DISCOVERY MONTESSORI SCHOOL LTD v. VEENA GUPTA

DCCJ 4333/2022

[2023] HKDC 533

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 4333 OF 2022

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DECISION ON COSTS

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INTRODUCTION

1.  This is a decision on costs by paper disposal arising from an application for interlocutory injunction by the plaintiff (“P”), the owner of the subject Montessori school, to restrain one of its former teachers of the school, ie the defendant (“D”), from working for P’s competitor, who is running a new Montessori school in the vicinity of P’s school in Discovery Bay.

2.  By the order made by consent of the parties at the substantive hearing on 22 February 2023 in respect of the P’s summons filed on 7 November 2022 (“the Summons”) for the interlocutory injunction, the Summons was withdrawn upon the undertakings given by D with costs reserved with liberty to parties to file and serve submissions on costs and to be decided on papers.

BACKGROUND

3.  P sought the following interlocutory injunction by the Summons:

“(1) D shall not work for Guidepost Montessori International Kindergarten (Discovery Bay) located at Shop 106, 1/F, 92 Siena Avenue, Discovery Bay North, Discovery Bay until after 30 June 2023, either directly or indirectly; and

(2) D shall not whether by herself or by her respective servants, agents, personnel assigned by her or otherwise, directly or indirectly be interested or concerned (whether as a shareholder, director, employee, subcontractor, partner, consultant, proprietor, agent or otherwise) in any business, company or firm carrying on business which is likely to be, in competition with the business of the Plaintiff in Discovery Bay, Tung Chung, Tin Hau to Wan Chai district and Central and Western district area, including but not limited to Montessori School or Montessori Learning Centre, for a period of one year from the date of termination of employment of D, i.e. from 30 June 2022 to 30 June 2023.”

4.  The following undertakings were given by D for P’s withdrawal of the Summons at the substantive hearing:

“D undertakes until 30 June 2023 not to:

(1) copy, utilize, or disclose the files stored on the Plaintiff’s Google Drive folder as maintained and controlled by the Plaintiff as at 30 June 2022;

(2) induce, entice or solicit or attempt to induce, entice or solicit:

i. any existing employee of the Plaintiff to leave such employment; and

ii. the custom or business (which is in competition with the Plaintiff) of any person, firm or company who is a client or customer of the Plaintiff or is negotiating with the Plaintiff in the Discovery Bay, Tung Chung, Tin Hau to Wan Chai district, and Central and Western District area.”

LEGAL PRINCIPLES

5.  Both parties have citied the summary of the applicable legal principles in Perrine Chamonix Limited v Star League Limited & Another[1] :

“(1) First, the starting pointing is that the party seeking to withdraw its action should pay the costs of the other party. The burden of persuading the court to depart from the general rule rests on the party who seeks to withdraw.

(2) Secondly, however, when a party has achieved substantially what he or she sought in the action or application, costs should be awarded to him or her. It is an application of the principle that normally costs should follow the event.

(3) The court does not adopt a mechanical approach. The court looks into the substance and the merits of an application. If, but for a plaintiff’s or an applicant’s application, he or she would not have obtained the relief he or she seeks in a writ of summons or a summons, then he or she is in effect the substantive winner of the case.

(4) If a plaintiff or an applicant withdraws an action or a summon because the defendant had done something, after the issuance of writ of summons or summons, which renders it unnecessary or academic for the plaintiff or the applicant to proceed with the action or application, the court has a full discretion to award costs to the plaintiff or applicant after taking all the circumstances of the case into consideration.”

6.  P’s position on costs is that the usual rule should be departed from and “no order as to costs” of the Summons shall be made, as the Summons was not withdrawn unconditionally but upon the undertakings given by D. Therefore, P submitted that “there are no winning and losing or successful and unsuccessful parties in the present proceedings.”

7.  D, on the other hand, considers herself as the “effective winner”, as she has achieved what she wants, ie to continue working at her current school, while P has failed in restraining D from working at her current school. D is now seeking costs of and occasioned by the Summons against P.

