CEI CONRAD ELECTRONIC INTERNATIONAL (HK) LTD v. MAHIR EMRAH KARAKOC

HCA 995/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 995 of 2016

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REASONS FOR DECISION

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The summons

1.  By an inter partes summons dated 10 May 2016 ("the 2^nd Summons") the plaintiff seeks to restrain the defendant from acting in breach of a contract of employment dated 22 August 2013 by working for Lidl Hong Kong Ltd ("Lidl") until after 31 August 2016.

The factual background

2.  The plaintiff is the sole sourcing arm of the Conrad Electronic Group which is a leading global retailer of electronics and technology.  Its range of products includes hand and power tools.  The defendant was employed by the plaintiff as a merchandising manager on 16 September 2013.  He was primarily responsible for liaising with suppliers and sourcing products but also had a range of other duties which included some connection with product design amongst other things.  Under paragraphs 8 and 9 of his contract of employment ("the Contract") the defendant was subject to non competition and confidentiality clauses, the relevant parts of which are as follows:

Paragraph 8:

"POST-CONTRACTUAL

COMPETITION CLAUSE

Mr Karakoc undertakes not to work during a period of six months after termination of this Contract for any organization that is active in the business areas or similar areas as the Company or any subsidiary company nor to do any business for his own account or for third parties in these business areas, and not to obtain any direct or indirect share or participation in the Company which is active in the business areas of the Company."

Paragraph 9:

"CONFIDENTIALITY

Mr Karakoc undertakes to maintain towards third parties during the duration and after termination of this Contract absolute secrecy about all legal and factual matters pertaining to the Company and its business activities, particularly business and manufacturing secrets, suppliers' and customers' data and internal information which may have come to his knowledge during his employment hereunder, and to make sure that the matters of the Company are handled confidentially. ..."

3.  On 1 February 2016 he tendered his resignation and was put on gardening leave until 29 February 2016.  On 10 March 2016 he was seen to be working for Lidl Hong Kong, which he does not dispute, a company which sources products similar to those sourced by the plaintiff.

Background to the current proceedings

4.  The plaintiff took out an inter partes summons on 15 April 2016 ("the 1^st Summons") for breach of contract under paragraphs 8 and 9 of the Contract to restrain the defendant from working at Lidl and to restrain him from disclosing confidential information.  At the inter partes hearing before Lok J on 22 April 2016 the defendant maintained he had already voluntarily terminated his employment with Lidl on 5 April 2016.  The matter was resolved by an undertaking from the defendant inter alia to inform the plaintiff of any potential new employment, which he did on 6 May 2016 indicating his intention to re-join Lidl on 17 May 2016.  The plaintiff takes objection to that employment.  Hence the 2^nd Summons, which is in slightly different terms to that of the 1^st Summons but I note that at paragraph 1 of the Order of Lok J dated 22 April 2016 the 1^st Summons was adjourned sine die with liberty to restore and at paragraph 2 of the 2^nd Summons the plaintiff seeks such further or consequential orders as the court thinks fit.  Accordingly, whether it be under a restored 1^st Summons or by way of my discretion exercised under paragraph 2 of the 2^nd Summons, or generally, I intend to consider the enforceability of paragraph 9 as well as paragraph 8.

The applicable principles

5.  An application for an interim prohibitory interlocutory injunction is governed first and foremost by the principles outlined in American Cyanamid Co v Ethicon Ltd [1975] AC 396.  In the normal course of events, in order for the applicant to succeed, the court needs to be satisfied that the claim is "not frivolous or vexatious; in other words, that there is a serious question to be tried" and thereafter, to look to where the balance of convenience lies.  American Cyanamid was subsequently expanded/explained in Fellowes & Son v Fisher [1976] QB 122 and adopted in Hong Kong by Huggins J in JC Penney Co Inc v Penneys Ltd [1975] 5 HKLR 598, which reasserted the ability of the court to take into consideration special circumstances in each case.  But as to balance of convenience generally, the question for the court is whether it would do less harm to grant an injunction which subsequently turns out to be unjustified or to refuse one which it subsequently turns out should have been granted?  This principle applies to interlocutory injunctions in restraint of trade in the same way as it applies to other applications for interlocutory injunction: Lawrence David Ltd v Ashton [1991] 1 All ER 385.

6.  In the matter before me, the two clauses in question are due to expire on 31 August 2016 well before the action can be tried.  This being the case, the granting or refusal of this application will effectively dispose of the action in that it is probable that the parties will not proceed further after the interlocutory stage.  It is therefore proper that the court, in determining this first question under American Cyanamid, should also have regard to the prospects of the plaintiff succeeding in the action and whether it is "more likely than not" that the plaintiff would succeed at trial:  NWL Ltd v Woods [1979] 1 WLR 1294, Lansing Linde Ltd v Kerr [1991] 1 All ER 418. That is the test I will apply.  I do so, reminding myself that I am not to attempt to embark upon a mini-trial on the affidavits before me.  All that is required is "some assessment" of the plaintiff's prospects of success and the extent of such assessment is wholly within my discretion.

