Team Moves and Springboard Relief

The field of employment litigation is dominated by the tension between an employer’s ability to protect its customer base against competition from ex-employees and the extent to which they are free to compete for the business of such customers despite alleged wrongdoing on their part.

Where restrictive covenants apply the dispute largely turns on the issue of enforceability. Generally, the ex-employer can succeed in obtaining an interim injunction where the restrictions appear likely to be upheld at trial, (e.g. Midland v Lo [2011] 1 HKLRD 470 @ 477). It is in the absence of such covenants where the availability of relief will depend on the need to establish the ‘Springboard’ that the law’s development has been uncertain and unpredictable.

Two recent Hong Kong cases illustrate the scope of the Springboard jurisdiction and the inevitable difficulties which the courts face in determining whether to grant interim relief:

Face It Ltd v Luk Mei Ling & Ors HCA 299/2019, 28 May 2019;

Mclarens v Corey Poon & Ors & Charles Taylor [2019] 3 HKLRD 403, (hearing 3 June, decision 14 June 2019).

In Face It a beauty treatments business was able to restrain a group of four ex-employees, (three more, (D5-7) were sued, (but no injunction was sought against them) who had also joined the new employer, (D8) a start-up competitor owned or controlled by the four; Judgment §32-35) from contacting customers or otherwise using “confidential information”, (comprising contact details and communication records for/with customers) and require them to deliver up all copies containing the same. The orders applied to all customers whether personally served by the Defendants or not unless they were already known by them other than through working for the Plaintiff.

The restraint was ordered until trial or further order and granted 5 months after the relevant Defendants had resigned, (by giving one month’s notice) and 3 months from when the writ was issued, (and an initial attempt to obtain relief ex parte had failed). The confidential information did not include any trade secrets in terms of the nature of the treatments/services provided and/or products/equipment used in connection therewith. Only one of the 4 enjoined Defendants had been a manager of the business, (and had previously been a director with 5% of the shares).

In Mclarens a leading loss adjuster failed to obtain injunctions against a team of senior departing staff, (1st-9th Defendants) including the director and head of construction division despite their having taken a large volume of documents which included confidential information. In response to the action the ex-employees gave undertakings to return all such documents, (which were performed between the initial and full hearings of the injunction summons) and not to use the confidential information pending trial. The sudden departure of the team had been effected by its members all agreeing to pay a month’s salary in lieu of notice. In the 3 month period up to the full hearing, many substantial clients had instructed the Plaintiff to transfer their files for ongoing jobs to the new employer, (the 10th Defendant which was an existing competitor able to expand its HK operations by the recruitment of the group). Such files included much of the confidential information which the Plaintiff complained had been taken and was contained in the copies returned by the Defendants.

The discussion here will explore the differing approach and outcome in the two cases, (unless otherwise stated references to paragraph numbers are to one or other of the two cases).

In Face It, the judgment, (issued on the same day as the hearing) cites no authorities and the term, ‘Springboard’ is not used at all. Nevertheless, the relief is sought and granted so as to restrict ‘unfair’ competition by the former employees through use of customer information/contacts. See §7-24 headed, Applicable Principles.

In Mclarens, the focus was expressly on the question of whether to grant a Springboard Injunction, (§18-25):

I am of the view that the Court has to consider the following five issues in order to determine whether a springboard injunction should be granted:

(1) Whether there was unlawful use of the plaintiff’s confidential information and/or breach of fiduciary duties by the 1st to 9th defendants;
(2) Whether by reason of such breaches of confidence and/or fiduciary duties, the defendants have obtained an unfair competitive edge or “head start” over the plaintiff;
(3) Whether the unfair advantage still exists at the date when the springboard injunction is sought and that it will continue to have such effect unless the relief sought is granted;
(4) Whether damages are an adequate remedy to the plaintiff;
(5) Finally, in deciding whether to grant any interlocutory injunction, including a springboard injunction, the court must take whichever course which appears to carry the lower risk of injustice if it should turn out that it was wrong. In Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041 at 1046 – 1047, Ma J (as he then was) said:

“ At the interlocutory injunction stage, the principal concern of the court is that it might make a wrong decision in the sense that after trial, the party to whom an interlocutory injunction has been granted may lose or the party who has been refused one, may win. The Court will therefore take whichever course appears to carry the lower risk of injustice if it should turn out that it is wrong. This ‘fundamental’ principle is the source of the guidelines that have evolved for the determination of interlocutory injunctions (included are, of course, the American Cyanamid guidelines) and therefore, in the application of any guidelines, sight must not be lost of this principle. See: Films Rover International Ltd v Cannon Film Sales Ltd [1987] 1 WLR 670, 680D–G, in a passage from the judgment of Hoffmann J which was approved by the House of Lords in R v Secretary of State for Transport, ex p Factortame Ltd (No 2) [1991] 1 AC 603 and recently reiterated in the English Court of Appeal decision of Zockoll Group Ltd v Mercury Communications Ltd [1998] FSR 354 (which Mr Au was kind enough to place before me).” (emphasis added) (§19).

In Face It the relief was designed to enforce a ‘non-disclosure clause’ in the employment contracts:

The application is for orders that those 4 defendants:

….(3) be restrained from divulging such information to any 3rd parties, from contacting any of FIT’s customers, from keeping records of the Customers Information or Communication Records, and from using it in any way, in particular in running a business in competition with FIT. (§3)

There was an express term of Luk’s contract of employment relating to the protection of confidential information (“Non-disclosure Clause”), being:

“[FIT’s] administration, business strategies and any documents and customers information are all to be regarded as confidential information of [FIT]. Employees (whether in the course of his/her employment or post-employment) shall not divulge any information of [FIT] to persons being neither [FIT’s] personnel nor persons in connection with [FIT]. Upon termination of his/her employment, the Employee shall not contact any customers of [FIT], or retain in his/her possession any of such information.” (§28)

In Mclarens, the Plaintiff was seeking to impose non-solicitation and non-compete restrictions in addition to the undertaking not to use confidential information contained in documents which had been removed. In other words, in addition to the Modified Undertakings, if this Court grants springboard injunctions against the 1st to 9th defendants, they will be restrained, without any enforceable restrictive covenants, from engaging in any meaningful employment for a period of six months. Further, it will mean that, inevitably, they will have to breach their employment contracts with their existing employer, the 10th defendant. (§18)

It is suggested the decision in Face It to enforce the contractual prohibition against ex-employees from contacting customers may have been wrong. The identity and contact details of customers are not trade secrets of and in themselves. Any post termination restraint would therefore have to rest on the Non-disclosure Clause which had no temporal limit; did not identify with any precision the supposed confidential information concerned and did not permit contact even with those customers the employee might know independently of the employment relationship, (though, as noted the order did make this proviso). The finding that such clause did not operate in restraint of trade seems incorrect: I have considered the argument that the Non-disclosure Clause should be held unenforceable because of the lack of a temporal limit. However, I agree with Mr Chen that the clause is not a restraint of trade or non-competition clause. It simply protects a legitimate interest in the confidential information after an employee has left employment. Indeed, I agree that where the relevant confidential information belongs to FIT, it is difficult to see why Luk, Ngai, Yip or Lai should be allowed to make use of that information at any point in the future, not least if it is to help them in a competing business. (§77)

This view is supported by the relevant passage from Brearley & Bloch, Employment Covenants and Confidential Information, 4th Edition §6.98-103, (where the authors prefer the approach in Ixora Trading v Jones [1990] FSR 251 to that in SJB Stephenson v Mandy [2000] IRLR 233):

“Because of the difficulty of drawing the line between confidential information of the employer and general skill and knowledge of the employee, and also the difficulty of policing breaches of confidence, most employers prefer to protect their trade secrets and confidential information by means of area covenants. However, most contracts of employment also contain express covenants requiring the employee to maintain confidentiality during and after employment. These covenants are helpful, provided that they define and communicate to the employee the kinds of proprietary information for which the employer seeks protection.