MERITS OF THE SUMMONS

8.  The gist of the present application is about the enforceability of “non-compete” or “restraint of trade” clauses in the last employment agreement entered by the parties on or about 22^nd March 2021, in which D was employed by P as the “Montessori Lead Teacher / Program Coordinator” commencing from 1^st September 2021 to 31^st August 2023 (“the Employment Agreement”).

9.  On or about 25 April 2022, D tendered her resignation and indicated that she would like her final day of employment on 23 June 2022. Eventually, D was working for P until 30 June 2022.

10.  P is relying on Clauses 5.6[2] and 7[3] of the Employment Agreement (two clauses collectively referred as “the NCC”) to restrain D from working for any Montessori schools or learning centres in the Discovery Bay, Tung Chung, Tin-Hau to Wan Chai district, and Central and Western District for 1 year following the termination of her employment with P, ie from 30 June 2022 to 30 June 2023.

11.  P subsequently discovered that D started working for Guidepost at Shop 106, which is P’s direct competitor in terms of target students or proximity, allegedly in breach of the NCC. The indorsed writ was issued by P on 7 November 2022 claiming injunctive reliefs against D and on the same day the Summons was taken out.

12.  In essence, the Summons is based on the following grounds:

(a)  the NCC protects the P’s legitimate interests:

(i)  confidential information and/ or trade secrets; and

(ii)  client connections;

(b)  the NCC goes no further than reasonably necessary; and

(c)  the balance of convenience lies in favour of granting an interlocutory injunction.

Confidential Information and/ or Trade Secrets

13.  The confidential information and / or trade secrets which P seeks to protect are stored in a Google Drive including:

(a)  contact lists of P’s previous and existing class students and parents; and

(b)  teaching curriculums and materials, internal planning and other school documents.

14.  According to P, access to the Google Drive has been granted to D during the entire period of her employment with P. Evidence also indicates that the Google Drive account is managed by Ms Leung, a director of P, who is entitled to change the log-in passwords for the Google Drive.

15.  D denies having in possession of any of the alleged confidential information and / or trade secrets. P on the other hand does not have evidence showing that D is still possessing or has disclosed to others such confidential information.

16.  Apart from the NCC, there is an independent confidentiality clause in the Agreement purportedly protecting P’s interest against employees’ leaking confidential information (ie clause (6)).

17.  In Midland Business Management Ltd v Lo Man Kui[4], Johnson Lam J (as he then was) stated in paragraph 24 that the plaintiffs do not have a good prospect of success in upholding the validity of a non-compete clause (cl.11.3) because they already have the protection of two other similar anti-poaching clauses (cl.11.4 & cl.11.5).

18.  I am of the view that the above authority is applicable in the present case. As P already have the protection of clause 6 against compromising the confidential information and/or trade secrets by D, P do not have a good prospect of success in upholding the validity of the NCC relying on the such ground.

Client Connections

19.  The other area of legitimate interests which P seeks to protect by the NCC is the so-called “client connections”. P considers students and parents as its “customers” who are likely to develop loyalty to their service providers, ie teachers. In particular, D, being the Lead Teacher and Program Coordinator and the most senior teacher, plays an extremely important role in promoting P, boosting enrolment, building relationships with parents of prospective, existing and past students and communicating with the media. P even considers D as the “symbol / icon” of P.

20.  The following 3 authorities upholding post-termination restraint of trade clauses are cited by P’s counsel in her Skeleton Submissions dated 20 February 2023:

(1)  East England Schools v. Palmer [5];

(2)  The Delivery Group Limited & Another v Christopher Mark Yeo[6];

(3)  Beckett Investment Management Group Ltd v Hall[7].

21.  In East England Schools v. Palmer, the claimant (“E”) brought an action against the defendants (P and S), a former employee and her new employer, for damages following P’s alleged breaches of post-termination restrictive covenants in her contract of employment. E, a recruitment agency in the educational sector, had employed P as a recruitment consultant under a written contract of employment. Clause 15 of her employment contract contained a number of post-termination restrictive covenants.

