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MASSIVE DAMAGES AWARDED AGAINST FORMER EMPLOYEE
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The Employment Relations Authority has recently carried out a damages assessment that will result in a former employee having to pay over $5 million to Nova Energy, for misuse of confidential information that he obtained during the course of his employment.

Background

Michael Mitchell was previously employed by Nova. Shortly before his employment ended with Nova, Mr Mitchell made electronic copies of Nova’s confidential customer and pricing information. Upon leaving Nova, he set up a gas brokering company, National Energy Limited (‘NEL’). Mr Mitchell then used the information he had obtained relating to Nova’s customers and pricings to identify Nova customers for NEL to target. In particular, he approached customers who were paying significantly higher than market rates and those who were near the end of their supply contract with Nova. When Nova became aware of NEL’s activities, it began a campaign to mitigate its losses arising from Mr Mitchell’s use of confidential information by offering a selection of its customers reduced prices in return for signing a new contract with Nova.
 
In a previous decision by the Employment Relations Authority, Mr Mitchell was found to have acted in breach of both his confidentiality obligations and his duties of good faith and fidelity. The Authority found Mr Mitchell liable for Nova’s losses in respect of three groups of customers. The first were the customers who left Nova for other suppliers following approaches by NEL, the second were customers who signed new contracts with Nova at lower rates negotiated by NEL, and the third were customers who signed new supply contracts with Nova on lower rates as a result of the mitigation campaign Nova launched in response to NEL’s actions. The Authority also found NEL liable for aiding and abetting those breaches.

Damages

The Authority explained that the purpose of the damages award was to put Nova in the position it would have been if Mr Mitchell had not committed the various breaches of his duties. It said that the standard of proof for assessment of losses was the ‘balance of probabilities’. It held that the losses arising from Nova’s campaign to mitigate its losses were also recoverable.
 
In evaluating the measure of damages, the Authority conducted a two-step analysis. First, it assessed the value of the revenue lost over one year. The parties advanced competing expert assessments as to how Nova’s annualised losses should be calculated. The Authority conducted an analysis of the various calculations and attributed an annualised loss to Nova in respect of each of the three groups of customers, together totalling $1,021,209.
 
Second, the Authority assessed the appropriate period for losses to be awarded.  Nova proposed that ten years was the appropriate period, which Mr Mitchell and NEL unsurprisingly argued was excessive. The Authority ultimately arrived at a ‘time-horizon’ of seven years. It reasoned that there was an inherent uncertainty in any business forecast for a period as long as ten years, and explained that it was not satisfied that a period of more than seven years had sufficient reliability in the context of general economic or specific dynamic market factors.

Discounts

The Authority accepted that certain discounts were appropriate. For example, a discount of 11.64% was appropriate to reflect the net present value of money awarded now, in advance of the years in which the loss would actually occur. A further adjustment of 8.71% was appropriate to account for customer ‘churn’, and other factors that, as a matter of commercial reality, would have affected the income Nova derived from the customers concerned. Nevertheless, the amount payable to Nova is likely to be well in excess of $5 million.

Penalties

The Authority also ordered Mr Mitchell to pay a penalty of $30,000, and NEL a penalty of $50,000, and ordered that these be paid to Nova rather than to the Crown. It gave several reasons for arriving at those penalties, including that Mr Mitchell had admitted that his breaches were deliberate. On the other hand, the degree of harm caused to Nova was ameliorated to some extent by the damages award, as was the deterrence factor.

Conclusion

This award is one of the largest in New Zealand’s legal history arising from unlawful conduct by a departing employee. The decision to award damages reflecting a seven year period of loss is also unusual. This case demonstrates that the courts will not hesitate to order former employees to pay large sums of damages where this is warranted on the facts.

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