XCHRX DYNAMIC WAY INTERNATIONAL LTD. AND ANOTHER v. HO KUI CHEE AND OTHERS

HCA 16149/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 16149 OF 1999

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D E C I S I O N

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1. This is the Plaintiffs' application for an interlocutory injunction to restrain the 1st to 3rd Defendants from disclosing or using the Plaintiffs' confidential information and misrepresenting shutters installed by the Plaintiffs as their jobs or job references. At the conclusion of the hearing, I dismissed the application with costs and gave brief reasons for the decision. I now reduce the full reasons into writing.

Background

2. The 1st Plaintiff has since December 1993 been the sole distributor of EUROLOOK Shutter. This is a kind of transparent security shutter for installation at shop fronts and entrances. The 1st Defendant is the sole proprietor of Hung Fat Roller Shutter Engineering ("Hung Fat"). In March 1994, Hung Fat was appointed by the 1st Plaintiff as its sole contractor responsible for the assembly, installation, repair and maintenance of EUROLOOK Shutters.

3. In July 1994, the 1st Plaintiff and the 1st Defendant entered into a joint venture and the 2nd Plaintiff was formed as a result. The arrangement was for the 1st Plaintiff to award contracts for the assembly, installation, repair and maintenance of EUROLOOK Shutters to the 2nd Plaintiff, which in turn would assign the work to Hung Fat. Between July 1994 and July 1999, the 1st Defendant was a director and a 40% shareholder of the 2nd Plaintiff.

4. The Plaintiffs contend, but disputed by the 1st Defendant, that the incorporation of the 2nd Plaintiff was with a view to a full merger of the 1st Plaintiff and Hung Fat.

5. The 2nd Defendant is the son of the 1st Defendant and an employee of Hung Fat. The 2nd Defendant had also since the incorporation of the 2nd Plaintiff, been its site supervisor. The affidavit evidence shows that the 2nd Defendant had participated in most of the directors' meeting of the 2nd Plaintiff.

6. On 5 July 1997, the 1st and 2nd Plaintiffs and Hung Fat entered into a written General Conditions which embodied the arrangements between them in relation to the assembly, installation, repair and maintenance of EUROLOOK Shutters ("the General Conditions"). It is the Plaintiffs' case, which the 1st Defendant disputed, that the General Conditions was preceded by an oral agreement between the 1st Plaintiff and the 1st Defendant imposing obligations of confidence and fidelity on the part of the 1st Defendant and Hung Fat in relation to information received from the 1st Plaintiff.

7. The 3rd Defendant was incorporated in June 1999 with the 2nd Defendant as one of its directors and a shareholder holding 50% of the shares. The 3rd Defendant engages in the supply and installation of a type of transparent plastic shutters known as "Clearlink", as the agent for the 4th Defendant.

8. In June 1999, the 1st Defendant proposed to withdraw from the 2nd Plaintiff. With the agreement of the 2nd Plaintiff, this took effect from 1 July 1999. The Plaintiffs then discovered that the 3rd Defendant had in collaboration with the 4th Defendant been engaging in the business of Clearlink transparent plastic shutters, and had approached their customers in relation to this type of shutter. The Plaintiffs also believed that the 1st and 2nd Defendants had been instrumental in the activities of the 3rd and 4th Defendants. The Plaintiffs therefore commenced these proceedings on 12 October 1999 and took out the present summons on 26 November 1999.

The Plaintiffs' Case

9. The Plaintiffs' cause of action against the 1st Defendant is in breach of the General Conditions, and against the 1st to 3rd Defendants, in breach of duty of confidence and for conspiracy to injure the Plaintiffs.

10. It is the Plaintiffs' case that between 1994 and 1999, the Plaintiffs had passed to the 1st and 2nd Defendants confidential information relating to the Plaintiffs' business. These took the forms of job orders from the Plaintiffs to Hung Fat, information disclosed during the directors' meetings of the 2nd Plaintiff and information disclosed in contemplation of a merger of the 2nd Plaintiff and Hung Fat.

