Labelmakers Group Pty Ltd v LL Force Pty Ltd
[2012] FCA 512
•18 May 2012
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] 2 KB 80 cited
Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 citedDate of hearings: 23, 24, 25, 27, 30 & 31 May 2011, 1, 2, 3, 6, 7, 8, 9, 10 June 2011 and 2, 4 and 5 August 2011 Date of last submissions: 12 August 2012 Place: Melbourne (heard in Melbourne and Perth) Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 370 Counsel for the First and Second Applicants: Mr S Anderson SC and Mr J P Slattery Solicitor for the Applicants: Clayton Utz Counsel for the Respondents: Mr G T Bigmore QC and Mr S B Rosewarne
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 555 of 2009
BETWEEN: LABELMAKERS GROUP PTY LTD (ACN 114 717 814)
First ApplicantLABELMAKERS GROUP WA PTY LTD (ACN 061 909 788)
Second ApplicantAND: LL FORCE PTY LTD (TRADING AS LABELFORCE) (ACN 136 603 891)
First RespondentERNEST SAMPSON COOLEY
Second RespondentJASON ERNEST COOLEY
Third RespondentPAUL RICHARD DEVENEY
Fourth RespondentSCOTT SWEENEY
Fifth RespondentCHLOE LEECH
Sixth Respondent
JUDGE:
TRACEY J
DATE OF ORDER:
18 MAY 2012
WHERE MADE:
MELBOURNE (HEARD IN MELBOURNE AND PERTH)
THE COURT ORDERS THAT:
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
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
VID 555 of 2009
BETWEEN: LABELMAKERS GROUP PTY LTD (ACN 114 717 814)
First ApplicantLABELMAKERS GROUP WA PTY LTD (ACN 061 909 788)
Second ApplicantAND: LL FORCE PTY LTD (TRADING AS LABELFORCE) (ACN 136 603 891)
First RespondentERNEST SAMPSON COOLEY
Second RespondentJASON ERNEST COOLEY
Third RespondentPAUL RICHARD DEVENEY
Fourth RespondentSCOTT SWEENEY
Fifth RespondentCHLOE LEECH
Sixth Respondent
JUDGE:
TRACEY J
DATE:
18 MAY 2012
PLACE:
MELBOURNE (HEARD IN MELBOURNE AND PERTH)
REASONS FOR JUDGMENT
Mr Ernie Cooley has been involved in the printing industry for over 50 years. At one time he was a 30% shareholder in a printing business named Labelcraft. It was later renamed Labelpower and, under this name, it was sold, in 2004, contrary to Mr Cooley’s wishes, to the first applicant in this proceeding (“Labelmakers”). The second applicant (“Labelmakers WA”) was a wholly owned subsidiary of Labelmakers established to run the Western Australian operations formerly conducted by Labelpower.
While at Labelpower Mr Cooley had involved his son Jason and another respondent, Mr Paul Deveney in the business.
When Labelmakers WA was established Mr Ernie Cooley was employed as a consultant. Mr Jason Cooley was employed as General Manager. Mr Deveney was the Production Manager. Mr Scott Sweeney was appointed the Operations Manager.
By early 2008 Mr Ernie Cooley was discontented about the manner in which the Labelmakers WA business was being conducted in Western Australia. He started to develop plans for the establishment of a new company which would compete with Labelmakers WA in the State. These preparations included the drafting of business plans and the making of applications to banks for finance. By mid-2009 these plans had come to fruition. The first respondent (“Labelforce”) had been incorporated and a business name was registered. Its shareholders included Messrs Ernie Cooley, Jason Cooley, Deveney and Sweeney. Each of them resigned as senior executives of Labelmakers and went to work for Labelforce.
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 Confidentiality
Throughout 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.”
Towards the middle of 2006 Mr Ernie Cooley attended a luncheon with two business acquaintances, Mr Kevin Sorgiovanni and Mr John Scolaro. Mr Scolaro worked in the business of Harvey Fresh which was Label Power’s (and, subsequently, Labelmakers WA’s) major client. Mr Scolaro was also the son of the owner of Harvey Fresh. During the luncheon Mr Scolaro and Mr Sorgiovanni raised the prospect of Mr Ernie Cooley commencing his own business.
Shortly afterwards Mr Ernie Cooley obtained legal advice about the extent of the restraint of trade limitations imposed on him by his extant contract of employment with Abdale.
On 6 July 2006 Abdale changed its name to Labelmakers WA.
In August 2006 the sixth respondent, Ms Chloe Leech, commenced employment with Labelmakers WA as a junior receptionist. After a three month probationary period she was offered permanent employment. The letter of offer which was given to her on 28 November 2006 contained the following passages:
“You should be aware that the nature of our business and our relationships with customers requires the handling of highly confidential information concerning products and methods of manufacture.
Therefore, the need for confidentiality is an important requirement of employment with the Company, and we require you to give us, in writing, by your acknowledgement of this letter, an assurance that you will keep confidential any information passed on to you whilst in our employ. Without in any way limiting this condition, you shall not:
· Except with the prior written approval of the Company or in the proper discharge of your duties, disclose to any third party during your employment or thereafter any information relating to the Company’s affairs, or the affairs of any company in the Labelmakers Group which may come to your knowledge. In the course of your employment and during the term of this contract and as far as is reasonable thereafter, you shall use your best endeavours to prevent the disclosure of any such confidential [information];
· The Employee agrees that the Company shall be the exclusive and absolute owner of any information in any form that has and/or may come to the Employee’s attention in any manner whatsoever in the course of his employment with the Company with respect to the Company or the Company’s Activities including its clients, suppliers, contracts, products, services, processes, analysis, studies, research, discoveries, inventions, ideas, developments, computer programs and systems, and that, accordingly, he shall not, either directly or indirectly, disclose to anyone or use any such information to his own advantage or to the advantage of a third party, on any consideration, either during the period of his employment or thereafter, except information which becomes part of the public domain otherwise than by a breach hereof, or with the prior written consent of the Company.
· Except with prior written approval of the Company, engage or be engaged during the period of your employment either directly in any other trade, business of occupation, that is either in competition with our business or directly impacts your ability to fully complete the duties and responsibilities of your position.
· Engage or be engaged in any conduct or activity designed to harm or adversely affect the Company’s operations, business or interest.
All property of the Company, including without limitation, reports, documents, files, books, manuals, records, price lists, employee lists, customer or prospective customer lists, statement papers, writing and similar items (whether in hard copy, electronic, magnetic or other form) relating to the Company’s affairs and all other materials, property or equipment shall be and remain the property of the Company and shall be handed over to the Company by you from time to time on demand and in any event on your leaving the service of the Company.
Upon termination of your employment or at any other time upon demand, you will deliver to the Company or its authorised representative:
(a)Documents or other materials (including copies in your possession or control) in any way relating to any confidential information or trade secrets of the Company or any company within the Labelmakers group; and
(b)Any property of the Company or any company within the Labelmakers group, including but not limited to keys, books, papers, mobile phones, computers, software or vehicles, which the Company is entitled to possess.
You shall not, without prior consent from the Company, your Manager or other delegated officer, remove any records, documents, … or other property from the workplace. You will be required to return any Company property or property of any company in the Labelmakers group, in your possession or control at the cessation of your employment.
In addition to the specific functions mentioned, we expect that you will perform the duties and requirements of the position diligently and with a level of skill commensurate with that, which would be expected to be displayed by an experienced person in your position, and that you always promote the interests and endeavour to enhance the reputation of the Company and the Labelmakers Group generally.”
Ms Leech signed an acknowledgement that she was to be bound by these terms.
The year 2007 was, relevantly, uneventful. Early in 2008, however, Mr Ernie Cooley had another discussion with Mr Sorgiovanni about when he (Mr Cooley) might start up his own business.
This discussion appears to have generated renewed interest by Mr Cooley in such a project.
On 17 January 2008 Mr Greg Poole (whom Mr Ernie Cooley described as “a former colleague”) sent an e-mail to Mr Cooley to which was attached details of an “existing label print business” which was then on the market.
On 30 January 2008 Mr Ernie Cooley requested his solicitor to prepare a confidentiality agreement to cover discussions between him and the vendors of a label printing business named “Label Magic.”
On 28 February 2008 Mr Ernie Cooley obtained a quotation from an insurance broker for insurance of a “new business venture”.
During February various e-mail exchanges occurred between Mr Ernie Cooley and Mr Jason Cooley dealing with budgets and other matters relating to a possible new business.
On 4 March 2008 Mr Ernie Cooley created a document on his home computer. The document was entitled “sales”. It read, in part, as follows:
“In fact one of the other shareholders, Kevin Sorgiovanni, is the General Manager of Harvey Fresh, which requires $1,600,000 labels per annum, who intends offering the new venture a three to five year contract for the supply of labels.
Another client Planet Sales, a label requirement of $1,200,000 per annum, will enter into an agreement to purchase a minimum of $300,000 labels from the new Company.
The following Companies have also indicated their desire to purchase labels from the new identity because of a number of reasons namely delivery times, service, quality and raw material (produced by the parent Company (Labelmakers Vic) problems that cannot seem to be rectified.
Company Yearly Usage Assumed Sales D’orsonga $500,000 $250,000 Ferngrove Winery $300,000 $150.000 Pascoe’s $400,000 $100,000 Gourmet Chevups $300,000 $250,000 Winecorp $140,000 $140,000 Canon Foods $50,000 $50,000 B&S General $20,000 $20,000 Action Engineering $10,000 $10,000 Australian Mud $80,000 $10,000 Harvey Fresh $1,600,000 $1,600,000 Planet Sales $1,200,000 $300,000 Total $4,600,000 $2,950,000”
On 11 March 2008 Mr Ernie Cooley sent budgets for a new business to Mr Jason Cooley at the latter’s request. The budget made provision for the purchase of a new machine.
