SK HYNIX INC.v. VANNEX INTERNATIONAL LTD AND ANOTHER

HCA1473/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1473 OF 2014

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DECISION

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Introduction

1. This action concerns confidential information contained or stored in die wafers manufactured by SK Hynix Inc (“Hynix”). By its summons dated 1 August 2014, Hynix applies to continue the ex-parte interlocutory injunctions (“the Ex Parte Injunctions”) against Chen Hung-Min (“Chen”) granted by Barnes J subsequently continued by L Chan J by consent. On the other hand, Chen applies by his summons dated 14 August 2014 to discharge the Ex Parte Injunctions.

2. The Ex Parte Injunctions mainly enjoin Chen from dealing in, selling or in any way using any part of those die wafers originating from Hynix that are now in Chen’s possession, custody and/or power.

Hynix’s case

3. The underlying facts on which the claim Hynix is founded are largely not in dispute and can be outlined as follows.

4. Hynix is the second largest supplier of memory semi-conductors for use in computer devices and mobile phones in the world. Important components of such memory semi-conductors are deis and wafers. They themselves contain information as to the latest integrated circuit configurations and patterns of such memory semi-conductors and those information relating to their design and manufacturing process used in the manufacturing process of such memory semi-conductors (collectively “the Information”). The Information is confidential in nature.

5. The Information is stored in the fine patterns existing in multiple layers of the integrated circuits on such dies and wafers. A layman is unable to discern let alone extract the Information from such dies and wafers. Only a highly skilled person with the relevant technological knowhow can peel off each layer for the fine patterns and use an electronic microscope to take pictures of the fine pattern for analysis and extract the Information.

6. Hitech Semiconductor (Wuxi) Co Ltd (“Hitech”) is a subsidiary of Hynix. On behalf of Hynix, in September 2013 Hitech entered into an undated written agreement with Vannex International Limited (“Vannex”) whereby Vannex agreed to dispose of such defective or scraped die wafers (“Bad Die Wafers”) on behalf of Hynix (“the Disposal Agreement”).

7. The express terms of the Disposal Agreement included that Vannex shall collect Bad Die Wafers from Hitech and ship them to Hong Kong for disposal. The agreed method of disposal is to grind the Bad Die Wafers into dust with 1.5 to 2 mm diameter. Vannex should be remunerated at the rate of RMB$5,600 per ton of such Bad Die Wafers.

8. However, instead of disposing of the Bad Die Wafers received from Hitech pursuant to the Disposal Agreement, Vannex sold 2,880 kg of the Bad Die Wafers to Chen with a view to a resale. This sale was discovered as a result of Chen’s complaint about the quality of the Bad Die Wafers to one of the subsidiaries of Hynix in China (“Hynix China”) in May 2014.

9. Chen further threatened on 14 June 2014 that if Hynix failed to make a proposal to compensate his loss for his purchase of the Bad Die Wafers by 31 July 2014, he would dispose of them. However, it transpired that Chen actually shipped the Bad Die Wafers to his potential buyer in the Philippines on 4 July 2014 already.

10. The central contention of Hynix is that the Information is confidential in nature and Vannex came into possession of such Bad Die Wafers only for the purpose of disposing of the same in the manner prescribed by the Disposal Agreement. As a result, Vannex owes Hynix a duty of confidence or a fiduciary duty not to use the Bad Die Wafers and the Information contained therein for any purpose other than the specified purpose stated in the Disposal Agreement, viz, complete destruction. The sale of the Bad Die Wafers by Vannex to Chen was a breach of its duty of confidence or fiduciary duty.

11. Likewise, Chen having received the Bad Die Wafers from a confidant in breach of its duty of confidence owed to Hynix with actual or constructive notice of the confidential Information contained therein owes Hynix a duty of confidence.

12. Accordingly, Hynix demands that Chen should return the Bad Die Wafers to Hynix pending conclusion of these proceedings.

Chen’s case

13. Chen has filed an affirmation and the crux of his defence is that he denies the existence of any confidential information contained in the Bad Die Wafers which he purchased from Vannex in good faith.

14. He first gave details about his business. He has been in the business of scrap trading for almost 29 years and started his trade in electronic scraps in the 1990s.