22.  While employed by E, P was responsible for matching teacher applicants with secondary schools in Essex. Emails would normally be sent out (even if written by other members of staff or automatically) over P’s name. It was envisaged that she would, primarily, be the person who visited the schools and who spoke to them over the telephone on behalf of E. P also met and spoke on the telephone to the candidate teachers. The building up of relationships with schools and teachers was held to be an integral part of the role envisaged for her.

23.  An excerpt of the judgment of East England Schools was cited at §29 of The Delivery Group Limited & Another v Christopher Mark Yeo:

“In East England Schools v Palmer [2014] IRLR 191, the court considered whether a business had a protectable connection with its customers such as to justify non-solicitation and non- dealing covenants in the claimant’s (Ms Palmer’s) contract of employment. It held that the fact that the relationship between schools and teachers on the one hand and the agency on the other was known to be a fragile one made it more rather than less necessary and legitimate for the employer to seek to protect it, because the prospect of a successful solicitation by the ex-employee was more likely.”

24.  The defendant in The Delivery Group Limited & Another was formerly employed as an Account Manager by the 2^nd claimant (“C2”), a company operating in the mail and parcel delivery services industry. After considering East England Schools case at §29, Mr Justice Saini went further to state in following paragraph 30 as follows:

“I agree with the Cs that the case is directly analogous to the present. On the evidence before me, D had important client relationships with C2’s clients and had access to Cs’ confidential information. This is the very reason why Cs require protection. Indeed, I note that D himself recognises this: "the Downstream Access mail marketplace is very limited with only three players having major national operational capacity to sort mail" and he adds that clients like to "shop around".”

25.  The third English authority Beckett Investment Management Group Ltd v Hall is about a claim by B, a holding company within a group of companies providing financial services, against its former employee (H) who had allegedly been in breach of contract in his involvement with a competitor business on leaving B’s employment. H was a registered independent financial adviser and had been employed within the group for some years before entering into a contract with B to become B’s sales director and also a director of two subsidiaries. H’s contract contained a clause covering restrictions after termination of employment.

26.  Lord Justice Maurice Kay set out the peculiar feature of the financial service industry and laid the foundation for upholding the particular post-termination restrictive covenant at the beginning of the judgment at §1:

“Any financial services company relies on employees to attract and retain a client base. If those employees who deal directly with clients leave the company and set up on their own account or go to work for a rival company, it is not unnatural that, one way or another, sooner or later, the clients will follow them. Although they have been the clients of the company rather than of its employees, from the clients’ point of view it may well be the personal relationship with an individual adviser in which they have particular trust and confidence. A tension therefore arises between the interest of the company in protecting its client base in the event that one or more of its employees depart and the interest of such employees who wish for the freedom to develop their careers elsewhere. The clients are not captive. In this situation, it is inevitable that employers include in contracts of employment clauses which seek to limit the ability of employees to take the client base with them. This is the context of the present appeal.”

27.  Lord Justice Maurice Kay then in §25 cited “A Practical Approach to Employment Law” 7^th edition by John Bowers QC at paragraph 6.51 as follows:

“The courts will, in most cases, carefully consider the nature of the market in which the employee was engaged. The narrower and more specialist the market, thus the more likely it is that a non-dealing covenant will upheld, given that clients will in those circumstances naturally gravitate to the ex-employee who opens a new, competing company in such a case.”

28.  Having considered the above English authorities, I am unable to share P’s view that the above cases are directly analogous to the present case for the following reasons:

(1)  The relationship of a school and the parents of students should not be as “fragile” as the relationship of a commercial entity and its clients.

(2)  Unlike clients in commercial world who like to “shop around” their service providers, it is unusual for parents to keep shopping around desirable schools after their children have entered a particular school;

(3)  Employees who deal directly with clients tend to develop personal relationship with their clients and in particular, Lord Justice Maurice Kay in Beckett Investment Management Group Ltd pointed out that clients may have particular trust and confidence on an individual financial adviser. When the adviser goes to work for a rival company, it is not unnatural that, one way or another, sooner or later, the clients will follow him. However, it is not the case for teachers / parents. No matter how good or how popular a teacher is, it is unusual for parents to develop personal relationship with any teachers of their children, not to mention to let their children follow a departing teacher to a new school.