Shortly afterwards Mr Ernie Cooley and Mr Jason Cooley met with Mr Sorgiovanni and Mr Scolaro. The Cooleys were anxious to obtain the support of Harvey Fresh for their new business. Mr Jason Cooley considered that the Harvey Fresh contract was the “jewel in the crown of the Labelmakers’ client list.” They therefore sought to persuade Mr Sorgiovanni and Mr Scolaro to transfer all the label printing work which was then being given to Labelmakers WA to the new entity once it had been established. Mr Sorgiovanni “agreed to give Ernie Cooley all our label business.” The Cooleys produced spreadsheets which provided anticipated income and expenditure data for the proposed new printing business. Mr Sorgiovanni and Mr Scolaro told Mr Ernie Cooley that they were “in”.
On 2 April 2008 Mr Ernie Cooley prepared a letter on his home computer addressed to Hart Finance. He was seeking to arrange finance for the new business. The letter advised that “clients have indicated that they would immediately give the new identity their business.” He advised that “sales of $1,900,000 are mainly from clients who have already committed to the new business”. The letter noted the need for “complete confidentiality”. It continued:
“In normal circumstance [sic] new Companies need to identify potential clients and then begin the long process of establishing relationships, pricing, quality capabilities and servicing ability.
This new business starts with three shareholders who have knowledge of Companies with $11,000,000 worth of sales and personal relationships with $8,000,000 and these Clients know the credentials and capability of the shareholders.
And that is the big difference with this business.”
On 9 April 2008 Mr Ernie Cooley sent an e-mail to Mr John Scolaro attaching budgets and cash flows “for new business.” A number of documents were attached to the e‑mail. One attachment dealt with assumptions on which the budget was based and stated that sales numbers were based “on known commitments”. A spreadsheet was also attached. The spreadsheet contained sales figures for many of Labelmakers WA’s major clients including Harvey Fresh. The spreadsheet also contained a list of “staff” for the new business. The list included references to Mr Ernie Cooley, Mr Jason Cooley and Mr Sweeney. The positions of machinists, a graphic artist, a plate maker, a slitter, a receptionist/book keeper, a storeman and a production manager were also listed.
This e-mail was also forwarded to Mr Jason Cooley.
After the e-mail had been sent Mr Sorgiovanni informed Mr Ernie Cooley that he and Mr Scolaro and two other investors, Ms Rose Bonavita and Mr Laurie Sorgiovanni, were each interested in investing five percent of the capital in the new business.
On 14 April 2008 Mr Ernie Cooley, Mr Jason Cooley, Mr Deveney and Mr Sweeney had a meeting with a representative of Aldus Engineering. At this meeting they expressed an interest in the possible purchase of a Mark Andy XP5000 slitting machine.
On 19 April 2008 Mr Ernie Cooley sent an e-mail to Mr Poole. He advised Mr Poole that:
“I am slowly putting the pieces together for our new Company.
I am waiting on Harvey Fresh’s final decision which I am very confident of getting in one way or another.”
On 22 April 2008 Mr Jason Cooley created a document on his laptop computer. It recorded that:
“For sometime now Jason and Ernie Cooley have been consistently questioned by long standing clients as to when they would be starting up again in business.
A number of these clients have indicated that they would immediately give the new identity their business.
After a considerable amount of investigation Jason and Ernie Cooley have decided to begin a new business in selfadhesive label printing.
…
Although in principle this will be a new business, the shareholders have been servicing the potential customers for over fifteen years and, in most cases, are personal friends so in reality the business is a follow on from an existing business …
Kevin Sorgiovanni of Harvey Fresh, nonworking shareholder, is responsible for the ordering of $1,500,000 labels per annum.
In normal circumstance new Companies need to identify potential clients and then begin the long process of establishing relationships, pricing, quality capabilities and servicing capability.
…
[T]he sales of $2,950,000, see Budget Notes, are 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 shareholders of the new Company were identified in the document as being Mr Ernie Cooley, Mr Jason Cooley, Mr Sweeney and the Sorgiovanni and Scolaro family members.
On 24 April 2008 Mr Jason Cooley sent an e-mail from his Labelmakers WA account to his personal e-mail account attaching a document entitled “client billings”. The document contained billing/pricing details for numerous clients of Labelmakers including Harvey Fresh.
Towards the middle of 2008 Mr Ernie Cooley and Mr Deveney went to Melbourne. They visited Aldus Engineering and discussed the possible purchase of a Mark Andy machine. On 15 August 2008 Aldus Engineering sent a quote for the Mark Andy machine to Mr Deveney at his Labelmakers WA e-mail address. Mr Deveney immediately forwarded the e-mail to his personal e-mail account.
In late 2008 and early 2009 Mr Ernie Cooley initiated discussions with representatives of the Westpac and National Australia Banks about the possibility of obtaining finance for the new venture. During this period both Mr Ernie Cooley and Mr Jason Cooley created many documents which contained business and financial information which could be used to support an application for bank finance. They also continued to transfer financial information relating to Labelmakers WA’s business from their Labelmakers WA accounts to their personal accounts.
On 1 February 2009 Mr Jason Cooley prepared a document entitled “Budget Notes”. This document was subsequently attached to an application made to the National Australia Bank for finance: see below at [39].
On 12 February 2009 Aldus Engineering submitted a quotation for a Mark Andy model “showroom press”. The quotation was addressed to Mr Deveney at Labelmakers WA. It was sent by e-mail and Mr Deveney immediately forwarded it on to Mr Ernie Cooley.
On 18 February 2009 Mr Ernie Cooley submitted an “Application for Business Finance” to the National Australia Bank. In the introductory section of the document the bank was advised that:
“For sometime now Jason and Ernie Cooley have been consistently questioned by long standing clients as to when they would be starting up again in business.
A number of these clients have indicated that they would immediately give the new identity their business.
After a considerable amount of investigation Jason and Ernie Cooley have decided to begin a new business in self adhesive label printing.”
The shareholders of the new entity were then identified as Ernie and Jason Cooley, Mr Sweeney and “Sorgiovanni and Scolaro family members”.
Machines selected for use in the new business were mentioned.
Under the heading “Sales” the application contained the following passages:
“Although in principle this will be a new business, the shareholders have been servicing the potential customers for over fifteen years and, in most cases, are personal friends so in reality the business is a follow on from an existing business.
The working shareholders, at present, are responsible for approximately $8,000,000 of sales and, as stated above, many of these clients have extremely close and long standing relationships with the shareholders.
Kevin Sorgiovanni of Harvey Fresh, nonworking shareholder, is responsible for the ordering of $1,500,000 labels per annum.
In normal circumstances new Companies need to identify potential clients and then begin the long process of establishing relationships, pricing, quality capabilities and servicing ability.
This new business starts with three shareholders who have knowledge of Companies with $11,000,000 worth of sales and personal relationships with $8,000,000 and these Clients already are well aware of the credentials and capabilities of the shareholders.
And that is the big difference with this business.
The sales of $2,950,000, see Budget notes, are mainly from clients who have already committed to the new business and in particular Harvey Fresh who will purchase $1,500,000 per annum.
A further list of highly probable clients shows sales of $765,000, see Budget notes.”
The sales figure of $2,950,000 does not appear in the Budget notes. It appears to have been based on the table created by Mr Ernie Cooley on 4 March 2008: see above at [23]. The Budget notes attached to the application were dated 1 February 2009. They had been prepared by Mr Jason Cooley. They contain the following anticipated sales figures:
“1. Sales
Committed Sales Per Annum - Planet Sales $250,000 (Yearly spend $800,000) - Pascoes $150,000 (Yearly spend $400,000) - Harvey Fresh $1,500,000 - Canon Foods $75,000 - B&S Print $20,000 - D’Orsogna $500,000 - Ferngrove $150,000 - Three Oceans $150,000 - Action Eng. $10,000 - Aust. Prem. Wine $70,000
Total committed sales $2,875,000
Expressed Interest in using new Identity
The balance of sales will come from the following clients who have, over the past fourteen years, been serviced by one or all of the shareholders and have expressed interest in dealing with new business.
- Aus Mud $125,000 - Gourmet ChevUps $200,000 - Dusk $150,000 - Waterboys $50,000 - Leeuwin $50,000 - Sprouts $40,000 - David Gray $30,000 - Casa $30,000 - Fine Foods $20,000 - Karri Spring $50,000 - Paradise Waters $20,000
Total Probable Sales $765,000”
Under the heading “Materials” the notes recorded that:
“The historical material usage percent has been used for calculating materials with the exception of paper.
Paper has been put in at 33%. This compares to an actual figure of 32%.
The self adhesive paper will be imported through Stockman Paper, who’s [sic] Managing Director and Major Shareholder Doug Rose is Gina Cooley’s partner, at a cost of approximately 10% less than currently being paid and this will impact positively on the paper percentage.”
Towards the end of the document under the heading “Overheads” it was said that “all numbers [apart from rent and insurance] are assumptions based on current business.”
The application was signed by Mr Ernie Cooley, Mr Jason Cooley and Mr Deveney. They signed under a declaration to the bank that “all information provided in, or with, this application is true, correct and complete.”
On the same day Mr Ernie Cooley forwarded a similar application to the Westpac Bank. It contained much of the same material as had been sent to the National Australia Bank, including the introductory section, the section on “sales” and the “budget notes”. Attached was the quotation from Aldus Engineering for a Mark Andy machine which had been sent to Mr Deveney at Labelmakers WA on 12 February 2009 (see above at [38]). Under the heading “Sales” the document read:
“The two most important factors that impact on the success or failure of the budget are sales and the paper usage %.
Without sales, obviously, there is no chance that the budget can be reached.
In the first year Sales of $2,700,000 are budgeted for and to enable the Bank to verify the validity of this target I have arranged for the Bank to be able to ring two of the main customers.