15. In or about January 2014, Chen came to know that there was a demand of scrap electronic dies and wafers for the manufacture of integrated circuit in the Mainland. Chen then sourced a number of suppliers and eventually he found Mr Kan of Vannex.

16. Vannex subsequently agreed to sell to him the Bad Die Wafers at a total price of US$332,535. The Bad Die Wafers were delivered to him in April 2014.

17. Chen made complaint about the quality of the Bad Die Wafers directly to Hynix China in May 2014 in view of the unhelpfulness of Vannex.

18. Despite his complaint, on 4 July 2014, Chen shipped the Bad Die Wafers to Telung Subic International Corp (“Telung”) in the Philippines for pre-sale testing through Directsys Technology Limited (“Directsys”).  Pursuant to an oral agreement between Telung and Chen, in the event that Telung is satisfied with their quality, they would be sold to Telung in the sum of US$800,000.

19. Chen alleges that if he decides to cancel the deal, it was agreed that he would have to make compensation to Telung in the sum of US$400,000 exclusive of freight charges. There is no document evidencing this oral agreement.

20. Chen’s major contention is that it is a trade practice in the scraping trading industry that scraped wafers and dies in the market no longer contain any confidential information. Any such confidential information should have been eradicated before they are marketed. In any event, once the die wafers are available in the market, such confidential information would become something in the public domain and anyone through reverse engineering or other technologies would be able to gain access to such information.

21. Both the summons of Hynix and the summons of Chen do not concern Vannex, the 1^st defendant herein, and Vannex has not taken any part in these applications. It did not appear at the hearing of these summonses either. This court note that by a decision dated 10 February 2015, DHCJ Yvonne Cheng SC granted Hynix interlocutory reliefs against Vannex similar to those now being sought by Hynix against Chen. 

Applicable principles

22. The parties have no argument about the general principles. This court would bear in mind the well-established principles expounded in American Cyanamid Co v Ethicon Ltd [1975] AC 396, which hardly need repetition here.

23. Insofar as the mandatory injunction sought by Hynix, i.e. the delivery up of the Bad Die Wafers in Chen’s possession, custody and power/control is concerned, Mr Yu, counsel for Chen, argues that a higher threshold is required. He submits that Hynix should show a strong prima facie case.

24. There is no doubt that this is the general approach a court would adopt when dealing with an application for interlocutory mandatory injunctions. At the end of the day, this court should nevertheless consider whether the refusal to grant such mandatory injunctions would in fact carry a greater risk of injustice than granting them. If it is so, even if the court does not feel the high degree of assurance, it would be right to grant such mandatory injunctions: Music Advance Ltd v Incorporated Owners of Argyle Centre Phase I [2010] 2 HKLRD 1041 per Ma J (as the Chief Justice then was) at §12(g).

25. Both Mr Chan, counsel for Hynix, and Mr Yu refer to me the same paragraph (§27-06) in Clerk & Lindsell on Torts (21^st edn.,2014) which sets out the three elements of a claim of breach of confidence. They are:

   (a) The information in respect of which relief is sought must have the necessary quality of confidence about it.

   (b) The information must have been imparted in circumstances importing an obligation of confidence although there is no need for an initial confidential relationship.

   (c) There must be an unauthorized use or disclosure of that information.

26. In regard to the legal principles relating to a claim of breach of confidence, Mr Chan helpfully refers this court to Sim Kon Fah v JBPB & Co [2011] 4 HKLRD 45 where Recorder Anderson Chow SC (as he then was) made a succinct summary of the applicable principles. It is pertinent to note that it is now no longer necessary to identify a prior confidential relationship before a duty of confidence can arise.

27. It is also noteworthy that so long as the information in question had the necessary quality of confidence and had been imparted in circumstances importing an obligation of confidence, a defendant who intentionally obtained such information without authorization must have appreciated that the claimant had an expectation of privacy. The intentional acquisition of such confidential information by the defendant was in itself a breach of confidence: §44. 

28. However, if a third party being a bona fide purchaser of the information without any knowledge of its confidential nature, equity may not allow the plaintiff to injunct the bona fide purchaser from dealing with such information: §46. 

