FEDERAL COURT OF AUSTRALIA

Prescott Securities Limited v Gobbett [2017] FCA 74

ORDERS

THE COURT ORDERS THAT:

1.    Paragraphs 29.3 to 29.6, 29.9 and 29.10, 77.1, 77.2, 77.3, 77.4, 77.5, 81.5 and 81.6 of the Amended Defence filed 18 November 2016 be struck out.

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

EX TEMPORE REASONS FOR JUDGMENT

WHITE J:

1    I am dealing with the plaintiff’s interlocutory application seeking the striking out of specified paragraphs of the defendant’s amended defence.

2    The plaintiff in the proceedings (Prescott Securities) conducts business as a financial advisor and sharebroker.

3    Between 1 September 1999 and 30 April 2015, the defendant (Mr Gobbett) was an employee of Prescott Securities and for a period its Managing Director. He is now an employee of Baillieu Holst Ltd, a provider of financial and stockbroking services in competition with Prescott Securities. By his defence, Mr Gobbett pleads that he commenced that employment on 9 July 2015, that is, just over two months after the cessation of his employment with Prescott Securities.

4    In these proceedings Prescott Securities seeks declaratory relief and pecuniary relief of two principal kinds:

(a)    damages in respect of the alleged breach by Mr Gobbett of a covenant in his employment contract concerning post-cessation employment (referred to by Prescott Securities as the “Restricted Covenant”);

(b)    compensation pursuant to s 1317H of the Corporations Act 2001 (Cth) for breach of the duty imposed by s 183(1) of the Corporations Act.

5    As to the first, Prescott Securities alleges that Mr Gobbett has breached the Restrictive Covenant contained in cl 3.1 of Sch 2 to his contract of employment. By that clause Mr Gobbett agreed that he would not, during “the Restraint Period”, and whether directly or indirectly on his own account, jointly or with any other person as an employee or otherwise, (relevantly): solicit or endeavour to solicit any client away from Prescott Securities, undertake or perform work for a client which is work of a similar kind to the services provided by Prescott Securities, engage in any business activity which is the same as, substantially similar to or competitive with the business of Prescott Securities, and which is within a radius of 5 km from that business, interfere with the relationship between Prescott Securities and its clients, employees or contractors or solicit, or induce any employee or contractor of Prescott Securities to leave their employment or cease their engagement.

6    The Restraint Period is defined elsewhere in the employment contract in alternatives, in descending order, of 12 months, nine months, six months or three months.

7    Prescott Securities alleges that Mr Gobbett has breached the Restrictive Covenant by his conduct in relation to nine of its clients or pairs of clients (now former clients). It also alleges that Mr Gobbett has breached the Restrictive Covenant by encouraging seven of its employees to leave Prescott Securities and to commence employment with Baillieu Holst.

8    Prescott Securities’ claim under s 1317H of the Corporations Act is that Mr Gobbett has contravened the obligation imposed by s 183(1) of the Corporations Act by improperly using information which he obtained in the course of his employment with it.

9    Mr Gobbett denies each of the allegations of Prescott Securities.

Client solicitation

10    The first part of Prescott Securities’ strike out application concerns Mr Gobbett’s pleading in his defence to its allegation of loss resulting from his alleged conduct with respect to the nine former clients. The pleading of Mr Gobbett’s conduct in the further amended statement of claim (FASC) in relation to each client follows a similar format. It alleges, in relation to each client or pair of clients, the conduct said to constitute the breach of the covenant. Paragraph [29], in relation to the first client, concludes with the plea:

[29]    By reason of the breaches by Gobbett of the Restrictive Covenant pleaded in paragraph 28 above, Prescott Securities has suffered loss and damage.

Particulars

The plaintiff refers to the particulars of loss and damage contained in Schedule 1 to this Further Amended Statement of Claim.

11    Mr Gobbett’s amended defence responds to that plea in relation to the first client and then adopts by incorporation that pleading in relation to each of the succeeding pleas concerning the other eight clients or pairs of clients. The pleading in [29] of his amended defence is as follows:

[29.1]    Prescott Securities has suffered no loss and damage because this Prescott Securities' client would, or would likely, have terminated their retainer with Prescott Securities in any event, and in consequence Prescott Securities would not have earned the revenues or profits pleaded in Schedule 1 of the FASOC.

[29.2]    Prescott Securities is and at all relevant times has been a fully owned subsidiary of Crowe Horwath (Aust) Pty Ltd, which company was acquired by Findex Group Ltd (Findex) in mid-2014.

[29.3]    After Findex's acquisition of Crowe Horwath (Aust) Pty Ltd, and in turn its subsidiary Prescott Securities in late 2014, Findex required changes to be made to the way in which the business of Prescott Securities was to operate.

[29.4]    Those changes and the directions to implement those changes, full particulars of which can only be provided after discovery in this action, effected or were to effect an implementation of a more standardised and type cast approach to the provision of financial advice to the clients of Prescott Securities (including the introduction of “managed discretionary accounts” which were promoted by Findex representatives as requiring less client contact and being more efficient and profitable, and the encouragement of clients to move their investments to “wrap accounts” from self-managed superannuation funds), as opposed to a previous practice of providing advice with a focus on the individualised circumstances, including the financial circumstances, of clients and a more personalised relationship between the Prescott Securities’ adviser and the client.

