AB CLUB LTD AND OTHERS v. chan yin ki cubie AND OTHERS

HCA 1644/2020

[2021] HKCFI 681

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1644 OF 2020

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J U D G M E N T

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1.  The matters before the court arose out of what is described on behalf of the plaintiff as a “team move case” in which a large number of employees have left the employment of the plaintiff companies in order to set up in competition.

2.  The plaintiffs sought, and obtained interim interim relief on 25 September 2020.

3.  At the hearing on 26 January 2021, the plaintiffs sought undertakings from the 1^st to 9^th defendants restraining them from the use of confidential information; continuation of the interim interim injunction orders made against the 2^nd, 3^rd and 4^th defendants (in respect of non-solicitation of clients or employees of the plaintiffs until the expiry of a 12 month period from the end of their respective employment and or directorship); and in respect of the 1^st and 2^nd defendants, orders restraining them from competing against the business of the plaintiffs until the expiry of six months from the end of their directorships.

Background

4.  The background to the proceedings between the plaintiffs and the defendants has been summarised in the Reasons the Decision given by Mr Recorder Pow SC on 5 November 2020.  In short form the plaintiffs were variously, the employers of the 1^st to 9^th defendants.  The plaintiffs form a group of companies involved in the business of marketing and selling overseas properties to buyers, principally in Hong Kong.  It is the case of the plaintiffs that the 1^st to 9^th defendants have set up in competition with the plaintiffs’ business, and have incorporated the 10^th and 11^th defendants to carry out the same type of business as the plaintiffs.

5.  The 1^st to 9^th defendants (“the individual defendants”) left the employment of the plaintiffs (“the AH Group”) within a short period of time, between 18 May 2020 and 17 July 2020 (excepting the 6^th defendant who was sacked on 25 August 2020).  The AH Group contends that these individual defendants have misappropriated, and made use of confidential information belonging to the AH Group, and have solicited clients and employees of the AH Group in breach of their contractual duties (set out in their contracts of employment) and in breach of fiduciary duties.  Those breaches are firmly denied by the individual defendants.

6.  Further detail of the background to the AH Group has been given in the affirmation of Mr Lai Yuen Fong, filed on 28 September 2020. He has explained how the different companies within the AH Group have specialised in types of customer and properties from different locations.  He has also given some background as to the types of agencies, and their numbers including, he says, around 25 to 30 active agencies either selling only overseas property or selling both local and overseas property.

7.  The 1^st defendant (“Cubie”), and the 2^nd defendant (“Michele”) began their careers with the AH Group as employees, but each were invited to become shareholders in companies within the AH Group in 2017.  The terms of the employment contracts for all of the individual defendants are similar (although Cubie’s signed contract has not been found by the plaintiffs), and all contain “non-compete” clauses and clauses relating to the use of confidential information and its non-disclosure.

8.  Mr Lai says that his suspicions were aroused in about June 2020 following the resignation of eight employees, including Cubie and Michele within the space of approximately six weeks.  He says that he began to suspect that a competing business was being established and, being conscious of the fact that Cubie and Michele had previously had free access to confidential information of the AH Group, he requested that they sign post termination non-disclosure agreements.  Neither agreed to sign such a document, and Mr Lai says that he began to investigate, and discovered that Cubie and Michele had incorporated a company, Swan Knights Ltd on 22 April 2020 while they were still directors of the 2^nd and 3^rd plaintiffs respectively.

9.  Mr Lai says that Swan Knights Ltd (which is now the 10^th defendant) has been operating in direct competition with the AH Group. SK One Ltd (the 11^th defendant) was incorporated on 20 May 2020, and has as directors the 3^rd and 4^th defendants.  SK One Ltd shares an office address with Swan Knights Ltd.

10.  Each of the individual defendants has filed affirmation evidence, some addressing their reasons for departure from their employment with the AH Group, and all affirming an undertaking given to the court on 30 September 2020 as to the delivery up of Confidential Information in their possession custody or power.

11.  The 2^nd defendant, Michele, made an affirmation on 2 December 2020 in which assertions made by Mr Lai in his affirmation of 28 September 2020 were disputed.  Michele states that she resigned as a director of Swan Knights Ltd on 16 July 2020, and therefore was not a director of that company at the time that Mr Lai made his affirmation. Furthermore, her shareholding in Swan Knights Ltd was transferred to Cubie on 12 August 2020.

12.  The 3^rd defendant made an affirmation on 1^st December 2020 in which he also disputed assertions made by Mr Lai, in particular disputing the alleged relationship between the business affairs of SK One Ltd, and Swan Knights Ltd.  His evidence on this is corroborated by the 3^rd affirmation of the 4^th defendant.

