SMART KIDS’ CLUB LTD v. LEUNG PO SZE AND OTHERS

HCA 916/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 916 OF 2009

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J U D G M E N T

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Introduction

1.  This is an application for an interim injunction which has been very well argued on both sides.  Unfortunately it has been heard on the day before my departure on long leave and so I am having to deliver judgment on the same day when otherwise I might have taken a little time to prepare my judgment.  Notwithstanding the time constraints the judgment will need to stand on its merits.

2.  The Plaintiff is in the business of selling English teaching materials which it does by direct selling to parents of local children who wish them to become proficient in English.  These teaching materials are not cheap.  They cost between $10,000 to $80,000 per package.  As a company the Plaintiff has a number of departments with the Sales Department being its most important and which is the department that is the subject of this action.  It is made up of three sales teams each led by a District Manager and two to four Unit Managers who in turn lead a number of sales personnel.  The 14 Defendants in this action comprise the largest of the three sales teams.  In the course of January this year the entire team had decided to remove itself at very short notice and go and work for MI Kids Limited, a rival of the Plaintiff.  The Defendants had been engaged by the Plaintiff on an Agency Agreement in writing containing a number of restrictive covenants purporting to regulate the Defendants activities and employment in the event of their leaving the Plaintiff.  These terms, which I will need to consider in some detail in a moment, relate to future employment with rival organisations, prohibitions on the use of the Plaintiff’s confidential information and the soliciting of the Plaintiff’s customers.  By this application the Plaintiff is seeking to impose these restrictions on the Defendants pending the trial of the action.

3.  The Defendants, only three of whom have the advantage of being represented by counsel and solicitors, submit that the terms that the Plaintiff seeks to impose are unreasonable, are an unfair restraint of trade and unnecessary.

The Defendants

4.  The Defendants can be placed into two groups.  The first five Defendants are the senior people within this sales team.  The 1^st Defendant is the District Manager and the other 4 are Unit Managers, the 3^rd Defendant being the Senior Unit Manager of the other three.  The rest of the Defendants are referred to as Education Consultants and are the more junior on the sales side.

The history of the Plaintiff and of MI Kids Limited

5.  What is now these two companies had been incorporated as the MI Group in 1993.  In June 2000 the Plaintiff was incorporated with its own separate database of sales information and has maintained a Lead System by which potential purchasers are contacted and cultivated.  They also operate a Purchase Order System (POS) by which the purchases that are made are stored and used to solicit further purchases.  And so since 2000 the Plaintiff and MI Kids have operated separately and in competition with each other.

6.  Of the Defendants, the 1^st Defendant has been with the Plaintiff the longest – since November 2003.  It is said that the first five Defendants, occupying senior positions within the sales team, have had access to detailed and extensive confidential information of the Plaintiff and as such would be in a position to cause the most harm to the Plaintiff’s interests by switching allegiance to its rival.

The Agency Agreements

7.  All 14 Defendants have identical contracts.  The Plaintiff says all of them were not employees but self-employed independent contractors.  Some of the defendants say that they were employees and not independent contractors.  For present purposes this does not matter.  By way of example I take the Agreement of Mr Alex Leung who happens to be the 3^rd Defendant (see 61-68).  He has signed on every page, as have all the other defendants on their Agreements.  The application for the injunction is based on clauses 7 to 10 inclusive.  The restrictive covenants are for 12 months following termination.  These clauses are as follows:

“Confidentiality

While performing his / her duties for the Company, it is likely that the Assistant Education Manager will have access to and come into contact with confidential information, trade secret and know-how in relation to the Company.  The Assistant Education Manager will have obtained knowledge of and influence over the Company’s customers and / or employees.  He / She should know that all such information is private, sensitive, confidential and proprietary in nature to the Company, and that the disclosure of the same to a third party would be harmful to the Company.  He / She therefore are required to accept that the restrictions contained in or referred to in this Clause (7) are reasonable and necessary to protect the legitimate interests of the Company both during and after the termination of the Agreement.  The Assistant Education Manager shall neither during his / her term of his / her service (except in the proper performance of his / her duties) nor at any time (without limit) after the termination thereof, without the consent in writing of the Company being first obtained, directly or indirectly: -