1.Harvey Fresh – Budgeted sales $1,600,000
Kevin Sorgiovanni, Managing Director – 0418 900 014
2.Planet Sales – Budgeted Sales $300,000
Mike Perkins, Managing Director – 0409 110 543
A simple phone call to these Gentlemen will confirm their intentions and also give the Bank an insight into the capabilities and industry standing of the Shareholders in the proposed new business.
Under the heading “Paper %” it continued:
“The variable costs have a great bearing on the profitability of the venture and the largest variable cost is paper.
The budget assumes paper is 31% of sales.
Currently the paper per centage runs at 32%, however, the new printing press the finance is required for will decrease wastage by approx. 6% when combined and with the purchase price of paper reduced between 5 and 9% it is reasonable to assume 31% is easily achievable.
To prove up the paper % 32% a number of actual jobs over the past 2 to 3 months were studied with the following numbers:
Company No of Jobs Sales Paper % Harvey Fresh 44 $302,456 $91,055 31.35 D’Orsogna 29 $197,097 $56,047 28.44 Pascoes 24 $54,918 $18,276 33.27 Planet Sales 7 $160,799 $63,458 39.46 Total 104 $715,270 $228,836 31.99 The above actual workings are available if required.”
On 24 March 2009 the National Australia Bank approved Mr Cooley’s application for finance subject to certain conditions. One of those conditions was that Mr Ernie Cooley would supply a copy of a formal supply agreement between his new company and Harvey Fresh. The agreement was to reflect a level of sales at a minimum of $1.5 million per annum.
In the event the bank did not insist on satisfaction of this condition. On 12 April 2009 Mr Ernie Cooley recorded on his home computer that Harvey Fresh was not willing to provide supply agreements. The bank was, however, prepared to act on written confirmation from Harvey Fresh that it had dealt with both Messrs Cooley for 14 years and intended to give its business to the new company which was being established. The value of that business was to be of the order of $1,500,000. Harvey Fresh also agreed to confirm that, in the two preceding financial years, it had placed orders of that value and that up to March 2009, Harvey Fresh had paid Labelmakers WA $1,380,000. It did so in a letter dated 15 April 2009.
On 15 April 2009 LL Force Pty Ltd was registered.
During April 2009 Mr Ernie Cooley and Mr Deveney were involved in discussions with third parties about the purchase of equipment for the new business and the sourcing of paper.
By the end of April 2009 the preparations for the commencement of the new business were well advanced. On 30 April 2009 Mr Ernie Cooley sent an e-mail to Mr Jason Cooley, Mr Sweeney, Mr Deveney and Mr Scolaro advising that:
“To Shareholders
We are getting close to finalizing all equipment and the exchange rate has worked in our favour.
On Monday another property will be looked at in Welshpool that has both the presentation and power needed. Tomorrow I will give the NAB a copy of the unit trust for there [sic] perusal and instruct then [sic] to open a bank account.
So shareholders [sic] funds will be required by the end of next week and I will notify you of the bank account details.
The funds required are:
Ernie Cooley $255,000
Jason Cooley $255,000
Scott Sweeney $85,000
Paul Deveney $85,000
Scolaro & Sorgiovanni $170,000 this is to be $40,000 as above with the balance end of June as agreed.Originally $1,000,000 capital was required, however, I am hoping we can get by with $850,000; however, the balance may be required should funds run out and there are no other options.
At this stage everything appears to be going in our favour.”
It had been necessary for Messrs Ernie and Jason Cooley, Sweeney and Deveney to obtain finance to cover their respective capital investments in LL Force. They had made applications to financial institutions.
Mr Jason Cooley had set about the task of obtaining the funds which he needed as early as 3 February 2009. On that day he sent an e-mail to a finance broker in which he said:
“I am looking at starting up a new business with my farther [sic] and one of our best/biggest customers.
…
This is very confidential!
I would be looking to finance about $200,000 (possibly through the ANZ)
My farther [sic] has a meeting scheduled with a ANZ manager next Thursday.”
There was attached to the email a document which was in substantially the same terms as the introductory section to the application made to the National Australia Bank on 18 February 2009: see above at [39]-[41].
On 26 February 2009 Mr Ernie Cooley had sent statements of assets and liabilities prepared by Mr Sweeney and Mr Deveney to the Westpac Bank. He advised that each would have a 10% shareholding in the new business. This communication was made to advance applications made by Messrs Sweeney and Deveney for loans to finance their capital contributions.
On 1 May 2009 Mr Ernie Cooley tendered his resignation from Labelmakers WA to take effect on 29 May 2009.
On 4 May 2009 Mr Ernie Cooley and Mr Jason Cooley inspected the Welshpool property. On the following day Mr Jason Cooley made an offer to lease the Welshpool property. The lease was signed by Mr Ernie Cooley on 28 May 2009. In the intervening period Mr Jason Cooley had discussed the power requirements of the new premises with the estate agent. On 7 May 2009 Mr Sweeney sent an e-mail to Mr Deveney about power supply at the factory. He said that he “didn’t want to use my work email so I have sent this email from my wifes [sic] email address.”
On 6 May 2009 Mr Ernie Cooley sought legal advice from a solicitor relating to the need for “a broad strategy designed to minimize [his] exposure to any possible legal proceedings … against [me] as a consequence of” his involvement with the establishment of a business which was to compete with Labelmakers WA.
On the following day Mr Ernie Cooley sent an e-mail to Mr Paul O’Sullivan, the general manager of Labelmakers, confirming that he had resigned.
On 7 May 2009 Mr Jason Cooley telephoned Mr O’Sullivan and said that he was thinking of leaving Labelmakers WA, was considering his options and that he was unsure about what he wanted to do.
On about 10 May 2009 Mr Ernie Cooley and Mr Deveney travelled to China to inspect an offset press and offline equipment for Labelforce. They also attended a trade fair. Mr Deveney took leave from Labelmakers WA in order to make the trip.
On 11 May 2009 Mr O’Sullivan flew to Perth and met with Mr Jason Cooley. Mr Cooley told Mr O’Sullivan that he was “at the cross roads” in his career and that he was not sure what direction to take.
On 19 May 2009 Mr Jason Cooley tendered his resignation from Labelmakers WA. Mr Mark Fairclough was appointed to replace him.
On the same day Mr Ernie Cooley sent an e-mail to Mr Jason Cooley, Mr Sweeney, Mr Deveney and Mr Scolaro in which he advised, among other things, that he had resigned and was to leave on the following Friday. He continued:
“The Labelmakers Management has been informed I intend to go back into the industry, as well, Jason has indicated he is unhappy and will probably resign at the end of May.
He was asked to reconsider with a massive increase in salary but indicated that he was likely to join me, his father, in the industry.
All this has been done on Legal advice and I do not believe we could be fairer to Labelmakers.”
On 20 May 2009 Mr Sweeney sent an e-mail to Mr Deveney asking: “How’s the letter of resignation coming along?”. Later the same day Mr Deveney submitted his resignation from Labelmakers WA.
On the same day Mr Ernie Cooley sent an e-mail to Mr Sweeney which read:
“Jason and I will bring Harvey, Planet and I believe 95% D’Orsogna and Pascoes a total of about $2.3 to $2.4 million.
If you bring Palandri and Ferngrove $400k we are then at $2.7 to $2.8 plus say Winecorp and Cannon a minimum of $150,000 means we are nearly at $3,000k.”
Copies of this e-mail were sent to Mr Jason Cooley and Mr Deveney.
On 21 May 2009 LL Force registered the business name Labelforce.
On 23 May 2009 Mr Jason Cooley confirmed his resignation giving four weeks notice.
Mr Sweeney had not resigned by this time. On 22 May 2009 he commenced a period of four weeks annual leave (for which he had applied on 24 April 2009) and travelled to the United Kingdom.
On 23 May 2009 Mr Sweeney sent an e-mail to Mr Jason Cooley saying:
“Mark [Fairclough] is onto us mate but we just have to keep quiet and do everything by the book. You need to let him know that he is [fuelling] the fire of paranoia in the place and it is very damaging. Even if a new company does start down the track like he suspects he can’t do anything about it so he should focus on what is in his immediate control … Make sure you send that letter out about the management going on a 5 day week and make sure my name is left out of it. I’m going to use this as part of my reason for resigning and say that it makes me feel a bit vulnerable in my position. Mark also said he wants me to be the sales manager if he takes over so that will give me two good reasons for leaving. Does he really think I would take the job that we head hunted him to do. What an arrogant git he is.
Take it easy mate and keep me in the loop.”
Mr Jason Cooley responded to Mr Sweeney by e-mail on 25 May 2009 saying:
“Apparently he [Mr Fairclough] has been telling everybody that [Ernie Cooley] had already approached 4 staff!!! …
This all happened Friday!!
He also spent some time on the phone with Paul O’Sullivan.
I intend to call him in to the office Monday morning and ask him to let me know the staff that Ernie has approached.
I will then ask them directly, in front of Mark if Ernie has offered them a job.
Let’s see how he handles this!!!
I will keep you up to date.
Enjoy the holiday.
We have everything in control.”
On 3 June 2009 Mr Jason Cooley sent an e-mail to Mr Sweeney saying that:
“Someone has been at Gayles’s [Lung] computer!
Not sure [what] they have been looking for/at/or found.
We need to be very careful what we ask the studio to do as Brooke can see what has been copied to disc etc UNLESS customer has asked for it in writing.
Gayle has accepted our offer!!! …
Can you have your phone on Thursday as I need to call you to discuss Chloe or Kate.”
On the following day Mr Sweeney sent an e-mail to Mr Jason Cooley saying:
“Can you call me when you get a minute?
Mark [Fairclough] keeps trying to call me and I want to get my story straight before I talk to him. He will ask me if I have been in contact with you etc etc.”
