GSL ENGINEERING LTD v. SAMMON YAU (YAU HON-YIN) AND OTHERS

[An employee who has wrongly diverted the benefit of his employer's trade connection to himself cannot necessarily treat himself as free to make use of that trade connection when he is dismissed or retires from office]

1990, No. A3102

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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BETWEEN

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JUDGMENT

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1. The plaintiff in this action is a company specialising in the design and marketing of cordless rechargeable tools and appliances. An example of such an appliance is the well-known hand-held vacuum cleaner which, the evidence suggests, is now commonplace in Hong Kong. Other such items include portable lights and portable drills.

2. The 1st defendant was until earlier this year the managing director of the plaintiff. The other defendants are individuals or companies assoicated with the 1st defendant.

3. As managing director of the plaintiff, the 1st defendant became, of course, intimately familiar with its mode of operation and with its customers and suppliers. The plaintiff contends that the information which the 1st defendant must have as to the pricing structure of the plaintiff, the identity of the plaintiff's customers, and all other relevant market information, is confidential information which it is entitled to have protected from abuse by the 1st defendant. In particular, the plaintiff is concerned that the 1st defendant has acquired an intimate knowledge of the plaintiff's customers and of their requirements, and in particular of substantial European customers named in the evidence. The plaintiff is anxious to protect its trade connection from any unlawful invasion by the 1st defendant and his associates. The 1st defendant says that many of the customers forming part of the plaintiff's trade connection were customers with whom he became acquainted when he worked earlier for a company in Germany. But in my judgment, nothing turns on that.

4. On 17th May 1990 the 1st defendant was dismissed from or resigned his office as managing director of the plaintiff. Before that date he embarked upon a course of conduct which involved diverting business away from the company and in his own direction. The 1st defendant says that now that he no longer holds office as managing director of the plaintiff, there is no further relationship between himself and the plaintiff (except, as is the case, that he is a shareholder in the plaintiff, holding some 30% of the plaintiff's shares). The 1st defendant says that in these circumstances he is or should be at liberty to contact the plaintiff's suppliers and customers and to do business with them. Their identity is a matter in the public domain. And, in any case, he says some of them were known to the 1st defendant before the plaintiff was incorporated.

5. So the 1st defendant is anxious to contact, and do business with, the suppliers and customers of the plaintiff. However, that is a course not open to the 1st defendant as matters presently stand; because, under an order of this court dated 17th May 1990, the 1st defendant is injuncted, amongst other things, from contacting any suppliers or customers of the plaintiff. The 1st defendant now seeks to be relieved from the constraints of this injunction. He says that now he no longer holds office as managing director of the plaintiff, he is in exactly the same position as any other officer or servant of an employer who leaves his employment and seeks to set up in competition with his former employer.

6. The present application, then, with which I am concerned, is an application by the defendants for an order modifying or varying the terms of the injunction so as to permit the 1st defendant to deal with suppliers and customers of the plaintiff. The application is described in an affirmation of Roderick Miller filed on 1st August 1990 on behalf of the plaintiff as "extraordinarily bold". I agree.

7. As Mr Miller points out, the defendants have admitted the plaintiff's case; that is to say, they have admitted that they have wrongfully diverted business from the plaintiff and that they have made secret profits thereby. They now seek in effect to be permitted to continue this course of conduct pending the trial of the action. The question I have to consider is whether, despite the unfavourable view which the court must necessarily form of the defendants' conduct, they are nevertheless correct in saying that they ought now to be entitled to compete with the 1st defendant's former employer, the plaintiff. Naturally, the plaintiff says they are not correct.

8. The plaintiff claims, among other things, that the 1st defendant is in a position to misuse confidential information of the plaintiff, not only in relation to the plaintiff's industrial designs and manufacturing processes, but also the plaintiff's list of customers and suppliers, the plaintiff's pricing structure for its products and the plaintiff's marketing strategies for its products. The 1st defendant, says the plaintiff, knows at what price the plaintiff purchases from its suppliers and at what price it sells to its customers. The plaintiff claims that the 1st defendant has, or may have, lists of the plaintiff's suppliers and customers and that there is a risk that he will use them for his own benefit.

