Labelmakers Group Pty Ltd v LL Force Pty Ltd

JUDGE: TRACEY J DATE: 22 OCTOBER 2013 PLACE: MELBOURNE (HEARD IN PERTH AND MELBOURNE)

REASONS FOR JUDGMENT 1 In Labelmakers Group Pty Ltd v LL Force Pty Ltd [2012] FCA 512 ("Labelmakers (No 1)") I found that the individual respondents had been guilty of significant breaches of their fiduciary, contractual and statutory obligations to their employer. I also found that LL Force Pty Ltd ("LL Force") was liable for the same breaches. The determination of appropriate orders relating to relief and costs was deferred pending determination of the issues relating to liability. 2 The applicants seek the following remedies: (a) Damages/equitable compensation; or (b) Alternatively, at their election, an account of profits; and (c) An equitable lien securing payment of the higher of the monetary awards payable under paragraphs (a) or (b); and (d) Injunctive relief and delivery up.

DAMAGES/EQUITABLE COMPENSATION 3 The applicants contended that the conduct of the respondents caused substantial loss and damage to them. The applicants' claim for damages/equitable compensation had two principal elements: the loss of profit on foregone label sales to former customers solicited by the respondents and loss of profit on foregone paper sales by other entities in the Labelmakers Group to Labelmakers Group WA Pty Ltd ("Labelmakers WA"). 4 In Warman International Limited v Dwyer (1995) 182 CLR 544 at 559 the High Court said that "[i]t is necessary to keep steadily in mind the cardinal principle of equity that the remedy must be fashioned to fit the nature of the case and the particular facts." This principle supports a flexible approach to the calculation of equitable compensation. Such flexibility is necessary, not least because calculations must necessarily involve a comparison between the hypothetical position which would have existed, but for a respondent's contravention and the actual position in which an applicant has been placed as the result of misconduct. 5 The principles on which a Court acts when ordering equitable compensation are now well established. In V-Flow Pty Ltd v Holyoake Industries (Vic) Pty Ltd (2013) 296 ALR 418 at 429-30 the Full Court of this Court said: "55. The object of the equitable remedy of compensation or damages is restitution of what the victim has lost. The question is whether the loss would have occurred but for the breach. Whilst the monetary sum awarded to the victim is normally computed by reference to the detriment actually suffered by the victim, it may occasionally be computed by reference to the profit that has been made by the errant fiduciary. Nevertheless, the primary purpose of equitable compensation or damages is compensatory: Nocton v Lord Ashburton [1914] AC 932; Re Dawson (1966) 84 WN (Pt 1) (NSW) 399. No element of penalty is involved: R P Meagher, W M C Gummow and J R F Lehane, Equity: Doctrines & Remedies, 4th ed, at [23-02]. 56. The obligation imposed by equity to pay damages or compensation is not fettered by the usual notions that serve to diminish the quantum of an award of damages at common law. The obligation imposed by equity upon an errant fiduciary is of a more absolute nature than the common law obligation to pay damages for tort or breach of contract. Thus, the obligation is not limited or influenced by common law principles governing remoteness or damage, foreseeability nor causation: Hill v Rose [1990] VR 129 at 144. However, while foreseeability is not a concern in assessing equitable compensation or damages, the only losses that are made good are those that, on a common sense view of causation, are caused by the breach of duty: Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 at 556." (Emphasis added). See also: Parker, Re Purcom No 34 Pty Ltd (in liq) (No 2) [2010] FCA 624 at [23] (per Gordon J). 6 Inevitably, difficulty will be encountered in calculating the precise extent of an applicant's losses as a result of an errant fiduciary's conduct. What is required is a "judicial estimation of the available indications": see General Tire and Rubber v Firestone Tyre and Rubber Company Limited [1975] 1 WLR 819 at 826.