(4)  Parents do not naturally “gravitate” to outgoing teachers, because teacher-parent relationship is very different from the relationship between employees and clients, as the nature of commercial market is very different from the education sector.

(5)  It is a matter of common sense that it will not be an easy or casual decision for parents to change the school of their children. Usually, parents will take into account of a basket of factors when choosing a school for children, such as the reputation, mission and vision of the school, curriculum, past academic results of the school, location, campus environment, school facilities, qualification of teachers, and general conduct of students …etc. It is highly unlikely for parents to disregard the above factors or to ignore the risk of adaptation problem of their children in a new environment. Therefore, it is rather difficult to change the school of their children in order to follow an individual outgoing teacher.

29.  Apparently, P has hold D in high regard and emphasized the important and unique role of D regarding the building up of relationships with parents and students.

30.  Even though a Montessori teacher would be in charge of the same group of students for 3 whole years, there are 3 other teachers co-teaching the same class with D. It is rather inconceivable that D would have overriding influence on parents to follow her to change school.

31.  In any event, D has denied the existence of loyalty of parents and students to a particular teacher. Moreover, P has no concrete evidence to support its assertion that D has been influential among the parents.

32.  For the aforesaid discussion of the English authorities, the customer service employees / clients relationships in the commercial market context are not analogous to the school / parents & students relationship in the local education sector. The so-called “client connections” are not likely to be held as a legitimate interest to be protected by the NCC. Eventually, P will not succeed in obtaining the injunction order, as the NCC are apparently unenforceable.

33.  To conclude, P has failed to discharge its burden to show that it will succeed if the matters proceed to trial, but the evidence indicates a likely defeat of P.

EFFECTIVE WINNER

34.  The starting point of P’s position on costs is that there are no winning / losing or successful / unsuccessful parties in the present proceedings.

35.  P has also drawn my attention to various pre-action warning letters issued by P to D, but D has failed to make any replies. It suffices to mention the letter before action issued by P’s solicitors, Huen & Partners dated 25 August 2022 (“the Letter”).

36.  The Letter began by setting out the background of the employment relationship of the parties. Then it recited clauses 5.6 and 7 of the Employment Agreement (ie the NCC). It went on to accuse D’s breach of the NCC by joining Guidepost.

37.  The previous warnings communicated to D by various media were recapped in the Letter. Finally, the ultimatum was given on the last page, demanding D to quit her job with Guidepost:

“In light of the warning email sent by our client to you on 9 August 2022, we are instructed send you the FINAL WARNING LETTER, that if you do not terminate your employment contract with Sunshine House / Guidepost Montessori School, refrain yourself from committing any further violation of the Employment Contract and provide the evidence of the termination of employment with our client’s director competitor to our client within 14 days from the date hereof, we have standing instructions to commence legal proceedings against you for injunction order and for recovery of damages and costs incurred due to your violation of the Employment Contract without any further notice. Please be reminded that any costs incidental to the above shall also be borne by you.” [8]

38.  It is obvious that P’ objective is to make D quit her job with Guidepost. D’s current undertakings of abiding by the other contractual obligations under clauses 5.5 & (6) have never been suggested or requested by P.

39.  Therefore, I agree with D’s submissions that P has failed in restraining D from working for Guidepost, whereas D has succeeded in keeping her current job.

40.  The remaining issue to be decided is whether there should be no order as to costs because of the undertakings given by D. First of all, D does not have to quit her job with Guidepost in order to comply with the undertakings. Thus, by giving the undertakings does not render it unnecessary or academic for P to proceed with the injunction application.

41.  Besides, D’s undertaking should not be regarded as her admission of liability for breach of any contractual obligations. I accept that giving of the undertakings is for the sake of amicable settlement of the Summons.

42.  For the above reasons, I agree with D’s submission that she is the effective winner of the Summons, as she has succeeded in maintaining the status quo of her employment with Guidepost.

CONCLUSION

43.  As P has failed to persuade this court to depart from the general rule, costs should follow the events. Therefore, I make an order that P shall pay D’s costs of and occasioned by the Summons, to be taxed if not agreed, with certificate for counsel.

44.  Finally, I am grateful to counsel for their assistance rendered to this court.