FEDERAL COURT OF AUSTRALIA
Labelmakers Group Pty Ltd v LL Force Pty Ltd (No 2) [2012] FCA 512
IN THE FEDERAL COURT OF AUSTRALIA | |
DATE OF ORDER: | |
WHERE MADE: |
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
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 061 909 788) 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: | 18 may 2012 |
PLACE: | MELBOURNE (HEARD IN MELBOURNE AND PERTH) |
REASONS FOR JUDGMENT
1 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.
2 While at Labelpower Mr Cooley had involved his son Jason and another respondent, Mr Paul Deveney in the business.
3 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.
4 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.
5 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
6 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.
7 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”).
8 In 1995 the business name of Labelcraft was changed to Label Power.
9 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.
10 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.
11 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.”
12 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.
13 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.
14 On 6 July 2006 Abdale changed its name to Labelmakers WA.
15 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.”
16 Ms Leech signed an acknowledgement that she was to be bound by these terms.
17 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.
18 This discussion appears to have generated renewed interest by Mr Cooley in such a project.
19 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.
20 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.”
21 On 28 February 2008 Mr Ernie Cooley obtained a quotation from an insurance broker for insurance of a “new business venture”.
22 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.
23 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” |
24 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.
25 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”.
26 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.”
27 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.
28 This e-mail was also forwarded to Mr Jason Cooley.
29 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.
30 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.
31 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.”
32 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.”
33 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.
34 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.
35 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.
36 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.
37 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].
38 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.
39 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.”
40 The shareholders of the new entity were then identified as Ernie and Jason Cooley, Mr Sweeney and “Sorgiovanni and Scolaro family members”.
41 Machines selected for use in the new business were mentioned.
42 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.”
43 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 | |
- David Gray | $30,000 |
- Casa | $30,000 |
- Fine Foods | $20,000 |
- Karri Spring | $50,000 |
- Paradise Waters | $20,000 |
Total Probable Sales $765,000”
44 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.”
45 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.”
46 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.”
47 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.
48 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.”
49 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.
50 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.
51 On 15 April 2009 LL Force Pty Ltd was registered.
52 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.
53 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.”
54 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.
55 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.”
56 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].
57 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.
58 On 1 May 2009 Mr Ernie Cooley tendered his resignation from Labelmakers WA to take effect on 29 May 2009.
59 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.”
60 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.
61 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.
62 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.
63 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.
64 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.
65 On 19 May 2009 Mr Jason Cooley tendered his resignation from Labelmakers WA. Mr Mark Fairclough was appointed to replace him.
66 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.”
67 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.
68 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.
69 On 21 May 2009 LL Force registered the business name Labelforce.
70 On 23 May 2009 Mr Jason Cooley confirmed his resignation giving four weeks notice.
71 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.
72 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.”
73 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.”
74 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.”
75 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.”
76 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.
…”
77 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.
…”
78 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”.
79 On 15 June 2009 Ms Leech tendered her resignation to Labelmakers WA. The notice took effect on 19 June 2009.
80 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.
81 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.
82 Mr Deveney ceased work for Labelmakers WA on 17 June 2009. On the following day Mr Jason Cooley left.
83 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.
84 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.
85 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.”
86 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.”
87 An advertisement was placed in the West Australian newspaper shortly afterwards for a “Slitter Operator”. Mr Ngo responded and was engaged by LL Force.
88 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.
89 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.
90 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.
91 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.”
92 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
93 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.
94 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.
95 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.
96 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.
97 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.
98 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.
99 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.
100 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.
101 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.
102 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
103 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).
104 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.
105 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.”
106 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.
107 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.
108 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 …”
109 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.”
110 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.”
111 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].
112 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.
113 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].
114 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].
115 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].
116 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].
117 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
118 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
119 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.
120 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.
121 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
122 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
123 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.
124 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.
125 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.
126 The applicants challenged the temporal limits placed by Mr Cooley in his admissions and the truthfulness of his denials.
127 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.
128 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.
129 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.
130 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.
131 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.
132 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
133 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.
134 The evidence strongly supports the applicants’ submission.
135 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.
136 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.
137 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.
138 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.
139 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.
140 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).
141 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].
142 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.
143 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.
144 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.
145 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.
146 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.
147 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
148 The applicants contended that Mr Ernie Cooley had, while an employee of Labelmakers WA, encouraged Mr Jason Cooley, Mr Deveney, Ms Leech, Mr Ngo, Mr Humphries and Ms Lung to leave Labelmakers WA and accept employment with Labelforce. Mr Cooley denied having done so.
149 The evidence of Mr Ernie Cooley, Mr Jason Cooley and Mr Deveney confirms (and I find) that Mr Ernie Cooley invited and encouraged Mr Jason Cooley and Mr Deveney to join the new business. Jason Cooley gave evidence that, prior to June 2009, he had embarked upon establishing a new business with Ernie Cooley, and had concealed that fact from Mr O’Sullivan. Ernie Cooley’s evidence confirmed that he had had discussions with Jason Cooley early in 2008 about setting up a label printing business together. To this end, Ernie Cooley had commenced searching for existing printing businesses for sale in about January 2008. Both Jason and Ernie Cooley confirmed in their evidence that these discussions and investigations were concealed from Labelmakers WA. Mr Deveney gave evidence that he and Ernie Cooley had had some detailed discussions over dinner in 2008 about Mr Cooley’s intentions to establish another label-printing business, a discussion which was continued over coffee in about February 2009, at which Mr Cooley asked Mr Deveney whether he would like to be involved in the new business. Mr Cooley made a similar offer to Mr Sweeney prior to 4 May 2009.
150 There is no doubt that Mr Ernie Cooley had considered the possibility of recruiting Ms Leech to the new business. Her name had been mentioned in his budgets since February 2008. He had discussed the possibility of employing her with Messrs Jason Cooley, Sweeney and Deveney during the early part of 2009. There was, however, no evidence that Mr Ernie Cooley had approached Ms Leech or discussed employment with Labelforce with her prior to him leaving Labelmakers WA at the end of May 2009.
151 I do not accept that Mr Ernie Cooley sought to procure the services of Ms Leech for Labelforce whilst he was an employee of Labelmakers WA.
152 Mr Ernie Cooley also gave consideration to the employment of Mr Ngo whilst he (Mr Cooley), was employed by Labelmakers WA. Mr Ngo’s name was included in the budget which had been submitted to the National Australia Bank on 18 February 2009. After he had left his employment at Labelmakers WA Mr Ernie Cooley caused the advertisement to be placed in the West Australian newspaper seeking a machine operator for the new business. He also discussed Mr Ngo’s remuneration with Mr Deveney on 11 June 2009.
153 There was, however, no evidence that Mr Ernie Cooley made any approach to Mr Ngo whilst he (Mr Cooley) was employed by Labelmakers WA.
154 I do not accept that Mr Cooley sought to procure the services of Mr Ngo for Labelforce whilst he was an employee of Labelmakers WA.
155 Mr Ernie Cooley was also interested in procuring the services of Mr Humphries as a printer for Labelforce. Mr Cooley included Mr Humphries’ name in the list of employees of the new business which was sent to the National Australia Bank on 18 February 2009. He also discussed the prospect of employing Mr Humphries with Messrs Jason Cooley, Mr Sweeney and Mr Deveney in May 2009.