A Preliminary Issue 7 The parties broadly accepted these statements of principle but differed in important respects as to their application. A significant difference between the parties related to the application of the "but for" test. The applicants contended that "but for" the individual respondents' breaches of duty, LL Force could not and would not have been established. This was because the business would not have been economically viable had significant customers of Labelmakers WA not been solicited by the respondents while those respondents were still employed by Labelmakers WA. Had these clients not agreed to place orders with LL Force from the outset of its operations the new company's business would not have survived for long. The individual respondents (other than Ms Chloe Leech) knew this and it was one of the motivating factors which led them to approach some of Labelmakers WA's significant clients. For convenience, I will refer to the second, third, fourth and fifth respondents as the "investor respondents". 8 The respondents, on the other hand, submitted that, having regard to the close association that existed between Mr Ernie Cooley and the principals of the solicited companies, it was likely that, once the LL Force business was established, they would have (as they did) transferred their business to the new company. The new business could, they contended, have been established without any breach of duty on the part of the individual respondents within a period of about two months after their resignations from Labelmakers WA had taken effect. 9 The applicants countered that the evidence given by the individual respondents at trial made it clear that they would not have established the LL Force business had they not sought and obtained the assurances from the clients of Labelmakers WA that orders would be forthcoming immediately after the LL Force business commenced operating. 10 These differences plainly have implications for any assessment of whether the applicants would have sustained loss "but for" the respondents' breaches. The resolution of this dispute has implications for a number of the calculations which fall to be made in quantifying the applicants' losses. It is, therefore, convenient to deal with this issue before turning to make those calculations. 11 In Labelmakers (No 1) I found that: "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]." 12 In dealing with Mr Paul Deveney's liability I noted that: "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." 13 To a large extent these findings were based on evidence given by the individual respondents who invested in the LL Force business. All had invested significant sums of money which they could not afford to lose. All accepted that it was critical to the success of the new business that Harvey Fresh was committed to supporting it. During the early stages of planning Mr Ernie Cooley waited until he received a commitment from Harvey Fresh before taking the proposal further. The commitment of Harvey Fresh and some of the other large clients of Labelmakers WA was relied on by the respondents when they applied to banks for finance for the new venture. The importance of Harvey Fresh to the proposed lender was confirmed when the National Australia Bank sought written confirmation of Harvey Fresh's commitment as a precondition to advancing finance for the enterprise. 14 Although Mr Ernie Cooley said that he did not know whether he would have proceeded to establish the LL Force business without Harvey Fresh's prior commitment, he conceded that, to have done so, would have been "difficult". He regarded Harvey Fresh as the "cornerstone" of the new business. 15 Mr Jason Cooley also regarded Harvey Fresh's commitment to the new business as critical. He needed to maintain continuity of income. This he achieved, in part, by ensuring that the new business was ready to commence operations immediately after he left the service of Labelmakers WA. The assurance that Harvey Fresh and some of the other Labelmakers WA's clients would place orders as soon as the new business was operative provided him with the necessary reassurance. His family and other commitments meant that he could not afford to underwrite a loss making business for more than a matter of months. 16 Mr Deveney's position was that the pre-commitment of Harvey Fresh was "absolutely critical" to his decision to invest in the new business and that, without it, he would not have been involved. 17 The involvement of Harvey Fresh was also critical to Mr Sweeney's decision to invest in LL Force. It was his view, as I understood his evidence, that, without Harvey Fresh, "Labelforce did not have a business". 18 I am satisfied, on the basis of this evidence, that, had the individual investor respondents not secured a commitment from Harvey Fresh to support the LL Force business from its inception, that business would not have been established. The economic risks of starting the business without this major client would have been simply too significant to justify these respondents abandoning secure employment and facing the prospect of losing the substantial funds which they had borrowed to invest in the new company. Although Harvey Fresh was by far the most important (in terms of the value of its orders) of Labelmakers WA's clients who were approached by the investor respondents, they also sought to protect their investment by obtaining the support of at least four other significant customers of Labelmakers WA.

Loss of Profit of Label Sales 19 In the wake of the establishment of LL Force by the individual respondents, Labelmakers WA lost at least 10 clients to LL Force. These clients had placed orders with Labelmakers WA over many years and, upon the establishment of LL Force, either ceased to place orders with Labelmakers WA at all or had substantially reduced the value of their orders. In Labelmakers (No 1) I found that the business of "at least" five of these clients had been solicited by the individual respondents in breach of their equitable, statutory and contractual obligations to Labelmakers WA. The five were Harvey Fresh, D'Orsogna, Planet Sales, Ferngrove Winery and Canon Foods. 20 In the three financial years preceding the departure of the individual respondents from Labelmakers WA these clients accounted for approximately 30 per cent of Labelmakers WA's total sales. 21 The applicants submitted that I should also infer that the respondents had solicited five other clients of Labelmakers WA who had transferred business to LL Force soon after it had commenced operations. These former clients were Pascoes, Gourmet Chevups, Australian Mud Company, Australian Premium Wine Collection and Crystal Foods. 22 Collectively these ten former clients provided about 35 per cent of the revenue generated by Labelmakers WA in the 2008/2009 financial year. In the next financial year, after LL Force had been established, their contribution had fallen to 12.5 per cent and, in the following financial year (to 30 November 2010), their contribution had fallen further to about five per cent. Labelmakers WA moved from a net profit of $422,770 in 2008/2009 to a net loss of $867,707 in the following financial year. 23 The respondents objected to any losses attributable to the second group of five former clients being brought into account. They pointed out that no findings had been made in the principal judgment in relation to these five companies and to evidence (which was not challenged at trial) that none of the individual respondents had sought to solicit their business whilst those respondents were employed by Labelmakers WA. 24 In Labelmakers (No 1) I found that the investor respondents had solicited "at least" the first group of five clients of Labelmakers WA. No express findings were made in respect of the second group of five former clients. For present purposes it is notable that this second group collectively contributed only about one sixth of the sales revenue provided to Labelmakers WA by the first group. It was the commitment of this first group which emboldened the investor respondents to embark on the new venture: see above at [7]-[18]. Had it not been for the solicitation of these clients of Labelmakers WA, LL Force would not have come into existence. I therefore accept the applicants' submission that the revenue losses relating to the second group of former clients should be brought to account on the basis that "but for" the errant conduct of the investor respondents in soliciting the business of the first group, there would have been no LL Force business to which the second group of former clients could have directed orders. 25 Labelmakers WA's former customers provided LL Force with a flow of orders which enabled it quickly to become highly profitable. In the 2009/2010 financial year, its first in operation, LL Force generated sales of almost $3.5 million. Almost 90 per cent of those sales came from former clients of Labelmakers WA. In succeeding financial years LL Force's sales increased to $4.8 million (2010/2011) and (to 31 May 2012) $5.8 million. In the 2009/2010 financial year the first group of five former clients accounted for 76.4 per cent of LL Force's total sales. In 2010/2011 they accounted for 67.1 per cent of those sales and, in the ensuing financial year (to 31 May 2012), for 58.4 per cent of LL Force's total sales. 26 In the present case the applicants have sought the calculation of damages on the basis of losses sustained as a result of the solicitation of former clients by the respondents. This involves a comparison of the hypothetical financial position which would have obtained but for the solicitation of those clients and that in which the applicants found themselves following the establishment of LL Force. Such a basis of assessment of damages is well accepted: see, for example, Johnson v Perez (1988) 166 CLR 351 at 355 and 386. 27 The calculations of the hypothetical element of this comparison will often involve bona fide differences in expert opinion. Such was the case in the present hearing on the question of relief. 28 In order to assess the extent of that damage the applicants and the respondents each engaged highly qualified and experienced forensic accountants to examine the relevant accounting records and provide reports. These experts were Mr Owain Stone who was engaged by the applicants and Mr Jeff Herbert who was engaged by the respondents. Having first produced individual reports the two experts conferred and produced a joint report which identified the methods and calculations on which they were agreed and those where they differed. Where they differed they explained the basis for their respective opinions. Both gave oral evidence and were cross-examined. Both were impressive witnesses. The differences between them were, in the main, attributable to different instructions and assumptions on which their views were founded. They each readily acknowledged that their calculations were susceptible to variations depending on which underlying assumptions were accepted. 29 Mr Stone calculated Labelmakers WA's losses of sales revenue from its former clients over periods of five, seven and 10 years and over an indefinite period. The figures for each period varied depending upon the discount rate which was applied to make allowance for the time value of money and the possibility that one or more of the former clients might have, in any event, transferred business away from Labelmakers WA. Mr Stone started by working out a weighted historical average of the sales that Labelmakers WA was likely to have made to the former clients "but for" the misconduct of the respondents. He then subtracted from the resulting figure an amount for "actual" sales that Labelmakers WA made to those former clients. He then calculated the profit, after direct costs, that Labelmakers WA would have been expected to earn on the lost sales. This calculation was based on Labelmakers WA's historical financial results. The profit margin was 36 per cent of sales. 30 Mr Stone expressed his findings in tabular form as follows: Years Lost Profits (25% Discount Rate) Lost Profits (20% Discount Rate) 5 $2,999,596 $3,347,754 7 $3,555,954 $4,071,682 10 $4,038,625 $4,764,837 Indefinite $4,545,034 $5,716,974