Mr Jason Cooley responded to Mr Sweeney saying:
“The transition has not been easy, especially as it has been really quiet.
Mark has been playing his cards close to his chest (talking with John Molly, Jarred & Brooke & graham) behind closed doors.
The vast majorities of staff have, and are, being VERY non committal lets say.
Mark has a big job in front of him!!
…
Nothing happening with Ferngrove!!
A little happening with Palandri – 3 Oceans – will be forwarding details to Mick later today.
Had a look at the property today for the first time!
Office looks ok – maybe a little tight but we will make do!
Joe & Ernie have today purchased desks (not sure what type?????) could be interesting!
Machine still looks like mid/late June – still no answer to power.
Taking Mark to Harvey in the morning.
…”
On 8 June 2009 Mr Ernie Cooley sent an update by e-mail to Mr Scolaro, Ms Bonavita, Mr Jason Cooley, Mr Sorgiovanni, Mr Deveney and Mr Sweeney in which he advised that:
“Steady progress is being made on all fronts as per the following:
… Letterheads and business cards will be available for the graphic artist and me on June 11.
… Paul Deveney, production manager, will start June 22.
… Graphic artist will start employment June 22.
Machinist will start employment June 22.
Mark Andy (printing press) will arrive June 22.
… The Chinese equipment will arrive early August and operational September 1.
This is not a huge problem as the Mark Andy is our work horse and we will simply employ the machinist and Scott Sweeney a month later.
… In a nutshell we are about a [sic] 3 days behind our schedule for start up.
…”
Whilst still employed by Labelmakers WA Mr Deveney wished to attend the Welshpool factory to meet the electrical contractors (KRC) who had been engaged to do preparatory work. On 12 June 2009 Mr Deveney sent an e-mail to both Mr Ernie Cooley and Mr Jason Cooley saying that:
“I did contact Mark F on Friday asking for annual leave on Monday but he refused saying I will be needed (?) and Paul O will be there (?). I said that I would be in late then Monday as I have an appointment. (I have to meet KRC at our factory at 7.30 show them where the factory lighting is situated). I have also marked on the wall where the landlords distribution board should go. There should be enough room for KRC’s switchboard too. Jason and I reckon the bit of wall next to the toilets where the screen making equipment is going is a good place. Make sure the landlord listens to us.”
Jason Cooley replied:
“He can not refuse you leave without a good reason??!!
What we are doing is our business, not his”.
On 15 June 2009 Ms Leech tendered her resignation to Labelmakers WA. The notice took effect on 19 June 2009.
On 16 June 2009 Ms Leech sent an e-mail to her personal e-mail account. An attachment to the e-mail was a document known as “the Red Book Master”. It contained a list of every print job that Labelmakers WA had undertaken over the previous three years. It also included the then current pricing structures, print job descriptions and pre-press costs.
On 22 June 2009 Ms Leech commenced employment with Label Force. On the same day a document entitled “red book front cover page” was saved on Ms Leech’s computer at the Label Force office.
Mr Deveney ceased work for Labelmakers WA on 17 June 2009. On the following day Mr Jason Cooley left.
On 22 June 2009 Mr Sweeney returned to work from leave. He had a meeting with Mr Fairclough. Mr Fairclough raised with him the sending, by Mr Sweeney, of certain client artwork from his Labelmakers WA e-mail address to his home e-mail address. This had occurred on 19 May 2009. The e-mail contained original artwork for a Labelmakers WA client. Mr Sweeney had deleted the e-mail from his work e-mail “address sent” folder. When asked why he had done these things Mr Sweeney claimed that he wished to have access to the artwork remotely while he was away from the office. When this explanation was not accepted Mr Sweeney told Mr Fairclough that he (Mr Sweeney) “felt sick to [his] stomach”. He immediately tendered his resignation which was to take effect on the following day.
During May and June 2009 Messrs Ernie and Jason Cooley, Sweeney and Deveney were each involved, directly or indirectly, in successful attempts to induce employees of Labelmakers WA to resign and accept employment with Label Force. The employees concerned were Ms Leech, Mr Long Ngo, Mr Mark Humphries and Ms Gale Lung.
On 20 May 2009 Mr Sweeney sent an e-mail to Mr Ernie Cooley, Mr Jason Cooley and Mr Deveney in which he said:
“As a receptionist I don’t [sic] think we could find better than Chloe. All the clients like her, she is good with the red book, con notes, delivery dockets, job-sheets and would pick up my ops in about 5 minutes. It would be handy to have a girl like Chloe around to keep us guy’s [sic] organised …”
The position of receptionist in the new business was advertised in the press. On 5 June 2009, Mr Deveney told Mr Ernie Cooley in an e-mail that:
“I spoke to Chloe in confidence to look out for the ad and apply for it. I don’t know whether she realises, had you spoken to her before about it? She was very grateful of the tip off anyway.”
Mr Ngo had been employed as a slitter operator at Labelmakers WA. On 11 June 2009 Mr Deveney sent an e-mail to Mr Ernie Cooley saying:
“I believe Long is under paid at the moment considering his flexibility. He’s punctual and rarely takes a day off sick. I don’t believe we would get him for less than 50. I think it better to place an ad under SITUATIONS VACANT under OPERATOR/SLITTER/TRAINEE PRESS OPERATOR. That way not too many people will see it. I can then ask him to look there and apply if he’s interested.
Let me know tomorrow if this is the plan.”
Mr Ernie Cooley responded on the same day saying “I agree with you.”
An advertisement was placed in the West Australian newspaper shortly afterwards for a “Slitter Operator”. Mr Ngo responded and was engaged by LL Force.
Mr Humphries was employed as a printer by Labelmakers WA. In an e-mail which he sent to Mr Jason Cooley, Mr Sweeney and Mr Deveney on 20 May 2009 Mr Ernie Cooley identified Mr Humphries as one of Labelmakers’ employees who should be recruited to work in the new business. On about 2 July 2009 he was offered and he accepted employment as a printer in the new business. At a function soon after Jason Cooley’s last day at Labelmakers, Mr Humphries told Mr Cooley he wished he was leaving with him. Mr Cooley advised him to keep his “eye on the paper”. Mr Humphries noticed a job advertisement for a printer in the newspaper in late June 2009, while he was looking for work. He responded to the advertisement and received a telephone call from Mr Deveney in relation to his application. Until this point, Mr Humphries did not know that advertisement was connected to Mr Deveney or Labelforce. Mr Deveney invited Mr Humphries to an interview and, at the interview, made an offer of employment to Mr Humphries, which he accepted some time later.
Ms Lung was employed as a graphic artist by Labelmakers WA. On 4 June 2009 Ernie Cooley sent an email to Ms Lung offering her a similar position with LL Force. She accepted Mr Cooley’s offer by return email on the same date.
Labelmakers WA held its clients’ artwork for use in the production of labels. Prior to their departure from Labelmakers WA some of the individual respondents encouraged some of Labelmakers WA’s clients to request that Labelmakers WA transfer to them (the clients) the artwork in a form which would enable it to be used by Labelforce to produce similar labels for those customers.
By 19 June 2009 Mr Fairclough had become sufficiently concerned about implications of the establishment of a rival business for Labelmakers WA’s customer base that he wrote to Mr Sorgiovanni. He offered to provide Harvey Fresh with a 25 % rebate on future label purchases by Harvey Fresh. Mr Sorgiovanni promptly sent a copy of Mr Fairclough’s e-mail in which the offer was made to Mr Ernie Cooley. He asked whether he should also request a rebate “for the past 3 years.”. Mr Ernie Cooley responded: “Kev I will match the offer.” Having done so Mr Ernie Cooley sent a copy of the e-mails to Mr Jason Cooley with the covering question:
“What do you think about this e-mail.
I have matched the offer but there are no prices so I will just put 25% on the prices and put it in the bank and give it back.”
In the event Harvey Fresh did as it had undertaken to do: it transferred its business to Labelforce. Labelforce charged Harvey Fresh at the same rates as had been charged by Labelmakers WA.
CAUSES OF ACTION
The applicants rely on the following causes of action:
·Breach of contract in respect of both express and implied terms;
·Breaches of fiduciary duty, both equitable and statutory, by the individual respondents;
·The knowing involvement in these breaches of fiduciary duty by the individual respondents and LL Force Pty Ltd and the knowing receipt by LL Force Pty Ltd of the benefit of these breaches of fiduciary duty; and
·Breach of confidence, both in equity and in contract.
They contend that, whilst employed by Labelmakers WA, the individual respondents (other than Ms Leech) were each involved in planning to establish a business which was to compete with Labelmakers WA. To this end they engaged in a range of activities which breached their fiduciary and contractual obligations to Labelmakers WA. These activities included approaching customers of Labelmakers WA with a view to them transferring their business to Labelforce, using the resources and confidential information of Labelmakers WA in planning and establishing the new business, arranging for some of Labelmakers WA’s customers to request the repatriation of their artwork so that it could be on-sent to Label Force and used by Label Force and by recruiting employees of Labelmakers WA to come and work for Label Force.
The applicants further allege that, in planning their new business, these four respondents drew on Labelmakers WA’s confidential information and that they also transferred such information to their personal e-mail and other accounts with a view to referring to it in the conduct of the new business.
A narrower range of claims was made against Ms Leech. She too was alleged to have breached some of her fiduciary and contractual obligations to Labelmakers WA and to have misused certain confidential information.
Each of the individual respondents admitted that he or she was under a contractual duty to act towards Labelmakers WA with good faith and fidelity. They accepted that they owed fiduciary duties to the applicants not to place themselves in a position where their interests conflicted with their duties to the applicants and not to take advantage of their position with the applicants to obtain a benefit for themselves or any person with whom they were associated. Each also accepted that he or she was under the statutory obligations imposed by ss 182(1) and 183(1) of the Corporations Act 2001 (Cth) (“the Corporations Act”) to the extent that those statutory obligations were owed to Labelmakers WA. Each applicant denied having breached or contravened any of these contractual or fiduciary duties or statutory obligations.