7.  At this interlocutory stage, I need only form a tentative view of the evidence and the legal arguments.  I ought to be extremely slow to come to any firm view of the merits of the case as the evidence contained within the Affirmations placed before me is untested but I take into consideration that the likely result of my determination may bring this matter to a conclusion.

The Restraint of Trade and Confidentiality clauses

8.  Restraint of Trade clauses are prima facie unenforceable save where the legitimate interests of the employer are reasonably required to be protected and the public interest is served thereby.  An employer is not entitled to restrain a former employee from deploying his own skills and knowledge for the benefit of himself and his new employer:  Herbert Morris Ltd v Saxelby [1916] 1 AC 688; PCCW-HKT Telephone Ltd v Aitken [2009] 2 HKLRD 274.  Paragraph 8 seeks to prohibit the defendant from working in the same area of business as that of the plaintiff.  That is prima facie unenforceable.  There is therefore a serious question to be tried and it is clearly not a vexatious or frivolous issue.

9.  I move on therefore to the plaintiff's prospects of success.  Under paragraph 8, I understand "area" to mean type of business and not geographical area.  That is plain on the face of the contract as the plaintiff is CEI Conrad Electronic International (HK) Ltd and not the global company.  Nevertheless its ambit is extremely wide given the range of business which the plaintiff undertakes and given that the defendant was only its merchandising manager and did not hold a senior position.

10.  An employee brings with him his own skill, knowledge and experience. Mr Karakoc did this when he joined Conrad in 2013.  No doubt he added to that skill, knowledge and experience whilst at Conrad.  He is entitled to take away that enhanced skill, knowledge and experience when he leaves but he is not entitled to take away and use to his benefit or to the benefit of others, any confidential information by way of eg trade secrets and other confidential information, which his employer can legitimately protect.

11.  The plaintiff seeks to stop the defendant acting in a merchandising capacity in hand and power tools.  This is far too restrictive for it seeks to stop him doing his job.  What the plaintiff really seeks to achieve is to restrain him from utilizing the confidential knowledge he has in respect of suppliers and customers and that is an interest which can be legitimately protected for the short period of time which they seek to do so.  But not under paragraph 8.  Paragraph 8 is too wide, lacking in definition and likely to be unenforceable.

12.  I therefore take the view that whilst the plaintiff has satisfied me under paragraph 8 that there is a serious question to be tried, it has not satisfied me that it is more likely than not that the plaintiff would succeed if the matter were to go to trial.  Accordingly I decline to make the order sought under paragraph 1 of the 2^nd Summons.

13.  However, I have previously mentioned the scope of my power under paragraph 2 of the Order of Lok J on 22 April 2016 and paragraph 2 of the 2^nd Summons in respect of further orders.  As to paragraph 9 of the Contract, little was said as both parties accept the enforceability of that clause.  It is a valid clause.  As such its enforceability raises a serious question to be tried and it is more likely than not that the plaintiff would succeed in enforcing it at trial.  The only dispute before me was as to its extent.  The defendant was prepared to give an undertaking in the following terms:

"The Defendant undertakes until 31 August 2016 not to use any confidential information of the plaintiff acquired during his employment with the Plaintiff in particular in reference to but not limited to the CPM project, hand tools and power tools."

14.  This limits the restraint upon the defendant to the product itself.  The plaintiff declined that offer wishing to extend it to an undertaking not to engage in the business of hand tools and power tools generally until the expiration of the time period.  By business I assume that the plaintiff means merchandising business, which is the role of the defendant.  This the defendant was not prepared to do.  It therefore falls to me to consider where the balance of convenience lies.  I fully understand the concern of the plaintiff.  It is a simple one and directly related to the terms of paragraph 9 and the reference therein to suppliers and customers.  Lidl, by employing Mr Karakoc, will have available to it immediate knowledge of and access to sourcing a range of products in which Lidl wish to develop a larger market than they currently have.  Lidl will be able to source, produce and sell goods much more quickly than if they waited to do so until after 31 August 2016.  It may mean Lidl will steal a march on Conrad by only some three months but to Conrad there is a possibility of loss of market share three months earlier than might otherwise be the case.  Loss of market share is quantifiable although it might be difficult to establish to the requisite standard but that is not my concern here.

15.  On the other hand there is no evidence before me which suggests that the imposition of paragraph 9 alone would result in the defendant not being able to take up his job offer.  That being the case the plaintiff succeeds in its application under paragraph 2 of the 1^st Summons which I now restore, alternatively under paragraph 2 of the 2^nd Summons by way of further order or generally under my inherent discretion, in that I order that:

"The defendant be restrained in the terms of paragraph 9 of the Contract of Employment dated 22 August 2013 from disclosing to any person or persons any confidential information regarding the affairs and business of the plaintiff which the defendant has become or may have become in possession thereof whilst employed by the plaintiff including but not limited to the CPM project, hand tools, power tools and supplier and customer data, until after 31 August 2016."

16.  The plaintiff and defendant to be released from their undertakings under the Order of Lok J dated 22 April 2016 with immediate effect.

17.  Costs of the 1^st and 2^nd Summonses be in the cause.