31 Mr Herbert performed a similar calculation. It is not necessary to set out his figures because, in their joint report, Mr Herbert agreed with some of Mr Stone's calculations and explained his reasons for differing from Mr Stone in respect to others. It will, therefore, be convenient to use the figures appearing in Mr Stone's table and deal with the points of difference between him and Mr Herbert. 32 The joint report of Mr Stone and Mr Herbert disclosed a substantial measure of agreement between them. They disagreed only as to the calculation of a profit margin and the discount rate to be applied to take account of contingencies and vicissitudes which may have reduced future earnings.

Profit Margin 33 As already noted Mr Stone settled on a figure of 36 per cent of lost sales. Mr Herbert fixed on a lower figure of between 28.64 per cent and 29.14 per cent. The experts explained their difference by reference to three subsidiary items. These were: (a) administration salaries; (b) the extent of variation of certain costs; and (c) depreciation.

Administration Salaries 34 Mr Herbert proceeded on the assumption that the historical amounts actually paid to the individual respondents by Labelmakers WA totalled about $490,000. Although he had not undertaken any vouching or other verification of these amounts he acted on an instruction that the individual respondents were not replaced and, as a result, he concluded that a full adjustment of that amount should be made. It followed that the profit margin suggested by Mr Stone should be reduced by approximately five per cent. This was because, in Mr Herbert's view, Labelmakers WA would have had to continue to incur these costs in order to make the lost sales and service the clients. When giving oral evidence Mr Stone agreed that, if the assumption which Mr Herbert was instructed to make accorded with fact, it was, indeed, appropriate to make the reduction which Mr Herbert had suggested was appropriate. 35 Mr Stone was not instructed as to the amounts paid to the individuals and the question of whether or not any of them had been replaced following their departure from Labelmakers WA. He did however review the profit and loss accounts of the company before and after the individual respondents had left the employ of Labelmakers WA. He reported that normal administrative salaries paid by Labelmakers WA fell by a little under $250,000 between the 2008/2009 and 2009/2010 financial years. Mr Stone said that a reduction of this magnitude would have warranted a reduction of the profit margin of 2.5 per cent. 36 The figure on which this variation was based did not, however, include the reduction in on-costs of overtime, annual leave, payroll tax and superannuation which Mr Stone had found to have been saved following the departure of the individual respondents. When the differences between these two financial years were calculated, the reduction in expenditure on these items was a little over $478,000, not far short of the $490,000 which Mr Herbert was instructed to bring into account. 37 The respondents submitted that a reduction of 4.85 per cent was warranted under this head. Their calculations were set out in the following table: Stone Starting profit percentage 36% % Adjustment for administration salaries ($249,460) 2.5% % Adjustment for on costs ($228,883) 2.35% Profit percentage adjustment for administration salaries and on costs 31.15%

