronin v Norris [2010] NSWSC 434 compared
Dais Studio Pty Ltd v Bullet Creative Pty Ltd (2007) 165 FCR 92 cited
Deeson Heavy Haulage Pty Ltd v Cox (2009) 82 IPR 521 cited
Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 cited, discussed
Dinte v Hales [2009] QSC 63 cited
Freedom Motors Australia Pty Ltd v Vaupotic [2003] NSWSC 506 cited
Gasweld Pty Ltd v Wright (1989) 34 IR 91 cited
Hivac Limited v Park Royal Scientific Instruments Limited [1946] Ch 169 cited
Krueger Transport Equipment Pty Ltd v Glen Cameron Storage & Distribution Pty Ltd (2008) 78 IPR 262 cited
Lamb v Evans [1893] 1 Ch 218 cited
Ormonoid Roofing & Asphalts Limited v Bitumenoids Limited (1930) 31 SR (NSW) 347 cited
Parker v Tucker (2010) 77 ACSR 525 cited
Robb v Green [1895] 2 QB 1 cited, discussed
Robb v Green [1895] 2 QB 315 cited
Ridgeway International Ltd v McCullum (unreported, Sup Ct, NSW, Bryson J, 9 April 1998), discussed
Sanders v Parry [1967] 2 All ER 803 cited
Smith Kline & French Laboratories (Aust) Ltd v Secretary, Department of Community Services and Health (1990) 22 FCR 73 cited
Southern Real Estate v Dellow (2003) 87 SASR 1 cited
SWF Hoists and Industrial Equipment Pty Ltd v Polli (1996) 67 IR 356
R v Byrnes (1995) 183 CLR 501 cited, discussed
Victoria University of Technology v Wilson (2004) 60 IPR 392 cited
WA Fork Truck Distributors Pty Ltd v Jones [2003] WASC 102 cited, discussed
Warman International Limited v Dwyer (1995) 182 CLR 544 cited, discussed
Wessex Dairies Limited v Smith [1935]…
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Details
Case
[2012] FCA 512
Decision Date

CaseChat Overview and Summary

The case of Labelmakers Group Pty Ltd v LL Force Pty Ltd, which was heard in the Federal Court of Australia, involves a dispute between Labelmakers, a label printing business, and LL Force, a competitor that was established by former Labelmakers employees. The central issue in the case is whether the respondents, who were former employees of Labelmakers, breached their fiduciary and contractual duties by establishing LL Force and using confidential information from Labelmakers to compete against their former employer. The court was required to determine whether the respondents acted consistently with their obligations and whether LL Force benefited from any corporate opportunities that were denied to Labelmakers.

The court's reasoning focused on the evidence presented regarding the establishment of LL Force and the actions of the respondents in setting up the competing business. The court found that the respondents had breached their fiduciary and contractual duties by using confidential information from Labelmakers to establish LL Force. The court also found that LL Force had benefited from the corporate opportunities that were denied to Labelmakers, which constituted a breach of equitable and statutory fiduciary duties. The court rejected the respondents' claims that their actions were within the scope of their employment and did not constitute a breach of their obligations to Labelmakers.

The court ordered that the parties file and serve minutes of any orders and directions they believed should be made to give effect to the reasons for judgment and to facilitate the hearing of the remaining issues in the proceeding. The court also listed the proceeding for mention to hear the parties on what orders should be made as a result of the findings and what directions should be made for the second stage of the trial. The decision highlights the importance of protecting confidential information and the consequences of breaching fiduciary and contractual duties.

Orders

Orders of the court

1. The parties file and serve minutes of any orders which they contend should be made to give effect to the reasons for judgment delivered today on or before 24 May 2012.

2. The parties file and serve minutes of any directions which they contend should be made to facilitate the hearing of the remaining issues in the proceeding on or before 24 May 2012.

3. The proceeding be listed for mention at 9:15 am on 25 May 2012.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

FEDERAL COURT OF AUSTRALIA

Labelmakers Group Pty Ltd v LL Force Pty Ltd [2012] FCA 512

CORRIGENDUM

1. In paragraph 367 of the Reasons for Judgment, the final sentence which reads “[t]hirdly, it was LL Force which received the benefit of the corporate opportunity which the individual respondents’ conduct denied to the applicants” should be deleted.

I certify that the preceding one (1) numbered paragraphs are a true copy of the Corrigendum to the reasons for Judgment herein of the Honourable Justice Tracey.

Associate:

