TOTO TOYS LTD v. LEE MAN SHU AND ANOTHER

HCA 2600/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 2600 OF 2004

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D E C I S I O N

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Introduction

1.  This is an application by the Plaintiff for an interlocutory injunction restraining (1) the 1^st Defendant from divulging and misusing confidential information acquired by him during his employment with the Plaintiff between 1 January 2003 and 15 January 2004 and (2) the 1^st Defendant and the 2^nd Defendant who is the 1^st Defendant’s current employer from (a) contacting any third parties and making reference to the confidential information; (b) causing, soliciting or negotiating any business or business orders with the customers of the Plaintiff by misusing the confidential information and (c) offering to supply products similar to or comparable to the products developed by the Plaintiff since 1 January 2003 including certain specified items.

2.  The Plaintiff and the 2^nd Defendant were companies owned by two relatives, namely Wong Chong Piu (“Piu”) and his uncle James Wong (“James”).  The two companies operated as a group until the end of 2002 when Piu and James decided to split and to divide the assets and product series of the group.  They reached a written agreement under which Piu kept the Plaintiff company while James kept the 2^nd Defendant company (the “Written Agreement”).  Under the terms of the Written Agreement, each company would keep two of the four toy series manufactured by the group, but only in relation to its moulds, existing toy products, components parts and its outlook registration rights.  The Plaintiff kept the Space Series and Screw Series while the 2^nd Defendant kept the Marble Series and Miscellaneous Series.  Under a separate oral agreement, the two companies were entitled to manufacture and sell products belonging to the series allocated to the other company for a period of one year up to 31 December 2003 but had to pay 15% of the proceeds of sales to the other company (the “Oral Agreement”). 

3.  The 1^st Defendant had worked for the group as a shipping clerk since October 1999.  He continued to work for the Plaintiff after the split until he was dismissed in January 2004 allegedly for misappropriating the Plaintiff’s resources for his personal purpose and for purpose relating to certain criminal activities.  His duties in the Plaintiff’s company included arranging shipments for orders placed by the Plaintiff’s customers, preparing the related shipping documents, handling certificates of origin, PRC export documentation, invoices, packing lists, bills of lading and other related documentation. Two weeks after his termination, he commenced working for the 2^nd Defendant.

4.  In 2003, the Plaintiff commenced High Court Action, HCA 4715 of 2003 against the 2^nd Defendant seeking to enforce an agreement under which the 2^nd Defendant agreed to assign a trademark to the Plaintiff.  The 2^nd Defendant’s defence was that the Plaintiff had not complied with the conditions precedent to that agreement.  Then, in September 2004, the 2^nd Defendant brought an action, HCA 188 of 2004 against the Plaintiff for infringement of the 2^nd Defendant’s copyright in the Marble Series and Miscellaneous Series.  No defence has been filed by the Plaintiff as at the date of the hearing.

5.  In an affirmation dated 14 October 2004 and witness statement dated 29 October 2004 made in support of the 2^nd Defendant’s case in HCA 188 of 2004, the 1^st Defendant deposed:

“To the best of my recollection, I had been handling those shipping and relevant trading documents on the Plaintiff’s behalf regarding the orders placed by the following customers of the Plaintiff : -”

Then he gave a list of twenty-four names of the Plaintiff’s customers and the model numbers of the products they ordered from the Plaintiff.  The model numbers indicated model numbers of the 2^nd Defendant’s Marble Series and Miscellaneous Series and model numbers of the Plaintiff’s newly developed products which the 2^nd Defendant alleged in HCA 188 of 2004 were products infringing its copyright in the Marble Series and Miscellaneous Series.  This list was repeated in James’ witness statement dated 29 October 2004.  The Plaintiff complains that the affirmation of the 1^st Defendant evinced that he had deliberately committed the confidential information to his memory and/or taken away or copied them from the Plaintiff’s records and that the 2^nd Defendant misused the information so disclosed by the 1^st Defendant.

6.  On 2 November 2004, the 2^nd Defendant’s solicitors issued a letter to a major regular customer of the Plaintiff, Li & Fung (Trading) Limited, warning them of potential liability for purchasing from the Plaintiff a product, model number BL-20, which they alleged infringed the 2^nd Defendant’s copyright.  The Plaintiff’s complaint is that model number BL-20 was one of the Plaintiff’s newly developed products and this letter evinced another unlawful disclosure of confidential information by the 1^st Defendant and a misuse of the information by the 2^nd Defendant causing damage to the Plaintiff’s reputation and business.  These two incidents triggered the Plaintiff’s present application.

