FOOK TAI JEWELLERY GROUP LTD v. CHAN KUEN AND OTHERS

HCA991/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 991 OF 2011

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J U D G M E N T

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1.  By its amended summons, the Plaintiff is seeking an interlocutory injunction against the Defendants to enforce a restrictive covenant as well as preventing the use of alleged confidential information by them.

2.  The Plaintiff operates five jewellery retail shops in Hong Kong.  Two of these shops are situated in Chuen Lung Street, Tsuen Wan.  The Defendants are all ex-employees of the Plaintiff, working at either one of those shops.  The dates they joined the Plaintiff can be found in paragraph 4 of the statement of claim at page 35 of the bundle.

3.  Those information are not disputed.  It is also undisputed that they all resigned from the Plaintiff at about the same time and left their employment between 19 May and 1 June 2011. Further, it is uncontroversial that each of the Defendants initially joined the Plaintiff as a junior sales staff.

4.  It is the Plaintiff’s case that each of the Defendants had signed a written employment contract containing a set of standard terms.  Amongst such terms was a restrictive covenant as follows: 

“所有職員無論因何種理由離職，於離職後九個月內在服務地點方圓一里範圍內不得受職、變相經營或協助任何人經營有關曾服務於本公司所經營業務之行業，違者可訴諸法庭。”

5.  The restrictive covenant has a duration of nine months, and more than two months of that period have already expired.  It is therefore self‑evident that the result of this application should be decided as soon as possible.

6.  The legal issues involved in this dispute are far from straightforward.  However, I have derived a good deal of assistance from both Mr Lau and Mr Kwok, who appear for the Plaintiff and Defendants respectively.  I bear in mind the guidance of the Court of Appeal in Lea Tai Property Development Limited v Incorporated Owners of Leapoint Industrial Building [1996] 1 HKC 193 at 196 E-F, and I endeavour to set out my reasons for arriving at my decision succinctly.

7.  It should be pointed out at the outset that due to the duration of the restrictive covenant, the injunction being sought will be spent before the action can be tried.  It is therefore accepted by the Plaintiff that this court should examine the merits of this case when considering its causes of action.  See Fortune Realty Company Limited v Chan Hiu Yeung Dick , unreported , HCA1582/2001 at page 5, second paragraph.

8.  The law is not clear as to the extent to which I should examine the merits, save that the exercise is within my control.  I shall deal with the arguments in the order in which they were developed at the hearing before me.

The Existence of the Restrictive Covenant

9.  Firstly, the Plaintiff is unable to produce any employment contract which had been signed by the 1st or the 3rd Defendant.  On the other hand, on the evidence, I am prepared to accept that it was a practice of the Plaintiff that such a document would have been signed by all its employees.  However, regrettably, this does not resolve the complication.  It is undisputed that save for the employment contract of the 2nd Defendant, each of the employment contracts of the other defendants contained a duration clause such that it would come to an end upon the expiration of either 18 or 22 months.  See, for example, page 142, clause 19.

10.  I shall deal with the arguments concerning the alleged renewal of the contracts after considering the case of the 2nd Defendant.

11.  The employment contract of the 2nd Defendant was dated 1 October 2001, and it can be found at pages 137-8.  It contained no expiration clause.  His case is that he left the Plaintiff’s employment in December 2003 and rejoined it in January 2004, and that he subsequently signed an employment application form dated 12 September 2005 (it is not entirely clear from the evidence whether that form, which can be found at page 104, was dated 2005 or 2002).

12.  In reply, the Plaintiff’s case is that the 2nd Defendant’s employment continued within the Plaintiff’s group uninterrupted, i.e. he was merely “switching his employment with (sic) the Plaintiff’s group”.

13.  I am of the view that the evidence concerning the 2nd Defendant’s course of employment with the Plaintiff is not entirely clear.  However, the suggestion that his employment continued uninterrupted with the Plaintiff is not consistent with the document at page 104 which contained a reference as follows:

“本公司工作合約一律以二十二個月為限，期滿後再另訂新約。”

14.  In the premises, I am inclined to the view that, more likely than not, the 2nd Defendant’s written employment contract did come to an end at some stage.  Therefore, the point concerning the alleged oral renewal also applies to him.

15.  In respect of the alleged oral renewal, the Plaintiff’s case has been pleaded in paragraph 7 of the statement of claim on page 36 as follows:

“For each of the Defendants, upon expiry of his/her written employment contract, the employment was renewed/continued on the same terms of his/her written employment contract by oral agreements made between the Plaintiff and the Defendant. The restrictive covenant is at all material time binding on each of the Defendants.”

16.  Despite Mr Lau’s valiant attempt to persuade me otherwise, I remain of the view that the plea is seriously lacking in particulars.  The evidence adduced by the Plaintiff has not in any way improved the situation, and the court is left with a very general assertion that the employment contracts were renewed in the same terms and that it was done as a matter of common practice.

17.  This court does not know when or what was said in the course of the said alleged renewal.  In the circumstances of this case, I believe that there is a likelihood that the expiration of the contracts was simply forgotten or overlooked by both sides.  This deficiency in the Plaintiff’s case goes to the root of the cause of action in question.  In the premises, this court is not persuaded that the Plaintiff has demonstrated a cause of action in respect of the restrictive covenant which has a reasonable prospect of success.

