EAST ASIATIC SHIPPING LTD t/a NKI LOGISTICS and PACIFIC FAR EAST LINES v. WONG WING CHEUNG BASIL AND OTHERS

HCA1502/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1502 OF 2010

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BETWEEN

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JUDGMENT

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Introduction

1.  By summons dated 8 October 2010, the plaintiff, East Asia Shipping Limited (“EAS”) applies for the continuation of the ex parte injunction order made by Chu J on 5 October 2010 (“the ex parte order”) against the 1^st defendant, Wong Wing Cheung Basil (“Wong”), and the 3^rd defendant, Mc-Trans Worldwide Limited (“MTW”), until trial or further order.

2.  On 15 October 2010, Deputy High Court Judge Au-Yeung adjourned the summons for argument on a date to be fixed with three hours reserved, and gave various directions as to the filing of evidence.  At the same time, the Deputy Judge continued the ex parte order until the disposal of the summons or further order.

3.  The summons came before me this morning on 7 December 2010 for argument.

4.  EAS is a Hong Kong company engaged in the trade of provision of logistics services through air freight and shipment services to customers worldwide.  It trades under the trade mark “KRIEGER”, and is a subsidiary of a US company Norman Kreiger, Inc. (“NKI”).

5.  Wong and the 2^nd defendant, Ho Yuen Yin a.k.a. Biby Ho (“Ho”), are former employees of EAS.  Wong was employed by EAS as its full-time Branch Manager from 23 May 2001 until 17 July 2010.  Ho was employed by EAS as its full-time Ocean Operations Supervisor from 19 June 2001 until 30 April 2010.

6.  After leaving employment with EAS, both Wong and Ho were employed by MTW, a Hong Kong company also engaged in the freight forwarding business, and said to be a competitor of EAS.

7.  In essence, it is the circumstances surrounding the move of Wong and Ho from employment with EAS to employment with MTW that gives rise to EAS’ claim in this action.

8.  The broad complaint is that Wong and Ho have acted in breach of the express terms of their employment contracts with EAS, and in breach of the fiduciary and/or contractual duties owed by them to EAS. There are three broad areas of alleged breaches: (1) being involved in the setting up of the competitor MTW whilst still employed with EAS, then soliciting business from EAS’ known customers; (2) soliciting employees of EAS to work for MTW; and (3) misusing the confidential information and/or trade secrets of EAS.

9.  On 5 October 2010—on the basis of the evidential material in the 1^st affidavit of Robert Krieger (“Krieger”), President of NKI—EAS obtained the ex parte order which restrained Wong (whether directly or indirectly, acting alone or jointly or through corporate vehicles or otherwise) from:

(1)    being employed by or working for MTW, or any other person or entity who in commercial or any technical aspect shares the same business nature as EAS;

(2)    keeping, duplicating, disseminating or using any confidential information and/or trade secrets of EAS including those set out in schedule 3 to the ex parte order; and

(3)    soliciting from EAS’ known customers as set out in schedule 4 to the ex parte order, or engaging in business with those customers.

10.  The ex parte order also restrained MTW from:

(1)    employing Wong;

(2)    keeping, duplicating, disseminating or using any confidential information and/or trade secrets of EAS including those set out in schedule 3 to the ex parte order; and

(3)    soliciting business from EAS’ known customers as set out in schedule 4 to the ex parte order, or engaging in business with those customers.

11.  No injunction was sought against Ho, and she neither appeared nor was represented at the hearing of the summons.  She has, however, filed a separate Defence to EAS’ Statement of Claim, and her Defence is signed by the same solicitors and Counsel who signed the separate Defence of Wong, and who appeared at the hearing for Wong.

12.  Shortly before the hearing, MTW filed its Defence.

Background

13.  Before he joined EAS, Wong worked for a company called CTO (HK) Limited (“CTO”), together with a Mr Micky Lam (“Lam”), with whom Wong became very friendly.

14.  Lam later became the owner of another freight forwarding business called Mc-Trans Global Logistics (HK) Limited (“MTG”). Whilst Lam was originally the named 100% shareholder of MTG, 90% of the shares were apparently transferred to Sky Target Holdings Limited (“Sky Target”), a BVI company, and 10% to a Wong Wai Ming.  The company secretary of MTG is Smartlink Business Consultants Limited (“Smartlink”).

15.  From about 2004, and on the introduction and recommendation of Wong, EAS engaged MTG as a sub-contractor to forward cargo in Hong Kong and China by air freight.  It is EAS’ case that MTG provided substandard service at excessive rates, but that Wong procured EAS to continue using MTG, ignoring the instructions given to him by the Los Angeles office of NKI.  It is said that MTG became a, if not the, major sub-contractor of EAS.

16.  Wong and Ho were employed by EAS under similar terms of employment, including Clauses 13 and 14, which provided (with punctuation and spelling as in the original):

“13 Other Employment [and Non-Competition*]

During your employment with the Company, you will not, without the consent of the Company, be permitted to take on any other employment. [You hereby agree to bind yourself expressly not to render your service or be engaged to person, firm or company in commercial or any technical co-operation or association of the same business nature or interests of the Company during your employment period and within six (6) months following termination of your employment.

14 Confidentiality and Non-Disclosure

All clients and the Company business are totally and completely confidential. You are not permitted to disclose to any person or copy by any means whatsoever for your personal use or for any other person any information whatsoever relating to the business or affair of any client of the Company and you will keep with complete secret all confidential information of any kind ontrusted to you or that you may have to your knowledge in relation to the Company’s business. This restriction shall continue to apply after termination of your employment.

17.  Wong and Ho were apparently the two most senior staff of EAS since 2001, and were entrusted with the management of EAS, including in relation to trade connections, moneys, accounts, staff and assets. 