Each of the individual respondents (apart from Ms Leech) admitted that he had been involved in the planning for and establishment of the new business. Each accepted that he had done many (but not all) of the things about which the applicants complained. They contended, however, that such activities were undertaken during their own time and that they relied on the know-how each had accumulated during many years working in the label printing industry.
Each specifically denied any attempt to solicit any clients of Labelmakers WA to give work to Label Force whilst he was employed by Labelmakers WA.
Each denied any misuse of any of Labelmakers WA’s confidential information although Mr Ernie Cooley did concede that, if he did have resort to any such information, he did so merely to confirm figures which he had derived from his own industry knowledge.
Ms Leech denied the two allegations of misuse of confidential information which were levelled against her. She also denied having been solicited to work at Labelforce by any of the other individual respondents.
LL Force admitted that it had obtained the benefit of the activities of the individual respondents but otherwise denied all allegations made against it.
THE DUTIES OWED BY THE INDIVIDUAL RESPONDENTS TO LABELMAKERS WA
It will be convenient to deal with the causes of action founded on contract and equitable obligation together. They are closely related, the latter having informed the development of the former: see Concut Pty Ltd v Worrell (2000) 176 ALR 693 at 700-1 (per Gleeson CJ, Gaudron and Gummow JJ).
As employees of Labelmakers WA each of the individual respondents had an implied (if not express) contractual obligation to serve that company with loyalty and fidelity.
The scope of this duty was outlined by Palmer J in Digital Pulse Pty Ltd v Harris (2002) 166 FLR 421 at 424. His Honour there said:
“[20] An employee has a duty to act in the interests of the employer with good faith and fidelity. That duty is implied in every contract of employment if it is not otherwise imposed by an express term. In addition, the duty is imposed upon every employee by the law of fiduciaries, the relationship of employer and employee being recognised as a paradigmatic fiduciary relationship.
[21] The obligations imposed by the duty are not coterminous with the employee’s normal working hours: they govern all the activities of the employee, whenever undertaken, which are within the sphere of the employer’s business operations and which could materially affect the employer’s business interests. Whether a particular activity could materially affect the employer’s business interests is a question of fact and degree.
[22] The duty of loyalty requires that an employee not place himself or herself in a position in which the employee’s own interest in a transaction within the sphere of the employer’s business operations conflicts with the employee’s duty to act solely in the employer’s interest in relation to that transaction. A fortiori, an employee may not take for himself or herself an opportunity within the sphere of the employee’s business operations without the employer’s fully informed consent.”
It will be necessary, later in these reasons, to deal in greater detail with the applicants’ cause of action under s 182 of the Corporations Act. It is convenient to note, at this point, that s 182 codifies aspects of this contractual obligation to serve with loyalty and fidelity and that, as a result, much of what I am about to say about the implied contractual obligations will also be relevant to the applicants’ claim so far as it is based on s 182.
The relevant equitable principles are those expounded by the High Court in Chan v Zacharia (1984) 154 CLR 178 and Warman International Limited v Dwyer (1995) 182 CLR 544.
In Chan (at 199) Deane J (with whom Brennan and Dawson JJ agreed) said that:
“Stated comprehensively in terms of the liability to account, the principle of equity is that a person who is under a fiduciary obligation must account to the person to whom the obligation is owed for any benefit or gain (i) which has been obtained or received in circumstances where a conflict or significant possibility of conflict existed between his fiduciary duty and his personal interest in the pursuit or possible receipt of such a benefit or gain or (ii) which was obtained or received by use or by reason of his fiduciary position or of opportunity or knowledge resulting from it. Any such benefit or gain is held by the fiduciary as constructive trustee …”
This statement of principle was adopted and applied by the Court in Warman International. The Court there said (at 557-8) that:
“… the authorities in Australia and England deny that the liability of a fiduciary to account depends upon detriment to the plaintiff or the dishonesty and lack of bona fides of the fiduciary. Gibbs J in Consul Development Pty Ltd v DPC Estates Pty Ltd stated:
‘Where the rule applies, the liability of the person in a fiduciary position does not depend on the fact that the person to whom the duty is owed has suffered injury or loss.’
A fiduciary must account for a profit or benefit if it was obtained either (1) when there was a conflict or possible conflict between his fiduciary duty and his personal interest, or (2) by reason of his fiduciary position or by reason of his taking advantage of opportunity or knowledge derived from his fiduciary position. The stringent rule that the fiduciary cannot profit from his trust is said to have two purposes: (1) that the fiduciary must account for what has been acquired at the expense of the trust, and (2) to ensure that fiduciaries generally conduct themselves ‘at a level higher than that trodden by the crowd’. The objectives which the rule seeks to achieve are to preclude the fiduciary from being swayed by considerations of personal interest and from accordingly misusing the fiduciary position for personal advantage.
Thus, it is no defence that the plaintiff was unwilling, unlikely or unable to make the profits for which an account is taken or that the fiduciary acted honestly and reasonably. So, in Regal (Hastings) Ltd. v Gulliver, although the directors acted in good faith and in the interests of the company of which they were directors in taking up shares in a subsidiary which the company could not afford to take up, they were held accountable for the profit made on the sale of the shares. And, in Phipps v Boardman, the solicitor was held accountable for the profit he made, notwithstanding that he acted bona fide and in the interests of the trust and that the opportunity would not have been availed of but for his skill and knowledge.”
Consistently with these principles a duty falls on a fiduciary not to place him or herself in a position of conflict. If he or she does so the duty is breached. As Besanko J (with whom Finkelstein and Jacobson JJ agreed) observed in Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1 at 22, “fiduciary duties are proscriptive and not prescriptive.”
Fiduciary and contractual obligations do not provide an absolute bar to employees who may wish to make preparations for the establishment of a competitive business whilst remaining in the service of their existing employer. They do, however, limit what an employee may do in pursuing that objective. The weight of restrictions will fall more heavily the more senior the standing of the employee: see Victoria University of Technology v Wilson (2004) 60 IPR 392 at 438. Another relevant variable will be the extent to which the time and effort of the existing employee is directed to the establishment of a competitive business: WA Fork Truck Distributors Pty Ltd v Jones [2003] WASC 102 at [40].
Whilst it is permissible for some preparatory work to be undertaken outside normal business hours, fiduciary and contractual obligations can, and do, continue to bear on employees when they are not engaged in work for their employer. Such obligations cannot, routinely, be cast aside at the factory or office door. As Palmer J observed in Digital Pulse the “obligations imposed by the duty are not coterminous with the employee’s normal working hours.” The issue to be determined is whether particular activities, undertaken by the particular employees in relation to the establishment of a competitive business, could materially affect their employer’s business interests. As his Honour said, the answer to this question involves matters of fact and degree.
One activity which will normally be found to be in conflict with an employee’s contractual and fiduciary obligations is approaching clients of the employer and attempting to have them become customers of the proposed new business. As Lord Greene MR said in Hivac Limited v Park Royal Scientific Instruments Limited [1946] Ch 169 at 177 “[it] would be a curious result if… [an employee] could set himself during his spare time deliberately to injure the goodwill of his master’s business by trying to get his customers to leave him.” See also: Wessex Dairies Limited v Smith [1935] 2 KB 80 at 85; AMP Services Limited v Manning [2006] FCA 256 at [60]; Deeson Heavy Haulage Pty Ltd v Cox (2009) 82 IPR 521 at [101].
It matters not whether it is the employee or the prospective customer who initiates the discussion in which the employee seeks to obtain the customer’s business for the new enterprise: see Sanders v Parry [1967] 2 All ER 803 at 808-809; Dinte v Hales [2009] QSC 63 at [24].
A conflict will also arise if the employee seeks to persuade fellow employees to resign their employment and accept positions in the new business: see Warman International at 556, 566. To act in this way is to breach an employee’s duty “not to improperly use his position to cause detriment to his employer”: see WA Fork Truck Distributors at [67].
If an employee who is taking preparatory steps with a view to setting up a competitive business fails to inform his or her employer about what he or she is doing and actively seeks to ensure that the employer does not become aware that the preparatory steps are being taken, it may reasonably be inferred that the employee is aware that what he or she is doing is antipathetic to the interests of the employer: see Able Tours v Mann (2009) 187 IR 1 at [185]-[186].
A breach of duty will also arise if the employee uses his or her employer’s resources to assist in the establishment of a competitive business: Digital Pulse at 439 [127] – [128].
Mr Ernie Cooley
In his amended defence Mr Ernie Cooley admitted having engaged in a range of activities related to the planning for and establishment of the Label Force business while he was employed by Labelmakers WA. He denied that he had done other things alleged by the applicants such as soliciting clients and staff of Labelmakers WA to move to Labelforce.
The admitted conduct
Mr Ernie Cooley admitted that, in 2008, he did a number of things with a view to establishing whether he should establish a new printing label business. These activities were:
·The preparation of budgets and cash flows;
·Making enquiries about the availability of finance;
·Giving consideration to what staff and machinery might be required in a new business;
·Disclosing to Mr Sorgiovanni and Mr Scolaro (in response to questions asked by them) that he was considering establishing a new label printing business; and
·Discussing with Mr Sorgiovanni and Mr Scolaro (after they had expressed an interest in investing in the proposed business) plans and budgets which he had prepared.
