What if an employee secretly runs a competing business and sends client contact details to his personal email?
Introduction
Imagine this: An employee secretly runs a competing business. During his employment, the employee through his work email sent a draft email to be issued to the employer’s client for engaging the competing business for services. The employee also sent client contact details to his personal email address. After he left, he approached the employer’s clients for business. Can the employer take any action against the former employee?
In the recent judgment of Conpak Management Consultants Ltd v Luk Wai Ting [2024] HKDC 1545, the Court considered the legal issues arising out of such a scenario including breach of confidentiality, conflicts of interest, fiduciary duties, and post-termination relief.
Background
The plaintiff employer (“Employer”) is a certified public accountants firm providing accountancy and related services including tax advice. The defendant was its former employee (“Employee”), employed as its Tax Manager between 29 August 2016 and 31 July 2018.
During his employment:
1. In breach of his employment contract, the Employee never declared his ownership and control of a competing business, WILTAX & COMPANY (“WILTAX”).
2. The Employer provided the Employee with an email account for him to communicate with its clients (“Work Email Account”). Using the Work Email Account, the Employee sent to his personal email account the following:
a. a draft email to Tom Lee Music Foundation Limited (“Tom Lee”), one of the Employer’s clients, with the following attached:
i. a tax engagement letter for WILTAX to be engaged to provide professional services in respect of a letter dated 15 August 2017 issued by the Inland Revenue Department to Tom Lee at a fee of HK$65,000 exclusive of disbursements; and
ii. an appointment engagement letter provided that Tom Lee would appoint WILTAX as its representative to handle the said letter dated 15 August 2017 issued by the Inland Revenue Department to Tom Lee.
b. 223 emails with allegedly identities of the Employer’s clients, where the contents of the emails are confidential.
The Employer claimed against the Employee for various breaches during and after employment, including:
1. unauthorised disclosure and forwarding of information contained in the emails sent to the Work Email Account including contact information of former and current clients of the Employer (“Information”);
2. conflicts of interest regarding the Employee’s sole ownership and control of a competing business, WILTAX, during his employment; and
3. diversion of business opportunities to WILTAX by emailing former clients after his departure.
The Employer claimed breach of contract, breach of confidence and breach of fiduciary duties and sought against the Employee:
1. injunctive relief to prevent further disclosure of the Information;
2. delivery up of all documents and/or materials in possession, power, custody or control of the Employee the use or disclosure of which would offend against the injunction; and
3. an inquiry as to damages or an account of profits by reason of the breaches of confidence and/or breach of the employment contract.
Issues
The Court considered the following main issues:
1. what the Information in question is and whether the Information has the quality of confidence for the remedies the Employer sought;
2. whether the Employer consented to the use of the Employee’s own personal email account for work during the course of his employment with the Employer;
3. whether the Employee had disclosed the Information of the Employer to other persons, companies or organisations without the prior approval or consent of the Employer; and
4. whether the Employee acted in conflict of interest with the Employer by wrongfully and unlawfully transferring business from a client of the Employer to himself and/or his sole proprietorship, WILTAX, and receiving such business on his behalf.
Decision and reasoning
Despite the Court had found the following against the Employee, it dismissed the Employer’s claims:
1. The Employee’s ownership of a competing sole proprietorship and failure to disclose his business interests was a breach of his employment contract, which required approval for other employment and declaration of interest.
2. The Employee had not obtained the Employer’s approval for forwarding emails from his Work Email Account to his personal email account.
3. The Employee owed fiduciary duties to the Employer in respect of the tax parts of the Employer’s business. It was clear that in drafting the email in the name of WILTAX using the Work Email Account, there was conflict of interest.
The Court dismissed the Employer’s claim on the following main grounds:
A. Lack of confidentiality
On the facts of the case, the Court did not find the Information in question has the requisite quality of confidentiality.
In deciding whether the Information (including clients contact details) was confidential, the Court applied the principles in Kuoni Travel (China) Ltd v Kelly Frances Richards and others, HCA 1265/2006, which include:
1. The information must be used in a trade or business.
2. The information is confidential, that is, not already in the public domain.
3. The information can be easily isolated from other information which the employee is free to use.
4. The disclosure of the information would be liable to cause real or significant harm to the owner.
5. The owner of the information must limit its dissemination or at least not encourage or permit its widespread publication or otherwise impress upon the employee the confidentiality of the information.
One of the essential elements is that the information was not publicly available, but the Employer failed to prove this.
Insofar as the 223 emails in issue, the Court disagreed with the Employer’s submission that because the Information came in the course of the Employer’s business, and so it must have been “confidential” in that it was not publicly available. The Court took the view that while the information may have come in the course of the Employer’s business, it did not follow that the information was not publicly available. The Court found that:
1. The identities of the clients in those emails were not made known to the Court. The Employer had failed to satisfy the Court that the contacts in these emails were confidential information.
2. Insofar as it was claimed that the contents of the emails were confidential, none of the contents had been pleaded or adduced in the evidence. There was no basis at all to find any part of these 223 emails were confidential.
B. No evidence of loss and/or diverted business resulting from
the breach of fiduciary duty and conflict of interest
Whilst there was a breach of employment contract and the fiduciary duties to the Employer in respect of the tax parts of the Employer’s business, the Court held that the conflict of interest ended with drafting the email to Tom Lee, a potential client, and went no further. No profit was made as no deal was struck. The Employer had only suffered a loss of business opportunity. The Employer needed to show actual harm from these breaches to justify an injunctive relief or damages. The Court could not assume that all profits made by the Employee’s business in WILTAX resulted from his breach of duty.
The Court found the Employer failed to prove its case and dismissed the Employer’s action.
Takeaway
The Court dismissed the Employer’s claims in Conpack on its facts. Although the Employee had breached his employment contract and his fiduciary duties, based on the evidence (or lack of it) presented to the Court, the Court found there was no misuse of confidential information on the part of the Employee, in particular, the Employer failed to satisfy the Court that the information in issue was “confidential”. In the absence of the essential element that the information in issue was not publicly available, the Court was not satisfied that the information carries the necessary quality of confidence to entitle the Employer to the post-termination protection it sought. As a result, the Court dismissed the Employer’s claim.
The law regarding protection against employee from misuse of confidential information during employment and post-employment is very different. Generally, during employment, an employee is subject to an implied duty of fidelity that requires him not to divulge or use, save for his employer’s benefit, any confidential information concerning the employer’s business. The threshold is low. However, post-termination relief against an employee is confined to restraining misuse or disclosure of trade secrets and confidential information of an equivalent status only. Confidential information of lesser significance is not subject to such protection.
The law regarding confidential information and employers’ right to restrain former employees’ use of confidential information is not straightforward and can be complicated. There are both legal and practical issues that need to be carefully considered. If in doubt, it is prudent to seek legal advice.
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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. |
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Published by ONC Lawyers © 2024 |
