Will the court grant a springboard injunction to assist an ex-employer where there is no restrictive covenant in the employment contract?
What
is a “springboard” injunction?
A “springboard” injunction is a type of
injunction designed to remove or limit the unlawful advantage or unfair
competitive head-start that a former employee has gained through unlawful
activities such as misuse of ex-employer’s confidential information. It ensures
the wrongdoer does not get an unfair start and restores a level playing field
between the ex-employer and the wrongdoers (including the former employee and
any other third parties such as the new employer or the competitor).
Will
the court grant a springboard injunction to assist an ex-employer
where there is no restrictive covenant in the employment contract?
An employer may make use of a restrictive covenant to protect his
legitimate interests such as trade secrets and his trade connections. But what
if there is no (or no enforceable) restrictive covenant in the employment
contract, will the court grant a springboard injunction to assist an
ex-employer?
In the recent case of DCL
Communication Limited v Lam Yim Chi Julia and Reach Technology Solutions
Limited [2023] HKCFI 98, the plaintiff ex-employer (“Employer”) applied for a springboard
injunction to restrain the 2nd defendant competitor company (which has
hired the plaintiff’s former employee) from using or disclosing certain
confidential information of the Employer including its clientele list. In the
absence of a restrictive covenant in the former employee’s employment contract,
the Court of First Instance (“CFI”) refused
to grant a springboard injunction.
Background
The Employer is in the business of providing
IT and Electrical & Mechanical infrastructure services to client companies
in respect of their server rooms and data centres, including the design and
installation of their facilities and subsequent maintenance. These maintenance
contracts are subject to annual renewal.
The 1st defendant employee (“Employee”) joined the Employer in
November 2012. During her employment with the Employer, she was responsible for
dealing with the Employer’s clients. Her last position was Customer Care Sales
Manager when she left in September 2019.
The Employee joined the 2nd defendant
company, her new employer (“Competitor”),
as Sales Manager in April 2021 (i.e. 1 year and 7 months later). The Competitor
is an IT infrastructure solution provider that was set up by another former employee
of the Employer. The Competitor’s principal business is more or the less the
same as the Employer’s.
In December 2021, the Employer lost its
maintenance contract with a long-standing client, Gold Coast Yacht Club (“Yacht Club”), which was previously
handled by the Employee. Another client told the Employer that the Employee had
(on behalf of the Competitor) approached them to sell similar services that the
Employer offered. The Employer therefore considered it was likely that the
Employee was the reason why it lost Yacht Club as a client. The Employer
suspected that the Employee had contacted its clients “at the right time” (i.e.
around the time when the clients’ maintenance contracts with the Employer were
due to be renewed) so as to entice those clients away.
The Employer applied to the CFI for a springboard
injunction against the Competitor from using or disclosing any of the Employer’s
clientele list, the date and time when the Employer’s contracts with its
clients expire, the profit margins for each contract, and the time when the
Employer will commence negotiation with its clients for the purpose of renewing
the contract (“Confidential Information”).
The Employer initially sought a similar injunction against the Employee, that
injunction was disposed of by consent by the Employee giving an undertaking to
the Court. The CFI needed to deal with the injunction application against the
Competitor.
Legal
principle
Generally for interlocutory injunction,
the court has to consider:
1.
whether there are serious issues to be tried; and
2.
whether damages would be an adequate remedy for either side and where
the balance of convenience lies.
In considering whether
a springboard injunction should be granted, QBE Management Services (UK)
Ltd v Dymoke & Others [2012] IRLR 458 remains the leading case.
The relevant legal principles are:
1.
there has
been unlawful conduct by the former employee;
2.
the former
employee has gained an unfair competitive advantage over the employer as a
result of that unlawful conduct;
3.
the nature
and period of the unfair competitive advantage are more than “ephemeral” or
“short-term”;
4.
the unfair
competitive advantage exists at the date the springboard injunction is sought
and will continue unless the springboard injunction is granted; and
5.
a
springboard injunction would be a proportionate and appropriate remedy.
(Please click here for our article “Protection for employers against team move
(Part II): Springboard Injunction” for a detailed discussion on QBE case.)
Applying the relevant legal principles, the CFI has to consider the
following questions in the Employer’s application:
1. Whether there has been any unlawful behavior by the Employee and the Competitor?
2. If so, whether an unfair competitive advantage over the Employer as a
result of the unlawful behavior has been obtained?
3. If so, whether the nature and period of the competitive advantage is
more than “ephemeral” and “short term”, and whether the Employee and the Competitor
are still enjoying and will continue to enjoy unless injunction sought is
granted?
4. Whether monetary award would have provided an adequate remedy to the Employer?
The
CFI’s decision
The CFI considered that even if the
Employee did have access to the Confidential Information, the Court still has
to decide whether there has been any unlawful behaviour on the part of the
Employee and the Competitor. If not, that would be the end of the matter. The
burden of establishing such unlawful behaviour is on the Employer, and the
Employer failed to do so.
The Employee’s employment contract with
the Employer provided, among other things, that:
“You shall not at any time, during and after
your employment by the Company, directly or indirectly divulge to third parties
any details of the Company business (pricing information and database), finance
transactions, affairs or dealings confidential to the Company without the prior
express written permission of the Management. The disclosure of such
information will expose you to disciplinary action, which may include summary
dismissal and may give rise to criminal prosecution.”
There was no restrictive covenant in the Employment Contract. The
Employee was entitled to approach the Employer’s clients and offered to provide
maintenance services.
The Employee joined the Competitor more
than one and a half years after she had left the Employer. All of the
Employer’s maintenance contracts would have been renewed once or even twice by
the time the Employee joined the Competitor. The Employer had not made out any
case that the Confidential Information could still be useful for the Competitor
to poach its clients. In such circumstances, there was no serious issue to be
tried that the Competitor had made any unlawful use of the Confidential
Information.
The CFI found that the Employer’s case was
built on suspicion and speculation without concrete evidence and dismissed the
Employer’s application.
Takeaways
The DCL case serves as a
reminder to employers that where there is no enforceable restrictive covenant
in the employment contract, the court will not grant a springboard injunction
as a substitute to assist them.
If employers want to protect their trade
secrets, trade connections or other confidential information from being misused
by employees after they leave, employers must ensure their employment contracts
are properly drafted with enforceable restrictive covenants. Employers should
bear in mind that the court will not enforce a restrictive covenant that is
unreasonably wide and is designed to protect an ex-employer against competition
by the former employee. The court will only enforce a restrictive covenant that
is reasonable for the purpose of protecting the legitimate interests of the
ex-employer.
If there is no restrictive covenant in the
employment contracts, employers should consider incorporating them. If there
are restrictive covenants in the employment contracts, employers should
consider having them reviewed to ensure they are enforceable. If in doubt,
employers should seek assistance from their legal advisers to draft or review
such clauses.
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Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
cannot be relied upon as legal advice in any individual case. If any advice
or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2023 |