18.  Wong’s contractual terms identified his duties and responsibilities as including “development, sales and marketing and overseeing the operation” of EAS.  In an email sent in July 2010, Wong himself described his:

“duties and responsibilities in the company:

- Business, sales and marketing development

- Overseeing the whole operations/customer services, and all the accounting, administration matters and human resource

- Staff Training

- Monitoring the whole operations and handling procedures in compliance with the requirements from C-TPAT, Civil Aviation Department, and Customs and Excise Department Hong Kong

- Contract and price negotiation with the carriers and co-loaders

- Liaison with overseas customers and agents

- Agency development

- Travelling to China and overseas

- Preparation for the budget

- Signing the cheque, bank documents and formal documents

- Exchanging and sharing the marketing news with overseas”

19.  Ho resigned from EAS, and her last working day was 30 April 2010.  Before she left, she received an email from Krieger expressing his upset at her resignation and asking her to reconsider.  This was forwarded by Ho to Wong on 26 April 2010 with her question:

“Should I say I want to give my boy and family a lot of care for coming a few years etc? I would like to have your guide.”

20.  Coincidentally, 26 April 2010 was the date of seeking the incorporation of MTW, which was incorporated a few days later (see below).  Despite the content of the email, Ho was clearly not intending to take time off with her family, and she commenced employment with MTW on 3 May 2010 (a Monday and the next working day after she left EAS the Friday before).

21.  Wong tendered his contractual one month’s notice on 19 June 2010, and his last working day was 17 July 2010.  Wong commenced employment with MTW almost immediately thereafter on 19 July 2010.

22.  There is a dispute as to what happened at the ‘exit’ discussions held between Wong and Krieger.  Krieger says he read the entirety of Wong’s contract to him, and thereby specifically reminded him of the duties owed under Clauses 13 and 14 which he expected to be followed; Wong denies this.

23.  Before he left, Wong deleted various emails from his computer at EAS.  This is not in dispute, although Wong says he simply deleted personal emails, whereas EAS says that Wong had deleted most if not all of the messages from his computer and EAS’ server.  One of the emails deleted, but recovered by EAS through the use of expert retrieval, was the 26 April 2010 email whereby Ho sought guidance from Wong as to what to say to Krieger about her resignation.  Few other emails have been recovered.

24.  Also working at MTW are at least two other former staff of EAS, being Ada Chan (“Ada”) (who had resigned from EAS in May 2007, ostensibly to work for the police), and Cat Yu (“Cat”)—Ada’s replacement—who left EAS about the same time as Wong.

25.  Correspondence between solicitors began on 15 September 2010, when solicitors for EAS wrote to Wong, Ho, MTG and Lam.  Solicitors for MTG and Lam replied pointing out that they had never employed Ada, Cat, Ho or Wong at MTG.

26.  It was in this context that EAS discovered the existence of MTW.  From the performance of a company search of MTW, it is apparent that MTW was incorporated on 30 April 2010, its registered address is the same as that of MTG, and it has the same company secretary in Smartlink. 

27.  The shareholders of MTW are Sky Target (90%) and Wong (10%).  Sky Target and Wong are the two directors.  The statement of compliance on incorporation, Form NC1, was signed by a person on behalf of Sky Target and by Wong for himself on 26 April 2010.

28.  It may be helpful to point out here that the contractual six month post-termination restraint period against Ho had expired before the application for the ex parte order, and the six-month period as regards Wong (if valid) would expire on 17 January 2011.

29.  In any event, Wong says he ceased employment with MTW on 5 October 2010, in response to the letters from EAS’ solicitors, and coincidentally on the same day as but without knowledge of the grant of the ex parte order.

30.  He also resigned as a director of MTW on 5 October 2010, and notification of that fact was received by the Companies Registry on 6 October 2010.

31.  Insofar as it seems Wong was at the business premises of MTW on 8 October 2010, he says that was for the purposes of a ‘handover’ to other staff, and he was not still engaged there.

EAS’ factual case

32.  EAS says that a logistics company like itself operates closely and in a stable manner with customers, sometimes called agents, to ensure consistent and reliable delivery service at competitive rates.  It says that customers tend to use trusted logistics companies with whom they have an established relationship, so that a competitor would find it difficult to divert the business away from the company without contact details of its customers, which are kept confidential and which are valuable and sensitive.

33.  EAS also says that, with numerous freight forwarders in Hong Kong, business is very competitive.  With a low profit margin in the industry, pricing and business information is also extremely valuable and sensitive.

34.  During his employment, Wong received circulated internal business reports on a monthly basis.  EAS says that the documents, and the information contained within them, are highly sensitive, and if made known to business competitors would allow those competitors a business advantage through the ability to adjust pricing by a narrow margin, enhancing their own competitiveness against EAS.  Hence, the need for Clause 14 of the employment contracts.

35.  Further, EAS says that if an experienced staff member leaves the company, substantial time will be needed to train a new employee and to let him or her rebuild connection with the existing customers. Hence, the need for Clause 13 of the employment contracts.  The six-month period is said to have been particularly necessary and reasonable given the prominent and long-term roles of Wong and Ho in the management and supervision of EAS and as against the relatively small number of experienced staff.

36.  EAS relies upon the express terms of the contract, and the implied terms of good faith and loyalty and not to be in a position of conflict of interest.

37.  In Krieger’s evidence, he says that Wong was fidgety and nervous, and behaved oddly at the meetings the two had after Wong gave notice to leave EAS.  There are some contemporaneous emails that Krieger sent to colleagues in the US that lend support for that evidence.  This is relied upon as showing the nefarious intention of Wong at the time around his leaving EAS.