156 There was, however, no evidence that Mr Ernie Cooley had any dealings with Mr Humphries relating to the possibility of Mr Humphries working for Labelforce either before or after Mr Cooley ceased working for Labelmakers WA.
157 I do not accept that Mr Cooley sought to procure the services of Mr Humphries for Labelforce whilst he was an employee of Labelmakers WA.
158 There can be no doubt that Mr Ernie Cooley was anxious to secure the services of Ms Lung as a graphic artist for Label Force. He had included her name in his budgets and had told her about the proposed new business whilst he was still employed at Labelmakers WA. He asked her to prepare a trademark for the new business and she did so whilst both were employed by Labelmakers WA.
159 Mr Cooley, did not, however, offer Ms Lung a position at Labelforce until after he had ceased working for Labelmakers WA.
160 I do not accept that Mr Cooley sought to procure the services of Ms Lung for Labelforce whilst he was an employee of Labelmakers WA.
Arranging for Transfers of Native Artwork
161 Labelmakers WA held “native artwork” for each of its clients. This artwork was used for the reproduction of all labels for the clients’ products. The artwork could be edited. It could only be viewed using sophisticated software operated by specially trained employees. The artwork was held by Labelmakers WA and not by the clients. The fact that Labelmakers WA held the artwork operated as a significant disincentive to any clients who might have wished to change printers. This was because such a client would need to have new native artwork produced and given to the new printer. Considerable expense was involved.
162 In May 2009 Labelmakers WA received a number of requests from clients to send their native artwork to them. These clients included Harvey Fresh, D’orsogna, Planet Sales and Canon Foods.
163 The applicants submitted that Mr Ernie Cooley had encouraged these clients of Labelmakers WA to make their requests so that the artwork could be provided by them to Labelforce.
164 Mr Ernie Cooley denied having been involved in the making of such requests.
165 The only other evidence which was called by the applicants which directly linked Mr Ernie Cooley to requests to Labelmakers WA for native artwork related to Canon Foods. Mention has already been made (above at [147]) of e-mails to which Mr Pace was a party on 18 and 19 May 2009. It is clear from these e-mails that Mr Ernie Cooley and Mr Pace had spoken about arrangements which would enable Canon Foods to recover its artwork from Labelmakers WA and that this was being done because they were anticipating that Mr Cooley was shortly to leave Labelmakers WA and to become actively involved in a new business to which Canon Foods would transfer its business. After Mr Cooley left Labelmakers WA further steps were taken in this process. On 26 June 2009 Ms Lung sent an e-mail to Mr Cooley suggesting a script which might be used by Label Force’s clients when requesting the repatriation of their native artwork. Mr Cooley forwarded a copy of the script to Mr Pace. Shortly afterwards Ms Nicole Dawson of Canon Foods sent an e-mail in the suggested terms to Mr Fairclough at Labelmakers WA. All of this occurred after both Mr Ernie Cooley and Ms Lung had ceased employment with Labelmakers WA and commenced work at Labelforce.
166 I therefore find that Mr Ernie Cooley breached his contractual and equitable obligations to Labelmakers WA in relation to requests for native artwork by Canon Foods.
Summary and Conclusion
167 Mr Cooley was a senior and trusted employee of the company. Despite this he was surreptitiously, over a period of at least 18 months, actively involved in establishing a competitive business. It was Mr Cooley who conceived the idea. He prepared budgets to test the viability of a new business. He sought out investors. He solicited some of Labelmakers WA’s major clients to transfer their business to the new entity. He recruited some of Labelmakers WA’s key employees to resign and come to work for Labelforce. It was Mr Ernie Cooley who applied for and obtained finance for the new venture. He was involved in obtaining premises from which it could operate.
168 These activities formed part of a scheme, devised by Mr Ernie Cooley, to plan for and establish a new business which was to compete with his then employer Labelmakers WA. Although he maintained that he had done nothing unlawful he plainly had misgivings as to the efficacy of his conduct. He was sufficiently concerned to seek legal advice about the matter in May 2009 and, throughout the period between February 2008 and his resignation from Labelmakers WA taking effect at the end of May 2009, he went to great lengths to conceal his activities from his employer. Most of the e-mail communications in which he participated passed between personal accounts and third parties were advised to treat material which he sent to them as confidential. At no time did he disclose what he was doing to the boards of either applicant. Nor did he seek approval for any of these activities.
169 Mr Cooley was prepared to pursue his competitive interests in setting up the Labelforce business during times at which he should have been attending to Labelmakers WA’s business. He had, for example, inspected two sets of premises which might be used by Labelforce during normal business hours. He had no qualms about using Labelmakers WA’s resources to obtain a quotation for a printing machine for use in the Labelforce business and then using these documents to support the application for finance that he placed before the National Australia Bank in a successful attempt to obtain finance for the new business.
170 I therefore find that Mr Ernie Cooley repeatedly and deliberately, between February 2008 and May 2009, pursued his own interests to the detriment of those of Labelmakers WA thereby breaching his fiduciary and contractual obligations to Labelmakers WA.
Mr Jason Cooley
171 Like his father, Mr Jason Cooley admitted having engaged in a number of activities relating to the planning for and establishment of the Labelforce business while he was employed by Labelmakers WA. He denied that he had done other things such as soliciting clients and staff of Labelmakers WA to move to Labelforce.
The Admitted Conduct
172 Mr Jason Cooley admitted that, in 2008, he had engaged in activities directed to considering whether to establish the Labelforce business and that those activities included having discussions with his father and reviewing budgets and other documents prepared by his father.
173 He also admitted that, between January and mid-June 2009:
His father informed him of the activities in which he (Mr Ernie Cooley) admitted he had undertaken during this period (see above at [119] – [120]); and
Contributing capital for the establishment of Labelforce.
174 Mr Jason Cooley contended that he had a lawful entitlement to undertake all of these activities and that he did so in his own time and primarily from his own home.
175 In evidence, Mr Jason Cooley sought to minimise the extent of his participation in the planning and preparation of the Labelforce business. He said: “I spent very little time in the planning process of the new business, no more than five or six hours.”
The Denials
176 Mr Jason Cooley specifically denied that, at any stage whilst he was employed by Labelmakers WA, did he solicit or attempt to solicit work for the new business from existing customers of Labelmakers WA.
Consideration
177 The applicants contended that Mr Jason Cooley had been untruthful when giving evidence about the extent and nature of his involvement in setting up the Label Force business. They submitted that he was “integral to the establishment of the new business” and that one of the major reasons that Mr Ernie Cooley was moved to establish it was Mr Jason Cooley’s discontent with his lot at Labelmakers WA.
178 Mr Jason Cooley was committed to the establishment of the new business from an early stage. He attended the meeting in April 2008 in which his father sought to interest Mr Sorgiovanni and Mr Scolaro in supporting and investing in the then proposed new business.
179 By no later than February 2009 he had determined to make a considerable personal financial commitment to the new business and to assist his father in obtaining bank finance for it. On 3 February 2009 he approached a finance broker with a view to obtaining funding for his own capital input.
180 On 1 February 2009 he prepared the budget notes which were attached to the applications for finance for the new business which was sent, on 18 February 2009, to both the National Australia Bank and the Westpac Bank. These documents contained a number of statements which substantially undermine some of Mr Jason Cooley’s denials.