i) use any Confidential Information (as defined herein) or trade secrets of the Company for his / her own purpose or those of any other person, company, business entity or other organization whatsoever; or

ii)    disclose to any person, company, business entity or other organization whatsoever any trade secrets or Confidential Information relating or belonging to the Company. For the purpose of this Agency Agreement, “Confidential Information” shall mean any document marked “Confidential” or any information which he / she have been told is “Confidential” or which he / she might reasonably expect the Company would regard as “Confidential” or any information which has been provided to the Company in confidence by customers, suppliers or other persons, including but not limited to any such information relating to customers, customers lists, marketing information, business plans or dealings, employees or officers, financial information and plans, and research activities.

Non-competition

Please note that for a period of twelve (12) months immediately following the termination or expiration of the Agreement, the Assistant Education Manager will be bound by the following restrictions (except to the extent to which any such restrictions may, in any particular case, be relaxed, reduced or waived with the prior written consent of the Company): -

a)    The Assistant Education Manager shall not be, directly or indirectly, employed, engaged or concerned in any business of the same type, style or concept as the business of the Company within Hong Kong Special Administrative Region of the People’s Republic of China (“HKSAR”)

b)    The Assistant Education Manager will no, directly or indirectly, carry on for his / her own account either alone or in Partnership with any other person (or be concerned as a director or adviser in any company or firm engaging) in any business of the same type, style or concepts as the business of the Company within HKSAR.

c)    The Assistant Education Manager shall not, directly or indirectly, assist any person, firm or company engaged or about to be engaged in any business of the same type, style or concept as the business of the Company within HKSAR.

d)    The Assistant Education Manager shall not, directly or indirectly, within Hong Kong solicit in relation to the business the custom of any person, firm or company with whom he / she has dealings or who at any time during the last one (1) year of his / her engagement with the Company under this agreement was a customer of the Company, or who at the date of termination of his / her agreement hereunder was negotiating with the Company in relation to its business;

e)    The Assistant Education Manager shall not, directly or indirectly, either on his / her own account or for any person, firm, company or organization, solicit or entice or endeavor to solicit or entice away any director, manager or other member of staff of the Company, whether or not such person would commit any breach of his or her contract of employment by reason of leaving the service of the Company; and

f) The Assistant Education Manager shall not, directly or indirectly, employ any person who has, during his / her appointment with the Company, been a director, manager or senior executive of, or employee to, the Company.

Upon signing the duplicate of this letter, the Assistant Education Manager shall be deemed to have accepted the restrictive covenants contained herein as fair and reasonable and necessary for the protection of the business goodwill and the legitimate interests of the Company.

Termination

a)    Either party may terminate this Agreement by providing one (1) day’s notice in writing.

b)    Notwithstanding anything to the contrary herein contained, the Company may terminate this Agreement without notice or payment in lieu if the Assistant Education Manager :

i) is in breach of any of the terms of this Agreement;

ii)    is guilty of fraud, dishonestly, or any criminal act;

iii)   becomes bankrupt or makes any arrangement or composition without his / her creditors or becomes of unsound mind or permanently incapacitated from performing his / her duties; or

iv)   has other employment which has not been approved by the Company

v)    fails to observe and obey any of the instructions, rules or regulations (verbal or written) of the Company

v)    does not meet training, production, or other requirements which may be set by the Company from time to time.

c)    Upon termination, the Assistant Education Manager shall return to the Company all customer data, name cards, information/selling kits as well as any records relating to the business of the Company.

d)    The Company reserves the rights to publish or circulate in any media either to the notice of the customers or public of the termination of this Agreement.