Date: 3 December 2012

Background

Background to the litigation

Labelforce quickly established itself as a competitor to Labelmakers WA in the label printing business. It attracted the custom of a number of former clients of Labelmakers WA. The issues in this case concern the manner in which Labelforce’s business came into existence and whether, in establishing it, Messrs Ernie Cooley, Jason Cooley, Deveney and Sweeney acted consistently with the fiduciary and statutory obligations they owed to the two applicants.THE FACTS It will be convenient to deal first with an account of relevant events insofar as they emerged from the uncontested evidence of witnesses and documentary records. Consideration of disputed matters will be deferred until the allegations made against the various respondents are dealt with. In 1993 Mr Cooley and a number of business partners purchased a label printing business called Labelcraft. Their purchase vehicle was Abdale Pty Ltd (“Abdale”). In 1995 the business name of Labelcraft was changed to Label Power. In July 2004 a wholly owned subsidiary of Labelmakers purchased all the shares in Abdale. The sale agreement provided for Mr Ernie Cooley, Mr Jason Cooley and Mr Sweeney to become employees of Abdale from 30 June 2005. It was a condition of the agreement that Mr Ernie Cooley enter into an employment contract which required him to work in the Label Power business for two years from 30 June 2005. On 30 June 2005 Mr Jason Cooley became general manager of the Label Power business. Mr Ernie Cooley did not have a specific title but worked in the business as a senior account manager responsible for a number of the business’ key clients. In July 2005 Mr Sweeney and Mr Deveney each signed a “confirmation of offer of employment”. In doing so they accepted a term of employment that:“As an Employee of LabelPower, Management requests your assistance and personal assurance in maintaining a high degree of confidentiality in relation to our initiatives, technological advancements, and procedures to which you become privy to under your Terms of Engagement.You are formally advised that under no circumstances shall the following be permitted:-•No label or production samples are to be taken off-site for personal use.•No documentation, in relation to production and/or procedures, unless specifically addressed to you as an Employee, shall be taken off-site or kept for personal use.•Photographs by Employees for personal use/reference are strictly not permitted.”In December 2005 Mr Sweeney and Mr Deveney each signed a “new employee induction plan” document. They thereby agreed to be bound by terms and conditions contained in the “Induction Handbook”. Paragraph 16.13 and 16.14 of the Handbook read:“16.13 Security…No company property may be removed from any site without specific permission from your manager. The company may, through its officers, employees and delegates inspect your personal property on Company premises or at work at any time.16.14 ConfidentialityThroughout your employment with LABELMAKERS GROUP, you will be required to deal with information which is confidential. This confidence must be respected at all times, in and outside of work.You must not reveal or use, either for your own benefit or anyone else’s, any confidential information which you acquire during your employment. Confidential information is information not publicly available, either written or oral. This obligation will still apply to you after your employment with Labelmakers Group Pty Ltd has ended.During your employment with the Company and for a period of 3 months from the termination of your employment with the company, or then after if stated in your contract of employment, you shall not solicit or entice from the company or it’s [sic] related entities any director, employee, contractor or customer.Upon termination of your employment all confidential property must be returned to the company, this includes intellectual property not in the public domain.”

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

LL Force, is, therefore, liable for the same breaches which I have found to have been committed by the individual respondents.CONCLUSION The parties were agreed that issues relating to liability should be dealt with first and that issues relating to damages and other remedies should be resolved having regard to the findings made at the first stage of the trial and after further evidence and submissions were considered. I will hear the parties on what, if any, orders should be made as a result of the findings which I have made. I will also hear them on what directions should be made so that the second stage of the trial can proceed.

Ratio Decidendi

Legal Principle Established

Mr Ernie Cooley denied having undertaken any other activities which were inconsistent with his contractual and fiduciary obligations to Labelmakers WA whilst employed by that company. He specifically denied soliciting any of Labelmakers WA’s clients to transfer their business to the new entity or soliciting any of Labelmakers WA’s employees to work in the new business.Consideration Many of Mr Ernie Cooley’s denials proved to be unsustainable in the light of documentary evidence obtained from third parties. As already noted (see above [42]) Mr Cooley told the National Australia Bank in February 2009 that committed sales of almost $3 million had come “mainly from clients who have already committed to the new business and in particular Harvey Fresh who will purchase $1,500,000 per annum.” The “clients” to which he referred were all major clients of Labelmakers WA. When confronted with this material in the witness box Mr Cooley, rather than conceding that he had engaged in soliciting of Labelmakers WA’s clients, chose to say that what he had told the National Australia Bank about the commitment of these clients was false. The application which he made to the Westpac Bank, also in February 2009 (see above at [47]-[48]), included a section on paper usage which contained figures, down to a second decimal point relating to the cost to Labelmakers WA of paper used when producing labels for Harvey Fresh, D’orsonga, Pascoes and Planet Sales. These figures were supplied in support of the assertion that a 31 percent of total cost figure was “easily achievable”. This material was relied on by Labelmakers WA to support one of its claims that Mr Cooley had wrongly used its confidential costing information. Rather than admit this, Mr Cooley said that the “easily achievable” statement was false and that he had made up the figures. By the time he gave evidence at trial Mr Cooley was well aware of the force of Labelmakers WA’s case. In a number of instances, such as those just cited, he was prepared to admit having told blatant lies to third parties rather than admit that he had done something which would tell against him and other respondents in the proceeding. As will be seen, there was compelling evidence that supported the accuracy of the assertions made in the documents. I do not consider that Mr Cooley was a truthful witness. To the extent that his evidence is contradicted by the applicants’ witnesses and the documentary record I reject it. The applicants challenged the temporal limits placed by Mr Cooley in his admissions and the truthfulness of his denials. There can be no doubt that Mr Ernie Cooley commenced planning for a new business to compete with Labelmakers WA in early 2008. His efforts included the preparation of budgets, evaluating machines for use in the business, recruiting shareholders and seeking to attract potential customers including Harvey Fresh. To these ends he instituted and participated in many e-mail exchanges with Mr Jason Cooley and Messrs Sweeney and Deveney and held regular discussions and meetings with them. These activities are summarised above at [20]-[36]. Confronted with this material Mr Cooley admitted, under cross-examination, that he had commenced preparatory work for the Label Force business in February 2008.