38.  Krieger also says, by reference to email exchanges with Wong, that Wong lied to him about who he had told he would be leaving EAS.  Indeed, EAS points out that from the disclosure made by MTW under the ex parte order, it is clear that MTW was doing business with EAS’ major known customers since early July 2010, when Wong had resigned from EAS but had yet to leave.

39.  EAS says it is clear that when Wong was still employed by EAS he set up MTW together with Lam (through Sky Target) to compete with EAS, and he enticed experienced staff away from EAS to work for MTW (which can be inferred from the timing of events).  Wong must have known of the employment terms of Ho, yet he enticed her to work for MTW in breach of those terms.  The same goes for Cat.

40.  EAS relies upon Wong’s own recognition that MTW was his “own company”, at least in part, as showing that whatever else Wong did, he was doing so to further his own interests at the expense of EAS.

41.  EAS also says that Wong stole from it valuable customer data in the form of business cards, and has contacted EAS’ customers and solicited business from them at the expense of EAS, and is using confidential information.

42.  Further, because of the time taken for a customer to change its nominated forwarding agents, EAS says that Wong and Ho must have been enticing EAS’ major customers to MTW well before Wong left employment with EAS, and perhaps even before the formalities of the incorporation of MTW were completed.

43.  EAS suggests that the deterioration in its business was due to Wong’s failure to develop it and make it prosper, in part by losing staff and using MTG and by diverting opportunities.

Wong’s factual case

44.  Wong has filed two affirmations.  The first was to comply with the part of the ex parte order which required certain disclosure of information.  The second sets out his case on the allegations made against him.  He has also filed a Defence.

45.  Having offered a brief description of the freight forwarding business, Wong says it is very rare that a freight forwarding company will commit itself to use one local agent exclusively.  This is in part because each local agent has its own connections with different airlines and shipping companies, and because freight forwarding companies prefer to retain the flexibility of engaging the local agents to secure services required at any given time.

46.  As regards the employment terms, and leaving aside legal arguments, Wong claims that he was unaware of the restriction contained in Clause 13.  Indeed, he says that during the negotiations for the contract of employment he was never informed that there would be any such restriction, and had he known of the restriction he would either have refused to join EAS or he would have insisted on deletion of that clause.

47.  After he started with EAS, Wong suggested recruiting Ho, with whom he had worked at CTO since 1996.  I note that it was Wong who signed the employment letter employing Ho on terms materially identical to the terms in his own contract (including, in particular, Clauses 13 and 14), even though it is said that the terms were drafted by staff at NKI.

48.  Wong says he maintained a business relationship with companies which he knew from working at CTO, including Vernazza SA (a freight forwarder based in Argentina) and Schryver (a freight forwarder based in Mexico).  Those counterparties agreed to engage EAS as soon as Wong joined, and they indicated that they would do business with whatever company he worked for because he was the one they trusted.

49.  The same was true of a former staff-member of Schryver who later joined AFS (also Mexico based).

50.  As EAS had only five staff members including himself, Wong states that it was impossible to have handled all the transactions by themselves.  Hence they outsourced certain local operations to another freight forwarding company.  After Lam set up MTG, EAS engaged MTG as its sub-contractor for air freight transactions in place of the previous sub-contractor.

51.  Wong says this was with the approval of Krieger, who had benefitted from the personal connection and relationship with Lam. Wong rejects the criticism as to the absence of any written sub-contracting agreement with MTG, by pointing out that one was never suggested by Krieger or others at NKI.

52.  Although EAS’ business was good within the first few years, it declined in 2008, following the financial crisis.  As a result, under pressure from NKI, Wong eventually let some staff go and put in place a salary reduction for all staff—through a no-paid leave arrangement. 

53.  At around the same time, arguments about the use of MTG were dealt with by Wong ceasing to use MTG for the Los Angeles office of NKI, whilst he continued to use MTG for customers of EAS which came through his own connection.  He did so because he thought MTG was more competitive.

54.  Wong says that in early April 2010, Lam mentioned to him that he had business connections with a particular freight forwarder agent in New York, and that he wanted to explore the opportunity to provide marine freight services to that company’s buyers.  Lam invited Wong to help, in return for which he would give Wong a 10% shareholding in the new company.

55.  Wong found Lam’s proposal attractive, as the opportunity “to start my own business”.  He says he checked the names of the buyers and found that none had any business relationship with EAS, and because there was no sign of improvement in EAS’ problems, he accepted the invitation. He states that he was at that time still unaware of the fact of the restriction in the employment contract.

56.  Wong resigned by giving one month’s notice, and accepts that Krieger asked him to reconsider.  He says that Krieger was upset when he would not agree to wait for an open-ended time until he was replaced. He specifically denies Krieger even showed him the employment contract, let alone that he read the entire document to him.

57.  As to the deletion of e-mails, he says he cleared the mailboxes deleting only personal e-mails.

58.  As to the other employees of MTW, Wong says he recommended Ada to Lam, as she was looking for different employment.  She had not in fact joined the police, but was working at a wedding dress shop and wished to return to the freight forwarding business.  Wong does not seem to deny that he asked Cat to join him when he moved to MTW, and he expressly accepts that he asked Ho to join him in the new venture, asking her to do so after he had accepted Lam’s invitation in April 2010.

59.  As to soliciting business from EAS’ customers, Wong says he did not solicit business from Vernazza, Schryver and AFS, though out of courtesy he informed his counterparties in those companies that he would be leaving EAS, and when asked told them to where he was moving.  As it turned out, those three companies started to engage MTW in July 2010, and Wong saw no reason to refuse that business as there was no exclusive agreement between them and EAS.