9. The 1st defendant says that he accepts there are such lists (he originally suggested otherwise, but that suggestion was later withdrawn). The 1st defendant also says that the plaintiff has no pricing structure for its products. The 1st defendant says that the plaintiff has no marketing strategies (apart from advertising in trade magazines like Hong Kong Enterprise and participation in trade fairs). He points out that he was himself at all times responsible for the plaintiff's marketing in Europe. He points out in particular that the plaintiff has not condescended to set out in any detail what the nature of the information is which it claims is confidential and which it says ought to be protected.

10. It is against that background of fact that I turn to the relevant law. The law respecting use by an ex-employee of confidential information is clear. I summarised it as follows in my judgment in Mauriello (Hong Kong) Limited v. Chen, 1987 High Court Action 7088, 23rd May 1989 (unreported). Although the case was not cited to me, I think it may be helpful to set out in this judgment the views that I there expressed. In my judgment in that case I said this :-

"There is no doubt that the court will look unfavourably on an employee who steals his employer's goodwill. If, during the  currency of your employment, you use your position and your employer's time for your own benefit you cannot expect any sympathy from the court. Every employee owes to his employer a duty of fidelity. If, after your employment is terminated, ..you steal your employer's trade connection by under-hand and dishonest conduct such as, for example, by taking away with you lists of his customers or copies of his records, again you cannot expect any favourable treatment from the court. If, whether before or after the termination of your employment, you set about, knowing of your employer's contracts with other people, to induce those other people to break their contracts with your employer and to do business with you, then again you can expect no sympathy from the court. All these things are wrongs and there will lie against you a remedy in damages. This is trite law; but so is the proposition that an employee who leaves an employer and enters into a business competing with his employer does not per se do anything wrong at all, no matter how damaging to the interests of the employer that course of conduct may prove to be. Every one is entitled to use or sell his or her own labour. The question in cases of this sort is whether anything the employee or ex-employee has done has been shown to be a dishonest abuse of his or her position as an employee."

I may add that an employer is entitled to take a covenant, so long as it goes no further than it is necessary to protect his trade connection, preventing his ex-employee from doing anything which, if he were allowed to compete with his ex-employer, would enable him to take advantage of his personal knowledge of or influence over the customers of the employer. This appears from the following passage in the speech of  Lord Parker of Waddington in Herbert Morris Limited v. Saxelby :-

"...The goodwill of an employer's business is, under the conditions in which we live, necessarily subject to the competition of all persons (including the servant or apprentice) who choose to engage in a similar trade. The employer in such a case is not endeavouring to protect what he has, but to gain a special advantage which he could not otherwise secure. 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 acquaintance with his employer's trade secrets as would enable him, if competition were allowed, to take advantage of his employer's trade connection or utilize information confidentially obtained."

11. But there is no such covenant in this case. So I have simply to consider whether on the evidence the plaintiff has raised a serious question that the defendants are in fact proposing to use information about the plaintiff's business, confidentially obtained, which the plaintiff is entitled to have protected. The defendants' knowledge of the way in which the plaintiff carries on the business, obtained as a result of the 1st defendant's service as its managing director, is not, in my judgment, information of that character. It is part of the 1st defendant's general fund of personal knowledge, skill and experience, gained, admittedly, in the plaintiff's service, which he is entitled to use for his own benefit : see, for example, Printers & Finishers Ltd. v. Holloway & others [1965]1 WLR 1. The 1st defendant's knowledge of the plaintiff's customers' requirements and of its prices to its customers and of its suppliers and their prices to the plaintiff are all, in my judgment, of precisely the same character : for a comparable case in which a similar conclusion was reached at the trial of the action (not, as here, on an interlocutory application) see the decision of the Court of Appeal in England and Wales in Faccenda Chicken Ltd. v. Flower & Others [1986]3 WLR 288.

