24 August, 2019
The scope for springboard injunctions in Hong Kong has been confirmed by the Hong Kong Court of First Instance (CFI) as extending to circumstances where contractual or fiduciary duties have been breached. The CFI found, in McLarens Hong Kong Ltd v Poon Chi Fai Corey, that a breach by senior employees of their fiduciary duties and/or duty of good faith and fidelity are grounds on which springboard relief may be sought under Hong Kong law.
Traditional scope of springboard injunctions
Springboard injunctions are usually sought to prevent a former employee who has used confidential information to his/her own advantage from gaining a head start (or springboard) in competition with the former employer. An ordinary injunction may not be effective in such circumstances where the confidential information has already been used and may no longer be confidential. Springboard injunctions can be particularly useful when dealing with team moves as they can form the basis for restraining parties from certain conduct where there are no express contractual restrictive covenants (for example, non-compete or non-solicitation covenants) or where such covenants are otherwise enforceable. To obtain a springboard injunction, the applicant employer must satisfy the Court that:
- there has been an unlawful activity by the defendant (the former employee);
- the former employee has, as a result of that activity, gained an unfair competitive advantage over the employer;
- the nature and period of the competitive advantage are more than “ephemeral” or “short term;
- the advantage still exists at the date the injunction is sought and will continue unless the relief is granted; and
- an injunction would be proportionate having regard to the other protection which might be available to the plaintiff, for example, existing restrictive covenants or damages.
The aim of the injunction is to restore the parties to the competitive position they would have occupied had the misconduct not occurred. It must not be used to punish the former employee, nor should the employer be put in a better position than had there been no wrongdoing in the first place. The length of time that an injunction may be granted for is the length of time that it would have taken the wrongdoer to achieve lawfully what he/she achieved unlawfully, relative to the victim.
Extended scope of springboard injunctions
For a number of years there was debate over whether springboard relief could be granted in cases other than where there had been misuse of confidential information. The English High Court has now established that a breach of fiduciary duties and/or the duty of good faith and fidelity by a senior employee may be a ground upon which springboard relief may be sought.
This development may be particularly useful in cases where a team moves en masse. Before leaving their employment, employees are likely to discuss the proposed move with the new employer and this conduct may amount to a breach of the duties owed to their existing employer. English case law has confirmed that an employee’s implied duties include a duty not to compete, including a particular duty not to entice employees, a duty of confidentiality, and possibly the duty to disclose wrongdoing.
McLarens Hong Kong Ltd v Poon Chi Fai, Corey [2019] HKCFI 1550
The scope of springboard injunctions was recently considered in Hong Kong in McLarens Hong Kong Ltd v Poon Chi Fai, Corey [2019] HKCFI 1550.
Background
The Plaintiff, an insurance firm, applied for a springboard injunction against its nine former employees and their new employer (Charles Taylor PLC). The former employees made up the majority of the Plaintiff’s construction and engineering division in its insurance business. Their new employer was a competitor of the Plaintiff.
The employees resigned en masse and undertook to make a payment in lieu of their notice period to the Plaintiff. The weekend they resigned, the employees met together in the Plaintiff’s offices at which point they copied vast amounts of information, including client lists, lists of files and projects being managed and handled for those clients, and an excel spreadsheet with the Plaintiff’s budget. The Plaintiff claimed loss of profit on revenues, costs and expenses incurred in mitigating the damage caused which was ongoing, and time and opportunity costs arising from the disruption to its business. The Plaintiff also claimed that the new employer was party to the conspiracy to injure the Plaintiff.
Subsequently, the employees signed undertakings to the Plaintiff agreeing not to use confidential information relating to the Plaintiff’s business or to any of the Plaintiff’s customers which they had obtained on or before the date they resigned. The Plaintiff argued that these undertakings were not sufficient and that the former employees should be restrained for a period of six months from, amongst other things, being engaged in the insurance business in the UK, Hong Kong or China. The Plaintiff asserted that, in addition to the misuse of confidential information, the duty of fidelity owed by the employees required them to inform the Plaintiff about the actions of other employees which were detrimental to its interests.
Decision
The Court held that the Plaintiff had made a strong case to restrain the nine former employees until trial from making use of, disposing of or dealing with the confidential information. However, the Court held that the undertakings signed by the former employees were as good as an interim injunction, and therefore declined to grant an injunction.
The judgment reiterated the important distinction between breach of the duties of confidentiality and/or fiduciary duties and the use of such information. Whilst the Court agreed with the Plaintiff that it was very likely the information was taken from the Plaintiff to be used for the employees’ own benefit, this was a different issue as to whether the information had been used or whether it needed to be used by the former employees to their advantage. In this regard, the Court held that the Plaintiff had failed to show causation between the information taken and the competitive advantage.
More importantly, the Court noted that there were no enforceable restrictive covenants in the former employees’ employment contracts which could have prevented them from soliciting employees, nor did the Plaintiff show that failing to notify it of the planned team move would enable the Defendants to build a springboard. On the whole, the Court considered that the balance of convenience weighed in favour of not granting an injunction and that damages would be a sufficient remedy.
Deputy Judge Wong SC remarked that he saw no reason why springboard relief should be limited to misuses of confidential information and that such relief 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 terms.
Key takeaways
Following the English position, the Hong Kong court has confirmed springboard injunctions have an extended scope which covers circumstances where contractual or fiduciary duties have been breached and will not be limited to circumstances relating to misuse of confidential information. However, springboard relief will not be granted as mere substitute relief to assist an ex-employer who has not insisted on express and enforceable contractual covenants to protect its confidential information and to regulate employee’s obligations both during and following the employment relationship. Employers should, therefore, review their employment contracts to ensure they include robust and enforceable post-employment covenants and clearly set out the broader duties of employees including, for example, a duty to act in the employer’s best interests.
This also serves as a reminder of the high bar that plaintiffs who seek relief of this nature must meet in terms of demonstrating the precise nature and period of competitive advantage. Where team moves are anticipated or have occurred, employers must move promptly to obtain clear evidence of the actions that the employees have taken which amount to a breach of their duties and the impact that these actions have had or may have on their business.
For further information, please contact:
Gareth Thomas, Partner, Herbert Smith Freehills
gareth.thomas@hsf.com