60.  Other supposed customers of EAS, Wong says, were not in fact customers.  The relationship was the other way round.  As a result, far from soliciting business from them, it would be Wong’s intention to give them business.

61.  Wong accepts that he took his boxes of name cards from EAS, but says he did so in full view of Krieger and without objection, and that the cards were his own property and information anyway (some collected from the time even before he worked for EAS).

62.  Wong denies that he took any internal business reports of EAS, and denies that they would have contained any sensitive information which could have been used by competitors in any event.

63.  Wong says he resigned from MTW on 5 October 2010 because, though he had taken the view that the restriction in Clause 13—once he knew of it—was unreasonable, he wished to avoid further dispute. Unfortunately, the resignation crossed with the application for the ex parte order made on the same day.

MTW’s factual case

64.  On behalf of MTW, a Lee Tat Hong (“Lee”) has filed two affirmations.  The first was to deal with the disclosure required under the ex parte order.  The second is to oppose the continuation of the ex parte order.

65.  Lee says that he is a Manager of MTW, and although Wong was one of the two founder members and directors, it was Lam who was at all material times the managing director and in full control of MTW.

66.  MTW was wholly unaware of any restraint of trade clause in Wong’s employment contract with EAS, so there is no basis for any claim that MTW was dishonest in assisting the alleged breach of duties by Wong.

67.  Lee says that MTW was set up to take advantage of a business opportunity known to Lam, and it was for that reason that Wong was invited to bring his experience in marine freight to MTW.  But MTW never asked Wong to bring in any business, because it already had sufficient business from its US customers.  The business for those customers is over 90% of the business of MTW, and the continuation of the injunction requiring a replacement for Wong puts MTW at risk of losing those customers.

The applicable legal principles

68.  It is accepted by Ms Frances Lok (appearing for EAS) that where a period of restraint will have expired before the action is tried, it might be said that the grant or refusal of the interlocutory injunction will effectively dispose of the that part of the action, such that it is proper to have regard to the prospects of the plaintiff succeeding in the action.

69.  There was some discussion between counsel as to how regard must be had to those prospects.  Mr Kenneth Y.F. Wong (appearing for MTW) suggested by reference to the case of Cayne v. Global Natural Resources plc [1984] 1 All ER 225, that the application might be viewed as though it were an application for summary judgment.

70.  I would not go that far, but propose to adopt what was said in Lansing Linde Ltd v. Kerr [1991] 1 WLR 251, at 258A-D:

“It will not be possible to hold a 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 the 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 letter 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 emphasize “some assessment”, because the courts constantly seek to discourage prolonged interlocutory battles on affidavit evidence.  I do not doubt that Lord Diplock, in enunciating the American Cyanamid doctrine, had in mind what its effect would be in that respect.  Where an assessment of the prospects of success is required, it is for the judge to control its extent.”

71.  This was also the view taken in Hong Kong in, for example, Fortune Realty Company Ltd v. Chan Hiu Yeung Dick (HCA1582/2001, 24 May 2001, Chu J), where it was also pointed out in that case at [9] that:

“… the court is not to embark upon a mini-trial on the affidavits.  All that is required is “some assessment” of the plaintiff’s prospects of success and it is for the judge to control the extent of such assessment.”

72.  As to the assessment of the enforceability of a covenant in restraint of trade, the principles are reasonably well settled, and were not significantly in dispute. 

73.  The basic rule is that covenants in restraint of trade are unenforceable unless they can be shown to be reasonable in the interests of the parties and in the public interest: see Bridge v. Deacons [1984] 1 AC 705, 713A-B.  It is trite that the burden of demonstrating the reasonableness of a covenant is on the party seeking to enforce it.

74.  The law on enforceability of restrictive covenants in an employment contract has conveniently been summarized recently by Mr Recorder Shieh SC in Degreeasia Ltd v. Paules Lee Siu Yuk & ors (HCA1686/2006, 25 June 2010), he in effect adopting a summary earlier put forward in Office Angels Ltd v. Rainer-Thomas and O’Connor [1991] IRLR 214.

75.  I gratefully adopt the summary.  Those principles are:

(1)    If the court is to uphold the validity of any covenant in restraint of trade, the covenantee must show that the covenant is both reasonable in the interests of the contracting parties and reasonable in the interests of the public.

(2)    A distinction is, however, to be drawn between (a) a covenant against competition entered into by a vendor with the purchaser of the goodwill of a business, which will be upheld as necessary to protect the subject-matter of the sale, provided that it is confined to the area within which competition on the part of the vendor would be likely to injure the purchaser in the enjoyment of goodwill he has bought, and (b) a covenant between master and servant designed to prevent competition by the servant with the master after the termination of his contract of service.

(3)    In the case of contracts between master and servant, covenants against competition are never as such upheld by the court.  As Lord Parker put it in Herbert Morris Ltd v. Saxelby [1916] AC 688, at 709:

“I cannot find any case in which a covenant against competition by a servant or apprentice has, as such, ever been upheld by the Court. Wherever such covenants have been upheld it has been on the ground, not that the servant or apprentice would, by reason of his employment or training, obtain the skill and knowledge necessary to equip him as a possible competitor in the trade, but that he might obtain such personal knowledge of and influence over the customers of his employer, or such an aquaintance with his employer’s trade secrets as would enable him, if competition were allowed, to take advantage of his employers’ trade connection or utilize information confidentially obtained.”

(4)    The subject-matter in respect of which an employer may legitimately claim protection from an employee by a covenant in restraint of trade was further identified by Lord Wilberforce in Stenhouse Ltd v. Phillips [1974] AC 391, at 400, as follows:

“The employers’ claim for protection must be based upon the identification of some advantage or asset inherent in the business which can properly be regarded as, in a general sense, his property, and which it would be unjust to allow the employee to appropriate for his own purposes, even though he, the employee, may have contributed to its creation.”

