SUPREME FAME INDUSTRIAL LTD v. CHEUNG MAN KWOK AND ANOTHER

HCA 4208/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4208 OF 2003

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D E C I S I O N

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1. I have before me an application for an interlocutory injunction pending the hearing of the inter partes summons in this matter. The factual background to this case is as follows.

2. The Plaintiff is a Company that is engaged in the manufacture of items of bedding and in particular, mattresses, pillows and other similar items. It appears that from about 2001 until 18 October 2003, the 1st Defendant was employed by the Plaintiff as a sales manger and from about 2000 until 10 November 2003, the 2nd Defendant was employed by the Plaintiff as its manager responsible principally for marketing and manufacturing of its products.

3. It appears from the evidence of Mr Wong Suen Wai ("Mr Wong"), a director of the Plaintiff and a substantial shareholder in the Company, that the 1st and 2nd Defendants have been, until their resignation recently, the two most highly paid employees of the Plaintiff. It is said that in the course of their employment, they would have obtained knowledge of various matters, in particular, of the prices that the Plaintiff offered its goods to its customers and in this case, not just the catalogue or general prices, but the quoted or bottom-line prices for particular products to particular clients. It is said also that they would have obtained information as to the customers' requirements and specifications for products supplied to those customers.

4. The particular relevance of these types of information in this case is that one of the Plaintiff's major customers is a company known as Toward Industrial Co. Ltd ("Toward"). Toward is said to have placed orders with the Plaintiff for a new line of products, which were developed by the Plaintiff to the specifications of Toward over the period from December last year until April this year. The products consisted of a number of different bedding products which are known as the 336 range, the number being a reference to the product code that appeared in relation to each of these products, the first 3 digits of which in each case are the numbers 336.

5. It is said that there were substantial sales of these products to Toward between April and June this year, following which there was a sudden drop off in the amount sold. This was brought to the attention of Mr Wong towards the end of August this year. He was led to investigate the reasons for this and discovered, to his surprise, that there had been sales of the products not just to Toward Industrial but to a company of which he had previously been unaware called River Dragon Development Ltd ("River Dragon").

6. The sales to River Dragon were at lower prices than those to Toward. Mr Wong then caused a company search to be made in respect of River Dragon and found it was a company that was owned and controlled by the 1st and 2nd Defendants who were its only shareholders and directors. It transpired that River Dragon had been buying goods from the Plaintiff at prices lower than the Plaintiff was supplying such goods to Toward for whom these products had been developed, and was on selling them to Toward at lower prices than had previously been offered to Toward by the Plaintiff.

7. Further investigation and inquiries resulted in the discovery that River Dragon had apparently set up a factory in China and that one of the Plaintiff's employees involved in the design of its products had moved over to work for River Dragon at its said factory. The response of the Plaintiff to this discovery was to try and seek promises from the Defendants that they would not continue with such behaviour. However, no promise or undertaking was given, and instead the 1st and 2nd Defendants gave notice to the Plaintiff and left the employment of the Plaintiff in October and November this year respectively. It is against this background that the Plaintiff issued these proceedings.

8. By these proceedings, the Plaintiff seeks injunctions the objective of which is first, to stop the Defendants dealing with products in the 336 range of products, and in particular to stop them from selling such products to Toward (as well as other buyers), and also, importantly, to stop them from using confidential information or trade secrets of the Plaintiff in the form of the quoted prices or bottom-line prices and the specifications of particular products, in particular, the 336 range of products developed for Toward.

9. Having issued these proceedings, the Plaintiff seeks interlocutory injunctions to restrain such conduct by the Defendants pending the trial of the action. The Defendants resist the grant of such injunctions and are not prepared at this stage to offer any undertakings in a form satisfactory to the Plaintiff. They have suggested that the matters should be set down for argument and they seek directions to enable that to happen. The Plaintiff does not object to directions being given but seeks interim relief pending the hearing of full argument on the summons after all the evidence is in and a further hearing they have been set. This measure of interim relief is resisted by the Defendants.