181 The introductory section of the applications referred to “long standing clients” who had consistently questioned him and his father about “when they would be starting up again in business”. He admitted that the clients to whom he was referring were clients of Labelmakers WA.
182 The document went on to say that a number of these clients had indicated that “they would immediately give the new identity their business.” This clearly suggested that Mr Jason Cooley was aware of, if not privy to, discussions with these clients of Labelmakers WA for the purpose of attracting their business to the new entity. It will be recalled that the budget notes also identified Harvey Fresh, Planet Sales, D’Orsogna and Canon Foods as companies which were committed to placing orders with the new business. Mr Cooley said in cross-examination that these statements were untruthful notwithstanding the fact that he had certified to the National Australia Bank that they were true and correct.
183 The applications to the banks also referred to the proposed new business as “a follow on from an existing business.” Under cross-examination Mr Cooley said that that “existing business” was Labelmakers WA.
184 When he wrote to the finance broker seeking personal finance on 3 February 2009 he said that he and his father were looking at starting up a new business with “one of our best/biggest customers.” In evidence he sought to deny that this statement was true and that the biggest customer, to which he referred, was Harvey Fresh. He said that he would have “said anything” in order to obtain the finance he needed to invest in the new business.
185 Mr Jason Cooley’s oral evidence was unconvincing. I do not consider that he would have made assertions to the banks and the finance broker which were material to the success of the various applications which were untrue. They could readily have been checked by the financial institutions when assessing the applications. Had the assertions been found to have been untruthful, the success of the applications which was so important to Mr Cooley would have been jeopardised. In these circumstances, I consider that it is far more likely that Mr Cooley was truthful in what he said in supporting the applications for finance than he was when he gave oral evidence to the Court.
186 Mr Jason Cooley also gave untruthful evidence relating to the provision by Aldus Engineering of the quote on the Mark Andy machine on 12 February 2009. It will be recalled that that quotation had been sent to Mr Deveney at Labelmakers WA. Mr Jason Cooley said that the quotation had been obtained for the purposes of Labelmakers WA. This was not so. Upon receiving the quotation Mr Deveney immediately sent it on to Mr Ernie Cooley who in turn e-mailed a copy to Mr Jason Cooley. The quotation was attached to the applications to the National Australia and Westpac Banks on 18 February 2009. Mr Cooley was well aware of this as a signatory to, at least, the National Australia Bank application. The quotation was obtained and used for the purpose of the new business.
Soliciting Clients
187 The applicants submitted that Mr Jason Cooley was knowingly concerned with his father’s solicitation of Labelmakers WA’s clients whilst he (Mr Jason Cooley) was employed by Labelmakers WA. They pointed, for example, to an e-mail, sent by Mr Jason Cooley from his Labelmakers WA account to his personal e-mail account which had attached to it a document entitled “client billings”. This document contained the sales figures for some of the top 50 clients of Labelmakers WA for the 2007/2008 financial year and the budgeted figures for those clients for the next two financial years. Mr Jason Cooley admitted that he had sent that information on to his father because they wished to attract the listed clients to the Labelforce business.
188 Mr Jason Cooley was actively involved in obtaining the support of Harvey Fresh for the new business. He was present at the meeting with Messrs Sorgiovanni and Scolaro in April 2008 when discussions took place about those gentlemen investing in the new business and transferring the work then being given to Labelmakers WA to the new entity. Mr Cooley was privy to subsequent e-mail exchanges which confirmed Mr Sorgiovanni and Mr Scolaro’s interest in the new business. It was Mr Jason Cooley who prepared the budget notes which identified Harvey Fresh as a committed sale. Two days later he told the finance broker that he was looking at commencing a new business with his father “and one of the best/biggest customers” of Labelmakers WA, namely, Harvey Fresh. Mr Jason Cooley also signed the application form to the National Australia Bank in mid-February 2009 to which the budget notes were attached. He thereby certified as being true and correct the identification of Harvey Fresh as a confirmed supporter of the new business.
189 The budget notes also identified D’orsogna as one of the Labelmakers WA’s clients who had committed to supporting the new business. In June 2009, while he was still employed by Labelmakers WA, Mr Jason Cooley was actively involved in an attempt to transfer some of D’orsogna’s native artwork from Labelmakers WA so that it could be used by Labelforce to print labels for D’orsogna. On 4 June 2009 he sent an e-mail to Mr Eric Marrollo at D’orsogna attaching some artwork for one of D’orsogna’s leg ham products. Ms Gale Lung (who at the time was also still employed by Labelmakers WA) subsequently advised Mr Cooley that:
“Whilst I think we could print straight from this file, we will not be able to enhance or tweak it easily. Nor will we be able to create other varieties based on this file.
I would much prefer to work from the recent native (illustrator) artwork files, complete with links, fonts etc.
Since we will be printing on different presses I would feel more comfortable knowing that I can adjust the file to take into account things such as trapping, dot gain, etc.
Sorry to be the bearer of bad news, but I don’t want to give you a false impression of what can be achieved from this file.”
190 This advice from Ms Lung led Mr Cooley to send an e-mail to Mr Marrollo on 9 June 2009 stating that:
“Unfortunately, Gale [Lung] is not 100% happy with the file emailed through.
LabelMakers [sic] have done this intentionally so it can only be used as low resolution reproduction.
What is really required is native (illustrator) artwork files which we may need to get from the original designer … at least for the top labels.
We may be able to get away with these low resolution files on the backs!”
191 It is plain from these exchanges that, by the time they occurred, D’orsogna was committed to transferring its business from Labelmakers WA to Labelforce, that Mr Jason Cooley was well aware of this and that he was actively engaged in facilitating the transfer.
Soliciting Staff
192 The applicants submitted that Mr Jason Cooley had, while he was employed by Labelmakers WA, encouraged Mr Deveney, Mr Sweeney, Ms Leech, Mr Ngo, Mr Humphries and Ms Lung to leave Labelmakers WA and accept employment with Labelforce. Mr Jason Cooley denied knowledge of his father’s attempts to attract some of these employees and initially denied having approached any of these people himself.
193 There can be no doubt that, when Mr Jason Cooley was general manager of Labelmakers WA, he (at the least) actively supported his father in recruiting Messrs Deveney and Sweeney to become shareholders and employees of the new business. Mr Jason Cooley admitted that, in 2008, he had approached Mr Sweeney and asked him if he was interested in participating in the new business.
194 The evidence also strongly supports the applicants’ submission that Mr Jason Cooley was involved in the recruiting of Ms Lung to Labelforce. On 3 June 2009 (see above at [74]) Mr Cooley told Mr Sweeney that “Gayle has accepted our offer!!!” On the following day Mr Ernie Cooley sent her a formal offer. A few days later Mr Jason Cooley sought the views of Ms Lung in relation to the usefulness of the D’orsogna artwork in the form in which he had extracted it from Labelmakers WA and Ms Lung responded in terms which made it clear that she anticipated using such artwork in the new business (see above at [189]).
195 There can be little doubt that Mr Jason Cooley had discussions with his father and Messrs Deveney and Sweeney about recruiting Ms Leech, Mr Ngo and Mr Humphries to work at Label Force and did so whilst he was employed by Labelmakers WA. So much is evident, for example, from the e-mail which Mr Ernie Cooley sent to Mr Jason Cooley (among others) on 20 May 2009 (see above at [85] and [88]). There was, however, no evidence that Mr Jason Cooley had spoken to any of these prospective employees about them resigning from Labelmakers WA and commencing employment with Label Force.