11. The Plaintiffs contend that prior to the 1st Defendant's withdrawal from the 2nd Plaintiff, the 1st and 2nd Defendants caused the 3rd Defendant to be incorporated and that they have been in control of the 3rd Defendant. Through the 3rd Defendant, the 1st and 2nd Defendants are said to have mis-used the confidential information of the Plaintiffs in a number of ways. Firstly, it was alleged that the 1st and 2nd Defendants had, through the 3rd Defendant, approached and solicited sales from customers of the Plaintiffs, using the EUROLOOK Shutters supplied by the Plaintiffs as their job references. It was suggested that in so doing the Defendants had made misrepresentations to the Plaintiffs' customers. Secondly, it was alleged that the 1st Defendant had disclosed to the 4th Defendant confidential information of the Plaintiffs in relation to the tender for supplying shutters to a food court in Tung Chung so as to enable the 4th Defendant to compete with the Plaintiffs in bidding for the project.

12. The Plaintiffs say that the 1st Defendant was in breach of the terms of the General Conditions. In particular, under Clause 12 thereof, Hung Fat acknowledged that the information relating to the 1st Plaintiff's customers is the property of the 1st Plaintiff. Hung Fat also agreed not to solicit sales, promote or sell its own products to the 1st Plaintiff's customers during the subsistence of the General Conditions and within 1 year after its termination. Further, under clause 21, Hung Fat contracted not to divulge to third party the 1st Plaintiff's customers list and information relating to the contract sums.

13. The Plaintiffs further said that the 1st Defendant's mis-use of the Plaintiffs' confidential information amounts to a breach of his duty of confidence which arises out of his fiduciary duty as a former director of the 2nd Plaintiff.

14. As against the 2nd Defendant, the Plaintiffs' case is that by reason of his position in Hung Fat and his active participation in the board meetings of the 2nd Plaintiff, he is a "de facto" director of the 2nd Plaintiff and as such he also owes a duty of confidence to the 2nd Plaintiff.

15. As for the 3rd Defendant, the Plaintiffs' case is that it has been the corporate vehicle through which the 1st and 2nd Defendants carried out their unlawful activities.

The Defendants' Objections

16. The 1st to 3rd Defendants oppose the interlocutory injunction principally on the following grounds:

(1) The information which the Plaintiffs seek protection are not confidential information that the law will afford protection in the circumstances of this case.

(2) The ambit of the confidential information as defined in the schedule to the Plaintiffs' summons is too broad and vague.

(3) There is no justifiable basis for proceeding against the 2nd and 3rd Defendants.

(4) There is little or no useful purpose to be served by an injunction against the 1st Defendant when the restrictive covenant (i.e. Clause 12) in the General Conditions will be expiring in a few months' time.

17. I shall now deal with these objections in turn.

The Summons

18. The information which the Plaintiffs say is confidential and require protection is set out in the Schedule to the Summons. There are 7 categories of them. They are information relating to:

(1) The product features and the supply source, including the 1st Plaintiff's pricing elements and formula, for EUROLOOK Shutters;

(2) The names, addresses and contact persons of the 1st Plaintiffs customers, the locations of the shops using EUROLOOK Shutters and the specifications of the shutters installed;

(3) Product test results, pricing elements and formula of EUROLOOK Shutter and other shutters fabricated or manufactured by the Plaintiffs from time to time;

(4) The parts, switch boxes, electronic keypads, tailored made bottom bars and stainless steel coupling tubes of EUROLOOK Shutter and other shutters fabricated or manufactured by the Plaintiffs, being value added services developed by the 1st and 2nd Plaintiffs;

(5) The channels through which applications could be made to be qualified as an approved contractor of major real estate developers, government entities and other public transportation companies'

(6) The Plaintiffs' marketing strategies and product development strategies in relation to EUROLOOK Shutter and other shutters fabricated or manufactured by them;

(7) Shutters and shutter related products, including pricing of the competitors, customers' profile, and other comparative studies undertaken by the 1st Plaintiff, being market data collected and compiled by the 1st Plaintiff at its own costs.

Confidential Information

19. The starting point of the Plaintiffs' case against the 1st Defendant is the provisions in the General Conditions. Clause 12 provides that:

(a) Information relating to the 1st Plaintiff's customers is the 1st Plaintiff's property; and

(b) Hung Fat shall not, during the subsistence and within 1 year after the termination of the General Conditions, solicit sales from, promote or sell its own products to the 1st Plaintiff's customers.

Clause 21 further provides that Hung Fat shall not divulge the 1st Plaintiff's customers list and information relating to the contract sum to third parties.