38 The applicants argued that no such deduction should, however, be made because of additional expenses indirectly incurred by Labelmakers WA as a result of the departure of the individual respondents and the solicitation by them of the former clients of Labelmakers WA. The loss of orders had resulted in a significant underutilisation of production capacity. In order to maintain the viability of Labelmakers WA the Victorian office of the Group placed significant orders with Labelmakers WA. This meant that considerable expense was incurred transporting material to and from Melbourne. There were also substantial costs incurred by Labelmakers WA in producing new printing plates to satisfy the orders from Melbourne. 39 The experts were not called on to express opinions as to the impact of these changes on the calculation of the profit margin. 40 The applicants' argument was supported by confidential evidence which disclosed the value of orders placed by the Group in Melbourne for work to be performed by Labelmakers WA in the latter part of 2009 and the early part of 2010. Suffice to say there were hundreds of orders with a total invoice value in excess of $1 million. The applicants sought to compare this figure with the $94,000 which was the total invoiced cost of work done by Labelmakers WA for the Group in Melbourne in the 2008/2009 financial year. Mr O'Sullivan, the Managing Director of Labelmakers WA, also gave evidence of a general character about the additional administrative burdens which fell on him and some other Labelmakers WA executives in order to salvage its business operations after the departure of the individual respondents. There was, however, no evidence or estimate of the transport costs or the administrative costs associated with the salvage operation. This latter cost would, to a substantial extent, have already been brought to account in dealing with the salary adjustments paid to Labelmakers WA executives who were called on to assume additional responsibilities. 41 The respondents objected that work undertaken by Labelmakers WA for three large customers, National Foods, George Weston Foods and Watsonia/Don Smallgoods had been included as work ordered by the Group in Melbourne in the 2009/2010 financial year despite the fact that, in previous years, large volumes of work had been performed for these customers by Labelmakers WA independently of the Group in Melbourne. No explanation was proffered by the applicants about why these accounts were treated in some years as Group accounts and in others as Labelmakers WA's accounts. In each of the 2007/2008 and 2008/2009 financial years, for example, Labelmakers WA undertook printing work for National Foods valued at over $400,000. None of this work was commissioned by the Group office in Melbourne. In 2009/2010 Labelmakers WA did work to the value of about $317,000 for National Foods of which some $93,000 was said to have been printed following orders from the Group office. As a result, the respondents submitted "that the Court must accept that either Labelmakers WA always held the accounts for those clients, or that Labelmakers Victoria held the account but the printing was always completed by Labelmakers WA." Whilst other explanations may exist for these apparent anomalies, there is force in the respondents' submission that it would not be safe to act on the basis that the full value of the additional orders placed by the Group in Melbourne on Labelmakers WA after the departure of the individual respondents was indirectly attributable to their misconduct. It is also to be borne in mind that the three clients referred to by the respondents were not among those solicited by the respondents. 42 I consider that some allowance of the kind contended for by the respondents is warranted. There should also be some small offset to take account of the additional expenses incurred by the applicants. Doing the best that I can on the limited evidence available I consider that an allowance of four per cent should be made under this head.

Variable Cost Components 43 Mr Stone did not make any allowance for what Mr Herbert described as "the variable component of other administration expenses." These expenses were either fixed, semi-variable or variable in nature. They included distribution costs, rental, depreciation and administration wages (apart from amounts paid to the individual respondents). In the joint report Mr Stone agreed that expenses of this kind were likely to contain a variable component that should be taken into account in calculating the profit percentage. He had not made any adjustments because he did not consider that he had sufficient information about the nature and variability of the expenses to place a reliable estimate on them. Mr Herbert acknowledged the absence of data but considered that, even in the absence of precise information, a reasonable estimate, based on experience, should be made. Mr Stone agreed that, if a further deduction was warranted, it would be in the range of 1.5 to 2 per cent. 44 I accept that an adjustment of 1.5 per cent should be made.

Depreciation 45 The third item on which the experts disagreed in calculating the profit margin was depreciation. 46 Mr Stone did not consider that he had sufficient information regarding Labelmakers WA's plant and machinery to enable him to estimate the useful life and residual value of these items prior to the departure of the individual respondents from Labelmakers WA. Furthermore he said that he was unable to estimate the extent of the impact that a reduction in turnover would have had on the useful life and residual value of the equipment. In any event, Mr Stone did not consider that any allowance should be made for depreciation when calculating the profit margin. This was because, in his view, depreciation was not a cash cost but rather a mechanism to spread the cost (already incurred) of a capital asset against the income that the asset will generate. 47 Mr Herbert felt able to place an estimate, on average, of 15 years on the useful life of the plant and machinery. He assumed a linear relationship between the level of usage and economic life and he also assumed that there was a directly proportional relationship between the two. These assumptions were made on the basis of Mr Herbert's experience as a receiver of printing companies and on his view that "probable improvements in future technology will render [printing machines] uncompetitive." On this basis he allowed a reduction of 0.35 per cent for depreciation. 48 It will, depending on the state of the evidence before the Court, be appropriate to bring depreciation to account in calculating a business's profit margin. In TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd (1963) 180 CLR 130 at 140 the High Court held that, in calculating a loss of profits, it was necessary to deduct depreciation and capital expenses in order to avoid compensating an applicant for all profits lost without taking into account the expense of earning them. 49 The difficulty in the present case is that there is a paucity of evidence relating to the condition and useful life of Labelmakers WA's plant and equipment. In their joint report Mr Stone and Mr Herbert agreed that they did not have "sufficient information to be able to ascertain the extent, if any, that the estimated useful lives or residual values of the various key pieces of plant and machinery used by Labelmakers WA [had] been impacted by the changed level of usage." They agreed that "but for" the respondents' actions Labelmakers WA's turnover would have been about 50 per cent higher than was actually the case after 30 June 2009 but they were unable to assess the exact extent that that increased turnover would have had on the usage of plant and machinery. 50 Mr Herbert's estimate of the useful life of Labelmakers WA's plant and machinery was based on a number of assumptions which were of dubious application to Labelmakers WA's equipment. Mr Herbert had not visited Labelmakers WA's premises. Nor was he aware of the number, age or type of machines on those premises. Mr Herbert also assumed that future improvements in technology would render Labelmakers WA's machinery uncompetitive but conceded, in his oral evidence, that he did not know whether technology would affect the life of the machines actually being used in Labelmakers WA's business. 51 On the material available I do not consider that any allowance should be made for depreciation.

Conclusion on Loss of Profits 52 The profit margin should be calculated at the rate of 30.5 per cent of lost sales.

The Discount Rate 53 Another area on which the two experts disagreed was the establishment of a discount rate to be applied in calculating the quantum of the applicants' losses as a result of the respondents' misconduct. Mr Stone opted for a discount rate of between 20 and 25 per cent. Mr Herbert considered that a figure of 37 per cent was appropriate. 54 In their joint report the two experts attributed their differences to their underlying approach to two issues. These were: (a) Assumptions about competition in the market in which Labelmakers WA would have been operating "but for" the errant conduct of the respondents; and (b) Differences in perception about the scale and impact of risk factors which may have impacted on an ongoing Labelmakers WA business.