Arranging for Transfer of Native Artwork
196 Mention has already been made (above at [189] – [190]) of the involvement of Mr Jason Cooley with Ms Lung in arranging for some of D’orsogna’s native artwork to be removed from Labelmakers WA and made available to Labelforce.
197 This evidence makes clear that Mr Jason Cooley misused his position at Labelmakers WA to secure access to this artwork for the benefit of Labelforce.
Mr Cooley’s time commitment
198 I also reject Mr Jason Cooley’s evidence that he spent no more than five or six hours over a period of almost 18 months in planning the new business. He was provided with copies of all the budgets and planning documents which were prepared by Mr Ernie Cooley between 11 March 2008 and 22 May 2009. These were extensive documents. He made comments and suggestions about the contents of those documents. He could not have done so had he not read and considered them and undertaken his own research. There was extensive e-mail correspondence between him and the other investor respondents relating to these matters. There were also a number of off-site face to face meetings between them. It is, simply, incredible to suggest that all this could have been done in five or six hours. It is hardly likely that Mr Jason Cooley, given his significant financial commitment to the new business, would have left the budgets and planning documents unread. He did not. So much is demonstrated by the fact that he responded and contributed to the development of drafts over a period of many months. He also devoted time to procuring customers for and investment in the new business.
Summary and Conclusion
199 Mr Jason Cooley was a senior and trusted employee of Labelmakers WA. He abused the trust which was reposed in him. From at least the early part of 2008 he devoted a good deal of time and effort to the planning of and preparation for the establishment of the Labelforce business. He was involved in arrangements to procure premises and machinery for the new business, in procuring the services for it of Mr Sweeney and Mr Deveney, in obtaining the support of Harvey Fresh and D’orsogna and various other activities which were inconsistent with the duties which he owed to Labelmakers WA as its general manager.
200 Like his father, Mr Jason Cooley was prepared to subjugate Labelmakers WA’s legitimate interests to those which he sought to pursue. He treated the Labelforce business as merely a continuation of that conducted by Labelmakers WA. When confronted with any choice between his interests and those of Labelmakers WA he frankly admitted that he looked after himself. He was quite prepared to make disparaging comments about Labelmakers WA to one of its clients (D’orsonga) in an effort to curry favour with that company in the hope of obtaining its business for Label Force. Under cross-examination and with hindsight he was prepared to concede that this was “a despicable thing to do” to Labelmakers WA. When Mr Deveney told him, in June 2009, that Mr Fairclough had refused Mr Deveney leave which Mr Deveney had sought (without disclosing the purpose) so that he could meet electrical contractors at Labelforce’s new premises, Mr Cooley responded that “what we are doing is our business, not his.” This was said at a time that Mr Jason Cooley was still employed as general manager of Labelmakers WA.
201 Mr Jason Cooley also went to great lengths to avoid Labelmakers WA becoming aware that he was actively engaged in establishing a rival business. He persisted in these attempts almost to the end of his time at Labelmakers WA. As late as 11 May 2009 he was prepared to and did lie to Mr O’Sullivan about his future intentions in order not to disclose that he was about to start up a competitive business.
202 Mr Cooley was prepared to and did use Labelmakers WA’s resources, such as e-mail facilities, to pursue his competing business interests.
203 Much of what Mr Cooley did to this end was undertaken in “his own time”. Given his seniority and the seriously detrimental impact of his activities on the business interests of Labelmakers WA, the timing of his activities does not afford him a defence against allegations of breach of his fiduciary and contractual obligations.
204 I find that Mr Jason Cooley breached his fiduciary and contractual obligations to Labelmakers WA.
Mr Sweeney
205 In his amended defence Mr Sweeney made some limited admissions but generally denied the allegations made against him. He specifically denied soliciting clients and staff of Labelmakers WA.
The Admitted Conduct
206 Mr Sweeney admitted that, in 2008, he had discussions with Messrs Ernie and Jason Cooley about the possibility of establishing a new label printing business. He had reviewed budgets and other documents which Mr Ernie Cooley had prepared in that regard. He further admitted that, between February 2009 and the termination of his employment with Labelmakers WA on 23 June 2009, Mr Ernie Cooley had kept him informed of the arrangements which he (Mr Cooley) was making for the establishment of the new business. Those matters are set out above at [119] – [120].
207 Mr Sweeney admitted that he had contributed $85,000 for a 10% share in the capital of the new venture.
208 Mr Sweeney asserted that he had a lawful entitlement to undertake these activities and that he did so in his own time.
The Denials
209 As already noted Mr Sweeney otherwise denied breaching any of the contractual and fiduciary obligations which he owed to Labelmakers WA. In particular he denied soliciting clients or staff for the new business.
Consideration
210 The applicants challenged the truthfulness of Mr Sweeney’s denials and contended that he had significantly understated his role in the establishment of the Label Force business.
211 Mr Sweeney was engaged in the preparatory work for the Labelforce business from an early stage. By his own admission he was so engaged at least from April 2008. From that time on he received and considered planning and budget documents. He had regular discussions with Messrs Ernie and Jason Cooley and Mr Deveney about the proposed new business. Mr Sweeney had considered and supported the applications for finance which were made, in February 2009, to the National Australia and Westpac Banks. He had determined to make a personal commitment of $85,000 to secure a 10% interest in the new business and had, in the early part of 2009, set about seeking to borrow this money.
212 His claim that all of these activities involved no more than about 20 hours of his time is simply incredible. It is all the more incredible, as the evidence demonstrated he undertook considerably more work than he was prepared to admit to assist in establishing the Labelforce business. These activities will be considered in more detail below.
Soliciting Clients
213 The applicants submitted that Mr Sweeney had been knowingly concerned in the solicitation of Labelmakers WA’s clients by Messrs Ernie and Jason Cooley. Mr Sweeney denied this.
214 I do not accept his denial. Mr Sweeney had reviewed the contents of the applications to the National Australia and Westpac Banks. He knew that they contained the representation that Harvey Fresh, Planet Sales, Canon Foods and D’orsogna had, by February 2009, “already committed to the new business.” He was aware that the Westpac Bank had been advised that Mr Sorgiovanni of Harvey Fresh and Mr Perkins of Planet Sales would confirm, if asked, that their firms were committed to the new business. Mr Sweeney was well aware that these companies were important customers of Labelmakers WA.
215 Mr Sweeney also knew that the principals of Harvey Fresh had agreed to and subsequently did invest in the new business. He accepted in evidence that it was important to Labelforce that Harvey Fresh would transfer its business from Labelmakers WA. He was also aware that Mr Ernie Cooley had arranged for Harvey Fresh to provide a letter of support which could be provided to the National Australia Bank to support Label Force’s application for finance.
216 Mr Sweeney also agreed that he had held a number of discussions with Messrs Ernie and Jason Cooley and Mr Deveney about which of Labelmakers WA’s clients might be induced to support the new business.
217 Despite being aware of these activities Mr Sweeney did nothing to alert Mr O’Sullivan or other senior managers of Labelmakers WA’s parent company of what was occurring.