20. The Plaintiffs rely on these provisions and contend that an injunction ought to be granted to restrain the 1st Defendant from breaching these contractual provisions.

21. I accept that the court will always, though not as a matter of course, act to restrain the breach of a clear and express negative covenant: Doberty v. Allman (1878) 3 App. Cas. 709 per Lord Cairns at p. 720; The Incorporated Owners of Mai On Industrial Building & anor v. Hedit Limited HCA 6529 of 1987 (unreported) at p. 8. This consideration is however inapplicable in the present case. To begin with, it is common ground that the General Conditions had been terminated, although the precise date of termination is in dispute. Clause 21 therefore ceases to be effective. As for Clause 12, it is in essence a restrictive covenant which even on the Plaintiff's case only has less than 7 months to run. The scope of this covenant is narrow and limited. It is confined to approaching the 1st Plaintiff's customers to solicit business and selling products of Hung Fat. This is different from the ambit and purpose of the injunction now sought by the Plaintiffs, which is to restrain the 1st to 3rd Defendants from disclosing or using the Plaintiffs' confidential information. The confidential information covered by the injunction is not limited to information of the 1st Plaintiff's customers. That being the case, it cannot be said that the injunction applied for is to enforce a negative covenant. The observations of Lord Cairns in Doberty v. Allman therefore has no application.

22. The question for the court then is whether on the evidence, the Plaintiffs have raised a serious question that the 7 categories of information can be regarded as confidential information that merits the protection the Plaintiffs are seeking.

23. In Faccenda Chicken Ltd v. Fowler & Others [1987] 1 Ch. 117, an action brought by an employer against his former employers claiming an injunction and damages for breaches of contracts of employment and breach of confidence, Neill L.J. observed (at p. 136B-E):

"The implied term which imposes an obligation on the employee as to his conduct after the determination of the employment is more restricted in its scope than that which imposes a general duty of good faith. It is clear that the obligation not to use or disclose information may cover secret processes of manufacture such as chemical formulae (Amber Size and Chemical Co. Ltd v. Menzel [1913] 2 Ch. 239), or designs or special methods of construction (Reid & Sigrist Ltd v. Moss and Mechanism Ltd (1932) 49 R.P.C. 461), and other information which is of a sufficiently high degree of confidentiality as to amount to a trade secret. The obligation does not extend, however, to cover all information which is given to or acquired by the employee while in his employment, and in particular may not cover information which is only "confidential" in the sense that an unauthorized disclosure of such information to a third party while the employment subsisted would be a clear breach of the duty of good faith."

24. Neille L.J. then went on to observe that when determining whether any particular item of information is entitled to protection upon the termination of an employment contract, it is necessary to consider all the circumstances of the case. One of the matters to which attention must be paid is the nature of the information itself. His lordship pointed out that (at p. 137D):

"[T]he information will only be protected if it can properly be classed as a trade secret or as material which, while not properly to be described as a trade secret, is in all the circumstances of such a highly confidential nature as to require the same protection as a trade secret eo nomine."

25. On the question of what constitutes a confidential information or trade secret, Sir Robert Megavry V.C. suggested in Thomas Marshall Ltd v. Guinle [1979] 1 Ch. 227, at 248E-G, that, in an industrial or trade setting, 4 elements may be of assistance:

(a) The owner believes that the release of the information would be injurious to him or of advantage to his rivals or others;

(b) The owner must believe that the information is confidential or secret in the sense that it is not already in the public domain;

(c) The owner's belief under (a) and (b) must be reasonable;

(d) The information must be judged in the light of the usage and practices of the particular industry or trade concerned.

26. In the present case, the Plaintiffs say that the information is confidential as it was imparted to the 1st and 2nd Defendants in confidence and these Defendants knew full well that they were under a duty of fidelity and confidence in respect of the information. That however is not good enough because not all information given in confidence is a trade secret which the recipient can be prevented from using for his own advantage when, for instance, his employment is over: Printers & Finishers Ltd. v. Holloway [1965] R.P.C. 239, 253.