7.  The first issue raised by this application is whether the Plaintiff has shown a serious question to be tried in that the information which the Plaintiff sought to restrain the 1^st Defendant from disclosing and both Defendants from misusing are confidential information which warrant protection by the Court even after termination of the 1^st Defendant’s employment with the Plaintiff and whether unless restrained the Defendants would misuse the information.  If the Plaintiff is able to show there is a serious question to be tried, the next issue is whether the balance of convenience lies in favour of granting or refusing the interlocutory relief sought.

Serious question to be tried

8.  The Plaintiff’s case is that the confidential information in the possession of the 1^st Defendant which he disclosed to the 2^nd Defendant is trade secret which the Court shall protect even after termination of the 1^st Defendant’s employment with the Plaintiff.  Information acquired by an employee in the course of his employment may be classified into three categories: (1) information which, because of its trivial character or its easy accessibility from public sources of information, cannot be regarded by reasonable persons or by the law as confidential at all; (ii) information which the servant must treat as confidential but which once learned necessarily remains in the servant’s head and becomes part of his skill and knowledge and (iii) specific trade secrets so confidential that, even though they may necessarily have been learned by heart and even though the servant may have left the service, they cannot lawfully be used for anyone’s benefit but the master’s: see Faccenda Chicken Ltd v Fowler And Others [1984] ICR 589.  An employee is free to use the information in the first category for his or another employer’s benefit.  An employee is under a duty of confidence to his employer not to disclose any information belonging to the second category to another while he remains in that employment; but once that employment has ceased, he is free to use that information unless he is restrained under the terms of his employment from using the information.  As for trade secret under the third category, an employee may not lawfully use that information even after his employment with the employer from whom he acquired the information has ceased.  The first and third categories are readily distinguishable while the distinction between the second and third categories is blurred and that is where disputes often arise.  In AXA China Region Insurance Co Ltd & Anor v Pacific Century Insurance Co Ltd & Ors [2003] 3 HKC 1, I have reviewed a number of distinguished authorities, including Faccenda Chicken Ltd v Fowler And Others [1984] ICR 589, Lansing Linde Ltd v Kerr  [1991] 1 WLR 251, Thomas Marshall (Exports) Ltd v. Guinle [1979] Ch 227 and Printers & Finishers Ltd v Holloway [1965] RPC 239.   From these authorities, I reached the conclusion that a “trade secret” possesses the following characteristics:

(1)	It is used in a trade or business (Lansing Linde Ltd and  Faccenda Chicken Ltd 5(b));
(2)	It is confidential, i.e. not already in the public domain(Thomas Marshall (Exports) Ltd v. Guinle and Faccenda Chicken) Ltd;
(3)	It can be easily isolated from other information which the employee is free to use so that any man of average intelligence and honesty would think it is improper to use the information at the disposal of his new employer (Faccenda Chicken Ltd 5(d) and Printers & Finishers Ltd)
(4)	If disclosed to a competitor, it would be liable to cause real or significant harm to the owner, (Lansing Linde Ltd and Thomas Marshall (Exports) Ltd v. Guinle); and
(5)	Its owner must have limited its dissemination or at least must not have encouraged or permitted its widespread publication or must have otherwise impressed upon the employee the confidentiality of the information (Lansing Linde Ltd and Faccenda Chicken Ltd 5(c)).

9.  The test to be applied for items (2) and (4) is that of the owner’s subjective belief in the light of the usage and practices of the trade and industry, including the nature of the employment, for example whether the employment is in a capacity where confidential material is habitually handled by the employee (Faccenda Chicken Ltd 5(a) and Printers & Finishers Ltd).

10.  There is no dispute that the information which the Plaintiff seeks to protect is used in a trade or business.  For the purpose of the present application, I must also accept the Plaintiff's evidence that the information possesses the characteristics in items (2), (4) and (5).  The outstanding issue is whether the information can be easily isolated from other information which the 1^st Defendant is free to use so that any man of average intelligence and honesty would think it is improper to use the information at the disposal of his new employer.  The information disclosed by the 1^st Defendant in his affirmation are the names of customers and the model numbers of the products the customers purchased from the Plaintiff.  The information which the Plaintiff seeks to protect are names of customers, their respective orders, prices, quantities, costs and other specific requirements of each customer since the split.  Mr Cheung, Counsel for the Plaintiff, rightly concedes that identity of the customers and the Plaintiff’s model numbers on their own are not confidential information, especially as most of the customers of the Plaintiff are in fact common customers equally known to the 2^nd Defendant as to the Plaintiff in view of the association of the two companies prior to the split on 1 January 2003.  The information does not have the qualities of a trade secret.  It is the information which falls clearly within the first category I described above which the 1^st Defendant is free to isolate from other information and use after the termination of his employment with the Plaintiff. 