Discussion

29. With these principles in mind, I turn to the evidence adduced by the parties. On the following undisputed and/or incontrovertible evidence, I am of the firm view that Hynix’s case of breach of confidence has a good prospect of success. 

30. First, Hynix has a good arguable case that the Information has the necessary quality of confidence on the evidence of Sangwon Kang (“Kang”), the head of the Department of Manufacturing Enabling of Hitech. I do not think I need to go into any detail on the technological level and suffice it to say Chen being a scrap trader himself is unable to adduce contrary evidence to argue against the confidential nature of the Information. His primary position is only that any confidentiality has lost when Hynix’s memory semi-conductors are available in the market.

31. I accept Mr Chan’s submission that the mere fact that Hynix made available its memory semi-conductors in the public domain does not necessarily destroy the confidentiality of the Information. In Yates Circuit Foil Company and Anor. v Electrofoils Ltd and Anor. [1976] FSR 345 at 387, Whitford J had this apposite observation:

“The fact that the means of ascertaining the ingredients used in treatments is publicly available does not, to my mind, make the information relating to those ingredients common knowledge. Someone who has taken the trouble, by analysis, to acquire specific knowledge in relation to a feature of a particular treatment may in fact have acquired information of value which, until it becomes a matter of common knowledge, in my view he is entitled to protect.”

32. In the present case, there is no evidence that the Information has become a matter of common knowledge at all. The unchallenged evidence of Kang is that the Information could only be extracted by a skilled person with technical means. In the premises, I opine that Hynix has a strong case of establishing the necessary quality of confidence of the Information.

33. Before I proceed to the second requirement, I should make it clear that I do not accept Chen’s bold assertion of the alleged trade practice that any confidential information in the dies and wafers would have been removed from such dies and wafers before they are traded in the scrap market. There is no corroborative evidence of such a trade practice. Nor is there any evidence as to how (and indeed by whom) such confidential information is to be removed from the Bad Die Wafers.

34. Again on the incontrovertible evidence, I have little difficulty in concluding that Hynix has a good prospect of success in establishing that Hitech imparted the Information to Vannex in circumstances importing an obligation of confidence. The express terms of the Disposal Agreement are highly indicative of such an obligation.

35. To start with, the fact that Hitech found it necessary to engage the professional service of Vannex to dispose of the Bad Die Wafers with the specific and precise requirement that they had to be heavily crushed (1.5 – 2mm) strongly supports the contention of Hynix that the Bad Die Wafers did contain the Information of a confidential nature and they had to be thoroughly destroyed and not to be misused by Vannex and/or any third party. It is obvious that the Bad Die Wafers were no ordinary unwanted materials which could be disposed of casually.

36. Further, the obligation of confidentiality was expressly imposed on Vannex in the Disposal Agreement: Clauses 14(2) and (3). Vannex was expressly forbidden to misappropriate the business secrets of Hitech in the course of the Disposal Agreement. I accept Mr Chan’s submission that arguably these clauses also cover the Information in the Bad Die Wafers.

37. Next I have to deal with the issue as to whether Chen actually knew or ought to have known that the Bad Die Wafers contained the Information at the time of his purchase of the same. Chen insists that he was a bona fide purchaser and he had no such knowledge, actual or constructive. On this issue, I bear in mind I should not resolve factual disputes on paper evidence.

38. In the first place, given Chen’s allegation of the trade practice, he should expect that confidential information contained in the Bad Die Wafers supplied by Vannex should have been eradicated before his acquisition of the same at all. In a way Chen acknowledges the necessity of removing any confidential information in such electronic scraps before he could deal with them in his business. There is however no evidence as to what Chen had done to find out whether the Information had been removed from the Bad Die Wafers before he further dealt with the same.

39. Mr Chan further places heavy reliance on the prices of the Bad Die Wafers to infer actual or constructive knowledge on the part of Chen. Whilst in his evidence Chen says that good quality scrap wafers and dies can cost up to RMB 200,000 per ton in his experience, he actually paid US$332,535 for 2,880 kg of the Bad Die Wafers, at a far more expensive rate. The calculation of Mr Chan, not disputed by Mr Yu, is that Chen paid Vannex RMB 713,564.43 per ton.