'Limited' or 'Full' Competition 55 Mr Stone opted for a lower discount because he assumed that, had the investor respondents not solicited the business of Harvey Fresh and other significant clients of Labelmakers WA during their employment with that company, the competitive LL Force business would not have been established. As a result there would have been no direct competition between Labelmakers WA and new business which would have threatened Labelmakers WA's profitability. This was referred to in the joint report as the "Limited Competition" assumption. 56 Mr Herbert proceeded on a different assumption. That was that, whether or not the misconduct had occurred, the investor respondents would have been able to set up a business in competition with Labelmakers WA, albeit not for a period of some months after their resignations from Labelmakers WA took effect. This was described as the "Full Competition" assumption. 57 For the reasons which I have explained above at [7] - [18] I consider that Mr Stone has proceeded on the correct assumption. 58 In their joint report the two experts discussed the prospect of them agreeing on a discount rate if the Court were to accept (as it has) that Mr Stone had proceeded on the correct assumption. Mr Stone was prepared to concede that a figure as high as 30 per cent would not be unreasonable although it would be at the very high end of the range. Mr Herbert opined that a range of 30 to 35 per cent would be appropriate. As a result they advised that "it would be reasonable to use a discount rate of 30% for these calculations under the assumption that [the] "Limited Competition"" assumption was correct.

Other Risks 59 In settling on their respective discount rates Mr Stone and Mr Herbert both factored in a range of risks which might have impacted on Labelmakers WA's ongoing business. They accepted that such risks existed but parted company on the scale of the adjustments required to make allowance for them. 60 After discussing their respective analyses the experts were able to agree, notwithstanding their differences, that these additional risks could be factored in to the range of discount rates on which they had agreed. In their joint report they advised that: "56. The experts differ on the scale of the impact of a number of risks on the likely value of the business. These are reflected in the differences in the ranges of discount rates that they have arrived at above. However, as discussed above, whilst they differ on these elements, the existence of the risks under the different scenarios is not in dispute; it is the scale of the adjustments required for these elements not agreed on. 57. There are some differences between the experts as to exactly how to arrive at ranges they have derived, and whether appropriate adjustments have been made for all appropriate elements. However both experts agree that, having made all the various adjustments, it is necessary and appropriate for the valuers to "step back" and consider the discount rate or multiple they have arrived at. 58. Having done that, and clarifying the different scenarios, the experts have concluded that whilst their ranges are different, they do overlap to provide a suitable discount rate (or multiple for later issues) as set out in this Joint Report."

Conclusion on Discount Rate 61 I accept the experts' evidence on this point: a discount rate of 30 per cent should be applied.

Rebates 62 In the wake of the defection of the individual respondents the new management at Labelmakers WA made a forlorn effort to retain the business of some of the company's larger clients by offering price reductions. The respondents instructed Mr Herbert that, when calculating losses sustained by the applicants, he should assume that Labelmakers WA would have granted rebates of 25 per cent and 20 per cent respectively to D'Orsogna and Harvey Fresh in the 2009/2010 and 2010/2011 financial years. These assumptions had an impact on the discount rates and profit percentages determined by Mr Herbert. Mr Stone received no such instructions and did not make any allowances for such reductions. 63 Had it not been for the respondents' errant conduct the rebates would never have been offered or paid. No allowance should be made for them in calculating the applicants' losses.

Period During Which Losses to be Calculated 64 As appears from the table in [30] above the quantum of lost profits was calculated over five, seven and 10 years and for an indefinite period. 65 The applicants contended that their loss should be calculated for an indefinite period. 66 The respondents opted for a much shorter period of 61 days or such longer period as the Court considered to be an appropriate "head start" period. 67 The applicants submitted that it was reasonable for the Court to conclude that "but for" the respondents' misconduct the former clients of Labelmakers WA whose business had been solicited by the investor respondents would have remained clients of Labelmakers WA indefinitely. They acknowledged that a feature of the market for labels was that orders were placed by customers on a short term needs basis. Long term supply agreements were not the norm. They stressed that, nonetheless, it was also a feature of the market that customers remained loyal to printers provided that the printers satisfied orders in a timely manner and at a standard acceptable to the client. They pointed to the long term association between the 10 solicited clients of Labelmakers WA and the company. 68 There was, however, some evidence which tended against a finding of an indefinite association between Labelmakers WA and each of the solicited clients. Mr Ernie Cooley had maintained a close personal association with the principals of some of these clients. They valued his knowledge and experience. At relevant times he had turned his mind to retirement. In 2009 he was aged 69. He was grooming his son, Mr Jason Cooley, to succeed him. It cannot, therefore, be assumed that Mr Ernie Cooley would have continued to have been involved in the Labelmakers WA's business for an indefinite period and there was, therefore, a possibility that some of the solicited clients might have been less committed to the association following his departure. This possibility must be balanced against the likelihood that Mr Jason Cooley would, as his level of knowledge and experience increased, have provided continuity in the business relationships. 69 Other variables which must be considered include the possibility that some of the respondents might have been forced to scale back their levels of production or, for other reasons, reduce the scale of their orders. There also existed the possibility that one of Labelmakers WA's competitors might have succeeded in attracting the business (or part of it) from one or more of the solicited clients. On the other hand new manufacturers may have entered the label printing market. 70 The respondents submitted that losses should be calculated over a much shorter time. That period, they contended, should be determined by reference to the "head start" which they had obtained by reason of their breaches. 71 There will certainly be cases in which it will be appropriate to apply the "head start" doctrine. In WA Fork Truck Distributors Pty Ltd v Jones [2003] WASC 102 at [94] Pullin J explained the doctrine as follows: "The plaintiff, instead of waiting until he terminated his employment, by giving proper notice, and then taking the considerable time which was necessary to set up his competing business - which he was entitled to do - took the time of his employer and established the business so that he was in a position to start in competition almost immediately after he left his employment. If he had not breached his duties and contract, he would have not have been able to start in business straight away. He therefore gained a "head start" as a result of his breach of contract and breach of fiduciary duty." His Honour went on to make an estimate of how long it would have taken the plaintiff to establish a competing business and calculated compensation on that basis. 72 The "head start" approach to the calculation of compensation will have utility in circumstances in which the evidence before the Court suggests that the fiduciary could establish a competing business within a reasonably short period and had available the resources to tide him or her over the establishment period when remuneration was no longer being received from the person to whom the duties were owed. The present is not such a case. For the reasons which I have already explained, I do not consider that the LL Force business would have been established had not the individual respondents' impugned conduct taken place over almost two years in order to ensure that continuity of income was assured. 73 In the circumstances I consider it appropriate to make allowance for lost profits over a seven year period.