218 Although Mr Sweeney was not, himself, directly involved in the soliciting of Harvey Fresh, Planet Sales, Canon Foods or D’orsogna, he did play a role in the solicitation of the Ferngrove winery business. It will be recalled that Mr Ernie Cooley had sent an e-mail to Mr Sweeney on 20 May 2009 (above at [68]) which contemplated that Mr Sweeney would “bring” Ferngrove’s business to Label Force. Mr Sweeney was Labelmakers WA’s account manager for Ferngrove. He had told Messrs Ernie and Jason Cooley in 2008 that he thought that he would be able to attract the Ferngrove business to Labelforce.
219 Before he went on leave on 22 May 2009 Mr Sweeney e-mailed Ferngrove’s native artwork, which was held by Labelmakers WA, to his private e-mail account. Having done so Mr Sweeney sought to delete the e-mail from his “sent items” folder. This was discovered by other managers at Labelmakers WA shortly after Mr Sweeney returned from his overseas holiday. When Mr Fairclough questioned him about why he had done this Mr Sweeney said that it was so that he could assist Ferngrove should it have any queries about the artwork while he was away. The fact was that Mr Sweeney had no need of the artwork while he was away and certainly not in the form in which he transferred it to his personal account.
220 Ferngrove subsequently transferred its business to Labelforce.
221 The representative of Ferngrove with whom Mr Sweeney normally dealt was a Ms Jayne McKennay. Although there was no suggestion that she was unavailable to give evidence, she was not called at trial.
222 In these circumstances I infer that Mr Sweeney, while an employee of Labelmakers WA, sought to procure the business of Ferngrove winery for Labelforce.
Soliciting Staff
223 The applicants contended that Mr Sweeney was complicit in the plans of Messrs Ernie and Jason Cooley and Deveney to recruit some of Labelmakers WA’s staff to work in the new business.
224 The many e-mail exchanges relating to this subject to which Mr Sweeney was privy established that he was, whilst an employee of Labelmakers WA, well aware of attempts being made by Messrs Ernie and Jason Cooley to secure the services of Ms Lung, Ms Leech, Mr Ngo and Mr Humphries for the new business. He told Mr Jason Cooley that he thought Ms Leech would be a good receptionist.
225 Mr Sweeney did nothing to alert Mr O’Sullivan or anyone else about the attempts being made to recruit these employees of Labelmakers WA for the new business. He did not, however, approach any of the employees himself to seek to obtain their services.
Use of Labelmakers WA’s Resources
226 Mr Sweeney admitted that some of his discussions with Messrs Ernie and Jason Cooley and Deveney about the new business took place in the offices of Labelmakers WA. From time to time he used his Labelmakers WA’s e-mail account to send e-mails relating to the establishment of Label Force. Mr Sweeney also sought to assist Mr Deveney in making arrangements for electrical work to be done at the Welshpool premises. He did this by advising a representative of KRC Electrical that Mr Deveney could be contacted on a particular telephone number which was Mr Deveney’s Labelmakers WA telephone.
Procuring Machinery
227 On 26 March 2009 Mr Sweeney used his Labelmakers WA e-mail account to commence a series of exchanges with Mr John Doherty. Mr Doherty was a manager of a label printing company in the UK named Labelgraphics. Having told Mr Doherty that he was planning a four week trip to the UK later in the year, Mr Sweeney asked Mr Doherty to make inquiries of some mutual acquaintances about whether they knew “of any reputable companies in the UK who are suitably qualified to do a valuation on a second hand labels press?” Mr Doherty responded with questions of his own concerning the type and age of the machine. Mr Sweeney, again using his Labelmakers WA e-mail account, then advised that the machine would be about ten years old and would be an offset printer. Although he originally denied that these enquiries were being made for the purpose of obtaining a machine for Label Force, he admitted at trial that this was the case.
Securing Premises
228 Mr Sweeney denied spending any time, whilst employed by Labelmakers WA, in locating, assessing and obtaining premises for Labelforce. The evidence, however, strongly suggests that this denial was untrue. On 7 May 2009, for example, Mr Sweeney sent an e-mail to Mr Deveney which contained a copy of a communication which Mr Sweeney had had with an electrical contractor relating to work to be done at the Labelforce premises at Welshpool. The e-mail read:
“I didn’t want to use my work email so I have sent this email from my wifes [sic] email address.
As we discussed earlier on today we need to get together to discuss the power of the welshpool factory. We currently have an offer on the table for this factory but it is subject to the power situation. It would be extremely helpful if you could spare Paul [Deveney] and I [sic] 10 minutes tomorrow to discuss this, as the matter is now urgent. Paul and I can come out to your office – alternatively you can come out and see us at any time that is suitable to you.”
229 Mr Sweeney provided the contractor with his own mobile telephone number and advised that “you can contact Paul [Deveney] on the Labelmakers number (9248 1011).” This e-mail was sent during Mr Sweeney’s normal working hours at Labelmakers WA.
230 There was also evidence that, about this time, Mr Sweeney was dealing with real estate agents about securing suitable premises.
Summary and Conclusions
231 Mr Sweeney held an important managerial position in Labelmakers WA. From at least the early part of 2008 he was involved, with Messrs Ernie and Jason Cooley in the establishment of the Labelforce business. Whilst he was not the driving force or the guiding mind of the project, once he had committed himself to it he devoted a great deal of time and energy to ensuring that it would be a success. His commitment became all the stronger after February 2009 when he had made a significant personal financial investment in the new venture.
232 Mr Sweeney was an active supporter of Messrs Ernie and Jason Cooley. He assisted in obtaining finance for the new business, securing premises in which it could operate and procuring machinery for it. He himself sought to persuade the Ferngrove Winery to transfer its business to Labelforce.
233 Mr Sweeney sought to avoid his activities coming to the attention of Labelmakers WA. When, on 23 May 2009, he thought that he may have been found out he sent an e-mail to Mr Jason Cooley (see above at [72]) in which he made some disparaging remarks about Mr Fairclough and proposed certain strategies to facilitate his resignation. He also conferred with Mr Cooley on 4 June 2009 (see above at [75]) in order to get his “story straight” before responding to some questions posed by Mr Fairclough.
234 Mr Sweeney was well aware that what he was doing was wrong. He was prepared to admit, for example, that he knew that it was wrong for him to send e-mails from his Labelmakers WA’s account which related to the establishment of Label Force.
235 His lack of ethical standards carried over into his dealings with other parties. When challenged about the accuracy of some of the statements he had made in support of the application for finance to the National Australia Bank he said that he would have told the bank anything in order to get finance for the Label Force business.
236 Some of Mr Sweeney’s activities were carried out using Labelmakers WA’s resources and during normal business hours. The bulk of them were, however, performed outside these hours. Nonetheless, having regard to his key role at Labelmakers WA and the severity of the impact of his impugned conduct on Labelmakers WA, such conduct was constrained by his fiduciary and contractual obligations to Labelmakers WA.
237 I, therefore, find that Mr Sweeney breached his fiduciary and contractual obligations to Labelmakers WA by repeatedly placing his own interests ahead of those of his employer.
Mr Deveney
238 In his amended defence Mr Deveney denied any involvement with the establishment of the Labelforce business prior to February 2009. Thereafter he admitted to having done a number of things to assist in the preparation for and the planning of the new business. He denied in engaging in other conduct which was alleged against him.