(5)    If the court is to uphold restrictions which a covenant imposes upon the freedom of action of a servant after he had left the service of the master, the master must satisfy the court that the restrictions are no greater than are reasonably necessary for the protection of the master in his business.  For any covenant in restraint of trade to be treated as reasonable in the interests of the parties, it must afford no more than adequate protection to the benefit of the party in whose favour it is imposed.

76.  The Office Angels case was subsequently considered in Steiner (UK) Ltd v. Spray (unreported, 1 December 1993), and in a passage which Mr Recorder Shieh SC considered to be of general assistance, Hoffman LJ (as he then was) said:

“It is clearly established that the employer is not entitled to protect himself merely against competition. The only legitimate interest which, as against a former employee, he is entitled to protect are his trade secrets and customer connections to the extent that the employee may have gained influence over the customer so they would be likely to follow the employee to his or her new employment. There is no question of trade secrets in this case. But the plaintiffs, in their affidavits, asserted that a hairdresser such as the defendant does, in the nature of things, acquire an influence over the customers so they would be likely to follow her to another salon. Mr Mehigan said that the plaintiff’s evidence is rather thin on this point. But it is a matter of common knowledge that people are loyal to their hairdressers and that that loyalty which, in law, is part of the goodwill of the employer, induces them to leave and thereby cause damage to the employer’s goodwill.”

77.  It is also well established that if a restrictive covenant cannot be shown by the employer to be reasonable, it will be struck down and will not be enforced unless the offending part can be severed by applying a notional “blue pencil” in removing words.  The court cannot and will not re-write the covenant or contract by substituting what in its view would be a reasonable restriction as to time, geographical location or types of work.

78.  As to the law about confidential information and trade secrets in an employment context, reference is usually made first to Faccenda Chicken v. Fowler [1984] ICR 589, at 598F-600D—upheld on appeal at [1987] 1 Ch 117, at 135G-138G—which identified that information acquired during employment can fall within three categories:

(1)    Information which is trivial, or accessible from public sources: there is no prohibition against use of such information by the employee, whether during or after employment, because this information cannot be regarded by reasonable persons or by the law as confidential at all.

(2)    Information which is confidential, either because the employee was expressly told so, or because of its character, but which once learned necessarily remains in the employee’s head and becomes part of his own skill and knowledge applied in the course of his employer’s business: so long as the employment continues, the employee cannot otherwise use or disclose such information without infidelity or breach of contract, but in the absence of an express restrictive covenant he is at liberty to use it thereafter.

(3)    Specific trade secrets: such material is so confidential that, even though it may necessarily have been learned by heart and even though the employee may have left the service, it cannot lawfully be used for anyone’s benefit but the employer’s.

79.  Essentially, whilst an employee remains in the employment of his employer, the implied obligations impose a duty of good faith or fidelity on him, the extent of which will vary according to the nature of the contract.  But after the termination of the employment, the implied obligations become more limited in scope.  A former employee is not allowed to use or disclose information which is of a sufficiently high degree of confidentiality so as to amount to a trade secret.  But the obligation does not extend to all information of whatever nature, including information the unauthorized disclosure of which might have constituted a breach of duty of good faith during the subsistence of the employment.

80.  An employee cannot make preparations during his employment, either during the working day or in his spare time, with a view to competing with his employer once his employment is over if such preparation has a material effect on his employer’s business: see, for example, Kammerling & Osman on ‘Restrictive Covenants under Common and Competition Law’ 4^th Ed at paragraph 7.1.3, and the cases there cited.

81.  But that text also recognizes that the dividing line between what is and what is not permissible is often difficult to draw. Whilst a servant may, when still in the employment of the master, be as agreeable, attentive and skillful as it is in his power to be to others with the ultimate view of obtaining the benefit of the customers’ friendly feelings when he calls upon them if and when he sets up business for himself, he cannot do anything more positive.

82.  For the purposes of deciding whether information is confidential, Mr Damian Wong (appearing for Wong) referred me to a decision of the Supreme Court of New South Wales (Equity), Forkserve Pty Ltd v. Jack [2000] NCWSC 1064.  In that case, Santow J suggested certain matters to be taken into account, being:

(1)    the fact that skill and effort were expended to acquire the information;

(2)    the fact that the information is jealously guarded by the employer, is not readily made available to employees and could not, without considerable effort or risk, be acquired by others;

(3)    the fact that it was plainly known to the employee that the material was regarded by the employer as confidential;

(4)    the fact that the usages and practices of the industry support the assertion of confidentiality; and

(5)    the fact that the employee in question has been permitted to share the information only by reason of his or her seniority or high responsibility within the employer’s organization.

83.  I agree that these are certainly matters to take into account, but the weight to be given to any individual element is bound to vary depending on the particular facts of any particular case.

Scope of dispute

84.  As pointed out above, the ex parte order had three main operative parts relating to:

(1)    the restraint of the employment of Wong by MTW: paragraphs 1(1) and 2(1);

(2)    the restraint of keeping or using confidential information and/or trade secrets of EAS: paragraphs 1(2) and 2(2) and schedule 3; and

(3)    the restraint of solicitation of EAS’ known customers and engaging in business with those customers: paragraphs 1(3) and 2(3) and schedule 4.

85.  Mr Damian Wong has pointed to the fact (see also above) that even if enforceable the restraint of trade period under Clause 13 would expire on 17 January 2011, and that it would be unfair and unreasonable to continue restraining Wong from working after that date. 