13.  The affirmations filed on behalf of the defendants include various assertions as to the way in which the AH Group conducted its business, as to the conduct of certain employees of the AH Group, as to the ability of the AH Group to make good on its undertaking in damages given to the court, and as to various matters of detail in connection with the respective resignations of the individual defendants. Such matters have been responded to an affirmation evidence by Mr Lai.

The Applications

14.  The applications at the hearing were for (a) a renewal of the undertakings given previously by the individual defendants, (b) a continuation of the non-solicitation orders made against the 2^nd to 4^th defendants, and (c) orders restraining Cubie and Michele from competing with the businesses of the AH Group plaintiffs.

Undertakings – Confidential Information

15.  The undertakings which were given to the court are recited in the order dated 30 September 2020 as follows: –

“that they and each of them by themselves, their servants or agents or otherwise howsoever will not use “Confidential Information” (as defined in the Schedule to this Order) or any part thereof for any purpose and/or otherwise exploiting the said information or any part thereof; and

that they will deliver all originals and copies of Confidential Information (whether contained in documents or in digital formats) in their possession, power, custody or control, to Messrs Henry Yu & Associates for safe custody pending further Order from the Court, with confirmation of such delivery up to be verified by affidavit or affirmation by each Defendant within 14 days of this Order”.

16.  The necessity for a renewal of the undertakings is moot since the undertakings recorded above were not, on their face, limited in time. Nevertheless, I understand further undertakings to have been offered and these are accepted.

Non-Solicitation

17.  Having accepted those undertakings, Recorder Pow SC further made the interim interim Orders in respect of the 2^nd, 3^rd and 4^th defendants restraining them from soliciting the business of any persons who were employees or clients of the plaintiffs until the final determination of the plaintiffs’ summons.

18.  Those defendants confirmed, through counsel, that they were willing to give undertakings not to solicit business from persons who were employees or clients of the plaintiffs until the first anniversary of their respective resignations of their employment.  These undertakings are expressed in the same terms as the injunction order which was sought by the plaintiffs, and it was submitted on behalf of those defendants that the undertaking proffered was therefore “as good as an injunction”.

19.  The plaintiffs note that Recorder Pow SC made an order in this regard, and submit that this should be continued rather than be replaced by undertakings.  No application to set aside the Order has been made.

20.  It was expressly noted on behalf of those defendants that the giving of such an undertaking was not to be taken as a concession that there had been any relevant breach, but rather was a recognition of the existence of like obligations arising in the employment contracts:

“Competition Prohibited

For a period of one year from the date of termination of this agreement for whatsoever reason, you shall not directly or indirectly for yourself or any other person, firm or corporation by whom you may be employed or in which you may be interested or associated solicit the business of any persons who were employees or clients of Ashton Hawks Ltd or any company within the Ashton Hawks Group at any time during the period of your employment.”

21.  The proffered undertakings did not resolve the debate between the parties in regard to the non-solicitation obligations, partly because the plaintiffs sought to add to the schedule to the order containing the definition of “confidential information”, a definition of “clients”.

22.  The definition of the term “clients” proposed on behalf of the plaintiffs was not accepted as being correct or reasonable by the defendants. It follows therefore that if it is appropriate that a definition be given to the term “clients” as proposed by the plaintiffs, then an injunction should be granted rather than the undertakings proffered being accepted.

The Definition of “Clients”

23.  As proposed on behalf of the plaintiffs, this term should be taken to mean “property buyers and property developers”.  On behalf of the defendants, no issue is taken with property buyers falling within the category of “clients”, but the defendants do not accept that “property developers” are to be understood as being “clients”.  The reasons for this are, firstly, that the plaintiffs themselves have, in their evidence, made no reference to property developers and property investors as a group, but rather have referred to them as being separate.  The same separation has been maintained throughout the plaintiffs’ submissions.

24.  Secondly, the employment contracts contain no definition for the term “clients”.  Thirdly, the defendants say that it is relevant to consider the way in which the plaintiffs themselves use the term “clients” in internal correspondence and promotional materials.

25.  Therefore, it is submitted, the parties to the employment contracts understood the term “clients” to encompass purchasers and investors.

26.  Should the court take the view that there is any ambiguity in the contractual restriction, then the defendant submits that the doctrine contra proferentem ought to be applied against the plaintiff such that the restriction is given only a limited reading/understanding.

27.  The plaintiffs’ case is that the natural and ordinary meaning of the term “clients” should be adopted, this being, it is submitted, any person using the services of a professional.  Both purchasers and sellers of property use the services of agents to facilitate sales transactions, and, it is submitted, the evidence shows that both purchasers and sellers paid fees and commissions to the plaintiffs.

28.  The plaintiffs submit that the extrinsic matters on which the defendants seek to rely are not valid sources on which to interpret the contract.  Nor can reliance be placed on a contra proferentem interpretation when, firstly, the term is not ambiguous, and secondly, the contracts were not standard forms “imposed” on the defendants.