Mr Ernie Cooley also admitted that, whilst employed by Labelmakers WA between January and May 2009 he had engaged in a number of activities which were related to the establishment of the Labelforce business. These activities included:
·Arranging finance for the Labelforce business, including his personal capital contribution;
·Placing an order on 7 May 2009 for a Mark Andy press and slitter;
·Placing an order on 26 May 2009 for an offset press and offline equipment;
·Placing an order, on or about 25 May 2009, for self-adhesive material;
·Seeking premises for the Labelforce business and leasing the Welshpool premises on 25 May 2009;
·Arranging for the incorporation of LL Force Pty Ltd;
·Opening bank accounts for LL Force Pty Ltd;
·Undertaking financial and general planning for the new business; and
·Discussing these activities, from time to time, with Mr Jason Cooley, Mr Deveney and Mr Sweeney.
Mr Ernie Cooley contended that he had a lawful entitlement to undertake all of this work and that it was undertaken by him in his own time and primarily from his own home.
The denials
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.
Mr Ernie Cooley’s admissions significantly understated the amount of time and effort which he devoted, during 2008, to the planning phases of establishing Labelforce.
A good example of such understatement is provided by Mr Cooley’s efforts to obtain essential machinery for his new business. He was interested in Mark Andy machines. He was prepared to admit that he placed an order for such machines on 7 May 2009 whilst still employed by Labelmakers WA. He was not, however, prepared to admit to having undertaken inspections and assessment of machines which might be purchased for the new business at any earlier time. He steadfastly maintained that his discussions with Aldus Engineering in April and July 2008 about the possible purchase of Mark Andy machines (see above at [30] and [35]) were not pursued with a view to purchasing such machines for Labelforce. He said that he had attended Aldus Engineering with a view to the possible purchase of machinery for Labelmakers WA. I do not accept this denial. On 17 March 2009 Mr Cooley said, in an e-mail sent to the Westpac Bank, that “the Mark Andy would be the best and most capable Flexo machine in WA … it was our first preference back in July last year.” (Emphasis added). Moreover, Mr O’Sullivan had no knowledge of or interest in the proposed purchase of such machinery for the Labelmakers business.
I, therefore, find that Mr Cooley was, from February 2008, until the termination of his employment with Labelmakers WA at the end of May 2009, involved on a regular basis in detailed planning and preparation for the establishment of the business which became Labelforce. Much of this work was undertaken out of normal office hours and utilised personal equipment such as his home computer and e-mail facilities. Some of his activities were, however, carried out during normal business hours and using Labelmakers WA’s facilities. For example, he e-mailed information from his Labelmakers WA’s computer to his home account and his visit to Aldus Engineering took place whilst he was purportedly working for Labelmakers WA.
Mr Ernie Cooley’s defence that most of his planning and preparatory work took place “in his own time” is over simplistic. The issue to be determined is whether particular activities undertaken by him (and the other individual respondents) in relation to the establishment of the Labelforce business, could materially have affected Labelmakers WA’s business interests.
There can be no doubt, in my view, that Mr Ernie Cooley’s activities had the potential materially and prejudicially to affect Labelmakers WA’s business interests. He was a senior manager of the company. His intention, to which he gave effect, was to create and operate another business in competition with Labelmakers WA. During 2008 and the early part of 2009 he was intensively engaged in activities which he well knew were antipathetic to the interests of Labelmakers WA. He involved other senior staff of the company in those activities. He encouraged them (as he did) to ensure that their employer did not become aware of what they were doing. Mr Cooley arranged for the principals of one of Labelmakers WA’s most important customers to take equity in the new business. Mr Cooley’s conduct was no less a departure from his fiduciary obligations to his employer because much of it occurred outside normal business hours.
Soliciting Clients
The applicants submitted that the most egregious breaches by Mr Ernie Cooley of his contractual and equitable obligations to Labelmakers WA were his attempts to induce customers of Labelmakers WA to transfer their business to Mr Cooley’s proposed Label Force business. They invited the Court to find that, whilst an employee of Labelmakers WA, Mr Cooley had sought and obtained the support of (at least) Harvey Fresh, Planet Sales, Canon Foods and D’orsogna for the Label Force business.
The evidence strongly supports the applicants’ submission.
Mr Cooley denied attempting to solicit Labelmakers WA’s clients. I do not accept Mr Cooley’s denials. I reject his evidence for a number of reasons.
The first is that contemporaneous documentary records which were created by Mr Cooley are replete with assertions that such solicitation occurred. Many examples can be cited. The “sales” document created by Mr Cooley on 4 March 2008 (above at [23]) refers to both Harvey Fresh and Planet Sales having agreed to purchase labels from the new entity.
The applications for finance which Mr Cooley sent to the National Australia Bank and the Westpac Bank on 18 February 2009 listed Harvey Fresh, Planet Sales, Canon Foods and D’orsogna as “committed sales” for the new business (above at [43]). Mr Cooley represented to the National Australia Bank that all of this information was “true, correct and complete.” This declaration notwithstanding Mr Cooley said that he had lied to the bank when he told it that Harvey Fresh, Planet Sales, Canon Foods and D’orsogna were some of Labelmakers WA’s clients who had “already committed to the new business.” He was also forced to deny the truth of the assertion that a large number of other companies (some of whom were also clients of Labelmakers WA) had expressed interest in the new venture.
The business plan which Mr Cooley forwarded to the Westpac Bank on 18 February 2009 (above at [47]-[48]) advised that bank that Mr Sorgiovanni and Mr Perkins, respectively the managing directors of Harvey Fresh and Planet Sales, whose mobile telephone numbers he provided, would confirm, if asked, that they would be customers of the new entity. Mr Cooley gave unconvincing evidence that these statements were untrue and that he was merely bluffing, hoping that the bank would not make contact with either Mr Sorgiovanni or Mr Perkins. Had he not been assured, by reason of arrangements he had already made with Messrs Sorgiovanni and Perkins, that they would have confirmed his statements to the bank I do not consider that Mr Cooley would have proferred the names and contact details of these gentlemen to the bank. Had they been contacted and not confirmed his assertions, the success of the application would have been seriously jeopardised or doomed.
Secondly Mr Sorgiovanni confirmed in his evidence that Mr Cooley had told him, in 2008, that there were a number of companies, including Planet Sales, D’orsogna and Canon Foods which were interested in having their labels printed by Mr Cooley’s new business. Mr Sorgiovanni also confirmed (after some hesitation) that Harvey Fresh had, at Mr Ernie Cooley’s request, prepared the letter of support dated 15 April 2009 (above at [50]) in which it was said that Harvey Fresh intended to give its business to the new company.
Thirdly, the new Label Force business would not have been viable had it not had orders and been in a position to meet them within a few months of its commencement. So much was acknowledged by Mr Ernie Cooley and the other respondent investors in the business. It is consistent with this imperative that commitments would be solicited from potential customers well in advance of the start up of the new business. The importance of having an immediate customer base was emphasised by Mr Ernie Cooley when he told Mr Sweeney, on 20 May 2009, that “Jason and I will bring Harvey, Planet and I believe 95% D’Orsogna and Pascoes a total of about $2.3 to $2.4 million.” On 22 June 2009 the Mark Andy printing press was due to arrive at the Welshpool premises. Mr Jason Cooley and Mr Deveney were due to commence work on that day. Harvey Fresh placed its first orders with Labelforce on 22, 23 and 24 June 2009. Planet Sales placed its first order on 23 June 2009. Canon Foods placed its first order on 15 June 2009. These events are suggestive of the pre‑commitment, of which Mr Cooley wrote, having taken place and the truth of his assertions to the banks that a number of Labelmakers WA’s clients had “indicated that they would immediately give the new identity their business”. (Emphasis added).
The speed with which these former clients of Labelmakers WA transferred their business to the new entity strongly supports the inference that Mr Cooley (and perhaps others of the individual respondents) had actively canvassed these clients whilst still employed by Labelmakers WA: cf Cronin v Norris [2010] NSWSC 434 at [33].
For these reasons I am satisfied that Mr Ernie Cooley was actively involved, whilst employed by Labelmakers WA in persuading significant customers of Labelmakers WA to transfer their business to Labelforce. The companies whose business was successfully solicited included Harvey Fresh, Planet Sales, D’orsogna and Canon Foods.
In making these findings I have not overlooked evidence given by the principals or senior managers of these four businesses to the effect that neither Mr Ernie Cooley nor anyone acting on his behalf had contacted them to advise that he was starting a new printing business or sought to solicit any printing work for the new business before Mr Cooley left the employment of Labelmakers WA. I simply do not accept these denials.
Mention has already been made of evidence given by Mr Sorgiovanni relating to Harvey Fresh. Mr Sorgiovanni and three of his relatives had agreed to and did invest capital in the new business. They were kept abreast of the financial and other arrangements which Mr Ernie Cooley was putting in place. They were aware that the new business depended heavily on securing the Harvey Fresh account. They were prepared to give an indication to the National Australia Bank that Harvey Fresh anticipated placing orders to the value of about $1.5 million per annum with Labelforce.
Mr Michael Perkins was the managing director and part owner of Planet Sales. He had known Mr Ernie Cooley since 1987 and regarded him as “a good mate”. Under cross-examination he was guarded but did say that, in early 2008, he had had a conversation with Mr Ernie Cooley in which Mr Cooley had told him that he (Mr Cooley) was “thinking of starting up” a new business. In that conversation Mr Cooley might have said “would you support me?” and Mr Perkins “might have said ‘yes’”. These concessions are consistent with what appears in the “sales” document which Mr Cooley created on 4 March 2008 (see above at [23]). On 18 February 2009 Mr Ernie Cooley advised the Westpac Bank that Mr Perkins was one of “the main customers” whom the bank could contact to verify Mr Cooley’s sales target for the new business (see above at [47]). In his e-mail to Mr Sweeney on 20 May 2009 (see above at [68]) Mr Ernie Cooley said that he and Mr Jason Cooley would “bring in” Planet Sales to the new business. All of this evidence is consistent with Mr Ernie Cooley having, in 2008, solicited a commitment from Mr Perkins to support the new business, at least to the extent of orders to the value of $300,000 per year.