12. In my judgment, the plaintiff's evidence comes nowhere near establishing that the knowledge of the plaintiff's business of which the defendants are intending to make use is information which has that sufficient character of confidentiality necessary to support the plaintiff's case. The plaintiff's evidence might perhaps have done so, but in my judgment, it does not in fact do so, nor does it, in my view, even raise a serious question as to whether the information mentioned should be regarded as confidential or not. I have to consider the evidence as it is, not as it might have been and I accept the submission made on behalf of the defendants that the particulars given of the information sought to be protected do not warrant a conclusion that the information is, for this purpose, properly to be regarded as confidential information.

13. If then the only question in the case had been whether the plaintiff had satisfied me that there was a serious question to be tried whether the defendants were threatening to misuse information about the plaintiff's business obtained by the 1st defendant in confidence, I should have decided that question adversely to the plaintiff and I would have acceded to this application. But that is not the only question in the case. Quite apart from any question of misuse by the defendants of confidential information, there is the question of the 1st defendant's breach of duty, when he was managing director of the plaintiff, in diverting or attempting to divert business from customers of the plaintiff away from the plaintiff and in his own direction. The 1st defendant is no longer in the service of the plaintiff. He accepts that he has acted in breach of duty in the manner I have just described. But his contention is that, while he may have been wrong to do this in the past, he is no longer the plaintiff's managing director: He is therefore now entitled to deal with the plaintiff's customers and the plaintiff is not entitled to any injunction restraining him from doing it

14. That was an argument considered by Sir Robert Megarry, Vice-Chancellor, in Thomas Marshall (Exports) Ltd. v. Guinle [197911 Ch. 227. This was also a case of a managing director; in that case, one who had committed the breaches of duty complained of while there was still some years of his service contract yet to run, but who had purported to resign his office. He, too, had set up in business dishonestly in competition with his employer. The judge pointed out that the defendant had been guilty of gross and repeated breaches of his implied obligation to be faithful to the company whilst still in office as managing director of the company. He also, whilst still the managing director, and without the company's knowledge, sold goods for the benefit of himself and his companies to customers of the company. All that is very similar to what happened in the present case. The judge remarked that the employee's contention was that he was entitled to go on acting as he had and that the company was not entitled to any injunction restraining him from doing it. The judge nevertheless held that injunctions to restrain him from soliciting orders from the customers or suppliers of the company or otherwise dealing with them ought to be granted; and I agree with the approach of the Vice-Chancellor. I think it would be most unsatisfactory if an employee, whose breaches of fiduciary duty are proved or admitted, should be enabled, pending the trial of the action at which all these matters are to be sorted out, to be allowed to go on with the course of conduct from which he has already derived an unjustified benefit.

15. The claim made by the employer in the Thomas Marshall case was based in part on the duty of a director of a company to apply the company's property for the benefit of the company and not for himself. It is true that here the 1st defendant is no longer in the employ of the plaintiff, but it was argued in the Thomas Marshall case that it was by way of his acting as managing director of the company that the defendant had established his relationship with the suppliers and customers of the company, so that, even if he ceased to be managing director of the company, he could not claim instant freedom to use for himself the relationship which he had established on behalf of the company. It seemed to the Vice-Chancellor that the employer had at least a good arguable case on that point. Again, I take the same view. I am far from convinced that the point will necessarily succeed at the trial of the action, but I am satisfied that it is a good arguable point.

16. So, while I am unable to accept the case of the plaintiff in so far as it relies on an alleged misuse of confidential information, I accept that the plaintiff has a good arguable case on the matter of the 1st defendant's continuing duty to make use of the plaintiff's trade connection for the benefit of the company and not for his own benefit. For these reasons, I come to the conclusion, on the whole matter, that it would not be right to release the defendants from the constraints of the injunction presently in force, and I therefore refuse this present application.