[29.5]    Prior to the aforementioned changes required by Findex, the Prescott Securities business was known in the market for its personalised approach to the provision of financial advice to clients.

[29.6]    The changes led to dissatisfaction of the clients of Prescott Securities.

[29.7]    Further, this Prescott Securities’ client had been serviced by Gobbett for a number of years, the exact length of time being unknown to Gobbett and only ascertainable from the files of Prescott Securities in discovery, during which time a natural personal affinity and level of trust developed between them and Gobbett.

[29.8]    In the premises of the preceding paragraph, quite apart from the alleged conduct and any alleged use of the PS Client Information, this client would, or would likely, have terminated their retainer with Prescott Securities in any event.

[29.9]    Since Findex implemented the aforementioned changes to the business of Prescott Securities, a substantial number of Prescott Securities’ clients, the identities of whom are not known to Gobbett prior to Prescott Securities making discovery of documents in this proceeding, have terminated their retainer with Prescott Securities by reason of their dissatisfaction with the aforementioned changes.

[29.10]    The aforementioned changes have caused a substantial decline in the profitability and the viability of the Prescott Securities’ financial advising business.

[29.11]    Gobbett does not know and cannot admit, without the provision of expert reports and the prior discovery of Prescott Securities files in respect of this client, its financial records, and records of previous sales and acquisitions of client books by Prescott Securities and/or Findex from other financial adviser practices:

[29.11.1]    the quantum of the alleged loss and damage pleaded in Schedule 1 to the FASOC in respect of this client;

[29.11.2]    whether the multipliers of 10 times annual profits or 3 times annual revenue as pleaded in Schedule 1 to the FASOC are appropriate for this client; and

[29.11.3]    whether Prescott Securities was making a profit equal to 35% of its revenues, as alleged.

Particulars

A.    Prescott Securities and/or Findex have acquired client books from other financial adviser practices, such as Centric Wealth Advisory Pty Ltd in or about early 2014, the full particulars of which are not known to Gobbett until after discovery in this action.

12    Prescott Securities seeks the striking out of the pleas in [29.1], [29.3], [29.4], [29.5], [29.6], [29.9] and [29.10]. It did not pursue an application that [29.7] be struck out, and nor did it seek the striking out of [29.11].

13    Prescott Securities seeks the striking out pursuant to r 16.21 of the Federal Court Rules 2011 (Cth) (the FCR). There was no dispute between the parties as to the principles to be applied on such a strike out application and it is not necessary to refer to them in detail. I do keep in mind that the power to strike out is to be employed sparingly and only in a clear case, and is to be exercised in the interests of justice. In the circumstances of this case, I also keep in mind that the striking out or retention, as the case may be, of the impugned paragraphs is likely to have a significant impact on the parties’ discovery obligations and on the evidence which it will be necessary for them to adduce at trial and, accordingly, on the length of the trial.

14    I consider that Prescott Securities’ application should succeed with respect to [29.3] to [29.6] inclusive and with respect to [29.9] and [29.10], but should otherwise be rejected. I have reached this conclusion on the grounds of relevance. Prescott Securities’ claim in [29] of the FASC concerns the loss which it alleges that it has suffered as a result of Mr Gobbett’s conduct in relation to one client only. Of the paragraphs in [29] of the amended defence, only [29.1], [29.7] and [29.8] are directed to the circumstances of the named client.

15    Paragraphs [29.3] to [29.6], [29.9] and [29.10] make allegations concerning the clients of Prescott Securities generally. I am confirmed in my view that these paragraphs are not responsive to the plea concerning the named client because they do not include any pleading to the effect that the circumstances which they allege have any application at all to the circumstances of the particular client. In my view, Mr Gobbett’s pleading of these paragraphs has the effect of introducing extraneous matters with the undesirable consequence that the attention of the parties will be distracted away from the circumstances which led the particular client who is the subject of [29] of the FASC to cease her retainer of Prescott Securities.

16    For those reasons, [29.3] to [29.6], [29.9] and [29.10] will be struck out.

17    On the basis that the pleading in [29.7] and [29.8] is a particularisation of the allegation at [29.1], which is the submission of Mr Gobbett, the pleading in [29.1] is not objectionable and will not be struck out. Those conclusions make it unnecessary to address the other bases of challenge mounted by Prescott Securities to the pleadings in [29].

18    Because the later pleadings in the amended defence concerning the remaining eight clients or pairs of clients adopted the technique of referring back to [29] it is not necessary to make orders with respect to them but this is, no doubt, something to which Mr Gobbett will wish to give attention in due course.

Employee solicitation

19    By [77] of the FASC, Prescott Securities pleads the loss and damage it says it has suffered by reason of the cessation of employment of each of seven identified employees. It pleads:

[77]    By reason of the Employee Solicitation, Prescott Securities has suffered loss and damage, namely:

a)    the loss of services of each Departed Employee;

b)    the cost of replacing of any Departed Employee; and

c)    the loss of clients to BHL to whom each Departed Employee had provided services when employed at Prescott Securities.