10. In summary, the Plaintiff's case is put on three bases by Mr Wong who appeared for them today. He says first that the Defendants are in breach of their duties of fidelity to the Plaintiff and that they are in breach of fiduciary duty to the Plaintiff in having dealt with Toward and in threatening to continue to do so. He says secondly that there has been misuse of confidential information amounting to trade secrets belonging to the Plaintiff by the Defendants in the form of information as to the quoted or bottom-line prices at which the Plaintiff supplied its products to its customers and also in relation to the specifications of such products, in particularly the 336 range of products which were specifically developed and designed to the specifications of Toward. Finally, he said that even if it might be found that such information is not of the nature of a trade secret that nonetheless it was confidential information and that it is not open to the Defendants to make use of that information so as to gain for himself an unfair advantage or had started in setting up business on their own, a concept which has become known as the springboard doctrine.

11. As to the claim for breach of duty of fidelity and breach of fiduciary duty, it seems to me that given the position of the Defendants within the Plaintiff, it is well arguable that duties of fidelity and fiduciary duties may have been owed by the Defendants to the Plaintiff. It seems to me that it is at least arguable that such duties are capable of continuing even after the Defendants had ceased to be employed by the Plaintiff at least in relation to maturing or recently matured business opportunities and the evidence at this stage, to my mind, clearly establishes that the dealings of the Plaintiff with Toward represented a maturing or recently matured business opportunity.

12. It seems to me that, at this stage, a clear prima facie case is shown that there were duties of fidelity and fiduciary duties owed by the Defendants to the Plaintiff and there appears to be at least a serious question to be tried as to whether or not the Defendants are in breach of those duties.

13. So far as breach of confidence is concerned, it seems to me that there is also, on the evidence before me, a serious issue to be tried as to whether or not the information that is relied upon by the Plaintiff, in the form of quoted prices and in the form of specifications for products developed for particular customers, are capable of being trade secrets. It seems to me that this is at least arguable and that accordingly the Plaintiff succeeds in establishing that there is a serious question to be tried in relation to this matter. If the information in question amounts to a trade secret, that is something that will merit protection even after the Defendants have ceased to be employed by the Plaintiff.

14. It seems to me that, further, even if at the end of the day the court is not satisfied that the information in question amounts to a trade secret, there is nonetheless a serious question to be tried in relation to the claim based on the springboard doctrine, since that would appear to be a claim that is appropriate in the circumstances of this case, even absent any trade secret, in relation to the confidential information of which misuse is now complained.

15. It seems to me that on the evidence of the Plaintiff, therefore, a prima facie case for injunctive relief has been made out.

16. Mr Sher, however, suggests that no injunction should be granted at this stage. He suggests first that the application for an injunction is no more than an attempt to prevent competition with the Plaintiff. He says that the Plaintiff is seeking simply to restrain that the Defendants from competing with them. However, having regard to the evidence as to the Defendants' position in the Company, their dealings through River Dragon with Toward and the nature of the information that is sought to be protected, it seems to me that the Plaintiff's case goes much further than being simply an attempt to restrain competition or to prevent former employees from taking up employment or taking up business opportunities in competition with their former employer in breach, perhaps, of a restrictive covenant in their contracts of employment - no such restrictive covenant has been referred to and none was relied upon in this case.

17. It seems to me that Mr Wong's case is firmly based on duties of good faith and fiduciary duties and on misuse of information or property belonging to the Plaintiff that amounts to confidential information and trade secrets which are capable of protection, notwithstanding that an employee may have ceased employment with his previous employer. It seems to me that the injunctions that are sought are directed to the protection of such information and property, and the prevention of the Defendants getting the benefit of the head start that they seem to have wrongfully obtained by their behaviour.

18. Mr Sher submitted, secondly, that the information and trade secrets that were said to be relied upon were vague and unparticularized, however, it is clear from the terms of the injunction sought that the Plaintiff has made an effort to limit the ambit of the information that is relied upon and to limit the ambit of the acts that are sought to be prohibited.