27. The Plaintiffs also rely heavily on the point that the 1st Plaintiff had put in tremendous effort in soliciting, cultivating and developing its customers and in building its trade connections. No doubt, the Plaintiffs believe that the information relating to the 1st Plaintiff's customers and trade connections is valuable and important. The evidence also shows that the Plaintiffs believe that the disclosure of such information has injured and will injure their business in that it will facilitate competition from third parties. The concern about and the likelihood of competition, however, do not necessarily render the information relating to the customers and trade connections confidential information or trade secret. Similarly, the fact that the 1st Plaintiff had incurred huge efforts in building up its clientele and connections cannot per se prevent other people in the same trade from approaching and cultivating relationship and connections with these customers. Indeed, it cannot be the purpose of injunction to prevent otherwise legitimate competition in business and trade. It is to be noted that the evidence does not show nor suggest that the 1st and 2nd Defendants had taken any list of customers from the Plaintiffs, or had deliberately memorized or learnt the particulars of the 1st Plaintiff's customers for their own benefits and/or to injure the Plaintiffs. It is therefore incumbent upon the Plaintiffs to demonstrate how and why it is said that the information is confidential or is a trade secret.

28. Despite the voluminous evidence filed, the Plaintiffs had said little to explain or to justify the confidentiality nature of the 7 categories of information, nor to demonstrate how the information is peculiar and crucial to the Plaintiffs. The failure to do so is particularly acute in this case. This is because the product in question is transparent shutters installed at shop entrances or shop fronts. Information such as the identities of the customers using the shutters, the features and dimensions of the shutters and the locations of shops installed with such shutters are readily available and discernible to the public. A further consideration is the fact that the 1st Plaintiff is the sole agent and distributor, not only in Hong Kong, but also in the mainland, Macau and Taiwan, of EUROLOOK Shutters. The release of such information as the supply source and the pricing elements and formula will not, prima facie, produce any injurious result to the Plaintiffs.

29. Counsel for the Plaintiff referred to the case of GSL Engineering Ltd v. Yau Hon Yin Sammon & others [1990] 2 HKC 360 and submitted that it would be unsatisfactory to permit the 1st to 3rd Defendants to continue with their breaches and wrongs. In GSL Engineering Ltd, the plaintiff had obtained an ex parte injunction preventing the defendant, who is its former manager director, from contacting its suppliers and customers. The defendant then applied to vary the injunction so as to enable him to deal with the Plaintiff's suppliers and customers. Godfrey J (as he then was) was of the opinion that the information lacked the necessary character of confidentiality for supporting the Plaintiff's case. His lordship nevertheless refused to vary the injunction. That is because the defendant had admitted the plaintiff's case that he had, while acting as managing director, diverted business from the plaintiff and made secret profits thereby. Godfrey J therefore recognized that to vary the injunction was to enable the defendant to continue with his previous course of conduct which was wrongful. The case is therefore plainly different from the present one and is distinguishable. The present Defendants deny the Plaintiffs' allegations of mis-using the information of the Plaintiffs and have gone on oath to do so.

30. I am not persuaded that the Plaintiffs have on the evidence raised a serious question that the 7 categories of information have the necessary degree of confidentiality as to justify an interlocutory injunction

Ambit of the Injunction

31. I turn now to deal with the ambit of the confidential information as defined in the Schedule to the Summons. It is beyond doubt that the terms of an injunction as well as the ambit of the information to be covered by an injunction must be defined with clarity. They must not at the same time be unnecessarily wide and oppressive.

32. In Lock International plc v. Beswick [1989] 3 All ER 373, at p. 378b-d, Hoffman J (as he then was) observed:

"On the other hand, there will be a good deal of other information which an employee could not without breach of duty disclose while he was employed but which he is free to use as part of his own skill and knowledge after his employment has ceased. It is therefore of the essence of a claim against an employee for misuse of confidential information that the employer should be able to identify with particularity the trade secret or similar confidential information to which he lays claim. The terms of any injunction must also be capable of being framed in sufficient detail to enable the defendant to know exactly what information he is not free to use on behalf of his new employer."

33. In a subsequent part of his judgment, Hoffman J observed, in the context of a discussion on the use of anton pillar order, that (at p. 384b-c):

"Even in cases in which the plaintiff has strong evidence that an employee has taken what is undoubtedly specific confidential information, such as a list of customers, the court must employ a graduated response. To borrow a useful concept from the jurisprudence of the European Community, there must be proportionality between the perceived threat to the plaintiff's rights and the remedy granted."