Mr Bradley Thomason was the managing director of D’orsogna. He had known Mr Ernie Cooley for 12 years during which time they had met socially. Despite Mr Thomason’s denials that he had entered into any arrangements with Mr Ernie Cooley before Mr Cooley ceased employment with Labelmakers WA, D’orsogna was one of the companies which were recorded in documents prepared by Mr Ernie Cooley as being one of the “committed sales” for the new business. Mr Sorgiovanni volunteered that D’orsogna was one of the companies which Mr Ernie Cooley had identified to him in September 2008 as being interested in placing orders with the new business.
The final witness in this category was Mr Richard Pace. He was the managing director of Canon Foods. He was a friend and golfing associate of Mr Ernie Cooley’s. They met about once a week and spoke three or four times a week on the telephone. Despite this he maintained that Mr Cooley had not advised him that he was planning to establish a new company or that he was leaving Labelmakers WA to start work at Labelforce. I find this evidence to be incredible. Canon Foods was another of the companies which Mr Ernie Cooley regularly referred to in documents as a “committed sale”. Mr Pace’s evidence was not consistent with the documentary record. On 18 May 2009 Mr Pace sent an e-mail to Mr Ernie Cooley at Labelmakers WA. He requested Mr Cooley to “provide a copy of all artwork you hold on our behalf.” A copy of the e-mail was sent to another manager at Canon Foods, Mr John Dickenson. Mr Dickenson immediately sent an e-mail to Mr Pace asking “when is he [Mr Cooley] leaving?”. Mr Pace replied: “End of May”. On 19 May 2009 Mr Pace sent an e-mail to his staff in which he said “What has happened with Ernie [Cooley] has got me thinking. We pay for all our artwork and own it, however, if we ever need to move suppliers it slows us down.” These exchanges establish that, notwithstanding his denials, Mr Pace was aware, by at least mid-May 2009, that Mr Cooley was proposing to leave Labelmakers WA and establish an alternative business and that he was contemplating moving suppliers when that occurred. So much is confirmed by an email which Mr Pace sent to Mr Ernie Cooley on his last working day at Labelmakers WA. The e-mail was headed “they have finaly [sic] woken up!!!!!!!”. I readily infer that this is a reference to Labelmakers WA finally having realised that Mr Ernie Cooley was not simply resigning but was doing so for the purpose of establishing a competitive business.
Soliciting Staff
Not all commercial information is impressed with the hallmark of confidentiality. In Smith Kline Gummow J identified four elements which rendered information confidential in the necessary sense. His Honour said (at 87) that:
“A general formulation apt for the present case of an equitable obligation of confidence has four elements: (i) the plaintiff must be able to identify with specificity, and not merely in global terms, that which is said to be the information in question, and must be able to show that; (ii) the information has the necessary quality of confidentiality (and is not, for example, common or public knowledge); (iii) the information was received by the defendant in such circumstances as to import an obligation of confidence, and (iv) there is actual or threatened misuse of that information, without the consent of the plaintiff.”
Liability to account for a breach of the equitable duty of confidence can also fall on a third party who has knowingly participated in the breach of confidence: see Attorney-General v Guardian Newspapers Limited (Spycatcher Case) [1987] 3 All ER 316 at 328.
Other remedies available to an applicant include an order for delivery up of the confidential information and orders restraining those responsible for the breach from using that information.
The Confidential Stock Work Out Information
This document contains figures used by Labelmakers WA to calculate stock allocation and wastage. It contains fields which, when completed, facilitate a calculation of the cost of production of particular labels. Labelmakers WA uses the material to quote for work. It is material that Labelmakers WA claimed would be of value to a competitor when quoting for any given job.
On his last day at work at Labelmakers WA Mr Ernie Cooley e-mailed this document from his Labelmakers WA’s account to his personal account. He said that he did so by mistake.
The formula which Labelmakers WA developed is complex. It was explained by Mr Fairclough. The number of labels required is first nominated.
“That number is then divided by the number of impressions on that job, being ‘6 (2 across x 3)’. That number is then multiplied by the cylinder repeat length … After following this formula, the total number of lineal metres required for that job is arrived at … . Once anticipated wastage during the print run of 17% is added to the quote, plus 600 lineal metres for ‘make ready’ (ie the amount of paper required to set up colours, dies and so forth at the start of any print run), a total lineal metre figure required to complete the job is arrived at.”
A reading of the document would enable a competitor of Labelmakers WA to calculate how much stock would be used and how much wastage would be incurred by Labelmakers WA when completing a job. Such information would assist a competitor in framing a competitive quotation.
Labelmakers WA retained this material in confidence. Mr Ernie Cooley knew this and it is implicit in his acknowledgement that he e-mailed it to his personal account in error that he knew that he should not have done so. The information was complex and did not form part of the information which he accumulated during his employment with Labelmakers WA. On the contrary, the complexity of the formula and Mr Cooley’s perceived need to retain access to it strongly suggest that he had not memorised the formula. It also suggests that he considered the formula would be of use in the Labelforce business to the advantage of Labelforce and the potential detriment of Labelmakers WA. The evidence does not enable me to determine whether this material was, in fact, used to the detriment of Labelmakers WA.
The stock workout information should be delivered up to Labelmakers WA and not further used by Mr Cooley or anyone else involved in the Labelforce business.
Confidential Financial Information
The financial information which Labelmakers WA seeks to protect is comprised of three spreadsheets. They are:
·A spreadsheet containing the wages of every employee of Labelmakers WA in early 2009;
·A complete profit and loss forecasted budget for Labelmakers WA for the 2008/9 financial year (with comparisons with the actual results for 2007/8); and
·The complete profit and loss budgeted forecast figures for Labelmakers WA for the 2009/10 financial year.
These three spreadsheets were attached to an e-mail that Mr Jason Cooley sent from his Labelmakers WA account to his Labelmakers e-mail account. He did this on 27 May 2009. He said that he did so so that he could have access to the documents using his Labelmakers WA mobile telephone. He could then download the attachments from his phone and save them externally or e-mail them to another e-mail address. He claimed that he wished to work on the documents in preparation for discussing them with Mr Fairclough at a meeting which was to take place away from Labelmakers WA’s premises.
The respondents admit that this financial information was confidential.
Mr Jason Cooley, however, said that the information was of no use to him after he left Labelmakers WA.
I do not accept Mr Cooley’s explanations for having obtained access to this information. He sent the e-mail more than a week after he had tendered his resignation from Labelmakers WA. He did so at a time when he was actively involved in the establishment of the Labelforce business. There was no evidence which supported his asserted need to work on the documents for Labelmakers WA’s purposes.
The evidence does not enable me to determine whether this material was, in fact, used to the detriment of Labelmakers WA.
Confidential Client Costing Information
This information relates to detailed costings for work performed by Labelmakers WA for one of its clients, Willow Bridge. The document is a copy of an old template which Labelmakers WA had used in the past to produce quotations for jobs.
The applicants assert confidentiality in respect of both the template and the information contained in the document concerning the costing of work done for Willow Bridge. In particular the document would disclose Labelmakers WA’s costings and profit margin.
The respondents accept that this material is confidential in nature.
Mr Jason Cooley attached the information to an e-mail which he sent from his Labelmakers WA account to the same e-mail address. He did so on 9 June 2009. He said that he had done so in anticipation of a meeting, offsite, with Mr Fairclough. He said that Mr Fairclough needed assistance because he did not know-how to calculate certain inputs for costing purposes including lineal metres and the value of base stock. Mr Jason Cooley said that the information was of no use to Labelforce and had not been used by it. This evidence was confirmed by Mr Ernie Cooley.
This information is and remains confidential. It should be delivered up to the applicants.
I do not accept Mr Jason Cooley’s evidence about how and why he sent the information to his e-mail account. It was sent shortly before his resignation took effect. The suggested offsite meeting with Mr Fairclough never took place. What did occur, however, was that, on 13 June 2009, Mr Jason Cooley sent an e-mail to Mr Ernie Cooley and Mr Sweeney to which was attached a template document in substantially the same form as the subject template. The covering e-mail read:
“Hi Dad & Scotty boy,
Can you please have a Look at the attached, trial it and let me know if it is ok?
I thought that I had a copy of the one Ian made but NO and it is far too risky trying to copy it to disc.”
In these circumstances I am persuaded that Mr Jason Cooley acted in order to ensure that the information would be available for use in the Labelforce business. On the same day Mr Ernie Cooley used the template to create the first Labelforce quote for Harvey Fresh.
I find that a breach of Messrs Ernie and Jason Cooley’s obligations of confidence has occurred and that the information was misused by them in the Labelforce business.
The Red Book Information
The Red Book was the name given to a loose leaf book which had long been maintained by Labelmakers WA’s staff. At Mr Ernie Cooley’s direction sales staff were required to enter in the book the details of every job undertaken by Labelmakers WA. It contained full pricing and costing information for all jobs done for all of Labelmakers WA’s clients. The document was commercially sensitive because a reader could find in it information which would allow competitive quotations to be made on future work for particular clients.
The respondents accepted that the material was confidential but said that the individual components could be said to form part of the respondents’ general know-how.
I do not accept this qualification. The information is too extensive and detailed to have been memorised by any of the individual respondents.
I have already found that Ms Leech sent an e-mail from her Labelmakers WA’s account on 16 June 2009 and that attached to the e-mail was a copy of the Red Book.
At the time the e-mail was sent Ms Leech had accepted an offer of employment with Label Force and tendered her resignation from Labelmakers WA. One of the first things she did when she commenced employment at Labelforce the following week was to draft up a front cover sheet for the Red Book. One of the reasons that Mr Sweeney had been anxious to obtain the services of Ms Leech for Labelforce was that she was “good with the Red Book.”