The Admitted Conduct
239 Mr Deveney admitted that he supported the application for finance for the new business, that he investigated and acquired machinery and supplies for Labelforce, assisted with the planning and establishment of premises from which Labelforce could operate the business, that he participated in extensive e-mail communications to this end, that he had meetings and discussions with Messrs Ernie and Jason Cooley and Mr Sweeney about the establishment of the new business and that he contributed capital as a 10% shareholder in LL Force Pty Ltd.
The Denials
240 Mr Deveney denied:
Being actively involved or being complicit in the activities of Messrs Ernie and Jason Cooley and Sweeney in soliciting customers of Labelmakers WA to transfer their business to Labelforce;
Being actively involved or complicit in the activities of Messrs Ernie and Jason Cooley and Sweeney in enticing Ms Leech, Ms Lung, Mr Ngo and Mr Humphries to resign from Labelmakers WA and accept employment with Labelforce;
Being actively involved or complicit in the activities of Messrs Ernie and Jason Cooley and Sweeney in encouraging clients of Labelmakers WA to request the provision of their native artwork from Labelmakers WA so that that artwork could be used to produce labels for those clients at Labelforce; and
Arranging for Mr Ngo and Mr Humphries to be trained in printing technologies by Labelmakers WA and thereby obtain skills which could be put to use by these employees at Labelforce.
Consideration
241 The applicants submitted that Mr Deveney had been involved in the planning of the Labelforce business well before February 2009. They also put in issue the truth of his various denials.
242 The documentary evidence supports the applicants’ contention that Mr Deveney was involved in the preparation of the Labelforce business throughout most of 2008. Between March and August 2008 Mr Deveney was involved in a number of meetings with representatives of Aldus Engineering. The meetings were to discuss the possible purchase of Mark Andy machines. Mr Deveney was also privy to a number of e-mail exchanges with Aldus Engineering and Messrs Ernie and Jason Cooley about such proposed purchases. On 15 August 2008, for example, Mr Deveney was sent an e-mail by Mr Jon Murray from Aldus Engineering. The e-mail attached quotes for two Mark Andy machines. Mr Deveney received the e-mail at his Labelmakers WA account but forwarded it on to his personal e-mail address.
243 Mr Deveney originally asserted that all these enquiries relating to Mark Andy machines were undertaken for the purpose of Labelmakers WA’s business. I do not accept this evidence. As has already been noted Labelmakers WA did not use Mark Andy machinery and the prospect of purchasing such machinery had not been raised with Mr O’Sullivan at any stage. It will also be recalled that Mr Ernie Cooley had advised the Westpac Bank by e-mail on 17 March 2009 that a Mark Andy machine was “our first preference back in July last year.” (Emphasis added). Under cross-examination Mr Deveney also admitted that the reason that he had sent the 15 August 2008 e-mail from Aldus Engineering to his home account was so that he could use it for Labelforce. One of the machines on which a quote had been provided by Aldus Engineering was subsequently purchased for the Labelforce business.
244 I, therefore, find that Mr Deveney was actively involved with the other investor respondents in the planning of and preparation for the new business from, at least, March 2008. I accept, however, that he did not devote as much time and effort to this endeavour as did the other three.
245 I also reject his specific denials.
Soliciting Clients
246 The applicants did not allege that Mr Deveney personally approached any of Labelmakers WA’s clients with a view to them providing work to Labelforce. There can, however, be no doubt that he was well aware of what was being done in this regard. This is hardly surprising. He was making a substantial personal financial investment in the new adventure. Its success depended upon attracting and retaining clients and having substantial orders within weeks of it starting up.
247 In February 2009 Mr Deveney had discussions with Mr Ernie Cooley about which clients would be approached. By this time he already knew that some, including Harvey Fresh, were committed to the new business. Mr Deveney was one of the signatories to the application for finance which was made to the National Australia Bank in mid-February 2009. It will be recalled that that application identified numerous customers of Labelmakers WA as being “committed sales” for the new business.
Soliciting Staff
248 Mr Deveney swore in an affidavit that he had never spoken to any of Labelmakers WA’s staff about Labelforce or any opportunity for employment in that business whilst he was still employed at Labelmakers WA. This claim is clearly gainsaid by the documentary evidence.
249 Whilst he was still the production manager at Labelmakers WA Mr Deveney spoke to Ms Leech and advised her to look out for an advertisement for a receptionist position at the new business and to apply for the position. He so advised Mr Ernie Cooley by e-mail on 5 June 2009 (see above at [85]). In the same e-mail Mr Deveney said that it was great “to have Gayle [Lung] on board.”
250 Mr Deveney was also anxious to recruit Mr Ngo to the new business. Mr Deveney advised Mr Ernie Cooley on 11 June 2009 (see above at [86]) that he thought that Mr Ngo was being underpaid at Labelmakers WA and made suggestions about how Mr Ngo could be attracted to Labelforce. Mr Cooley agreed with these suggestions and they were implemented.
251 Shortly before they both left Labelmakers WA Mr Deveney arranged for Mr Ngo to receive training in operating a flexo printing machine. Mr Ngo had not previously worked on such a machine but now does so at Label Force. In order to ensure that Mr Ngo had time to undertake the training Mr Deveney performed some of Mr Ngo’s work.
252 The evidence is less clear in relation to Mr Humphries. It is clear enough that Mr Deveney also wished to attract Mr Humphries to the Labelforce business. He arranged for Mr Humphries to be trained on an offset press at Labelmakers WA and Mr Humphries subsequently operated such a machine at Label Force. It was, however, Mr Jason Cooley who advised Mr Humphries to keep an eye out for a press advertisement for a printer. When he responded to the advertisement it was Mr Deveney to whom he spoke but by this time Mr Deveney had left Labelmakers WA. I am not, therefore, satisfied that Mr Deveney encouraged Mr Humphries to join Labelforce whilst Mr Deveney was an employee of Labelmakers WA.
Procuring Machinery and Supplies
253 Mr Deveney played a central role in procuring machinery and other equipment so that the Label Force business could be productive by July 2009.
254 Mention has already been made of some of the preparatory work which he had performed in 2008 (see above at [242]). His efforts intensified from February 2009. He inspected machinery. He discussed matters such as performance, price and delivery dates with the manufacturers of machines. He discussed the comparative qualities of various machines with Messrs Ernie and Jason Cooley and Sweeney.
255 Mr Deveney was also involved, during this period, in overseeing the installation of the necessary electrical cabling at the Welshpool premises.
256 These activities reached a climax in June 2009 and distracted Mr Deveney from the performance of his duties at Labelmakers WA. During that month he was observed by Mr Fairclough to take an unusually large number of telephone calls on his mobile phone in the Labelmakers WA office. These calls occurred during business hours and Mr Deveney often retreated to a secluded place to take the calls. This was unusual.
257 On 15 June 2009 Mr Deveney wished to visit the Labelforce premises to have discussions with an electrical contractor about the installation of switchboards and other electrical equipment. During the previous week he applied to Mr Fairclough to take a day’s leave saying that he had personal business which he needed to attend to which could not be undertaken outside business hours. Mr Fairclough refused to grant leave. This refusal gave rise to Mr Deveney’s terse e-mail exchange with Mr Jason Cooley on 12 June 2009 (see above at [78]). Notwithstanding Mr Fairclough’s refusal, Mr Deveney met the electrical contractor at Welshpool early on the morning of 15 June 2009 and, having attended to Labelforce’s requirements, arrived late for work at Labelmakers WA.