29.  In the further alternative it is submitted for the defendants that any construction of the term “clients” as including “property developers” would be unenforceable and void.  This submission is based upon the proposition that a contractual restriction on a former employee will be upheld only to the extent that the restriction is necessary or appropriate because of the relationship between the former employee and the employer’s customers having been such that there is a risk of the customers following the former employee away from the former employer.  Reliance is placed on Faccenda Chicken, and other authorities including Berry Birch and Noble Financial Planning Ltd v Berwick [2005] EW HC 1803 (QB) in which the court held at paragraph 27:

“it is not reasonable to require protection in respect of clients with whom the defendants never came into contact, or of whom they had no knowledge”.

30.  On the evidence, as summarised in Attachment B to the plaintiffs’ skeleton submissions, it is submitted the roles played by the 2^nd, 3^rd and 4^th defendants in the plaintiffs’ business did not include engaging with property developers on behalf of the plaintiffs.

31.  The plaintiffs do not accept that there is any question over the extent or reasonableness of the restriction as would emerge from construing “client” to include property developers.  The plaintiffs point to the evidence showing the steps taken by the plaintiffs to foster contacts and relationships between the relevant defendants and the developers.

32.  It is not necessary, much less appropriate, to form any concluded view on the above contentions at this stage.  I am satisfied that the propositions advanced by the plaintiffs are such as to show that there is a serious issue to be tried.

33.  Having come to that conclusion it is then necessary for consideration to be given as to the balance of convenience.  As described by Staughton LJ in Lansing Linde Ltd v Kerr [1991] 1 WLR 251 at 256:

“Once it is shown that there is at least a serious issue to be tried, the court should not embark further upon an examination of the plaintiff's prospects of success. The main question is then one of lesser evil: will it do less harm to grant an injunction which subsequently turns out to be unjustified, or to refuse one if it subsequently turns out that an injunction should have been granted? In either case the adequacy of a remedy in damages, and the likelihood of it being enforceable, is very important.”

34.  After considering various authorities, the judge continued:

“If it will not be possible to hold the trial before the period for which the plaintiff claims to be entitled to an injunction has expired, or substantially expired, it seems to me that justice requires some consideration as to whether the plaintiff would be likely to succeed at a trial. In those circumstances it is not enough to decide merely that there is a serious issue to be tried. The assertion of such an issue should not operate as a ‘lettre de cachet’, by which the defendant is prevented from doing that which, as it later turns out, he has a perfect right to do, for the whole or substantially the whole of the period in question. On a wider view of the balance of convenience it may still be right to impose such a restraint, but not unless there has been some assessment of the plaintiff’s prospects of success. I would emphasise “some assessment” because the courts constantly seek to discourage prolonged interlocutory battles on affidavit evidence …”.”

35.  It is clear in the present case that no trial of the action will take place prior to the expiry of the restraint period, and accordingly it is appropriate to make “some assessment” of the potential merit in the plaintiffs’ claim.  Doing so, I am satisfied that there are sufficient potential merits in the plaintiffs’ contention that the contractual restriction extends to what has been described as developer clients as well as purchasers of property.  This justifies a clarification of the injunction order so as to encompass such persons, but only to the extent of such business relationships as existed at the time of the 2nd, 3rd and 4th defendants’ employments.  For this reason also, I am persuaded that an order of the court rather than an undertaking from these defendants is appropriate.

Springboard Injunction

36.  The 1^st and 2^nd defendants do not accept that such an injunction order should be made because, firstly, in the event of any breach, and damage being established, a monetary award of damages would be adequate compensation for the plaintiffs. Secondly, it is submitted that there is no evidence of any misuse of confidential information on the part of defendants and, in any event, (thirdly) the injunction, even if granted, will expire before trial.

37.  So far as the legal principles are concerned the parties are in agreement, the following summary of those principles as given by the plaintiffs being adopted by the defendants:

“25.  Where a person has obtained a “head start” as a result of unlawful acts, the court may (quite separately from enforcing contractual obligations) grant a “springboard” injunction. The relevant principles have been summarized in McLarens Hong Kong Ltd v Poon Chi Fai, Corey & Ors [2019] 3 HKLRD 403 at [20]-[25]:

(1)  Where a person has obtained a “head start” as a result of unlawful acts, the Court has the power to grant an injunction which restrains the wrongdoer, so as to deprive him of the fruits of the unlawful acts, often known as “springboard” relief.

(2)  Second, the purpose of a “springboard” order is to prevent the defendants from taking unfair advantage of the springboard built up by misuse of information, including information in customer card indices.