[Such covenants may be enforceable without time limits where applicable to trade secrets, (Caterpillar Logistic v Huesca de Crean [2012] IRLR 410, §66) but would be unenforceable as a restraint of trade if purporting to prevent the ex-employee from using information which has become part of his skill, knowledge and experience.]

In Ixora Trading Incorporated v Jones [1990] FSR 251 Mummery J held (at pages 258–259) that the contents of a feasibility study and two manuals (alleged to constitute a fund of technical knowledge and experience) in fact comprised organisational and day-to-day management information which was part of the employee’s skill and knowledge and not confidential, even if this information was acquired in the course of employment and was useful in setting up a similar operation after termination of employment. This was so, despite express contractual obligations not to disclose any of the employer’s affairs or trade secrets during or after employment and that any information acquired in the course of employment would remain confidential and would not be used for the benefit of the employee. The express covenants were too wide to be enforceable for the protection of confidential information.

This approach is preferable to that adopted in SJB Stephenson v Mandy [2000] IRLR 233, where the court appears to have given undue weight to a very generally drafted standard confidentiality clause – with the result that a former employee of an insurance broking business was prevented from using his recollection of the names of clients of that business. The court (surprisingly – and contrary to the approach in Ixora) determined that the clause was a valid restraint of trade, and this appeared to influence its decision that the identity of clients (which fell within the broad ambit of the clause) was protectable by the employer, even after termination of employment.

If the court had examined the nature of this information without regard to any express confidentiality clause, then, in accordance with Faccenda, it should have held that this kind of information was not in the nature of a trade secret so as to be protectable after employment. If regard was then had to the confidentiality clause, it would be most surprising if a very generally drafted confidentiality clause could (in effect) raise the status of such information to that of trade secret. See Balston v Headline Filters [1987] FSR 330 at pages 351–352, in which Scott J referred to the inappropriateness of using confidential information restrictions to fetter the ability of employees to use their skills and experience after employment to compete with the ex-employer. Although he was referring to implied terms (which by their very nature the employee does not have the opportunity of rejecting before employment), the same point can be made in relation to generally drafted confidentiality covenants, which are hardly likely to be rejected by the employee, who is unlikely to realise how swingeingly these covenants may be used against him once he has left employment.

Indeed, in Reuse Collections v Sendall [2015] IRLR 226, HHJ Davies…said…: “…it would be wrong in principle to allow an employer, by the simple technique of defining confidential information in the widest possible terms, to categorise conduct which, on the facts…would not after employment amount to a breach of reasonable and hence enforceable express restrictive covenants, as a breach of an express confidentiality clause and thus achieve protection against…actual competition through the back door which it could not achieve through the front door.” (Emphasis added)

It ought to follow, (if HHJ Davies is right) that the validity of the non-disclosure clause in Face It should have been measured in like manner as covenants in restraint of trade. Indeed, it is suggested that even a confidentiality clause which specifically listed the identity of clients as confidential information might be ineffective. Bearing in mind that such express clauses are usually without limit in time, they can be much more restrictive than a ‘non-soliciting’ or ‘non-dealing with customers’ covenant (which will only be given effect to if they are properly limited in time and ambit). Accordingly, it is suggested that the approach of the court in Ixora is the correct one. Further, where the express confidentiality clause is specific, it should not divert the court from assessing whether the nature of the information in question is truly deserving of protection after termination of employment. The fact that the employer drew to the attention of the employee (in the contract of employment) that he (the employer) regarded particular information as confidential or secret is relevant, but not determinative.

In Mclarens, the decision not to grant wider Springboard relief seems to have been entirely correct based on the detailed analysis by the Judge, DHCJ William Wong SC (§26-58). In particular, the dual feature that the customer details were included in public information available from the Insurance Authority and that many of those customers had instructed the ex-employer to transfer their files to the new employer following the employees’ departure, largely influenced the result:

However, it is a different issue as to whether they indeed used the information and/or whether they needed to use the information for the purposes of contacting and offering their services to the plaintiff’s clients. There is considerable force in Mr Lee and Mr Carolan’s submission that lists of insurers, brokers and indeed the plaintiff’s clients are available from publicly accessible websites. The 1st to 9th defendants could easily go through the lists from public records and identify the plaintiff’s clients which they have previously served in order to contact and offer them services. I agree that it will take time for the 1st to 9th defendants to compile such lists from public records. It may take days or weeks, but in my view, certainly not months.

