Trusted Senior Manager misused employer’s confidential information to set up in competition
This month’s Employment Update looks at the recent Federal Court decision, Verix Pty Ltd v Williams  FCA 748 (‘decision’).
In this decision, the Federal Court concluded that a Senior Business Development Manager (with the assistance of others) had misused the employer’s confidential information to set up a business in competition, breaching “contract, statutory duties, fiduciary and other equitable duties”.
The court in this decision was required to examine several layers of duties (implied, express and statutory) because the Senior Manager did not have a comprehensive employment contract with express terms protecting the business.
The employer, Verix Pty Ltd (formerly PGA Laminating) (‘PGA’) is a family operated business established in 2000. PGA provides film packaging products to a number of manufacturers in the food industry. Most of the contracts entered into with PGA’s customers are “handshake agreements” and are facilitated with an exchange of forecasts, purchase orders and invoices. Competition in the industry is based on “customer service, price and product turnaround time”.
Mr Williams commenced employment with PGA in 2000 and was appointed to the Senior Business Development Manager role at the end of 2016, a position he held until resigning in November 2017.
Mr Swanepoel, a contractor, was introduced to PGA by Mr Williams in 2016. Mr Swanepoel was subsequently engaged by PGA and provided sales consultant services through his company, Swanell Corp Pty Ltd (‘Swanell Corp’). Through Swannel Corp Mr Swanepoel’s services were to “introduce new clients to PGA and to manage the clients that he had introduced, but not have contact with clients that he did not introduce”. In the decision, Justice Beach notes that “Mr Swanepoel was not for the most part authorised to have access to PGA’s confidential information”.
The Court heard that the day prior to Mr Williams’ resignation in November 2017, Mr Williams entered PGA’s office after hours and “removed unidentified items and a substantial volume of physical files”.
Due to concerns that Mr Williams had misused PGA confidential business information, PGA subsequently made an application for preliminary discovery against Mr Williams and required that PGA’s solicitors have access to “electronic devices, including hard-copy files, a personal computer, a personal mobile phone and Mr Williams’ and his wife’s personal email accounts”.
Forensic examination of the various electronic devices used by Mr Williams during his employment with PGA, indicated that prior to resigning Mr Williams “deleted a significant number of emails from his PGA email account using techniques to permanently delete the data and a substantial volume of data from the PGA share drive, and from the Surface Pro [his laptop].”
Based on the material provided during discovery, PGA then commenced further proceedings against Mr Williams, Mr Swanepoel and Swanell Corp claiming that they had “engaged in a course of conduct relating to the development of a new business designed to compete with PGA, including by soliciting business from and submitting tenders to its existing clients”.
As an aside, PGA also commenced proceedings against an employee of one of its suppliers and the supply company, as it was alleged that the supplier’s employee had assisted in the establishment and operation of the competitive business. However, proceedings were dismissed in exchange for an undertaking that the relevant parties would not to use PGA’s confidential information and copyright works.
During the proceedings, Mr Williams denied wrongdoing. Despite this, Justice Beach noted that Mr Williams “made little attempt to explain or contradict the extensive evidence filed by PGA demonstrating that during his employment he took steps to establish the competitive business with a view to transitioning PGA’s existing clients to the new business after his resignation, and that he did so by reference to information he obtained because of his employment with PGA”.
Contract of Employment
On examination, the court determined that Mr Williams did not have a comprehensive written contact of employment, but rather the employment agreement formed between Mr Williams and PGA was partly in writing, oral and implied.
Justice Beach noted that the only written component of the contract of employment was the existence of a written position description for the Senior Business Development Manager role provided to Mr Williams in December 2016. Justice Beach determined that the duties identified in the position description document were consistent with the duties described in weekly report documentation prepared by Mr Williams during his employment. Despite the absence of express written contractual terms, during the proceedings Mr Williams admitted that he was responsible for “developing new and existing relationships with PGA’s customers so as to identify opportunities to sell PGA’s products and services”.
Justice Beach said that there “was no doubt” that Mr Williams had an obligation during and post-employment to keep information provided during employment with PGA, confidential. Justice Beach determined that Mr Williams owed a duty to maintain “trust and confidence”, “render faithful and loyal service”, and “not do anything in conflict” with his duties to PGA. His Honour also confirmed that Mr Williams owed similar duties because of his fiduciary relationship with PGA.
On detailed examination, the court observed that Mr Williams held a “relatively senior position” and that “he was one of only four employees within the business who had access to all physical and electronic files containing PGA’s confidential and proprietary information”. Justice Beach pointed out that “senior employees are precluded from obtaining for themselves or another any property or business advantage belonging to their employer” and concluded that Mr Williams’ pursuit of setting up a business in competition with his employer, in conflict to duties owed, was “unacceptable”.