Others

a)    In the case of any misrepresentation or breach of any contract terms on the part of the Assistant Education Manager, the Company has the right to terminate this Agreement immediately.  The Assistant Education Manager is liable to compensate the Company for whatever damages it may have caused.

b)    The Assistant Education Manager agrees to fully and faithfully observe and comply with all rules, regulations procedures and practices which may be established or implemented from time to time by the Company with respect to its business operation.  In case he/she violates any of such rules, regulation, procedures or practices, thus causing damages or losses to the Company and/or third party, he/she shall be held responsible for such damages or losses suffered by the Company and/or the third party.

c)    This Agreement and the schedules and Annexure thereto constitute the entire Agreement between the parties hereto with respect to the subject matter hereof as the date hereof and supersede any prior Agreement and understanding.

d)    The Assistant Education Manager hereby agrees that if any of the above restrictions shall be adjudicated to go beyond what is reasonable for the protection of the confidential information and legitimate interests of the Company but would be adjudicated reasonable if part or parts of the wording thereof were deleted, the said restrictions shall apply with such words deleted.”

By way of brief summary what these clauses seek to achieve is to prevent the Defendants from making use of the Plaintiff’s confidential information for themselves and/or other individuals or companies and during a 12-month post-termination period not to be employed, carry on, assist in any business of the same type as the Plaintiff’s, not to solicit those who were the customers of the Plaintiff during the last 12 months of the Defendants’ engagement with the Plaintiff and not to entice away any of the Plaintiff’s staff.

The Defendants departures

8.  This occurred over a 9-day period in January this year and as I have already said was at very short notice.

The means by which the Plaintiff operates its business

9.  Potential sales information is maintained by the Marketing Department.  This information is collected through exhibitions, booth events, phone-in enquiries, internet enquiries, telemarketing and the building up of a database from outside sources.  The information is analysed and input into the Lead System which is referred to as “leads”.  Each lead is assigned by the Administration Department to individual sales persons.  Each sales person thereby builds up his or her own portfolio of leads which are then cultivated on a personal basis.  The POS is the system for the storing and allocating of purchase orders of each customer, credit card details, contacts and family details which may prove valuable in future.  Based on this information a sales person will wish to solicit further sales from these individuals.

10.  In establishing and applying this system the Plaintiff has spent time, expense and effort in training its Agents who in the course of their work will have become privy to this information.  The Plaintiff now wishes to keep the information confidential and in particular away from a rival company such as MI Kids.

The summons

11.  The following Orders are sought:

“(1)   An injunction to restrain the 1^st to 14^th Defendants from, until final judgment or further order or within twelve (12) months immediately after the termination of their respective agreements with the Plaintiff, whichever is the earlier, being employed, engaged or concerned in MI Kids Limited and/or any business of the same type, style or concept as the business of the Plaintiff within the Hong Kong Special Administrative Region;

(2) An injunction to restrain the 1^st to 14^th Defendants whether acting by their servants or agents or any of them or otherwise howsoever from, until final judgment or further order, using or disclosing any confidential information of the Plaintiff relating to and/or containing in the Lead System and the POS System;

(3) An injunction to restrain the 1^st to 14^th Defendants whether acting by their servants or agents or any of them or otherwise howsoever from, until final judgment or further order or within twelve (12) months immediately after the termination of their respective agreements with the Plaintiff, whichever is earlier, procuring orders from doing business with any person, firm or company who has done business with the Plaintiff during the twelve (12) months immediately preceding the dates of the termination of their respective agreements with the Plaintiff; and

(4) An injunction to restrain the 1^st to 14^th Defendants whether acting by their servants or agents or any of them or otherwise howsoever from, until final judgment or further order or within twelve (12) months immediately after the termination of their respective agreements with the Plaintiff, whichever is earlier, enticing away any director, manager or other member of staff of the Plaintiff.

12.  At an earlier hearing, at which the Defendants, who had previously being represented but could not afford to continue paying for their solicitors, asked for an adjournment to apply for Legal Aid.  I granted them an adjournment and made interim injunction in terms of paragraphs 2 and 4 of the summons.  Today, Mr K C Chan, who appears for the 6^th, 9^th and 13^th Defendant, has offered undertakings in a diluted form, if I can so express it, under paragraphs 2, 3 and 4 of the summons.