Loss Of Profit On Paper Sales 74 The applicants also asserted an entitlement to compensation for the profit lost by the Labelmakers Group on paper sales to Labelmakers WA. This claim was resisted by the respondents. 75 The evidence established that Labelmakers WA purchased paper from the Labelmakers Group. The Group placed a mark-up on the price it charged. When Labelmakers WA lost the business of the solicited clients it required much less paper and the quantity ordered from the Labelmakers Group fell significantly as too did the profits derived by the Labelmakers Group from these sales. 76 Mr Stone calculated the losses and recorded his findings in the following table: Years Loss Profits (25% Discount Rate) Loss Profits (20% Discount Rate) 5 $745,376 $831,891 7 $883,627 $1,011,781 10 $1,003,567 $1,184,025 Indefinite $1,129,406 $1,420,624

Mr Herbert did not dispute Mr Stone's methodology or the accuracy of his calculations. 77 The applicants sought an order for compensation calculated at a 25 per cent discount rate over an indefinite period. 78 The respondents resisted the making of any order for compensation under this head. They did so because they had been found to have breached their fiduciary obligations to Labelmakers WA, by whom they had been employed, and not the Labelmakers Group to whom, they contended, they owed no such obligations. 79 The applicants asserted that the Court should find that the investor respondents owed what they called "a fact based fiduciary duty to Labelmakers Group arising from the fact that they were senior employees of Labelmakers WA and knew that Labelmakers Group derived profit from applying a mark-up to the paper that it sold to Labelmakers WA." They accepted that such a finding would involve the acceptance of a fiduciary obligation falling outside the established range of relationships which attracted such obligations but stressed that these categories are not closed: cf Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 at 96. That being so it is necessary to examine those factors which the authorities have held to be suggestive of the existence of a fiduciary relationship. 80 The applicants relied on part of the following passage from the judgment of Mason J in Hospital Products. His Honour said (at 96-7) that: "The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman [1967] 2 AC 46 at 127), viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense. The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position. The expressions "for", "on behalf of", and "in the interests of" signify that the fiduciary acts in a "representative" character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal." (Emphasis added). In order for the applicants to succeed in making good this part of their case it is necessary for them to establish that the relationship between the investor respondents and Labelmakers Group incorporated the essential elements identified in the italicised passage. 81 The applicants sought to support their claim on the following basis. Each of the investor respondents was in a senior and trusted position in Labelmakers WA. Each was aware of the mark-up arrangements. Each had the capacity to affect the level of paper sales that Labelmakers Group made to Labelmakers WA by taking action which would reduce the level of sales by Labelmakers WA. In this way the Labelmakers Group was said to be vulnerable to their activities. The consequence was, so it was submitted, that the investor respondents owed the Labelmakers Group a duty not to act in a manner which they knew to be detrimental to Labelmakers Group's interests. They had breached this obligation by soliciting the clients and staff of Labelmakers WA and deliberately concealing their preparatory activities from Labelmakers Group. 82 The absence of contracts of employment between the four investor respondents and Labelmakers Group is not, of itself, an obstacle to a finding that they owed fiduciary obligations to that company: cf AMP Services Limited v Manning [2006] FCA 256 at [55]. Thus, for example, if company A and company B are part of the same corporate group and company A retains an employee and then directs the employee to work for company B, the employee may owe fiduciary obligations to company B. Such an obligation may arise if the employee is given powers to exercise for the benefit of company B in order to promote B's interests: cf C-Shirt Pty Ltd v Barnett Marketing and Management Pty Ltd (1996) 37 IPR 315 at 336. 83 The question then becomes whether the powers, conferred on the investor respondents by Labelmakers WA, were given for the purpose of promoting the interests of Labelmakers Group and, in particular, the securing of profits through paper sales. 84 The investor respondents and, in particular, Mr Ernie Cooley and Mr Jason Cooley, had responsibility for the successful conduct of the Labelmakers WA's business. The powers conferred on them were to be exercised for this purpose. They were employed by Labelmakers WA. 85 Orders for paper were placed on the Labelmakers Group and, as the respondents were aware, a mark-up was applied that provided a profit margin for Labelmakers Group. That did not mean that the power to order paper supplies was to be exercised for the benefit of Labelmakers Group. If, for example, another paper supplier had offered to provide Labelmakers WA with paper of a similar or better quality at a lower price, the respondents' duties to act in the best interests of Labelmakers WA may have required them to obtain paper supplies from the alternative producer. Any fiduciary obligation was owed to Labelmakers WA, not the Labelmakers Group. 86 I do not, therefore, consider that the applicants can succeed on this aspect of their claim.