Interestingly, Mr Williams attempted to argue that at the time of the alleged impugned conduct, that he was the General Manager of PGA and not the Senior Business Development Manager. Justice Beach in dismissing the argument expressed the view that such an argument was a “two-edged sword”, because if established, fiduciary obligations “were even more fortified in favour of PGA”.
Corporations Act 2001 (Cth)
The court considered statutory duties owed by Mr Williams to PGA under s 182 and s 183 of the Corporations Act 2001 (Cth) and concluded that Mr Williams had breached the Act by:
- Providing specifications for PGA customers to other persons for the purpose of obtaining quotes for the competitive business;
- Providing product specifications, pricing and volume information (PGA pricing spreadsheet) pertaining to all PGA customers;
- Collecting commercially sensitive information about the PGA business (and forwarding it to his personal Gmail account prior to resigning);
- Using PGA tray specifications and drawings;
- Using PGA and competitor pricing information in preparing and submitting a tender in competition with PGA;
- Diverting commercial opportunities away from PGA to the competitive business;
- Misusing PGA’s confidential information post-employment;
- Requesting, post-resignation, that Mr Swanepoel send him PGA confidential information; and
- Preparing data sheets based on PGA data sheets to use in the competitive business.
The court also considered statutory duties owed by Mr Williams under s 35 of the Copyright Act 1968 (Cth). After detailed examination, the court accepted that PGA was the owner of copyright for:
- PGA employee weekly activity reports (including PGA costings calculations and CRM record);
- PGA costing calculations;
- Letters from PGA to customers (or potential customers); and
- PGA customer specifications.
The court heard that Mr Williams, in addition to setting up the “wholesale” forwarding of all emails to his personal email, and prior to resigning, emailed copyright documentation to his personal email. The court accepted that PGA did not authorise Mr Williams to “copy or use any of such works outside the terms of his employment or for any purpose unconnected with the business of PGA”. Justice Beach noted that Mr Williams’ infringement of PGA copyright appeared to be “flagrant” within the meaning of the Copyright Act.
MR SWANEPOEL AND SWANELL CORP
Mr Swanepoel did not deny his involvement with PGA and Mr Williams but claimed that he had relied on “purported knowledge” that Mr Williams had ownership interest in PGA, to justify the dealings. Interestingly, Mr Swanepoel also claimed that he did not engage in any wrongdoing because “he was not subject to any restraints that would prevent him from attempting to gain business from any of PGA’s customers”.
Justice Beach clarified that the proceedings against Mr Swanepoel were based on accessorial liability, relating to the receipt and misuse of PGA’s confidential information such as:
- Taking an active role in setting up the competitive business;
- Receiving and using PGA’s commercially sensitive information;
- Taking steps to ensure the conduct of the competitive business remained concealed from PGA; and
- Ignoring the fact, that even if Mr Williams was part owner of PGA, that Mr Williams was “acting improperly”.
The court determined that Mr Williams had breached: his employment agreement with PGA (limited as it was), statutory duties, fiduciary duties and equitable duty of confidence. Justice Beach stated that the Mr Williams’ deletion of data to conceal his conduct also “frustrated and harmed” PGA and that his deletion of emails and files were further breaches of the Senior Manager’s duties.
The court also determined that Mr Swanepoel had breached his obligations by receiving and using PGA’s confidential information and concluded that “Swanell Corp was not merely a passive recipient of the benefits of Mr Williams’ breaches of duties and breaches of confidence. It was a necessary corporate vehicle which enabled Mr Williams and Mr Swanepoel to implement the strategy of establishing the competitive business”. However, claims of liability were not established against Mr Swanepoel and Swanell Corp for claims “involving knowing assistance of Mr Williams’ breaches of fiduciary duties”.
A separate hearing to address orders (and we assume determine compensation) is to be held at a later date. We hope to see a significant compensation decision in coming weeks / months.
Take-aways from the decision
The Federal Court decision highlights that, despite Mr Williams’ not having a proper employment contract as such, employees still owe significant statutory and common law obligations to their employers, and particularly in respect of an employer’s confidential information. Undoubtedly, a properly drafted employment contract would have made the pursuit of Mr Williams for his misconduct less complex, and potentially provided for more straight forward legal arguments to be run and won, but employers should take heart in the Court’s willingness to enforce Mr Williams and Mr Swanepoel’s obligations against them. With this in mind, all employers should be reviewing their contractual documents with employees including their senior employees. Aitken Legal can assist with contract assessment and then updating and/or preparation of employment contracts. Contact one of our expert lawyers for assistance.
Disclaimer: The information contained this article is general and intended as a guide only. Professional advice should be sought before applying any of the information to particular circumstances. While every reasonable care has been taken in the preparation of this update, Aitken Legal does not accept liability for any errors it may contain. Liability limited by a scheme approved under professional standards legislation.