19. In my view, the definition of the confidential information and trade secrets is sufficiently clear and defined and this is in contrast to the situation in the authority relied on by Mr Sher, Oriental Machinery Ltd v Choi Kin On (unreported, CFI, Deputy Judge Lam, 21 November 2001) in which there was simply a general reference to trade secrets and confidential information without further particularisation. By contrast, in this case, the Plaintiff has condescended to particulars of the sort of information that it asserts to be confidential and in the nature of a trade secret. The fact that the Defendants have now left the employment of the Plaintiff does not, in my view, assist them where trade secrets are concerned, nor does it assist them in a case where the springboard doctrine is properly applicable.

20. Finally, it does not seem to me that such the fact of their having ceased employment with the Plaintiff is of assistance to the Defendants where, as here, there appears to have been a maturing or recently matured business opportunity of which the ex-employees who owed fiduciary duties to their employer seek to take advantage.

21. Mr Sher also suggested that this is in reality a family dispute. Although there is some evidence that there are some family relationships between the various parties to these proceedings, it seems to me that this is not particularly material, where, as here, I am satisfied that a prima facie case has been shown for the relief that is sought. Mr Sher also relied on certain letters written by the minority shareholder in the company and by Toward Industrial as indicating that it was likely that the Company would continue to receive orders from Toward, and that both Toward and the minority shareholder were desirous that there should be no litigation in relation to this matter.

22. However, it seems to me that the attitude of the buyer in this respect is not relevant. What I am concerned with is the question whether or not the Defendants should be permitted to carry on acting, as they appear to have done, in a manner that is contrary to their duties and contrary to the interests of the Plaintiff. In this situation, it seems to me that the injunctions are directed more to preventing the Defendants from continuing to act in the way that they appear to have done to date than to seeking to restore the customer to the Plaintiff's business.

23. I therefore conclude that in this case, there is clearly a prima facie case shown and a serious question to be tried in relation to the grant of injunctive relief. It seems to me therefore that the question of whether or not such relief should be granted at this stage turns largely on the balance of convenience. As to this, I am satisfied that in the circumstances presently before me, the balance of convenience comes down in favour of the Plaintiff. It would appear that the Plaintiff has invested substantial amounts in the development of the products for Toward Industrial and that that investment may be difficult to quantify or incapable of being accurately assessed in terms of damages.

24. More pertinently, it would appear that on the material before me, there is a serious risk that the Plaintiff has suffered unfair competition from the 1st and 2nd Defendants by their use of information which they have obtained through their employment with the Plaintiff which can properly be characterized either as trade secrets or, at the very least, confidential information which they should not be permitted to use in order to give themselves a head start in competition with the Plaintiff.

25. It is difficult to see, particularly in the case of a springboard injunction, that the Plaintiff would be adequately be compensated by an award of damages where the refusal of the injunction would have the effect of enabling the unfair competition complained of to continue during at least part of the period during which it should properly be enjoined by the granting of an injunction to prevent unfairness under this doctrine.

26. It seems to me also that there has been no evidence or suggestion of any particular prejudice that the Defendants will be suffered even if an injunction is granted. It is to be noted in this context that the ambit of the injunction sought is limited first to dealing in products of the Plaintiff's 336 range and secondly, in dealing with any products where such dealings involve the use of confidential information or trade secrets of the Plaintiff of the nature specified in paragraph 2 of the order sought. It seems to me that, so limited, the injunction, if granted, will not have the effect of completely stifling the Defendants' legitimate business and that they are in a position to continue to carry on business if they wish to do so subject to the restrictions that will be placed on them by the grant of such an injunction.

27. In these circumstances, it seems to me that it would be right to grant an interlocutory injunction at this stage pending the further hearing of this matter, and I therefore grant an injunction in terms of paragraphs 1 and 2 of the summons which is before me today, pending the resolution of that summons, on the usual cross-undertaking as to damages, which has been offered by the Plaintiff.

28. I will now hear the parties as to costs and the further directions that should be given.