HU YI GLOBAL INFORMATION RESOURCES (HOLDING) CO, HONG KONG LTD v. HAI WAI YING AND ANOTHER

HCA 1429/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1429 OF 2008

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REASONS   FOR   DECISION

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1.  I gave my decision at the end of the hearing and reserved my reasons.  These are my reasons.

2.  This is an application for interlocutory injunctions to enforce a covenant against abuse of trade secrets and a covenant in restraint of trade and to enjoin the defendants from unlawfully interfering with the plaintiff’s business.

Background

3.  The plaintiff is in the business of providing internet domain name registration, keyword registration in internet and wireless communication and related online business solutions.  This action is mainly about the business of registration of Chinese domain names of the plaintiff and its associate company in the Mainland.  The plaintiff is an authorized registrar of the China Internet Network Information Centre (“CNNIC”).  The plaintiff and its associate company can provide to their customers the service of registering with CNNIC domain names that end with “.cn” and Chinese domain names.

The covenants

4.  The 1st defendant was the plaintiff’s manager from 13 June 2003 to 30 December 2006.  She resigned from the plaintiff’s employment on 30 December 2006.  Before the commencement of the employment, the 1st defendant had entered into an Employment Agreement dated 11 June 2003 and a Confidentiality Agreement dated 12 June 2003 with the plaintiff.  The relevant clauses of these Agreements are clause 8 of the Employment Agreement and clauses 2, 3, 6 and 10 of the Confidentiality Agreement.  The certified translation of clause 8 of the Employment Agreement is as follows:

“8.  Confidentiality

The Employee shall sign a Confidentiality Agreement with the Company.  You undertake that during your employment and after termination of your employment you shall keep confidential all information in relation to the Company and its subsidiaries (the Group) coming into your knowledge during your employment and in the course of performing the employment contract.”

The certified translations of clauses 2, 3, 6 and 10 of the Confidentiality Agreement are as follows:

“2. Apart from discharging her duties, Party B undertakes that without the prior consent of Party A, she shall not disclose, notify, announce, publicize, publish, pass on, transfer or by any other means make the technical secrets or other commercial secret information belonging to Party A or other parties to whom Party A owes a confidentiality duty known to any third party (including other employees of Party A who are not allowed to know of such secrets according to rules of the confidentiality system), and she shall not make use of such secret information outside the course of discharging her duties.

The agreement of managerial staff superior to Party B for Party B to disclose and use the relevant technical secrets or other commercial secrets shall be regarded as Party A’s agreement for so doing, unless Party A has announced the lack of authority of such managerial staff in advance.

3.  Both parties agree that Party B shall, after the termination of Party B’s employment, continue to observe her obligations as those which she observed during her employment of keeping in strict confidence and not making unauthorized use of technical secrets or other commercial secret information which Party B came across and had knowledge of during her employment with Party A, and which belong to Party A or a third party to which Party A owes a confidentiality duty, regardless of the reason for termination of Party B’s employment.

The period for which Party B shall observe the confidentiality duty after termination of her employment is 2 years from the date of termination of her employment.

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6.  Party B undertakes that without Party A’s prior approval, she shall not hold any office, including as shareholder, partner, director, supervisor, manager, staff member, agent, consultant, etc., in other enterprises, business units and organizations which manufacture and sell similar products as those manufactured and sold by Party A or provide services similar to those provided by Party A during her employment with Party A and within two yeas after termination of her employment.

…

10.    The commercial secrets referred to in this Agreement include but are not limited to: lists of clients, promotion plans, purchase information, pricing strategies, financial data, sources of goods, etc.

The technical secrets referred to in this Agreement include but are not limited to: technical policies, project designs, circuit designs, production methods, technical requirements, computer software, databases, research and development records, technical reports, test reports, experimental data, experiment results, sketches, samples, sampling machines, models, modelling equipment, operating manuals, technical files, relevant correspondences (and) telephone conversations, etc.”

The alleged breaches and unlawful interference

5.  On 1 August 2007, the 1st defendant incorporated the 2nd defendant.  The 1st defendant is also the sole shareholder and director of the 2nd defendant.  The 2nd defendant’s business is to provide domain name registration for customers.  It is similar to that of the plaintiff.  The plaintiff says that such activity of the 1st defendant is contrary to clause 6 of the Confidentiality Agreement.  This clause is a covenant in restraint of trade.

6.  The plaintiff also alleges that the 1st defendant has abused the confidential information or trade secrets of the plaintiff which includes the plaintiff’s customers’ lists by using such information or secrets to solicit the plaintiff’s customers to switch to the 2nd defendant’s services.  In other words, the plaintiff alleges that the 1st defendant has breached clauses 2 and 3 of the Confidentiality Agreement.

7.  The plaintiff also alleges that the staff of the 2nd defendant, when approaching the plaintiff’s customers, had misled them to think that the call was from the plaintiff.  Four such customers had allegedly entered into contracts with the 2nd defendant because of such mistaken beliefs.  The plaintiff said that it had discovered some of these cases in March 2008.  It did not make up its mind then on whether to sue the defendants.  However, there was a further case of the plaintiff’s customer having been allegedly misled that came to light in June 2008.  The plaintiff therefore started gathering evidence and put the matter into the lawyers’ hands.  Correspondence between the lawyers of the parties in July 2008 did not resolve the matter.  The plaintiff thus issued the Statement of Claim on 29 July 2008 and this application was made on 27 August 2008.