86.  Whether previously clear or not, at the hearing Ms Lok made clear that she was not suggesting any possible restraint after that date, though she sought the continuation of the restraint until that date.

87.  Therefore, the battleground as regards the continuation of paragraphs 1(1) and 2(1)—which respectively restrain Wong and MTW from the employment of Wong by MTW—is as to a possible continuing restraint of trade only for the period until 17 January 2011, some six weeks or so after today’s date.

88.  On this point, it is common ground that the burden faced by EAS is higher than merely showing a serious issue to be tried. Because the effect of the continuation would be tantamount to giving this final relief, and even though I should not conduct a trial on affidavit, I must make some assessment of the likelihood of EAS succeeding on this point at trial.

89.  In this context, Ms Lok emphasizes that this case will certainly go to a trial, at which the validity of the restrictive covenant will remain an issue, if for no other reason than EAS claims damages for breach of covenant against the defendants.  I accept that this is not a case where the determination of this continuation application will likely be determinative of the whole action.  But I will adopt a ‘higher’ than American Cyanamid test in the approach to the question of continuation of the injunction from the employment of Wong by MTW.

90.  On the other hand, as regards the other questions arising on this application, it also appears to be common ground that the appropriate test is to be found in American Cyanamid.

91.  The battleground as regards paragraphs 1(2) and 2(2) is in part as to whether or not the two sets of documents set out in schedule 3 are confidential in nature, and whether there is sufficient evidence of Wong and/or MTW having possession of them.

92.  In addition, I am also concerned with the restriction sought on the use or disclosure of confidential information on an open-ended basis, it being EAS’ case that it is information of nature that could never be used by Wong except for EAS’ benefit.

93.  Under paragraphs 1(3) and 2(3), I am concerned with the restriction on solicitation of EAS’ customers, and again the period for any such restriction must be considered.

Injunction against employment of Wong by MTW

94.  I accept Ms Lok’s submission that, even on Wong’s own evidence, there is at least a very strong argument (and certainly much more than just a serious issue to be tried) that Wong was in breach of his contractual and fiduciary duties owed to EAS.

95.  Wong set up, or assisted in setting up, MTW in April 2010, when he was still employed by EAS.  He became a 10% shareholder of MTW, and one of its two directors.

96.  There can be no dispute as to these facts, and I do not think that there is any answer to the found in Mr Kenneth Wong’s submission that MTW was really set up by Lam.  Of course, it seems that Lam was the majority shareholder, and I would expect the funder of the business, of MTW, but that does not detract from Wong’s role.

97.  I also note, though I do not regard it as an admission made by or on behalf of Wong himself, Mr Kenneth Wong’s clear acceptance on behalf of MTW that MTW was a competitor, or potential competitor, of EAS.  It seems to me that that is factually likely correct.

98.  Wong also encouraged his staff to leave EAS and join MTW.

99.  When he left EAS, Wong took away the collection of business cards.  That they were kept EAS’ offices seems to me to identify that they were for business use.  In other words, they were to be used, and were used, by Wong in EAS’ business. 

100.  Wong accepts that many of the business cards in that collection had been collected during the period of his employment with EAS. 

101.  Because of these facts, I do not think I need to seek to determine the competing merits in the arguments as to which of EAS and Wong had actual ownership of the business cards.

102.  EAS also relies on the inference it says can be drawn that Wong also took away the internal business reports of EAS.  Reliance is placed upon an inference because, as Ms Lok was forced to accept when pressed, there is simply no direct evidence that Wong took away any such material.

103.  But the inference is said to be able to be drawn from the facts that (a) Wong had access to those documentary materials whilst he was employed, (b) he deleted certain e-mails from his e-mail account and from the server, and (c) he took away the business cards.  I do not think that facts (a) and (c) on their own really give rise to the inference which is sought to be drawn, but (b) does at least suggest that Wong had acted in a way which he knew to be in breach of duties and obligations owed to his employer, and that he then sought to conceal that fact.

104.  I have taken account of the point made by Mr Damian Wong that, despite the apparent forensic e-mail account reconstruction attempted, the only e-mail which is said to be incriminating of Wong is that sent to him by Ho on 26 April 2010 (and for which Wong has offered an innocent explanation).  There is no other e-mail produced which suggests that Wong sent to himself any confidential information for later use, and it is not suggested by EAS that such material was extracted by any other means such as electronic copying onto a portable computer drive.

105.  But it is strongly arguable that, for whatever reason, Wong and Ho were being deliberately less than frank with EAS as to the reasons for their departure from employment, against the chronological coincidence of the setting up of MTW and the commencement of its business.

106.  Incidentally, that the business to be conducted by MTW was intended to be in competition with, or it is potentially in competition with EAS also seems to me should be apparent from the fact that the same staff—Wong, Ho, Ada and Cat—were to conduct, and did conduct, that business.  They moved at the invitation and with the encouragement of Wong.

107.  I have also taken into account the evidence from Lee that the primary purpose of setting up MTW was to do business with buyers in the US (through the connection of Lam), who had no business relationship with EAS.  I have taken into account Lee has said that 90% of the business conducted by MTW was with those customers, and that only 10% of the business related to previous customers of the EAS.  But of course the business was in its early stages, and it seems to be at least commercially unlikely that there would not have been the intention to expand the business beyond the US customers originally in mind.  As a shareholder in MTW, Wong clearly had a vested interest in the business and its expansion, which would no doubt have been welcomed, even encouraged, by Lam.

108.  As to Wong’s knowledge of the existence of Clause 13 in his employment contract, it seems that there is a very strong case that from his signing of it, and from his signing for EAS on other contracts in the same form, he must have known of the clause throughout.