13.  The other defendants, all of whom have addressed me as best they could, have offered similar undertakings.

14.  The contest therefore is a limited one.  I need to decide whether I should grant an order in terms of paragraph 1 and continue 2 and 4 as well as adding 3 in the terms sought under the summons.

The result

15.  As to paragraph 1, I do not believe this is necessary.  Quite apart from being a draconian measure at a time of, for Hong Kong, high unemployment the fact is that the Plaintiff’s legitimate interests can be fairly protected by a combination of the other orders that it seeks.

16.  I am satisfied that the information which the Defendants have inevitably acquired by their work with the Plaintiff’s organisation is confidential and that this should be kept confidential.  The Plaintiff has spent time, effort and money in building up its business and the court will, within reasonable bounds, protect that.

17.  The “watered down” undertakings offered by Mr K C Chan do not go far enough.  I gratefully reproduce here his skeleton argument which sets out what he proposes:

“Interim injunction 2 – opposed in its wide terms – would offer an undertaking, more limited in terms, as follows:

“whether acting by herself, her servants or agents or any of them until final judgment or further order not to use or disclose to any 3^rd party whosoever save for the purpose of the present action any confidential information (a) contained in the list of “leads” previously provided to her by the Plaintiff (excepting those “leads” that (D6 or D13) has collected personally by herself from potential customers) and (b) contained in the purchase orders of the Plaintiff previously handled by her”.

Interim injunction 3 – opposed in its wide terms – would offer an undertaking, again more limited in terms, as follows:-

“whether acting by herself, her servants or agents or any of them within 12 months of her termination of the agreement with the Plaintiff dated (30^th March 2007 and 5^th September 2008 respectively for D6 & D13) or until further order not to solicit or canvass for business in direct competition with that of the Plaintiff any customer of the Plaintiff with whom she had dealings during the last 12 months prior to her said termination or potential customers of the Plaintiff who at the date of the termination was negotiating with the Plaintiff in relation to its business”.

Interim injunction 4 – opposed in principle as there being no likelihood of D6 and D13 committing any breach, though D6 and D13 would consider offering an undertaking in similar terms covering the 12 month period immediately after termination.

18.  As to paragraph 2 of the summons it seems to me that to restrict the matter to cases where the individual defendants only have had direct dealings could well undermine the whole purpose of the injunctions that are applied for which I find are perfectly reasonable.  The information which is sought to be protected is “a pool” of information which can easily be passed on from one former sales agent to another and in that way passed on to third parties.  It seems to me that the injunction should go to restrain all information coming from that “pool” into the possession of the Defendants.  And so I propose to make an order in terms of paragraph 2.

19.  Paragraphs 3 and 4 of the summons are also perfectly proper and are not unnecessarily wide or in any way oppressive.

20.  Without paragraph 1, which I have dismissed, it seems to me that this Order would present a balanced package of measures to protect the Plaintiff’s legitimate interests and also enable the Defendants to continue their employment with MI Kids for those who are in such employment.  For the Defendants who are not employed by MI Kids they are at liberty to pursue their careers elsewhere provided they do not disclose the Plaintiff’s confidential information, procure orders from its customers or entice its staff to go elsewhere.

21.  Accordingly, I will make Orders in terms of these three paragraphs of the summons.

The law

22.  I have rather put matters the wrong way round by leaving the applicable legal principles to last.  In the event, these principles have not been the subject to any dispute.  Plainly in my judgment, the Plaintiff has raised a serious issue to be tried.  I do not believe that damages could be an adequate remedy in this case.  These would be very difficult to quantify and indeed to have paid by Defendants of modest means.  The balance of convenience unquestionably favours the grant of the injunction which will now go on terms of the Plaintiff offering the usual undertaking in damages.

23.  Before I leave this I want to say that I believe that these Defendants are all honourable hard-working individuals and that the making of the injunctions should not be taken as implying any moral turpitude or criticism of them.

24.  I will now hear the parties on costs.

Discussion on costs

25.  I will say that the costs of this hearing should be costs in the cause to include all costs previously reserved and for this hearing there will also be legal aid taxation of the 6^th, 9^th and 13^th Defendant’s costs.