Summary and Conclusions
258 Mr Deveney played a less significant role in the establishment of the new business than did Messrs Ernie and Jason Cooley and Mr Sweeney. His was, nonetheless, an important role. As production manager of Labelmakers WA he had an intricate knowledge of the engineering, electrical and other technical requirements for the conduct of a printing business. He involved himself in decisions relating to the purchase of machinery and supplies and the installation of electrical equipment on the premises which had been leased for Labelforce. He was aware that attempts were being made to attract Labelmakers WA’s staff to work at Labelforce. He used his position at Labelmakers WA to provide training for Mr Ngo in the operation of a machine which was similar to one which had been ordered for Labelforce. He was the person who advised Ms Leech to look out for the advertisement for a receptionist for Labelforce.
259 Mr Deveney used Labelmakers WA’s facilities to pursue some of these activities. Some of them were performed during normal working hours. Other activities occurred during his own time. They were all, however, activities which had the potential to and did materially prejudice Labelmakers WA’s interests. They should not have occurred.
260 Mr Deveney was prepared to admit that, by the time that he was about to leave Labelmakers WA he was giving preference to the interests of Labelforce over those of his employer. He had, in fact, whether he appreciated it or not, been doing so for a lot longer than that.
261 Mr Deveney breached his fiduciary and contractual obligations to Labelmakers WA for over 12 months prior to his resignation taking effect and did so on multiple occasions.
Ms Leech
262 The principal allegation levelled against Ms Leech was that she had e-mailed a copy of the Red Book from her Labelmakers WA account to her personal account with the intention that it would be available for use by Labelforce.
263 The Red Book contained full pricing and costing information for all jobs done for all of Labelmakers WA’s clients over a long period. The respondents (including Ms Leech) conceded that the material in the Red Book was the confidential information of Labelmakers WA.
264 Ms Leech denied that she had e-mailed the Red Book to her personal account.
265 Ms Leech had held the position of receptionist at Labelmakers WA for some years. The other individual respondents considered that she would be able to perform a similar role at Labelforce, in part, because she was familiar with the compilation and maintenance of the Red Book.
266 In an effort to obtain her services without making a direct approach to her the other individual respondents agreed that an advertisement should be placed in the press for the receptionist position. This was done. About 5 June 2009 Mr Deveney spoke to Ms Leech “in confidence” and told her that the advertisement was about to appear and that she should apply for the job. On 10 June 2009 she applied for the job with Labelforce. On the following day Mr Ernie Cooley offered her the job without conducting an interview. On 15 June 2009 she tendered her resignation from Labelmakers WA with effect from 19 June 2009.
267 On 16 June 2009 at 9:09 am an e-mail was sent from her Labelmakers WA account to her personal e-mail account to which was attached a copy of the Red Book.
268 Ms Leech denied having sent it and said that other people had access to her workstation and could have sent the e-mail when she was not present. Before trial she swore an affidavit in which she deposed that, at sometime between 8:30 and 9:30 am on 16 June 2009 she had left the Labelmakers WA premises and gone to the local Target store.
269 E-mail records produced by Labelmakers WA showed that:
At 8:21 am on 16 June 2009 Ms Leech had sent an e-mail to other Labelmakers WA’s employees to which was attached an updated stock report;
At 9:06 am Ms Leech had sent an e-mail to Mr Jason Cooley attaching some invoices “as requested”; and
At 9:15 am Ms Leech sent an e-mail to Mr Jason Cooley which was headed “Telephone Message” and asked Mr Cooley “Please call Eric when you return to the office.”
270 Each of these e-mails was put to Ms Leech when she was cross-examined. She admitted sending the e-mail at 8:21 am.
271 When the 9:06 am and the 9:15 am e-mails were put to her she insisted that she was “certainly” shopping at the Target store at the time at which they were sent. She thereby implied that someone else had sent these two e-mails although using her name to do so.
272 I do not accept her denial. The sending of the three e-mails strongly suggests that Ms Leech was at her desk for most, if not all of the time, between 8:21 am and 9:15 am on 16 June 2009. Her presence is also consistent with her affidavit evidence that she left to go to the Target store at sometime between 8:30 am and 9:30 am. She could, consistently with this evidence, have left shortly after 9:15 am.
273 When it occurred to her, in the witness box, that the 9:06 am e-mail had been sent only three minutes before the Red Book e-mail had been sent and that the 9:15 am e-mail had been sent only six minutes later, she suddenly became definite that she had been at the Target store at those times having left at sometime after 8:21 am.
274 I find that Ms Leech was at her workstation at Labelmakers WA at 9:09 am on 16 June 2009.
275 The Red Book was a document containing a large number of pages.
276 Ms Leech gave evidence that she checked her personal e-mail account on a regular basis. Despite this she had never seen the Red Book on her account. I consider this evidence to be incredible.
277 I find that Ms Leech sent the Red Book to her personal e-mail account on 16 June 2009. In doing so she breached her contractual and equitable duties to Labelmakers WA. Not only did she breach implied contractual obligations but she also breached express terms of her contract of employment, including requirements that she not engage in any conduct or activity designed to harm or adversely affect Labelmakers WA’s operations, business or interests and that she keep confidential information which came to her knowledge during the course of her employment.
CONTRAVENTIONS OF S 182 OF THE CORPORATIONS ACT
278 Section 182 of the Corporations Act relevantly provides:
“182(1) A director, secretary, other officer or employee of a corporation must not improperly use their position to:
(a) gain an advantage for themselves or someone else; or
(b) cause detriment to the corporation.
…”
279 By s 9 of the Act an “officer” is defined to include a director of a corporation and a person “who makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the corporation.” Section 179(2) of the Act provides that “[o]fficer includes, as well as directors and secretaries, some other people who manage the corporation …”
280 The statutory duties imposed on directors and others by s 182 of the Corporations Act mirror and co-exist with their equivalent equitable duties: see Southern Real Estate v Dellow (2003) 87 SASR 1 at 7-8; Parker v Tucker (2010) 77 ACSR 525 at 543.
281 The applicants seek findings that Messrs Ernie and Jason Cooley, Sweeney and Deveney each contravened s 182 by improperly using their positions to gain advantage for themselves or someone else or to cause detriment to Labelmakers WA.
282 In determining whether a director, officer or employee has contravened s 182(1) by ‘improperly’ using his or her position, an objective test is to be applied. In dealing with the predecessor of s 182(1) in R v Byrnes (1995) 183 CLR 501 Brennan, Deane, Toohey and Gaudron JJ said (at 514-5) that:
“Impropriety does not depend on an alleged offender’s consciousness of impropriety. Impropriety consists in a breach of the standards of conduct that would be expected of a person in the position of the alleged offender by reasonable persons with knowledge of the duties, powers and authority of the position and the circumstances of the case.”
283 Section 182(1) focusses attention on the director, officer or employee’s purpose in engaging in the impugned conduct. They do not have to succeed in gaining an advantage for themselves or causing detriment to their employer. They may contravene the sub-section even if they do not achieve their object: see Chew v R (1992) 173 CLR 626 at 633.