20    By way of defence to that pleading, Mr Gobbett pleads:

[77.1]    each of the Departing Employees would have left the employ of Prescott Securities in any event, quite apart from any Employee Solicitation (which is denied) occurring;

[77.2]    the changes to the way in which Prescott Securities managed and interacted with its clients as pleaded in paragraph 29 above (which plea is referred to and repeated) resulted in significant dissatisfaction of Prescott Securities’ employees in general and of the Departed Employees in particular;

[77.3]    on and from the time of Findex’s acquisition of Prescott Securities, Findex (and therefore Prescott Securities) also proposed and/or required the adviser employees of Prescott Securities:

[77.3.1]    to move from a commission-based reward structure to a fixed salary-based reward structure, which increased the employees' dissatisfaction with working at Prescott Securities; and

[77.3.2]    to sign up to new employment contracts which contained much longer (and unreasonable) post-employment restraint clauses covering a much wider territory.

[77.4]    at or about the time at which Findex and Prescott Securities was doing those things referred in the preceding subparagraph, Prescott Securities also terminated the employment of several of its high-performing employee advisers, which terminations became known to the other employees of Prescott Securities and, in particular, the Departed Employees, and also terminated the employment of other staff of Prescott Securities;

[77.5]    in consequence , Prescott Securities’ employees and the Departed Employees in particular feared for their job security, especially in light of the fact that Prescott Securities was asking them to sign new employment contracts which contained more onerous post-employment restrictions, which would limit their ability to obtain other employment if their employment at Prescott Securities was terminated;

[77.6]    Prescott Securities would have therefore lost the services of each Departing Employee and incurred the costs of replacing them in any event;

…

21    Prescott Securities seeks the striking out of [77.1] to [77.5] inclusive.

22    It is convenient to deal with [77.2] first. In my opinion, it should be struck out: first, because of the cross-referencing to [29], the substance of which I have ordered to be struck out; secondly, because of its incorporation of an irrelevant matter, namely, the alleged dissatisfaction of Prescott Securities’ employees in general, whereas the plea should be concerned with the reasons for departure of the seven departed employees as defined; and, thirdly, because of the pleading of the state of mind of all of the departed employees in a generalised way is inappropriate. In particular, such a generalised plea does not comply with the obligation imposed by r 16.43 of the FCR which requires a party who pleads a condition of mind, to state in the pleading, particulars of the facts on which the party relies. If Prescott Securities wishes to allege that the seven departed employees had a particular state of mind, then it should allege with respect to each of those employees the state of mind, and then provide the material facts in relation to each employee in accordance with r 16.43.

23    The same considerations indicate that the pleas in [77.3], [77.4] and [77.5] should be struck out. Mr Gobbett’s pleading should be confined to the circumstances of the seven employees, rather than making pleas with respect to employees generally at Prescott Securities. If the plea stands, then it would have, on my understanding, the unfortunate consequence of leading to evidence being necessary at trial as to the circumstances affecting the position of Prescott Securities’ employees generally and their individual states of mind, when the issue should be more confined.

24    Given that [77.2] to [77.5] are to be struck out, [77.1] should also be struck out on the basis that, on my understanding, [77.2] to [77.5] are intended to be particulars of [77.1].

Failure to mitigate

25    Finally, Prescott Securities seeks the striking out of Mr Gobbett’s pleading concerning its alleged failure to mitigate.

26    By [81.4], Mr Gobbett alleges that Prescott Securities “did not conduct any or any proper hand-over meetings between certain of the Departed Employees, a new client adviser employed by Prescott Securities and the client in question”. Prescott Securities contends that this plea is irrelevant to the alleged failure to mitigate. Ultimately, this argument was not pressed. In any case, I do not accept the submission. An omission to conduct hand-over meetings or proper handover meetings may be capable of supporting a plea of failure to mitigate. The application for the striking out of [81.4] is refused.

27    By [81.5] and [81.6], Mr Gobbett pleads that meetings described as “exit interviews” were conducted with three of the departed employees, that the conduct of Prescott Securities and its agents in those meetings constituted threats and intimidation, and that that conduct prevented any prospect of cooperation between the departed employees and Prescott Securities in the management of any handover of clients “following the employee’s departure from the firm”.

28    Prescott Securities seeks the striking out of those paragraphs, principally on the basis of relevance. I uphold that contention. That is especially so given the absence of any pleading as to the time at which the exit interviews took place in relation to the actual cessation of employment, and the absence of any plea that the employees were bound contractually, or would otherwise have volunteered, to cooperate in the handover of clients following the cessation of their employment. I am also concerned that the plea as it presently stands is in a form which verges on the scandalous, but it is not necessary to express a final view about that.

Conclusion

29    In summary, [29.3] to [29.6], [29.9] to [29.10], [77.1] to [77.5], [81.5] and [81.6] are struck out. I decline to strike out [29.1], [29.7] and [81.4]. I will hear from the parties as to consequential matters.

Associate:

Dated:    8 February 2017