109.  As to the enforceability of Clause 13, I accept that EAS has reasonably strong prospects of proving that at trial. There is more than just a serious issue to be tried.

110.  There is credible evidence from EAS as to the reasonableness of the period of restraint, namely six months.  I specifically take into account the fact that Wong had the prominent, indeed effectively the senior, managerial role in EAS, with the responsibilities that he himself identified in his e-mail (see above).

111.  While he may not technically been an officer or director of EAS, the actual directors were for the main part based overseas, and Wong took on the role as though he was a director.  I also take account of the characteristics of the freight forwarding and logistics industry, including the heavy reliance on personal contacts with customers and the trust thereby engendered (which matters are common ground).

112.  Mr Damian Wong has pointed out that the same restraint in Clause 13 applied to each and every member of staff of EAS, regardless of their position and experience.  He submitted that this demonstrates that EAS is anxious to avoid competition from its employees (whoever they might be and whatever position they might hold), rather than to protect its legitimate interests.

113.  There is some force in this point, but Mr Damian Wong also accepted that I must judge the reasonableness of the particular restraints by reference to the particular individual employee sought to be restrained, and the circumstances surrounding that employee. Therefore, that the restraint might seem obviously unreasonable in respect of different employees is not itself of much assistance in testing the reasonableness of the restraint as against Wong.

114.  Mr Damian Wong also submits that the effect of the restraint is to prevent Wong from working in the logistics industry at all, even if the new employer is not in any direct competition with EAS.  I reject this submission. It seems to me that the restraint against working for any person, firm or company which has the “same business nature or interests” as EAS shows that it is only such companies in competition with EAS that are in mind and engaged by the clause.

115.  There is more force in the submission based on the absence of any express limit on the geographical location for the restraint.  This might suggest that there is a prohibition on working in the logistics industry in the whole world, whereas EAS’ operation is carried out in Hong Kong. 

116.  In response to this submission Ms Lok offers, I think, two answers.  First, she says that a geographical limitation to Hong Kong is to be implied, as another employer with the “same business nature or interests” as EAS would be one in Hong Kong.

117.  Secondly, and perhaps alternatively, she says that it is the competing business that is the target for any legitimate protection of EAS’ business, and that competing business might be conducted from places in or out of Hong Kong.

118.  Mr Kenneth Wong identified that the logistics business is not one which can be conducted simply from a computer and telephone from anywhere in the world, and there must be some ties in this case to Hong Kong.  But it seems to me to be likely, on the information that I have, that the business might readily be conducted from, say, Shenzhen or Macau, so the territorial restriction to Hong Kong might be an irrelevant limitation.

119.  In any event, Ms Lok says that the defendants cannot have it both ways.  If there is a business tie to Hong Kong, then clearly another business of the same nature or interests would have that tie, and so the geographical limitation to Hong Kong is to be implied.  It there is no such business to Hong Kong, then any geographical limitation is irrelevant, and the absence of one from the clause does not make it unreasonable.  I strongly tend to agree.

120.  Mr Damian Wong also submitted that if EAS was really concerned with protecting its contacts with customers, that purpose could have been achieved by requiring a longer notice period for an employee’s resignation.  In other words, there should have been a contractual requirement for Wong to have given three or six months’ notice, instead of the contractual one month provided.

121.  Whilst attractive at first blush, I do not think this submission works.  First, there are a number of perfectly sound reasons why there might be a difference between a period of notice required for termination of an employment contract, and a period during which the employer may seek to protect legitimate business interests. 

122.  Secondly, the submission ignores the fact that any employee can take advantage of the provisions in section 7of the Employment Ordinance, which permit payment in lieu of notice.  If payment is made by the employee in lieu of notice, the contract is thereby immediately terminated.  In such circumstances, the only way in which an employer could protect his legitimate interests is by a post-termination restraint.

123.  As regards Mr Damian Wong’s submission that Wong’s becoming a director of MTW did not breach the duties owed in his employment by EAS, Ms Lok’s point was plainly not that being a director per se was a breach.  Rather, it was being a director of a company set up by Wong (and Lam) in competition with EAS whilst he was still in employment by EAS that constituted the breach.

124.  I have further taken into account the fact that Wong resigned his employment and his directorship of MTW on 5 October 2010, and that the remaining period of any restraint of that employment would be only for a further six weeks or so. 

125.  In considering the balance of matters, I have also noted that MTW is able to take advantage of the employment of the other former staff of EAS, namely Ho, Ada and Cat—all of whom are experienced in the relevant logistics industry, and who have to greater or lesser extents been mentored by Wong.

126.  Overall, I have made some assessment of the merits and I am satisfied to the higher test imposed on me as regards this particular aspect of the intended continued injunction that this is an appropriate case in which to continue the injunction restraining Wong from being employed by MTW or any other person or entity or whether in commercial or any technical aspects shares the same business nature or interests as EAS. 

127.  I also accept that the injunction against MTW restraining it from employing Wong should also be continued.

128.  The restraint will continue up to and including 17 January 2011.

Confidential information

129.  No challenge has been made as to the validity of Clause 14 of the employment contracts, which expressly provides that all clients of EAS and the EAS business are totally and completely confidential, and which prohibits the disclosure or use of any information whatsoever relating to the business or affairs of any client of EAS.

130.  The claim to confidentiality is to the two classes of documents being (1) the business cards, collected by Wong and taken by him when he left employment with EAS, and (2) EAS’ internal business reports prepared by its accountant and circulated to Wong on a monthly basis.

131.  Ms Lok submitted that the information in question can be in either category 2 or category 3 under the categorization identified in the Faccenda Chicken case (see above).