There was some limited evidence which suggested that Label Force (before it was restrained from using material in the Red Book) had used it for its own purposes. This evidence comprised a quotation which Mr Jason Cooley had given to Harvey Fresh shortly after the Labelforce business had commenced operation. That quotation was identical in every respect to a quotation given by Labelmakers WA to Harvey Fresh and recorded in the Red Book. To this extent I find that some of the information contained in the Red Book was misused.
Confidential Client Billing Information
This information was contained in a spreadsheet which set out the total billing information for 13 of Labelmakers WA’s clients. The information covered each financial year between 1995-6 and 2005-6. A further eight clients of Labelmakers WA were identified as “target clients”.
The information was sent by Mr Jason Cooley, using his personal e-mail account, to Mr Ernie Cooley, at his personal e-mail account. It was sent on 28 February 2008 under cover of a e-mail reading “[s]till working through the budgets.”
The respondents denied that any of this information was confidential. They knew who the major clients of Labelmakers WA were and had a clear understanding of the volume and value of the work which was performed for those clients by Labelmakers WA.
Mr Jason Cooley said that the 13 clients were chosen because they were clients which he and his father managed and from whom they thought they could get support for the new business. The eight target clients were clients of Labelmakers WA which were not serviced by Messrs Ernie or Jason Cooley but which they hoped they could attract to the new business.
I accept the respondents’ submissions that this material was not confidential. The volume and value of work performed for particular clients was part of the stock of knowledge accumulated by Messrs Ernie and Jason Cooley during their employment by Labelmakers WA. The spreadsheet should not, however, have been transferred from Labelmakers WA and then used by Mr Ernie Cooley in constructing budgets for his new business. It should be delivered up to Labelmakers WA.
Confidential Client Sales Information
This information is to be found in two spreadsheets. The first records the total billings of Labelmakers WA of its top 50 clients in the financial years 2001/2004/2005. The second records the sale figures for some of Labelmakers WA’s clients during the year ended 31 March 2008 and budgeted figures for some of those clients for the next two financial years.
On 24 April 2008 Mr Jason Cooley sent an e-mail from his Labelmakers’ account to his personal account to which these spreadsheets were attached.
The applicants claim that this information was confidential. Mr Fairclough gave evidence that he did not have access to it prior to him becoming the general manager of Labelmakers WA. It was available only to very senior managers of Labelmakers WA.
The respondents denied that the material in these spreadsheets was confidential.
In my view the information was confidential in the necessary sense. It was held closely and not disclosed to most people in the Labelmakers WA organisation much less outsiders.
Although Mr Fairclough was unable to give any evidence as to the misuse of the material contained in these spreadsheets, Mr Jason Cooley, under cross-examination, said that he had used the information in the course of budgeting and other preparatory work for Labelforce. The first spreadsheet contained historical information. The second enabled him to have up to date budgeting and planning information which could be used to work out which clients might be induced to transfer their business to Labelforce and, if they did, the likely revenue which could be obtained from that business. The information was used for this purpose. It should not have been.
Confidential Raw Material Information
Messrs Ernie and Jason Cooley determined that Labelforce would procure its paper supplies from Stockman Paper, a company controlled by a relative of the Messrs Cooley. That relative was Mr Doug Rose.
On 10 February 2009 Mr Rose sent an e-mail to the Messrs Cooley in which he enquired as to the “price [for paper] that you need to be competitive.” Two days later Mr Jason Cooley sent an e-mail from his personal account to Mr Ernie Cooley’s personal account. Attached to it was a spreadsheet document containing pricing details of various raw materials which were required to produce labels for a number of Labelmakers WA’s major customers, including Harvey Fresh, D’orsonga and Pascoes. In the e-mail Mr Jason Cooley asked “[i]s this correct?”. The information in the attachment appears to be derived from Labelmakers WA’s documents which record the cost of buying paper from its supplier, Labelmakers’ own paper division.
The applicants contend that this material is confidential. The respondents deny this but only on the basis that the information formed part of the stock of knowledge of both Messrs Ernie and Jason Cooley.
I do not accept this. The material is very detailed and, while the Messrs Cooley would have had a general appreciation of the cost of raw materials used by Labelmakers WA, I do not accept that they could have memorised a significant part of this material.
When asked about the circumstances in which Mr Jason Cooley came to forward the information to him, Mr Ernie Cooley initially claimed that it came unexpectedly and “out of the blue”. He did, however, accept that the prices appearing in the document were those Labelforce would have wished Mr Rose to charge in order for Labelforce to be competitive.
Mr Jason Cooley said that the information relating to raw material prices had come from Mr Rose.
I reject the evidence given by Messrs Ernie and Jason Cooley. It was sent following the request from Mr Rose. Mr Jason Cooley asked his father whether or not it was correct. Had Mr Rose been the source of the information there would have been no need for him to send his earlier e-mail seeking the information.
The prices charged to Labelforce by Stockman paper bear a very close similarity to the figures appearing in the document. I, therefore, infer that the information was used to assist Label Force in establishing its business and in obtaining paper at a price which would allow it to operate the business profitably.
Confidential Workload Information
This information was incorporated in a spreadsheet prepared by Labelmakers WA. It contained job information of the same kind as appeared in the Red Book. It related to a two week period and to work done for some of Labelmakers WA’s major clients including Harvey Fresh, Planet Sales and D’orsonga.
On 19 March 2009 Mr Sweeney sent an e-mail from his Labelmakers WA’s account to Mr Ernie Cooley’s personal account. A copy was also forwarded to Mr Jason Cooley. The e-mail had the spreadsheet attached to it.
The respondents admitted that the material in the document is confidential but contended that the information was of no commercial value to anyone other than Labelmakers WA. Mr Sweeney, however, admitted that this information would be of considerable value to a competitor of Labelmakers WA when quoting for jobs against Labelmakers WA.
Among the information contained in the spreadsheet was Labelmakers WA’s percentage paper use figure. Mr Ernie Cooley identified this figure as one of the two most important factors in determining the success or failure of the future business when he applied to the Westpac Bank for finance in February 2009 (see above at [48]). The paper use percentage figure was used in the applications for finance made to both the Westpac Bank and the National Australia Bank.
I, therefore, find that this confidential information was improperly used by the respondents in establishing the Labelforce business.
Confidential D’orsonga Pricing Information
Towards the middle of 2008 a competitor of Labelmakers WA had sought to obtain some of D’orsonga’s business. When this occurred Mr Eric Marrollo, a senior manager of D’orsonga sent Mr Jason Cooley a document containing the prices being paid by D’orsonga for labels. Mr Jason Cooley added a new column to the document which set out the revised prices which Labelmakers WA then offered D’orsonga in order to retain its business.
The document, in its amended form, was found on Mr Ernie Cooley’s computer following the execution of a search order.
The applicants claim that the information, to the extent that it disclosed the prices being charged by Labelmakers WA to produce various labels for D’orsonga was confidential.
The respondents deny that this information was confidential because it would have been provided to Labelforce by D’orsonga on request.
Mr Ernie Cooley gave evidence that the information contained in the document had, in fact, been provided to him by Mr Marrollo and that, the document, in the form in which it was found on his computer, had been re-typed by his daughter.
Labelmakers WA adduced evidence, which I accept, that the document found on Mr Ernie Cooley’s computer had been printed within Labelmakers WA on 14 April 2009. It was not possible to identify who had printed the document.
Mr Marrollo was not called to give evidence.
In these circumstances I am prepared to (and do), infer that the document was obtained from the records of Labelmakers WA.
It was subsequently used by Mr Ernie Cooley to negotiate prices in an agreement under which D’orsonga engaged Labelforce to provide labels from 1 July 2009.
Conclusions Relating to Confidentiality Claims
For the reasons given I consider that the documents which comprise the stock workout information, the financial information, the client costing information, the Red Book information, the sales information, the raw material information, the workload information and the D’orsonga pricing information is confidential to Labelmakers WA.
This material should, if it has not already been, be delivered up to Labelmakers WA.
Further remedies, including restraints on further misuse of this material may be appropriate.
CONTRAVENTIONS OF S 183 OF THE CORPORATIONS ACT
The applicants sought findings that Messrs Ernie and Jason Cooley, Sweeney and Deveney each contravened s 183 by improperly using information obtained by them in their respective capacities in order to gain an advantage for themselves or someone else or cause detriment to Labelmakers WA.
Section 183 of the Corporations Act provides that:
“183(1) A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:
(a)gain an advantage for themselves or someone else; or
(b)cause detriment to the corporation.
(2) A person who is involved in a contravention of subsection (1) contravenes this subsection.”
Each of the individual respondents was either an officer or employee of Labelmakers WA at relevant times.
To the extent that I have found that each breached his or her equitable obligations to maintain his or her employer’s confidences, each also contravened the requirements of s 183(1) by improperly using the relevant information in order to gain an advantage for him or herself or someone else.
LIABILITY OF LL FORCE PTY LTD
I have, thus far, concentrated on the impugned conduct of the individual respondents. Their conduct does, however, also have implications for the liability of LL Force. As Palmer J said in Digital Pulse at [25]:
“Where the employee who is in breach of the fiduciary duty of loyalty incorporates a company in order to take the benefits of the breach, then the company itself will be held to have participated in the breach so that it will be liable to the employer to the same extent as the employee.”
Such liability arises for a number of reasons. The first is that the individual respondents are the directing minds of LL Force. Secondly the rule in Barnes v Addy (1874) LR 9 Ch App 244 at 251-2 renders a third party who participates knowingly in the dishonest conduct of a defaulting fiduciary itself accountable as a constructive trustee. Thirdly, it was LL Force which received the benefit of the corporate opportunity which the individual respondents’ conduct denied to the applicants.
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.
I certify that the preceding three hundred and seventy (370) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tracey. Associate:
Dated: 18 May 2012
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