284 Mr Jason Cooley was subject to s 182(1) as the general manager of Labelmakers WA at least until his resignation was tendered on 19 May 2009, and, thereafter, until the termination of his employment, as an officer of the company.
285 Messrs Ernie and Jason Cooley, Sweeney and Deveney were, at relevant times, senior managers of Labelmakers WA and were officers and/or employees who were bound by the standards imposed by s 182(1).
286 In my view, by reason of the conduct which caused them to breach their respective fiduciary and contractual obligations to Labelmakers WA, they also contravened the duties imposed on them by s 182(1) of the Corporations Act.
THE APPLICANTS’ CONFIDENTIAL INFORMATION AND PROPERTY
287 In their amended statement of claim the applicants contended that the respondents (or some of them) had taken and retained confidential information and property belonging to the applicants. The relevant material was identified as being:
Confidential stock work out information;
Confidential contact information;
Confidential financial information;
Confidential client costing information;
Confidential Red Book information;
Confidential client billing information;
Confidential actual wage information;
Confidential client sales information;
Confidential profit information;
Confidential raw material information;
Confidential workload information;
Confidential end of month list information;
Confidential D’orsogna pricing information; and
Confidential Canon Foods stock information.
288 The respondents denied that much of this information was confidential and, in any event, denied appropriating or misusing it.
289 The respondents did not, in final submissions, seek to maintain their claims in respect of all these categories of information.
The Law Relating To Confidential Information and Property
290 One aspect of the contractual obligation to serve with loyalty and fidelity and the equitable obligations which fall on fiduciaries applies to post-employment conduct. The general position was summarised by Palmer J in Digital Pulse as follows:
“[23] When the employment ceases, the employee is free to compete with the employer unless subject to a valid contractual restraint on competition. The employee may take away and utilise the benefit of personal relationships built up with particular customers of the former employer and may solicit any customer whom the employee can recall without the aid of a list taken from the former employer and without deliberate memorisation of a customer list. The employee may not, however, use for his or her own benefit confidential information of the former employer, whether to solicit business from the former employer’s customers or to carry out work for such customers even if unsolicited.”
291 As these passages make clear the courts seek to balance two competing public interest considerations. In the absence of an express restraint, an employer is not entitled to impede a former employee from using the skill, experience and know-how, acquired during his or her service, to enter into competition with the former employer. On the other hand the law will protect an employer from the misuse of confidential information taken away by the former employee: see Robb v Green [1895] 2 QB 315; Wright v Gasweld Pty Ltd (1991) 22 NSWLR 317 at 329. As a general proposition the “more that information can be identified as part of the general stock of knowledge which the former employee must use in carrying on his occupation, the less likely it is that the alleged confidentiality of the information will be protected”: see Freedom Motors Australia Pty Ltd v Vaupotic [2003] NSWSC 506 at [13].
292 Nonetheless, care must be taken when employees of an existing business are engaged in preparations to establish a competitive business. Such an employee may not, for that purpose, copy, remove or memorise any of his or her employer’s commercially valuable information: see Robb v Green [1895] 2 QB 1 at 17 where Hawkins J quoted and applied the following observations of Lindley LJ in Lamb v Evans [1893] 1 Ch 218 at 226:
“What right has any agent to use materials obtained by him in the course of his employment and for his employer against the interest of that employer? I am not aware that he has any such right. Such a use is contrary to the relation which exists between principal and agent. It is contrary to the good faith of the employment, and good faith underlies the whole of an agent’s obligation to his principal.”
See also: SWF Hoists and Industrial Equipment Pty Ltd v Polli (1996) 67 IR 356 at 358; Digital Pulse at [93]; Ormonoid Roofing & Asphalts Limited v Bitumenoids Limited (1930) 31 SR (NSW) 347 at 354.
293 These principles fall to be applied to a range of confidential information. Such information potentially includes information of the kind which the applicants seek to protect in this proceeding.
294 One such category which is significant in this case is pricing information. In Ridgeway International Ltd v McCullum (unreported, Sup Ct, NSW, Bryson J, 9 April 1998) Bryson J held, in the New South Wales Supreme Court (at 43-4) held that “pricing information is characteristically, in commerce … in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret.” He further held that “[w]here a business is complex and competitive there probably is a core of information about pricing and costing which should be regarded as confidential; this conclusion is readily drawn where a manager or other senior employee has and uses pricing and costing information.”
295 Similarly, profit and loss figures and customer specific information are protected: see Gasweld Pty Ltd v Wright (1989) 34 IR 91 at 97; Co-ordinated Industries Pty Ltd v Elliot (1998) 43 NSWLR 282 at 287.
296 There is conflicting authority in Australia as to whether or not an applicant who seeks to rely on the equitable obligation of confidence must establish unauthorised use of the information to its detriment: see Smith Kline & French Laboratories (Aust) Ltd v Secretary, Department of Community Services and Health (1990) 22 FCR 73 at 111-2 (per Gummow J); Dais Studio Pty Ltd v Bullet Creative Pty Ltd (2007) 165 FCR 92 at 113 (per Jessup J); Krueger Transport Equipment Pty Ltd v Glen Cameron Storage & Distribution Pty Ltd (2008) 78 IPR 262 at 287 (per Gordon J). This issue need not be resolved at this stage of this proceeding.
297 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.”
298 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.
299 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
300 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.
301 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.
302 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.”
303 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.
304 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.
305 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
306 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.
307 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.
308 The respondents admit that this financial information was confidential.
309 Mr Jason Cooley, however, said that the information was of no use to him after he left Labelmakers WA.
310 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.
311 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
312 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.
313 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.
314 The respondents accept that this material is confidential in nature.
315 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.
316 This information is and remains confidential. It should be delivered up to the applicants.
317 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.”
318 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.
319 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
320 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.
321 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.
322 I do not accept this qualification. The information is too extensive and detailed to have been memorised by any of the individual respondents.
323 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.
324 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.”
325 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
326 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”.
327 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.”
328 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.
329 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.
330 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
331 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.
332 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.
333 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.
334 The respondents denied that the material in these spreadsheets was confidential.
335 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.
336 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
337 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.
338 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.
339 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.
340 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.
341 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.
342 Mr Jason Cooley said that the information relating to raw material prices had come from Mr Rose.
343 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.
344 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
345 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.
346 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.
347 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.
348 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.
349 I, therefore, find that this confidential information was improperly used by the respondents in establishing the Labelforce business.
Confidential D’orsonga Pricing Information
350 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.
351 The document, in its amended form, was found on Mr Ernie Cooley’s computer following the execution of a search order.
352 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.
353 The respondents deny that this information was confidential because it would have been provided to Labelforce by D’orsonga on request.
354 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.
355 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.
356 Mr Marrollo was not called to give evidence.
357 In these circumstances I am prepared to (and do), infer that the document was obtained from the records of Labelmakers WA.
358 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
359 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.
360 This material should, if it has not already been, be delivered up to Labelmakers WA.
361 Further remedies, including restraints on further misuse of this material may be appropriate.
CONTRAVENTIONS OF S 183 OF THE CORPORATIONS ACT
362 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.
363 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.”
364 Each of the individual respondents was either an officer or employee of Labelmakers WA at relevant times.
365 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
366 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.”
367 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.
368 LL Force, is, therefore, liable for the same breaches which I have found to have been committed by the individual respondents.
CONCLUSION
369 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.
370 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:
