Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 3)

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FEDERAL COURT OF AUSTRALIA

Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 3) [2013] FCA 1059

Citation: Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 3) [2013] FCA 1059
Parties: LABELMAKERS GROUP PTY LTD (ACN 114 717 814) and LABELMAKERS GROUP WA PTY LTD (ACN 061 909 688) 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: 22 October 2013
Catchwords: EQUITY – Remedies – damages or equitable compensation – in the alternative account of profits – equitable lien – injunctive relief – delivery up – election to be made as to whether equitable compensation or account of profits to be received – interest to be calculated in accordance with Federal Court Act
Legislation: Federal Court of Australia Act 1976 (Cth) s 51A
Cases cited: AMP Services Limited v Manning [2006] FCA 256 – considered
C-Shirt Pty Ltd v Barnett Marketing and Management Pty Ltd (1996) 37 IPR 315 – considered
General Tire and Rubber v Firestone Tyre and Rubber Company Limited [1975] 1 WLR 819 – considered
Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 – considered, cited
Johnson v Perez (1988) 166 CLR 351 – cited
Labelmakers Group Pty Ltd v LL Force Pty Ltd [2012] FCA 512 – discussed, cited
Parker, Re Purcom No 34 Pty Ltd (in liq) (No 2) [2010] FCA 624 – cited
TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd (1963) 180 CLR 130 – considered
V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd (2013) 296 ALR 418 – applied, considered
WA Fork Truck Distributors Pty Ltd v Jones [2003] WASC 102 – considered
Warman International Limited v Dwyer (1995) 182 CLR 544 – applied, considered, cited
Western Areas Exploration Pty Ltd v Streeter (No 3) (2009) 234 FLR 265 – cited
Date of hearing: 29 November 2012
Date of last submissions: 13 March 2013
Place: Melbourne
Division: GENERAL DIVISION
Category: Catchwords
Number of paragraphs: 126
Counsel for the Applicants: Mr S Anderson SC and Mr M J Slattery
Solicitor for the Applicants: Clayton Utz
Counsel for the Respondents: Mr S Rosewarne
Solicitor for the Respondents: Tottle Partners

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 Applicant

LABELMAKERS GROUP WA PTY LTD (ACN 061 909 688)
Second Applicant
AND:

LL FORCE PTY LTD (TRADING AS LABELFORCE) (ACN 136 603 891)
First Respondent

ERNEST SAMPSON COOLEY
Second Respondent

JASON ERNEST COOLEY
Third Respondent

PAUL RICHARD DEVENEY
Fourth Respondent

SCOTT SWEENEY
Fifth Respondent

CHLOE LEECH
Sixth Respondent

JUDGE:

TRACEY J

DATE OF ORDER:

22 OCTOBER 2013

WHERE MADE:

MELBOURNE (HEARD IN PERTH AND MELBOURNE)

THE COURT ORDERS THAT:

1.On or before 29 October 2013 the parties file and serve minutes of orders which give effect to the reasons…

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Details
Case
[2013] FCA 1059
Decision Date

CaseChat Overview and Summary

The case of Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 3) involved a dispute between the applicant, Labelmakers Group, and the respondents, LL Force and others. The applicants sought damages and equitable compensation for losses arising from the respondents' alleged breach of fiduciary duties and misuse of confidential information. The case was heard in the Federal Court of Australia. The central legal issues in the case included determining the appropriate discount rate to apply in calculating lost profits, whether rebates offered by Labelmakers WA to retain clients should be considered in calculating losses, and the period over which the losses should be calculated. The court had to decide on the appropriate range of discount rates to be applied, the validity of the assumption that certain rebates would have been granted, and the duration over which the losses should be assessed.

The court examined the experts' reports on discount rates and concluded that a discount rate of 30% was appropriate. The court found that the respondents' instructions to assume certain rebates would be granted were not valid as these rebates would not have been offered in the absence of the respondents' misconduct. Therefore, these rebates should not be considered in calculating the applicants' losses. Regarding the period over which losses should be calculated, the court determined that the losses should be assessed for an indefinite period, considering the long-term relationships between the customers and Labelmakers WA, despite the short-term nature of orders in the market.

The court issued orders for the parties to file and serve minutes of orders and submissions relating to the costs by specific dates, as per the Federal Court Rules 2011. The final orders were to give effect to the reasons for judgment and address the costs proposed by the respondents.

Orders

Orders of the court

1. On or before 29 October 2013 the parties file and serve minutes of orders which give effect to the reasons for judgment published today.

2. On or before 29 October 2013 the respondents file and serve submissions relating to the costs orders which they propose should be made by the Court.

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

Background

Background to the litigation

Full text does not contain this section.