11.  The other information as regards the particular customer, such as that customer’s ordering pattern, model numbers of the products ordered, the order size and price are outside the public domain.  It is confidential and falls within either the second or the third category.  Except for information relating to the price, which I shall revert to later, the information is about a particular customer’s trading behaviour.  It is one’s knowledge about one’s customer.  If the knowledge was acquired by an employee from his personal contact with a customer in the course of his former employment, it becomes part of the employee’s knowledge gained from his experience in his employment.  Any man of average intelligence and honesty would think it proper to use the information at the disposal of his new employer.  It is information within the second category.  But if the knowledge was acquired by accessing the records of one’s employer in the course of performing his duty rather than acquiring it through his personal contact with the customer, the employee was appropriating the information from his employer.  Any man of average intelligence and honesty would think it improper for an employee to use the information so appropriated for the benefit of his new employer.  The 1^st Defendant did not acquire the knowledge about the customers from his personal dealing with the customers but through the invoices and records he processed in respect of those customers.  It is probably more akin to appropriation of information from the employer than acquisition of experience through employment.  Thus, there must be a serious issue to be tried as to whether the information is a trade secret which the 1^st Defendant is not entitled to use for the benefit of the 2^nd Defendant.

12.  As for information relating to price, Mr Vaughan, Counsel for the Defendant, submits that this information was in the public domain as having been published in the price lists.  That I respectfully disagree.  The Court must approach the situation with realism by drawing on its knowledge of commercial reality.  Very often a contract is not concluded on the basis of the published price.  Discounts are sometimes given commensurate with the size of the order and payment terms and also as a result of negotiation and past business connection.  This information is obviously very important to a competitor.  Accepting as I must for the purpose of this application that the Plaintiff had impressed the 1^st Defendant that this information was strictly confidential and disclosure to other toy suppliers and traders was strictly prohibited and applying the test of the man of average intelligence and honesty, I find that the 1^st Defendant must know that it was improper to use the price information for the benefit of his new employer.  There is therefore a serious question to be tried whether information relating to price of the Plaintiff's competing products is trade secret which the Court will protect against its unauthorised use by a former employee.

13.  Mr Vaughan submits that the confidential information relied on by the Plaintiff is too wide and unspecific.  I do not agree.  The information sought to be protected is well defined in scope and time.  It is information relating to the model numbers, price and quantity of any orders placed by any customers of the Plaintiff acquired by the 1^st Defendant during his employment with the Plaintiff between 1 January 2003 and 15 January 2004.

14.  Mr Vaughan also argues that there is no evidence of any misuse of the confidential information as to justify the grant of an injunction.  He submits that the information about the orders placed by the twenty-four customers disclosed in the 1^st Defendant’s affirmation is not a secret.  He ingeniously argues that the information was compiled from invoices issued by the Plaintiff in respect of sales of toys of the 2^nd Defendant’s Marble Series and Miscellaneous Series pursuant to their Oral Agreement under which a party was entitled to sell goods belonging to the other party for a handling fee of 15% of the value of the goods sold.  However, the fraud in Mr Vaughan’s argument is that the information disclosed by the 1^st Defendant in his affirmation contained not only information about sale by the Plaintiff of toys of the Marble Series or Miscellaneous Series but also information about sale by the Plaintiff of toys which the Plaintiff argues were his newly developed competing products (though the 2^nd Defendant alleges they are products infringing its copyright in the Marble Series or Miscellaneous Series).  At this stage, the Plaintiff does not have to prove actual instances of misuse of the confidential information.  It is sufficient for the Plaintiff to prove a real likelihood of future misuse of its confidential information.  The information consists of names of twenty-four customers and hundreds of model numbers.  The inference to be drawn is that the information had been deliberately committed to the 1^st Defendant’s memory or that he had taken copies of the Plaintiff’s records.  The disclosure of the model numbers of these alleged infringing products in the 1^st Defendant’s affirmation strongly suggests that the 1^st Defendant had possession not only of the model numbers of the Plaintiff’s products sold to those customers, but also of other confidential information relating to the customers’ ordering pattern, order size and price in respect of those products and the Defendants have a propensity to misuse the confidential information which are arguably trade secrets.  I am satisfied that the Plaintiff has proved a real likelihood of misuse of its confidential information by the Defendants.

15.  While I have some sympathy for the 2^nd Defendant whose copyright in the Marble Series and Miscellaneous Series was allegedly infringed by the Plaintiff, I am satisfied that there is a serious issue to be tried as to whether a customer’s ordering pattern and price information are trade secrets and whether the 1^st Defendant has wrongfully disclosed the information to the 2^nd Defendant and whether the 2^nd Defendant has misused the information.    

