Filter
Back

Will the court grant a springboard injunction to assist an ex-employer where there is no restrictive covenant in the employment contract?

2023-03-31

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.

 


For enquiries, please feel free to contact us at:

E: employment@onc.hk                                                    T: (852) 2810 1212
W:
www.onc.hk                                                                    F: (852) 2804 6311

19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

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


Our People

Michael Szeto
Michael Szeto
Partner
Michael Szeto
Michael Szeto
Partner
Back to top