ACCOUNT OF PROFITS 87 In the alternative and at their option the applicants claimed the sum of $2,705,740 in trading profits made by LL Force in the period between 1 July 2009 and 31 May 2012 and capital profits totalling $2,440,000 over the same period. 88 It is the role of the Court "to determine as accurately as possible the true measure of the profit or benefit obtained by [a] fiduciary in breach of his duty": Warman International at 558. One method of undertaking the necessary calculation is to determine the profit made by the new entity established by the investor respondents for a given period and to then add the capital appreciation of their investment in the new entity. Such an approach was approved by the High Court in Warman International: see at 553-4 and 563-4. 89 In V-Flow the Full Court summarised the relevant principles to be applied in calculating relevant profits (at 430) as follows: "57. On the other hand, the purpose of an account of profit is to prevent the unjust enrichment of the fiduciary by compelling the fiduciary to surrender any profits actually made by the fiduciary that were made improperly, and nothing beyond that. It is not to punish the errant fiduciary: Dart Industries Inc v DÉcor Corporation Pty Limited (1993) 179 CLR 101 at 111; 116 ALR 385 at 387; 26 IPR 193 at 195 (Dart). The errant fiduciary is made to account for, and is then stripped of, profits made that it would be unconscientious for that person to retain, because they are profits made by the fiduciary dishonestly. For example, in the case of infringement of intellectual property rights, the account is limited to the profits of the wrongdoer during the period when the victim's rights were being infringed: Colbeam Palmer Ltd v Stock Affiliates Pty Limited (1968) 122 CLR 25 at 34; [1968] ALR 581. 58. There is no reason why an errant fiduciary should not be required to disgorge a capital profit, as well as a trading profit: Apand Pty Ltd v Kettle Chip Co Pty Ltd (No 2)(1999) 88 FCR 568 at 584; 162 ALR 505 at 522; 43 IPR 225 at 242; [1999] FCA 483(Apand). However, the profit must be shown to be one resulting from the breach of fiduciary duty. It is only profits properly attributable to the breach of fiduciary duty that should be the subject of the account: G E Dal Pont, Equity and Trusts in Australia, 5th ed, 2011, at [34.155]. In calculating the quantum of the relevant profit, the court adopts the nearest approximation to justice that it can make: Dart at CLR 119; ALR 394; IPR 202. In principle, there is nothing wrong with the court estimating the profit by drawing inferences, provided that there is some evidence of actual profit (Apand at FCR 571; ALR 509; IPR 229)."

Trading Profits 90 In its first year of operation LL Force's profits were derived substantially from former clients of Labelmakers WA. Mr Stone calculated the net profit generated by LL Force from 1 July 2009 to 31 May 2012 and also that part of the profits attributable to the former clients. His findings appear in the following table: Period Total Labelforce Profits Solicited Former Clients Profits 1 July 2009 - 31 December 2010 $1,038,486 $884,314 1 January 2011 - 31 December 2011 $1,114,603 $758,811 1 January 2012 - 31 May 2012 $552,651 $343,572 TOTAL $2,705,740 $1,986,697

91 In making his calculations Mr Stone found that LL Force's profit margin was 18.3 per cent. 92 Mr Herbert considered that the profit margin was 14.1 per cent. 93 In their joint report Mr Stone and Mr Herbert attributed their different figures as being "entirely a result of their different approach to the treatment of depreciation." As already noted Mr Stone, in making his calculations, made no adjustment in respect of depreciation. Mr Herbert made such an adjustment. 94 For the reasons given above at [45]-[50] , I do not consider that the evidence supports any allowance being made for depreciation. 95 There being no other material dispute between the two experts, I consider that the 18.3 per cent margin is appropriate. 96 The applicants claimed an entitlement to all of the profits made by LL Force in the period between 1 July 2009 and 31 May 2012. That sum was $2,705,740. 97 Two issues arise. The first is the period over which the calculation should be made and the second is whether the respondents should only be required to account for the profits attributable to the former clients of Labelmakers WA who were solicited by the investor respondents. 98 The periods over which Mr Stone's calculations ranged were chosen somewhat arbitrarily and concluded on 31 May 2012 because that was the date on which the then most recent accounts for LL Force were available. The profits disclosed by these calculations were acquired, at least to the extent that they were obtained by providing services to the former clients of Labelmakers WA, by LL Force as a result of the investor respondents' breach of their fiduciary duties. It might also be argued that, because LL Force would not have been established but for the investor respondents' errant conduct, any and all profits made by LL Force were attributable to their breach of duty. On the other hand, the securing of the business of additional clients and the profits attributable to those clients may fairly be considered to have resulted from the application, by the investor respondents, of their own skills and energy in the period after which they had left the service of Labelmakers WA. In the circumstances, I consider that the investor respondents should only be held accountable for the profits derived from solicited clients of Labelmakers WA. 99 It was for the respondents to establish that it would be inequitable for the Court to order an account of the entire profits: see Warman International at 561. 100 Save for the allowance already made, I consider that the respondents should account to the applicants for the entirety of LL Force's profits up to 31 May 2012. The respondents have not advanced any arguments which satisfy me that it would be inequitable to so order. 101 I therefore consider that the respondents should account to the applicants for trading profits of $1,986,697.