34. In this case, the confidential information as defined in the Schedule to the Summons is unjustifiably wide and lacks particularity. Apart from information relating to EUROLOOK Shutters, categories 3, 4, 6 and 7 extend to other shutters said to be "fabricated or manufactured" by the Plaintiffs, and in the case of category 3, "from time to time". It is difficult to see how the Plaintiffs can justify an injunction extending beyond EUROLOOK Shutters when the Plaintiffs' case is that the dealings between them and Hung Fat and/or the 1st and 2nd Defendants are in relation to EUROLOOK Shutters. There is also no evidence to suggest that the Plaintiffs have been in the business of manufacturing shutters. At any rate, there can be no justification for restraining the Defendants from disclosing or using information of shutters to be manufactured in future. In the case of category 7, it extends not only to information on shutters in general, but also on shutter-related products in general. Again, there is no evidential basis to merit a protection in this regard. The evidence does not show that the Plaintiffs have engaged in business of shutter-related products. It is also unclear as to what is intended to be shutter-related products.

35. The lack of particularity is not confined to category 7. The terms employed in the other categories, such as "value added services" in category 4 and "marketing strategies" and "product development strategies" in category 6, also lack particularity. The evidence filed do not assist in reducing the problem by, for example, identifying what is the specific information or documents that are covered by these general descriptive terms. The many minutes of the directors' meetings of the 2nd Plaintiff, on which heavy reliance is placed, is also of no assistance.

36. Counsel for the Plaintiffs submitted injunctions similar in terms to that sought in the present summons had been granted in Thomas Marshall (Exports) Ltd v. Quinle, supra, GSL Engineering Ltd v. Yau Hon Yin Sammon, supra and Jademan (Holdings) Ltd. v. Francis Leung Pak-to [1989] 2 HKLR 151. It is true that the injunctions granted in Thomas Marshall (Exports) Ltd case are similar in form to the one sought here. However, in that case, the Plaintiff had set out in the supporting affidavit details of the categories of information which are confidential: see p. 248H-249B. Even then, Sir Robert Megavry V.C. when holding that the plaintiff is entitled to the injunctions claimed, stated that it was subject to the question of the wording of the injunctions: see p. 249G. As for the GSL Engineering Ltd case, it is not clear at all from the law report as to what was the precise form or term of the injunction granted. It appears from the headnote that the defendant there was restrained from contacting the suppliers or customers of the plaintiff: pp. 360F, 361H & 36E H-I. In the case of Jademan (Holdings) Ltd, the injunction granted ex parte contained a schedule setting out the documents which the defendant was restrained from disclosing, publishing or making use of. The injunction also exempted information in those documents which is not already in the public domain: p. 152 G. The information to be protected in both Thomas Marshall (Exports) Ltd and Jademan (Holdings) Ltd case is therefore quite specific and well defined, a matter which is vital yet missing in this case.

37. I also agree with counsel for the 1st to 3rd Defendants that category 6 is so wide and general that it can be said to be oppressive. It is completely unclear as to which are the major real estate developers, government entities and other public transportation companies. It is also difficult to accept that information on the ways of becoming a contractor for developers, government entities and public transportation companies can be confidential, let alone all information thereon. These days in Hong Kong, it must be common practice for contracts to be awarded after invitation for tenders, whether open or private. The effect of restraining the 1st to 3rd Defendants from using such information will have the effect of preventing the Defendants from becoming contractors of these developers, entities and companies, irrespective of the kind of work or service. That plainly cannot be right and just.

Other Objections

38. Having found in favour of the 1st to 3rd Defendants on the above 2 objections, it will not be necessary to consider the other objections raised in details. Suffice it to say that I consider that there is, on the balance, a serious question to be tried on whether the 2nd or 3rd Defendant is a proper party to the injunction, having regard to the active role the 2nd Defendant played in the joint venture between the Plaintiffs and Hung Fat and considering the timing of the incorporation of the 3rd Defendant, its activities and the involvement of the 1st and 2nd Defendants in it. I also take the view that the fact that the restrictive covenant in the General Conditions will be expiring in several months' time is per se not sufficient to prevent the grant of an interlocutory injunction, although it is one of the relevant factors to be taken into account.

Conclusions

39. For the reasons stated above, I am of the view that the present application should be dismissed with costs to the 1st to 3rd Defendants. And I order accordingly.