40. The resale price is even more alarming. It is alleged that Telung agreed to pay US$800,000 for the Bad Die Wafers meaning they cost RMB 1,716,661.86 per ton.

41. This begs the question why Chen and Telung would ever agree to pay such high prices for the Bad Die Wafers if they were only ordinary scrap materials devoid of any confidential information. Mr Chan submits that Chen and Telung would agree to pay the prices only because they knew a premium had to be paid for the Information remaining in the Bad Die Wafers. I accept that there is much force in this submission. Mr Yu provides no answer in his submission. In my view, Hynix has a good arguable case of Chen’s knowledge of the confidential nature of the Information contained in the Bad Die Wafers. It is highly arguable that Chen intentionally acquired the Bad Die Wafers containing the Information which he knew to be confidential at a higher price, thereby committing a breach of confidence.

42. Lastly, I do not think that there is any question of unauthorized use or disclosure of the Information on the evidence. As is apparent in the Disposal Agreement, Hynix did and does not allow any resale of the Bad Die Wafers by Vannex. It could not be argued that Hynix ever authorized Chen’s intended sale of the Bad Die Wafers to Telung or any other third parties.

43. All in all, I find Hinex’s claim in breach of confidence to be highly arguable with a reasonably good prospect of success.   

Damages – adequate remedy?

44. It is obvious that an award in damages can rarely compensate for loss of confidentiality adequately. The following dictum of Lord Neuberger in Imerman v Tchenguiz and Ors [2011] Fam 116 at §69 is illustrative:

“It seems to us, as a matter of principle, that again in the absence of any defence on the particulars facts, a claimant who establishes a right of confidence in certain information contained in a document should be able to restrain any threat by an unauthorized defendant to look at, copy, distribute any copies of, or communicate, or utilize the contents of the document (or any copy), and also be able to enforce the return (or destruction) of any such document or copy. Without the court having the power to grant such relief, the information will, through the unauthorized act of the defendant, either lose its confidential character, or will at least be at risk of doing so. The claimant should not be at risk, through the unauthorized act of the defendant, of having the confidentiality of the information lost, or even potentially lost.”

45. Quite apart from this general principle, which is undoubtedly correct in my view, I accept that the loss of Hynix arising from a breach of confidence is difficult to be computed and can hardly be covered by damages.

46. On the issue, the only submission of Mr Yu is that there is no evidence that Chen ever possessed the relevant skills to extract the Information from the Bad Die Wafers and disclose the same to the competitors of Hynix.

47. I see no merit in this submission. It is irrelevant whether Chen himself had the relevant skills. His intended resale of the Bad Die Wafers together with the Information creates an obvious risk of the Information being misused by other persons with the means of extracting the same.

Balance of convenience

48. As discussed above, it is likely that Hynix would suffer irreparable loss if Chen is free to deal with the Bad Die Wafers.

49. Chen alleges that if he could not complete the sale with Telung pursuant to his oral agreement with Telung, he would suffer huge loss. Mr Yu submits that Chen’s business may come to an end. This only highlights the unsoundness of his financial position and shows that he is not good for damages in any event.

50. I accept the evidence of Kang that Hynix is financially sound to provide a cross-undertaking as to damages in respect of any financial loss suffered by Chen as a result of the injunctions sought.

51. On the other hand, Chen’s solicitors by their letter dated 16 December 2014 informed Hynix that the Bad Die Wafers previously shipped to Telung had been returned to Hong Kong. Chen should be in a position to deliver the same to Hynix pending the conclusion of these proceedings.

52. In the circumstances, the balance of convenience tilts heavily towards the grant of the injunctions sought. I so order.

Conclusion and Orders

53. For the reasons given above, I accede to the application of Hynix to continue the Ex Parte Injunctions and I would make an order in terms of paragraph 1 of its summons. I dismiss Chen’s summons accordingly save that I agree to give Chen 21 days from the date of this Decision to comply with the disclosure and delivery up obligations in the Ex Parte Injunctions.

54. As regards costs, I make an order nisi that costs of and occasioned by these applications by the two summonses including all costs previously reserved (including the hearings before Barnes J and L Chan J) be costs in the cause.

55. It remains for me to thank Mr Chan and Mr Yu for their able assistance.