Capital Profits 102 The expert evidence established that the investor respondents have each gained a capital profit through their shareholdings in LL Force. The extent of that profit, in each case, can be calculated by comparing the value of the investor respondents' shareholdings in LL Force at a given date and subtracting from that amount the capital contribution which each has made to the business. 103 In his second report Mr Stone calculated the value of the LL Force business on 31 December 2011 and 31 May 2012. The value was determined by estimating the businesses future maintainable earnings on each date and applying an EBITDA multiple of three to the FME estimates. The calculations, in tabular form, were as follows: 31 December 2011 31 May 2012 Estimated FME $1,200,000 $1,300,000 EDITDA Multiple 3.0 3.0 Value of Labelforce $3,600,000 $3,900,000

104 Although Mr Herbert originally opted for a multiple of 2.3, he agreed with Mr Stone, in their joint report, that a multiple of three was within the ranges that both considered appropriate. 105 The capital profits accumulated to 31 December 2011 and attributable to each of the four investor respondents can, therefore, be calculated as follows: Respondent % ownership of Labelforce Value of ownership share given to total Label force value of $3.6m Capital contribution Capital Profit Ernie Cooley 30% $1,080,000 $255,000 $825,000 Jason Cooley 30% $1,080,000 $255,000 $825,000 Scott Sweeney 10% $360,000 $85,000 $275,000 Paul Deveney 10% $360,000 $85,000 $275,000

106 The investor respondents should account to the applicants for these capital profits from which each has benefited.

EQUITABLE LIEN 107 The applicants sought an order seeking to secure any funds payable by the respondents by way of an equitable lien over the assets of LL Force and the investor respondents' shares in LL Force. The applicants did not, however, develop any submissions to establish the need for the granting of such a lien. 108 The respondents did not make submissions in relation to this claim. 109 In the absence of any detailed submissions by the applicants in support of the granting of an equitable lien I am not disposed to make the orders sought.

PERMANENT INJUNCTIONS 110 In Labelmakers (No 1) at [359] I found that documents falling into various categories contained information which was confidential to Labelmakers WA. These categories were identified as "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'Orsogna pricing information." I said (at [360]) that this material should, if it has not already been, be delivered up to Labelmakers WA. I anticipated (at [361]) that further remedies restraining the respondents from misuse of this material might be required. On 25 May 2012 interlocutory injunctions were granted requiring the respondents to deliver up to the applicants this confidential information. 111 The applicants now seek orders making permanent those interlocutory injunctions and requiring the respondents to deliver up to the applicants the confidential information. 112 The respondents advised the Court that they are no longer in possession of the information and they will have nothing to produce to Labelmakers WA should such a permanent order be made. They consented to the interlocutory orders made on 25 May 2012 being extended on a permanent basis. 113 The orders sought by the applicants should be made.

CONTRIBUTION BETWEEN RESPONDENTS 114 The applicants submitted that the Court should treat all respondents as being jointly and severally liable to the applicants for the losses incurred by reason of their misconduct. Any such order, it was suggested, should be subject to a reservation that each of the respondents be at liberty to apply to the Court for the determination of contribution issues as between themselves. Such an approach, it was submitted, was consistent with that taken by the Court in Western Areas Exploration Pty Ltd v Streeter (No 3) (2009) 234 FLR 265. 115 Alternatively the applicants sought that the investor respondents should be held jointly and severally liable to the applicants subject to the same reservation. Ms Leech would be ordered to pay nominal damages for her misconduct. 116 The respondents submitted that each of the respondents should be "held liable in respect of proven loss flowing from their found breaches of duty." 117 Ms Leech played no part in the preparation and planning of the LL Force enterprise by the four investor respondents. Her misconduct was much more narrowly confined. It related to her forwarding a copy of Labelmakers WA's Red Book to her personal e-mail account shortly before she left Labelmakers WA and accepted employment with LL Force: see Labelmakers (No 1) at [277]. The Red Book was a commercially sensitive document "because a reader could find in it information which would allow competitive quotations to be made on future work for particular clients": see at [320]. 118 There was evidence that some of the information contained in the Red Book had been used by LL Force to assist it in the conduct of its business. Any ongoing misuse was, however, prevented by the granting of an interlocutory injunction: see Labelmakers (No 1) at [325]. 119 In these circumstances I consider that Ms Leech's position should be treated separately from that of the investor respondents for the purpose of assessing damages. In the circumstances, and in particular, her limited involvement in the scheme devised by the investor respondents and the paucity of evidence relating to damage to Labelmakers WA occasioned by her misconduct, I consider that Ms Leech should be required to pay damages to the applicants fixed at $1,000. 120 The remaining respondents should be treated as being jointly and severally liable to the applicants. If any of them seek it I would be minded to grant them leave to apply for a determination as to what proportions as between themselves each should contribute to their joint and several liability to the applicants.

COSTS 121 The applicants have sought an order that the respondents pay their costs of the proceeding on an indemnity basis. 122 The respondents, in their written submissions, made no submissions relating to costs orders. They submitted that it was "premature and inappropriate to make submissions in respect of costs" until the Court had delivered its reasons relating to relief. No elaboration of this assertion was provided. 123 As previously advised I fail to see any necessary connection between the reasons for granting relief or the terms in which relief is provided to the applicants and the terms of an order which might be made in relation to costs. I am, however, reluctant to make orders relating to costs without first having heard submissions from the respondents. 124 The applicants have made detailed submissions on costs. I will, therefore, give directions requiring the respondents to provide answering submissions in writing within a relatively short period of the publication of these reasons. Unless the parties seek a further oral hearing to deal with costs issues I propose to deal with them having regard to the written submissions.

DISPOSITION 125 It will be necessary for further calculations to be made to quantify the extent of the respondents' (other than Ms Leech's) liability to the applicant. Once those calculations are made the applicants will have to make an election as to whether they will receive equitable compensation or an account of profits. Once the election has been made interest will have to be calculated in accordance with s 51A of the Federal Court of Australia Act 1976 (Cth). 126 I will, therefore, direct that the parties bring in minutes of orders which give effect to these reasons. I certify that the preceding one hundred and twenty-six (126) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tracey.