18.  In light of the foregoing, I shall deal with the arguments concerning the legitimacy of the restrictive covenant briefly.  It is common ground that the restrictive covenant, on its face, is an anti-competition clause, and that in order to justify its legitimacy, it is incumbent upon the Plaintiff to demonstrate a legitimate interest which such a clause was designed to protect.

19.  Mr Lau has advanced two such interests, namely, client relationship and confidential information.

Client Relationship

20.  Based on the authorities I have been referred to, I accept that client relationship cultivated as part of an employer’s business can constitute part of its goodwill and justify the protection by way of a restrictive covenant.  The Plaintiff said that the sale of jewellery to its customers was very much based upon the good relationship developed between its staff and the clients.  In opposition, Mr Kwok submitted that the matter should be examined with common sense.

21.  The Plaintiff’s business was the sale of low and medium‑priced jewellery, and its sales staff, including the shop manager and assistant manager, were unskilled and received modest salaries.  Mr Kwok also drew my attention to the fact that the authorities relied upon by the Plaintiff were all concerned with the provision of services in respect of which client relationship was more important.  A contrast should be made with the present case where the Defendants were involved in the sale of unsophisticated products.

22.  I am quite prepared to accept that some degree of customer relationship was developed as part of the Plaintiff’s business.  However, the law is not clear as to where the line should be drawn as to the degree of such relationship which deserves the protection of the law.  Given the higher threshold which the Plaintiff has to discharge in the present application, I am not satisfied that this legitimate interest has been made out.

Confidential Information

23.  The issue has been narrowed down to certain information referred to as “Wong Tai Sin Monthly Savings Plan Data”.  See Exhibit “LCW-2-1” at pages 223-235.

24.  Mr Kwok has accepted that such information may constitute “category 2 information” as identified by Goulding J in Faccenda Chicken Limited v Fowler and Others [1985] 1 All ER 724 (First Instance), which was cited in Kuoni Travel (China) Limited v Kelly Francis Richards and Others,unreported, HCA1265/2006 at page 8L-N.  However, he maintains that such information could not be protected post-employment in the absence of an express restrictive covenant and there was no such restrictive covenant.

25.  On balance, I am prepared to accept Mr Lau’s submission that the information in question, whilst not being trade secrets, is the kind of confidential information in respect of which the law extends its protection and may be regarded as the equivalent of trade secrets.  He relies upon Kuoni at page 6J-7J. 

26.  However, the matter does not stop here. Mr Kwok has a further answer in respect of the reasonableness of the restrictive covenant in light of the established legitimate interest based on paragraph 2(g), pages 161-2, Employment Covenants and Confidential Information Law Practice and Technique, 2nd Edition, by Brearley and Bloch. He submitted that there was a requirement for “functional correspondence” between the restrictive covenant and the legitimate interest to be protected. Where the interest to be protected is customer connection (as in this case) and there is no difficulty in identifying the customer, an area covenant is difficult to justify, since a suitably drafted non‑solicitation/dealing covenant would have protected the employer adequately.

27.  I am attracted by that argument, and had I been required to make a determination, I would have held that the restrictive covenant is unreasonable and therefore should not be upheld.

Injunction to protect the misuse of Confidential Information

28.  Following the discussion above, it is accepted that there is confidential information which potentially justifies the protection of an interlocutory injunction despite the termination of the Defendants’ employment with the Plaintiff.  I should say that it is disputed by the Defendants that they had misused any confidential information belonging to the Plaintiff.  I should point out that the higher threshold which the Plaintiff has to bear as identified above does not apply here.

29.  The normal American Cyanamidprinciple should apply, and I am prepared to accept that a serious issue to be tried has been made out by the Plaintiff here.  On the other hand, at the beginning of this hearing, there was an offer by the Defendants of an undertaking not to misuse any confidential information of the Plaintiff in the following terms:

“The Defendants undertake not to make use of and/or disclose and/or divulge to any third party the customers database of Wong Tai Sin Savings Plan belonging to the Plaintiff (as specifically identified in paragraph 8 of the second affirmation of Lai Chau-wai filed in these proceedings and Exhibits “LCW2-1” referred therein) until trial or further order”.

Regrettably, the offer was rejected by the Plaintiff.

30.  I bear in mind the circumstances of this case.  I am unable to see any reason why this court should not accept the Defendants’ undertaking, but to make an order at the insistence of the Plaintiff.  I have in mind in particular that the alleged misuse of confidential information is contested on the evidence and it is not possible for this court to resolve the same without cross-examination.

31.  For these reasons, I would not exercise my discretion to grant an injunction.  This court would, however, accept the undertaking from the Defendants in the terms set out above.

(Discussion with counsel)

32.  Having heard you, Mr Lau, I think what I have just said need not be tinkered with.

(Submissions on costs)

33.  Having heard the parties on costs, I think the first thing I want to do is to give liberty to apply to the Defendants, as suggested by Mr Kwok, since they have given an undertaking to the court and this case may not come back, therefore I think it is appropriate.

34.  As far as costs are concerned, I bear in mind the fact that the Defendants are the successful parties. The position is aggravated, if that is the right word, by the fact that the Plaintiff could have accepted the undertaking this morning, which would have rendered this hearing unnecessary.  They did not, so they have to bear the consequence of their action.

35.  I order that the costs of and occasioned by this application for interlocutory injunction be borne by the Plaintiff to be taxed if not agreed and paid forthwith.