Balance of convenience

16.  The thrust of the Plaintiff's argument is that in addition to economic loss, the misuse of the information would bring damage to the Plaintiff’s reputation and goodwill which would be difficult to quantify.  Mr Cheung referred to the 2^nd Defendant’s solicitors’ letter to Li & Fung (Trading) Limited dated 2 November 2004 as an example of the damage suffered by the Plaintiff as a result of the misuse of the information.  He also queries the 2^nd Defendant’s ability to pay damages.  On the other hand, Mr Vaughan argues that if restrained the 2^nd Defendant would be driven out of business.  The 2^nd Defendant would not be able to contact customers which originally were its and sell its products, while the copyright in its products are being infringed by the Plaintiff.  He argues that the 2^nd Defendant would suffer irreparable damage if the injunction is granted. 

17.  Looking at the matter realistically, the parties were in the toy business before the split.  They agreed to divide their assets, the product series and the intellectual property in them.  The customers are known to both parties.  The Plaintiff allegedly infringed the 2^nd Defendant’s copyright in the Marble Series and Miscellaneous Series allocated to the 2^nd Defendant under their Written Agreement by selling similar products which it claimed were its newly developed products.  The 2^nd Defendant brought an action against the Plaintiff in September 2004.  This claim of the 2^nd Defendant has never been answered by the Plaintiff.  Instead of filing a defence, the Plaintiff brought this action to restrain the 1^st and 2^nd Defendants from using the information some of which forms the evidential basis of the 2^nd Defendant’s action in HCA 188 of 2004.  It sought an injunction in very wide terms restraining the 2^nd Defendant from contacting any third parties and making reference to the confidential information and selling products similar to what the 2^nd Defendant alleged as products infringing its copyright.  Though on the face the injunction is sought for the purpose of protecting the Plaintiff’s interest in its newly developed product, it has the effect of muzzling the 2^nd Defendant from protecting its copyright in the Marble Series and the Miscellaneous Series against infringement by the Plaintiff and in marketing its products in those two series which must be in competition with the Plaintiff’s newly developed or infringing products but which the 2^nd Defendant is entitled to sell. 

18.  The Plaintiff has shown a serious issue to be tried, but the terms of the injunction sought by the Plaintiff is unnecessarily wide for the purpose of protecting its legitimate interests and has the effect of damaging those of the 2^nd Defendant.  At this stage, it is difficult to say whether the Plaintiff’s so called newly developed products are products infringing the 2^nd Defendant’s copyright.  It would unduly burden this Court for the purpose of this application to embark on an inquiry as to whether the Plaintiff has come to Court with clean hands.  I think justice would be best and safely served by granting an injunction in very limited terms and only in respect of information on the actual price of specified products of the Plaintiff’s customers.  This would be sufficient to protect the interest of all parties.  Accordingly, I grant an injunction restraining (1) the 1^st Defendant from divulging and misusing the above price information acquired by him during his employment with the Plaintiff between 1 January 2003 and 15 January 2004; and (2) the 1^st and 2^nd Defendants from using the said information in negotiating any business or business orders with the Plaintiff’s customers. 

Costs

19.  Costs in an interlocutory application is always a matter of discretion.  If the plaintiff is unsuccessful, usually he has to pay the costs of the interlocutory application.  But it does not necessarily follow that the plaintiff will get his costs if he is successful in the interlocutory application nor is there any rule of law that interlocutory costs should be in the cause of the main action.  The type of costs order to be made depends on the facts of the particular case.  If the injunction was granted without contest or for the purpose of holding the ring, then costs in the cause would certainly be appropriate.  In my view, where the plaintiff succeeds in the interlocutory application, there are two questions to be considered.  The first question is whether it was justified for the defendant to resist the application.  If “not”, secondly, whether it would be unfair for the plaintiff to be awarded interlocutory costs unless he succeeds also at trial.  Or, put it in another way, whether it would be fair for the plaintiff to be awarded his costs even if he fails at trial.

20.  The terms of the injunction sought, as I have held, are unnecessarily wide and even oppressive in the factual circumstances, especially if the Plaintiff’s newly developed products are products infringing the 2^nd Defendant’s copyright.  Directing my mind to the first question, I find it was justified for the Defendants to resist the application.  Though the Defendants are not successful, the Plaintiff is not wholly successful either.  The injunction is granted on very limited terms from those sought by the Plaintiff.  I therefore consider this case should be treated as if it were an uncontested case where the injunction is granted for the purpose of holding the ring during the interim period pending trial.  That is indeed the effect of the injunction I granted.  It is unnecessary to consider the second question.  Accordingly, I make a costs order nisi that costs of this application shall be in the cause of the main action.