(3)  Third, “springboard” relief is not confined to cases of breach of confidence, but also in relation to breach of contractual and fiduciary duties and flows from a wider principle that the Court may grant an injunction to deprive a wrongdoer of the unlawful advantage derived from his wrongdoing.

(4)  Fourth, “springboard” relief must be sought and obtained at a time when any unlawful advantage is still being enjoyed by the wrongdoer.

(5)  Fifth, “springboard” relief should have the aim of “simply restoring the parties to the competitive position they each set out to occupy and would have occupied but for the defendant’s misconduct; but it is not meant to drive the defendant out of business.

(6)  Sixth, “springboard” relief will not be granted where a monetary award would have provided an adequate remedy to the claimant.

(7)  Seventh, “springboard” relief is not intended to punish the defendant, but to provide fair and just protection for unlawful harm on an interim basis, measured by (i) the effect of the unlawful acts upon the claimant and (ii) the extent to which the defendant has gained an illegitimate competitive advantage. The seriousness or egregiousness of the particular breach has no bearing on the period for which the injunction should be granted.

(8)  Eighth, the burden is on the claimant to spell out the precise nature and period of the competitive advantage. The proper length of the injunction should consider:

(a)  The length of time that it would have taken the wrongdoer to achieve lawful what he in fact achieved unlawfully, relative to the victim.

(b)  That the exercise is a relative one and any advantage must be measured as such; wrongful activities may have both a positive effect (benefiting the wrongdoer) and negative effect (simultaneously harming the victim), eg poaching of key staff advantages the wrongdoer and the victim may have to recover lost market ground.

(c)  The period of time over which the unlawful activities have in fact taken place which is kinetic, not linear, to the length of the relief sought).

(d)  Other different factors during the period of unlawful activity materially affecting the advantage gained which may or may not be obtained in similar assumed circumstances of purely lawful activity, including soliciting junior employees whilst still being employed and in positions of power; the advantage of stealth and secrecy; or conversely the advantage of being able to work speedily instead of being covert.

(e)  What is fair and just in all the circumstances.

These submissions are based on McLarens Hong Kong Ltd v Poon Chi Fai, Corey & Ors [2019] 3 HKLRD 403 at [20]-[25], and QBE Management Services (UK) Ltd v Dymoke & Ors [2012] IRLR 458 at [240]-[247], [285]”

38.  To this the defendants add that such relief must be sought only against the particular ex-employee who wrongfully obtained confidential information or the company by which such an employee is now employed.

39.  The defendants submit that in any event, there is no evidence of a misuse of confidential information by either the 1^st or the 2^nd defendant. The plaintiff’s evidence on this is said to be no stronger than amounting to a suspicion that because it is believed that the first defendant has a copy of the AH Group’s client database and client list, that it would be misused even though it is acknowledged that Cubie has stated to a private investigator posing as a potential customer that she would not make use of AH Group’s database.

40.  The plaintiffs submit that misuse of confidential information is not a pre-requisite for the grant of “springboard” relief, and this is clear from McLarens (cited above). The basis for the application by the plaintiffs against the 1^st defendant (Cubie) is her commencement of a competing business while still a director of the plaintiff.  This, the plaintiffs submit, was an obvious breach of her fiduciary obligations, and one which is said to have significantly impacted the business of the plaintiffs.

41.  The defendants submit that, since the plaintiffs are seeking monetary relief in the statement of claim in respect of the alleged breaches of contractual duties, duties of good faith and fidelity and/or fiduciary duties with a claim for an account of profits in the alternative, self-evidently a monetary award (if a breach is established and damages shown) would be sufficient.  In those circumstances, it is submitted, the application for a springboard injunction is inappropriate.  Such an injunction order is appropriate only where it is necessary to prevent defendants from taking an unfair advantage created by the misuse of confidential information.  The evidence put forward by the plaintiffs only goes to show that there has been difficulty in replacing employees, not that there has been a misuse of the confidential information.

42.  The period of restraint sought by the plaintiffs is of significance, because being a period of 6 months from the date on which she resigned her directorship with the 2^nd plaintiff, that period will expire on 30 March 2021, only a matter of weeks from the date of this judgment.

43.  In the circumstances, and primarily for this reason, I do not consider the grant of springboard relief to be appropriate.  Although I do not accept the proposition that seeking monetary compensation implies that monetary compensation is an adequate remedy nor am I persuaded that the difficulty in the assessment of damages described by the plaintiffs precludes damages being an adequate remedy for the plaintiffs.

Costs

44.  The plaintiffs ask that costs be reserved, while the defendants have asked for their costs in the event that the summonses are dismissed and the undertakings accepted.

45.  In the circumstances, costs are reserved.

Order

46.  There will be orders in terms of paragraphs 1, 2 and 3 of the plaintiff’s revised draft minute of order.