As to ongoing client files and client claims handling procedures, it is not at all clear to this Court how these information help to build a springboard for the defendants. From the evidence, it appears that what happened was that the 1st to 9th defendants contacted the clients whom they have previously served and those clients then directed the plaintiff to transfer their case files to the 10th defendant for further handling. This is akin to a solicitor who leaves firm A to work for firm B and with consent of his or her clients, brings along with him or her case files that he or she were handling to the new firm. In the absence of an enforceable restrictive covenant, there is no legitimate basis to restrain him or her from working as a solicitor for any period of time.

(§40-41)

The upshot is that these two HK cases reveal contrasting approaches to the scope of Springboard relief which can only be partly reconciled by the divergence in the relevant sets of facts. In particular, two questions arise, one specific and the other a general one that is related:

1 Are customer names/contact details confidential information that ex-employees may be restrained from using absent an enforceable non-compete covenant?
2 Should such use be considered unfair competition?

The answers given in Mclarens are both “no” while in Face It, they appear to be “yes”.

The ‘factual variance’ does not fully explain the different outcomes. In Mclarens the evidence of breaches prior to termination was stronger given the substantial copying and removal of documents yet this was overridden by the public availability of customer data; apparent lack of use prior to return of the documents and the customers’ instructions requiring the Plaintiff to pass their files to the Defendants.

In Face It the ‘non-disclosure clause’ was treated as a de facto non-solicitation covenant so that ex-employees were restrained from contact with customers, (thus excluding them from the new business unless they were to approach it independently): Until trial or further order … the 1st to 4th defendant be restrained from divulging the Confidential Information to any 3rd parties, from keeping records of the Confidential Information and from using it in any way to contact any customers of the plaintiff (in particular for running a business in competition with the plaintiff), save that the injunction shall not apply where the Customers Information of the particular customer of the plaintiff was obtained by the 1st to 4th defendants otherwise than in the course of and as a result of their employment with the plaintiff. §95(2). This was despite the Confidential Information comprising no more than Customers Information and the Communication Record, (§45-46).

Neither Brearley & Bloch nor the English authorities referred to in the above extract were cited in Face It. It is submitted they support the proposition that a post termination restriction cannot prevent ex-employees from contacting customers unless as part of an enforceable non-compete. It may seem especially inappropriate the Defendants in Face It, (NB 3 of the 7 individual ex-employees sued were not sought to be enjoined despite also having commenced employment in the new business) could not contact customers they had personally served when other customers had already transferred their allegiance to the new business, (whether having been contacted before the order was made or not) in the 4 months since setting up. In a personal service industry knowledge of one’s customer seems to be part of an employee’s ‘stock in trade’ where he/she has been the service provider. A restriction designed to prevent an ex-employee from contacting other customers, (not known to him/her) may seem more reasonable. It may also follow that an enforceable non-compete, (with reasonable time/area limits) is necessary to achieve protection where the employer’s only legitimate interest to protect is the ‘customer connection’, (at least in so far as the ex-employee is already connected pre departure).