The defendants’ denial and the plaintiff’s reply

8.  The 1st defendant made an affirmation to oppose the application.  She criticised the business methods engaged by the plaintiff.  She alleged that she resigned because she was told to do so by the person in charge of the plaintiff.  She was later advised by lawyers that the covenant in restraint of trade was unreasonable and unenforceable.  She then set up the 2nd defendant and put it in the business of Chinese domain name registration service for customers in Hong Kong and overseas.

9.  She denied of having abused the plaintiff’s clients lists and information for accessing clients.  She said such information was available in the public domain.  She also denied the allegations that the staff of the 2nd defendant had pretended to be the plaintiff’s staff in approaching the plaintiff’s customers.  She also criticized the plaintiff for delaying the application. 

10.  The plaintiff also filed a reply affirmation and pointed out, among other things, that it is very different to obtain its clients’ domain names and their information from the public domain if the 1st defendant did not abuse the plaintiff’s clients lists and access information.

Serious questions to be tried?

11.  On the evidence before me, I find that there is a serious question to be tried on whether the 1st defendant has abused the plaintiff’s clients lists and the plaintiff’s information for accessing its clients which information is not in the public domain.  I also find a serious question to be tried on whether such information amount to trade secrets of the plaintiff.  I also find a serious question to be tried on whether the staff of the 2nd defendant had, when approaching the plaintiff’s customers, misled the customers to think that they were from the plaintiff.

12.  On the covenant in restraint of trade, the plaintiff argues that by the nature of its business, it is impossible to set a geographical limit for the restraint.  Counsel for the plaintiff also submits that if the 1st defendant did not enter into the covenant, the plaintiff would not have employed her.  This argument can be applied to almost all covenants in restraint of trade.  However, it is not one of the factors to be considered on the enforceability of the covenant. 

13.  This covenant seeks not only to protect the plaintiff’s interest by preventing its clients from being poached by an ex-employee, it seeks to prevent competition by the ex-employee for two years in respect of all entities of business or otherwise in Hong Kong and in the rest of world which would like to register a Chinese domain name.  In fact, the plaintiff’s business also includes other domain names.  The scope of the prohibition sought herein is even wider than Chinese domain names.  This covenant is indeed too wide to be reasonable (see Chitty on Contracts, 29^th edition, para. 16-075 and Office Angels Ltd v Rainer-Thomas [1991] IRLR 214 at paras. 23 to 25).

14.  I do not think there is any serious question to be tried on whether the covenant in restraint of trade in clause 6 of the Confidentiality Agreement is enforceable.  I find it unenforceable.  I therefore only need to consider whether to grant injunctions to prevent the alleged abuse of the plaintiff’s trade secrets and the alleged unlawful interference of the plaintiff’s business.

Damages adequate?

15.  The plaintiff submits that damages are an inadequate remedy.  The reason being that if the defendants should abuse the plaintiff’s trade secrets and poach the plaintiff’s customers or former customers in the plaintiff’s name, the plaintiff’s goodwill will be harmed.  This is particularly so for those who would take up the service of the 2nd defendant as the plaintiff has no way to monitor the quality of such service.

16.  The defendants argue that the plaintiff can track down those of its customers and former customers who have switched over to the 2nd defendant.  The plaintiff can then find out from these customers on whether they had been induced to switch over to the 2nd defendant because of the defendants’ unlawful acts.  The damages of the plaintiff arising from the defendants’ unlawful acts can thus be quantified.

17.  The plaintiff replied that it would be very difficult for the plaintiff to find out such information from their former customers.

18.  I agree with the plaintiff’s submissions that damages are not an adequate remedy for the plaintiff.  Regarding the defendants, they have denied the allegations of abuse of the plaintiff’s trade secrets or having used unlawful means to poach the plaintiff’s customers or former customers.  If so, I do not think any injunction enjoining them from so doing would cause them any loss.

19.  The 1st defendant has also said that the plaintiff’s monthly turnover as at December 2006 was about HK$3.5 million.  It is therefore in a position to pay substantial damages to the defendants, if need be.  

Other arguments

20.  I also consider whether the plaintiff has delayed in proceeding with this application so that it should be denied of the relief.  The discovery of the last alleged case of unlawful interference was in June 2008 and this application was issued about 2 months later.  I think the plaintiff could have dealt proceeded more expeditiously.  However, the delay here is insufficient to warrant the withholding of the relief.

21.  The defendants also argue that the covenant on trade secrets only has two more months to go and that I should not grant any injunction to enforce it.  I disagree.  The covenant is supposed to last for two years and not a year and ten months or a year and eight months (the application was made at the end of August 2008).

22.  In the premises, I grant the plaintiff the following injunctions:

(1) An interlocutory injunction to restrain the 1st defendant from making use of or disclosing or causing to be disclosed to the 2nd defendant or any third party the plaintiff’s lists of clients, information for accessing the plaintiff’s clients (which is not in the public domain), promotion plans, pricing strategies and financial data until 29 December 2008 or further order.

(2) An interlocutory injunction to restrain the 1st and 2nd defendants or any of them, whether acting by themselves, their officers, servants, agents or otherwise howsoever, from effecting any unlawful interference on the plaintiff’s business in their approach to and communication with their potential or prospective customers:

(i) by pretending to be the plaintiff or the plaintiff’s employee or agent or

(ii) by misleading their potential or prospective customers into believing that they are dealing with the plaintiff or the plaintiff’s agent;

until judgment in this action or further order.

23.  I also order the costs of this application be in the cause as both sides think that such order is reasonable and ought to be made.