Introduction
In our August employment newsletter, we discussed the UK case QBE Management Services (UK) Ltd v Dymoke & Others [2012] IRLR 458, where the employer successfully obtained, among other things, a 12-month springboard injunction against its former employees and their financial backer from starting a new competing business venture. Springboard injunction is a short term injunction that protects the plaintiff from unfair competition by the defendant (arising from breaches of the defendant’s duties) for a limited period of time. The QBE case confirms that the grounds for springboard injunctions have been extended to breaches of contractual duties, fiduciary duties, and the duty of fidelity. This was recently confirmed and applied in a Hong Kong Court of First Instance (“CFI”) case McLarens Hong Kong Ltd v Poon Chi Fai Corey [2019] HKEC 1857. In this third and final part of our employment newsletter series on this topic, we discuss the McLarens case.
Background
In McLarens, the Plaintiff employer applied for, inter alia, interlocutory injunctions against the 1st to 9th Defendants (“D1 to D9”), who were former employees of the Plaintiff in its Hong Kong office. The Plaintiff also claimed against the 10th Defendant, Charles Taylor Holdings B.V. (“New Employer”), D1 to D9’s new employer and a competitor of the Plaintiff providing insurance loss adjusting services in sectors similar to the Plaintiff, for conspiracy to injure and vicarious liabilities for D1 to D9’s breach of various duties including their breach of contractual duties of confidentiality and in the case of D1, for his breach of fiduciary and director’s duties to the Plaintiff.
In or around February 2019, D1 to D9 accepted an offer of employment from the New Employer. On 3 March 2019 (a Sunday) at about 5:02 p.m., D1 to D9 all submitted resignation letters to the Plaintiff stating that they were terminating their employment with immediate effect with payment in lieu of notice. Notably, the employment contracts of D1 to D9 contained no restrictive covenants.
The evidence suggested that D1 to D9 took away a wide range of documents in electronic form totaling over 200,000 files when they left the Plaintiff’s employment. Such documents include the Plaintiff’s client lists and ongoing client files. It also appeared that D1 to D9 contacted the Plaintiff’s clients previously served by them and those clients subsequently directed the Plaintiff to transfer their case files to the New Employer.
In the course of the proceedings, the Defendants signed undertakings to the court inter alia agreeing not to use confidential information relating to the Plaintiff’s business or to any of the Plaintiff’s clients obtained by them on or before the date of their resignation (“Undertakings”).
The Plaintiff argued that in addition to the Undertakings, springboard injunctions should be granted against D1 to D9 to the effect that they should be restrained for a period of six months from inter alia engaging in the insurance business in the United Kingdom, Hong Kong or China on the grounds of (i) misuse of the Plaintiff’s confidential information and (ii) breach of the duty of fidelity owed by D1 to D9 to the Plaintiff, which required them to inform the Plaintiff about the conducts of other employees which were detrimental to the Plaintiff’s interests.
Decision
The CFI held that D1 to D9’s past conducts had demonstrated a real risk of further misuse of the Plaintiff’s confidential information, and that the Plaintiff had made out a strong case to restrain D1 to D9 until trial from making use of, disposing of or dealing with the Plaintiff’s confidential information. Nevertheless, as the Defendants had given the Undertakings to the court, which were as good as an interim injunction, the CFI decided against granting an interim injunction to protect the Plaintiff’s confidential information.
The CFI emphasized that there was a distinction between breach of duties of confidentiality and the use of confidential information to build a springboard. Whilst the CFI accepted that it is highly likely that D1 to D9 intended to use the Plaintiff’s client lists and other trade secrets for their own benefits, whether they were used for or were needed to be used for the purpose of soliciting the Plaintiff’s clients was a very different issue. It would not be difficult for D1 to D9 to identify the Plaintiff’s clients from publicly available websites and compile a client list themselves if they were willing to spend days or weeks doing so. In addition, the CFI failed to understand how the Plaintiff’s ongoing client files would help create an unlawful advantage or unfair competitive head-start. The Defendants might simply obtain client files directly from clients who chose to transfer their files from the Plaintiff to the New Employer. The Plaintiff failed to discharge its burden of proof that there was a causal link between the Defendants’ misuse of confidential information and the creation of a springboard.
In any event, there was no evidence of continuing misuse of confidential information by the Defendants before the court. All of the Plaintiff’s information and documents had been returned to the Plaintiff and/or destroyed. The Plaintiff also enjoyed the protection and benefit of the Undertakings.
Citing the QBE case as the leading authority in springboard injunctions, the CFI accepted that springboard injunctions would be available to prevent any future or further economic loss to a previous employer caused by former employees taking an unfair advantage of any serious breaches of their employment contracts. However, in the present case, the CFI considered that there was no creation of a springboard by reason of D1 to D9’s failure to inform the Plaintiff of their plan to leave the Plaintiff. Given that the employment contracts contained no enforceable restrictive covenants, D1 to D9 could have easily left the Plaintiff to join the New Employer without committing any wrong. In this regard, Deputy Judge Wong SC opined that (§§45, 55 and 56 of the judgment):
“…as a matter of practical and commercial reality, there is nothing to prevent [D1 to D9] from leaving the [Plaintiff]…Given the fact that [D1 to D9] were entitled to terminate their employment contracts with the [Plaintiff] by serving a proper notice and, in particular, in the absence of any enforceable restrictive covenants from soliciting, the ease which the Plaintiff’s employees could leave the [Plaintiff] to join [the New Employer], I am not persuaded that the [Plaintiff] has discharged its burden of proof that the [Defendants] have built a springboard by reason of the failure to inform the [Plaintiff] of the en masse exodus.
…there is no restrictive covenant in the present case and a springboard injunction will not be granted as a substitute to assist an ex-employer who has not troubled to take an express covenant to protect his confidential information.
…I am of the view that to grant springboard injunctions against [D1 to D9] could well give the [Plaintiff] an advantage which it otherwise would not have.” (emphasis added)
The CFI considered that the course which seemed to carry the lower risk of injustice was not to grant springboard injunctions. The Plaintiff’s interests were protected by the Undertakings and the ability to seek an account for profits and/or damages if the Plaintiff succeeded at trial.
Conclusion
A springboard injunction will not be granted as a mere substitute relief to assist an employer who has neglected to include enforceable restrictive covenants in employment contracts. In the McLarens case, the absence of restrictive covenants is among the principal considerations of the CFI in deciding not to grant springboard injunctions against the former employees. One can see from the CFI’s reasoning that the Plaintiff employer would have a much stronger case against the former employees if there were enforceable restrictive covenants in their employment contracts. For instance, an enforceable non-solicitation clause would have made D1 to D9’s solicitation of the Plaintiff’s clients unlawful. Employers should ensure that their employment contracts contain enforceable restrictive covenants, failing which the remedies available to them in the face of team move may be severely limited.
As to our discussion on non-solicitation clause, and the approach of Hong Kong courts in inquiring into and assessing the reasonableness of a non-solicitation clause in a team move scenario, we invite you to read our July employment newsletter, “Protection for employers against team move (Part I): Non-solicitation clause”, the first part of this series.
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This article was originally published on ONC Lawyers.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to a practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.