The order made in Face It would, fetter the ability of employees to use their skills and experience after employment to compete with the ex-employer if the Court’s view of what would be ‘unfair competition’ is over restrictive. The Judgment seems to be that contacting customers is a use of confidential information proscribed by an enforceable non-disclosure clause; that if the new business is in competition, (by providing similar aesthetics and wellness services) it ought not to solicit such customers and if it is not then it need not contact them. With respect, these parts of the Judgment are difficult to follow, (§66-82). In particular, a non-competing business should be fully entitled to offer its different services to the market including Face It’s own customers. Assuming the new business is in competition, why should it not contact those customers who are known to and contactable by the ex-employees without use of the Plaintiff’s documents containing ‘Customers Information’? How would making such contact involve ‘taking information’ where that was achieved merely by using the same data entered in the ex-employees’ own devices as had been used before in their employment with Face It? How could Face It’s post-employment ‘legitimate interest’ extend to such data if it had become part of the employees, ‘skills and knowledge’? If, as seems clear such information is not a trade secret how can the ex-employee be restrained from using his/her own knowledge of it, at any point in the future? (§77) The confusion here seems to arise from not sufficiently analyzing the components of the Customers Information and Communication Records to identify what, if any of it amounted to either a trade secret or information capable of protection by a post termination restriction, (§62-63). If it comprised the latter and not the former then only a reasonable and precise restriction could be enforced. The non-disclosure clause appears to be no such thing and/or the information required to make contact with customers was no more than part of the employees’ own knowledge. Perhaps the error was for Defendants counsel to concede customer identity could be confidential information, (§14). Even so, the Court might have taken a different view of the non-disclosure clause, (§13&77). Had it found the provision was too wide/imprecise to restrict use of knowledge of customer contacts there would have been no basis for the non-solicitation injunction granted. Given the effect of the clause on competition it ought to have been subject to the restraint of trade doctrine but even on normal principles of construction its effectiveness may be doubted.

Having correctly identified the issue and exercise, (§11-13) the Court did not adequately analyze or carry it out. The result was to grant a de-facto springboard in the absence of full consideration of whether it was necessary or appropriate. While some of the factors required for granting such relief were touched on there was no recognition of the proper limits of the jurisdiction, (C.f. Mclarens) because the Court was persuaded that its task was merely to consider the enforcement of contractual rights for breach of confidence, (See §69-70, 72, 74-77 & 81).

Had it been otherwise the Court’s focus in Face It would have been on the 5 issues in the forefront of the decision in Mclarens and the outcome might have been different. Whatever the proper basis for relief, Face It applies the ‘serious question to be tried’ test for the availability of interim relief, (§17). Given trial, (if any) may occur after the relevant information has lost its confidentiality, the injunction granted is tantamount to final relief. Arguably a high likelihood or real prospect of success was therefore the applicable test, (E.g. ICAP v BGC [2005] 2 HKLRD 349 @ 357; Midland v Lo [2011] 1 HKLRD 470 @ 477) but the Judgment does not suggest the court was satisfied this could have been met, (§64-74).

Nevertheless, the approach taken might still be correct if, (as seems to be the case in Face It) the relative merits of the parties’ respective cases could not be clearly assessed at the interlocutory stage. However, if as suggested above the court in Face It ought to have had to rely on the Springboard doctrine the apparent doubts regarding the ex-employees alleged breaches of duty and/or actual use of confidential information indicates such relief may not have been granted. This is because the existence of a strong case is a pre-requisite to a plaintiff’s ability to show that a springboard had been built through the defendants’ wrongdoing, (See discussion of Springboard authorities at §22-25 of Mclarens, (where the undertakings given and performed effectively admitted large scale copying and removal of documents). See also ICAP, ibid 357, (§41-42) probably HK’s leading Springboard decision until now).

A final point of comparison might be the differing approach to adequacy of damages/balance of convenience. In Mclarens this was seen to favour the ex-employees, (§50-54) while in Face It, the ex-employer was given the benefit of the doubt, (§79-82). It is submitted the former would be the usual approach and it is surprising this was not followed in Face It where, (unlike in Mclarens) the new employer was a start up at risk of being, ‘strangled at birth’ by the injunction.

Given that Face It was required to fortify its undertaking in damages, (§87-93 & 95(3) by payment of HK$1m into court) a review of the propriety of the interlocutory injunction at trial, (if the action went that far) might well lead to the Defendants recovering compensation for loss of profit to the new business, (as conducted by 8th Defendant; §33-35) from customers who remained with Face It as a result of the injunction.

*The author acts for Charles Taylor Holdings B.V., the new employer, (10th Defendant) in the Mclarens case