132.  I do not accept that the relevant information falls within category 3.  But I accept that it falls within category 2, on the basis that it is confidential information which could not have been used or disclosed by Wong during his employment without breaching his duty of fidelity to EAS, and where there is the express restrictive covenant contained in Clause 14.

133.  Whilst the information contained on the business cards might be information readily available from public sources, it is the collection and collation of those parts and the information on them, plainly for use in the business at the premises they were kept, which creates the confidentiality of the information.  Indeed, if one were to ask the question would Wong have freely given away the cards and the information on them, by handing over his boxes of cards to competitors, the answer must almost certainly be ‘no’.

134.  As to the internal business reports, it is at least strongly arguable that they are plainly confidential, and were imparted in circumstances which identified their confidentiality.

135.  In these circumstances, there seems to me to be at least a serious issue to be tried on this point.  Further, the risk of injustice in the grant/continuation of the injunction should it later be decided that the injunction should not have been granted is plainly outweighed by the risk of injustice in its refusal should it later be decided that the injunction should have been granted.

136.  For the avoidance of any doubt, I accept that damages would not be an adequate remedy for EAS in this regard.

137.  I have taken into account that whilst Wong accepts he has the business cards, he has affirmed to the fact that they are at home, and that he does not have the internal business reports.  I have also taken into account that Lee has affirmed to the fact that MTW never had and does not have either the business cards or the internal business reports.  But I have already accepted (see above) that it is be seriously arguable that the inference should be drawn that the material was taken by Wong, and that it was concealed so as to cover up the intended wrongful use of it to the benefit of MTW.

138.  On the facts, there is clearly at least a serious issue to be tried that Wong’s knowledge is to be imputed to MTW.

139.  In any event, in the balancing of matters, the assertion that this material is not in their hands must also amount to an assertion that there cannot be any prejudice if they are restrained from having or using it.

140.  This part of the order will be continued until trial or further order.

Solicitation of customers

141.  I do not think that any restraint against solicitation of customers could be granted for a period longer than any restraint of the employment of Wong by MTW or a similar company.

142.  I also accept the point made by Mr Damian Wong that there is no non-solicitation clause in the employment contracts, so that non-solicitation of EAS’ customers was not, perhaps, at the forefront of the concerns at the time of the contracts.  But, if Clause 13 bites, the absence of a separate non-solicitation clause may be less important.

143.  On the evidence I have, I accept that there is a serious issue to be tried as to whether or not Wong has solicited business from EAS’ customers.

144.  I note Wong’s evidence that he enjoyed a good relationship with the particular customers even before he joined EAS, but I think it at least seriously arguable that he must have developed that relationship during the nine years of his employment with EAS.

145.  Wong denies that he solicited customers, and says that he simply told them of his intended change of jobs.  It was simply because those customers trusted him that they ‘followed’ him, and in effect transferred their business from EAS to MTW.

146.  Certainly, there is evidence that the main clients identified appear to have transferred their business around the time Wong moved jobs in July 2010.  In fact, the transfer began even before Wong left EAS and joined MTW, but when Ho was already there.

147.  But I accept that the figures provided by EAS as to the underlying turnover do not suggest that there was any diversion of business before that time.  As Mr Damian Wong submitted, if anything, the turnover appears to have gone up over the period from April to July 2010 as compared with the previous periods.

148.  So, for whatever reason—and solicitation can be subtle—the business has transferred.  On the other hand, it is clear that there was no exclusive business relationship between the particular customers and EAS, and that they were entitled to have transferred their business at any particular time of their choosing and for any reason of their choosing.

149.  In this context, I note that MTW is able to have accounted for the business so far conducted with those customers, and presumably could continue to so account.  This business is also only 10% of the overall business of MTW.  I also take account of the passage of time. 

150.  In all the circumstances, I am not convinced that damages would not be an adequate remedy, and I also think that the balance of convenience points at this time to the non-continuation of the injunction as regards soliciting customers.

151.  It may be thought that there is some illogicality in restraining the employment of Wong until the end of the restraint period of six months, but not restraining solicitation of EAS’ customers.  But I think there may be a difference in the positions of Wong and MTW in this regard.  The ability of Wong to solicit may well be frustrated anyway by the restraint against his employment, but MTW is in a different position.

152.  Therefore, I refuse to extend the injunctions in paragraphs 1(3) and 2(3) of the ex parte order.  In so doing, I stress that I am not making any ruling that the ex parte order should not have been made in this respect at the time it was made; I am simply saying that I do not think it right now to continue the order for any longer.  Whether or not the order should ever have been made is a question for another day.

Conclusion

153.  I will continue the terms of the ex parte order, except for paragraphs 1(3) and 2(3).  I think that the words in paragraph 1(1) should better track the wording in Clause 13 and so should refer to the “business nature or interests” (adding the words “or interests”).

154.  I have not dealt with paragraph 3 of the ex parte order, relating to the provision of information, as that is effectively spent.

155.  The remainder of the terms are not varied, and the undertakings given by EAS of course remain in place.

[Submissions on costs]

Costs

156.  Having heard argument, I am satisfied that in the exercise of my discretion the correct order for costs should be the ‘usual’ order of plaintiff’s costs in the cause.

157.  Whilst EAS has not fully succeeded in the continuation of the ex parte order, the pursuit of the non-solicitation injunction has not likely expanded the costs incurred.  I am not attracted to some partition of costs to seek to reflect the points won or lost. 

158.  Though the summons might have sought the continuation of the restraint of employment of Wong by MTW until trial or further order, and though he had already resigned in October, there was full opposition by Wong and MTW to any continuation of the order.

159.  Also, at this stage of the proceedings, the basis of allowing or refusing injunctions is on incomplete materials and possibly not by reference to the full argument as might later be open to the parties.