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

After discussing their respective analyses the experts were able to agree, notwithstanding their differences, that these additional risks could be factored in to the range of discount rates on which they had agreed. In their joint report they advised that:“56. The experts differ on the scale of the impact of a number of risks on the likely value of the business. These are reflected in the differences in the ranges of discount rates that they have arrived at above. However, as discussed above, whilst they differ on these elements, the existence of the risks under the different scenarios is not in dispute; it is the scale of the adjustments required for these elements not agreed on.57. There are some differences between the experts as to exactly how to arrive at ranges they have derived, and whether appropriate adjustments have been made for all appropriate elements. However both experts agree that, having made all the various adjustments, it is necessary and appropriate for the valuers to “step back” and consider the discount rate or multiple they have arrived at.58. Having done that, and clarifying the different scenarios, the experts have concluded that whilst their ranges are different, they do overlap to provide a suitable discount rate (or multiple for later issues) as set out in this Joint Report.”Conclusion on Discount Rate I accept the experts’ evidence on this point: a discount rate of 30 per cent should be applied.Rebates In the wake of the defection of the individual respondents the new management at Labelmakers WA made a forlorn effort to retain the business of some of the company’s larger clients by offering price reductions. The respondents instructed Mr Herbert that, when calculating losses sustained by the applicants, he should assume that Labelmakers WA would have granted rebates of 25 per cent and 20 per cent respectively to D’Orsogna and Harvey Fresh in the 2009/2010 and 2010/2011 financial years. These assumptions had an impact on the discount rates and profit percentages determined by Mr Herbert. Mr Stone received no such instructions and did not make any allowances for such reductions. Had it not been for the respondents’ errant conduct the rebates would never have been offered or paid. No allowance should be made for them in calculating the applicants’ losses.Period During Which Losses to be Calculated As appears from the table in [30] above the quantum of lost profits was calculated over five, seven and 10 years and for an indefinite period. The applicants contended that their loss should be calculated for an indefinite period. The respondents opted for a much shorter period of 61 days or such longer period as the Court considered to be an appropriate “head start” period. The applicants submitted that it was reasonable for the Court to conclude that “but for” the respondents’ misconduct the former clients of Labelmakers WA whose business had been solicited by the investor respondents would have remained clients of Labelmakers WA indefinitely. They acknowledged that a feature of the market for labels was that orders were placed by customers on a short term needs basis. Long term supply agreements were not the norm. They stressed that, nonetheless, it was also a feature of the market that customers remained loyal to printers provided that the printers satisfied orders in a timely manner and at a standard acceptable to the client. They pointed to the long term association between the 10 solicited clients of Labelmakers WA and the company.

Ratio Decidendi

Legal Principle Established

As already noted Mr Stone settled on a figure of 36 per cent of lost sales. Mr Herbert fixed on a lower figure of between 28.64 per cent and 29.14 per cent. The experts explained their difference by reference to three subsidiary items. These were: (a) administration salaries; (b) the extent of variation of certain costs; and (c) depreciation.Administration Salaries Mr Herbert proceeded on the assumption that the historical amounts actually paid to the individual respondents by Labelmakers WA totalled about $490,000. Although he had not undertaken any vouching or other verification of these amounts he acted on an instruction that the individual respondents were not replaced and, as a result, he concluded that a full adjustment of that amount should be made. It followed that the profit margin suggested by Mr Stone should be reduced by approximately five per cent. This was because, in Mr Herbert’s view, Labelmakers WA would have had to continue to incur these costs in order to make the lost sales and service the clients. When giving oral evidence Mr Stone agreed that, if the assumption which Mr Herbert was instructed to make accorded with fact, it was, indeed, appropriate to make the reduction which Mr Herbert had suggested was appropriate. Mr Stone was not instructed as to the amounts paid to the individuals and the question of whether or not any of them had been replaced following their departure from Labelmakers WA. He did however review the profit and loss accounts of the company before and after the individual respondents had left the employ of Labelmakers WA. He reported that normal administrative salaries paid by Labelmakers WA fell by a little under $250,000 between the 2008/2009 and 2009/2010 financial years. Mr Stone said that a reduction of this magnitude would have warranted a reduction of the profit margin of 2.5 per cent. The figure on which this variation was based did not, however, include the reduction in on‑costs of overtime, annual leave, payroll tax and superannuation which Mr Stone had found to have been saved following the departure of the individual respondents. When the differences between these two financial years were calculated, the reduction in expenditure on these items was a little over $478,000, not far short of the $490,000 which Mr Herbert was instructed to bring into account. The respondents submitted that a reduction of 4.85 per cent was warranted under this head. Their calculations were set out in the following table: The applicants argued that no such deduction should, however, be made because of additional expenses indirectly incurred by Labelmakers WA as a result of the departure of the individual respondents and the solicitation by them of the former clients of Labelmakers WA. The loss of orders had resulted in a significant underutilisation of production capacity. In order to maintain the viability of Labelmakers WA the Victorian office of the Group placed significant orders with Labelmakers WA. This meant that considerable expense was incurred transporting material to and from Melbourne. There were also substantial costs incurred by Labelmakers WA in producing new printing plates to satisfy the orders from Melbourne.