In brief
A recent decision of the Hong Kong Court reaffirmed the robust approach taken by the Court in examining the enforceability of a non-compete clause in an employment context even at the interim-interim stage.
A former employer has the burden of proof to adduce evidence to substantiate that a non-compete clause is reasonable and necessary for the protection of the former employer’s legitimate business interests for it to be enforceable. The Court will take a very robust approach in examining the scope of the restraint, and the specific basis of justifying a non-compete clause even at the interim-interim stage when a former employer seeks to restrain the ex-employee from joining the new employer competitor by relying on the non-compete clause in the employment agreement.
The Court reiterates that it will not redraft a non-compete clause for the parties, nor would it imply a term in order to save a covenant restraining an employee’s post termination conduct.
Key Takeaways
- It is of paramount importance to give adequate considerations to the drafting of restrictive covenants, including a non-compete clause. The golden rule is to ensure that the scope is reasonable and necessary for the protection of the employer’s legitimate business interests.
- Reference should be made to all the relevant circumstances, including (a) the position and duties of the employee; (b) the business model and geographical market of the employer; (c) the type/scope of confidential information known to the employee; and (d) the duration and geographical coverage of the restraint.
- The burden rests on the employer who seeks to enforce the non-compete clause to give specialty and clarity on precisely the confidential nature of the information and potential consequences of misuse in order for the Court to properly assess whether the non-compete clause is reasonable and necessary for the protection of the employer’s legitimate business interests.
In more detail
The plaintiff, a former employer, is an insurance company operating the Asia business of a wider international group. The dispute between the parties concerned the alleged threatened breach by the ex-employee, who was the CFO of the plaintiff, of a 12-month non-compete covenant (NCC) contained in his employment agreement.
Under the NCC, the ex-employee is restrained from being employed by the competitor of the former employer and its other group companies for a period of 12 months after the termination of the employment.
About six months after the NCC came into operation, the ex-employee informed the former employer of his intention to join an alleged competitor. The former employer applied for injunctive relief to restrain him from doing so by relying on the NCC, contending that there is a risk that the ex-employee would leak confidential information he obtained in the course of his former employment to the material detriment of the former employer’s interest if he is allowed to join a competitor before the expiration of the NCC.
In considering the application, the Court reaffirmed the following legal principles regarding the enforceability of a non-compete clause:-
- A non-compete clause under an employment contract is unenforceable unless the former employer can show that (i) it is reasonable in the interests of the parties and in the interests of justice; and (ii) it goes no wider than is reasonably necessary for the protection of the former employer’s legitimate business interests.
- The time for ascertaining the reasonableness of a non-compete clause is the time of the making of the contract.
- The greater the duration of the restraint and the wider its geographical extent, the more difficult to justify its reasonableness.
The Court made a note that it would not apply the strict merits threshold of injunction (i.e., a reasonably good prospect of success on the part of the former employer) with reference to the evidence adduced at the interim-interim stage. However, the Court considered that if it is of the provisional view that there is not even a serious issue to be tried on the former employer’s claim, there must be a risk of injustice in granting an interim-interim injunction.
The Court first found that in the absence of any express wordings of geographical limitation, the NCC seeks to impose a worldwide restraint on the ex-employee. The worldwide nature of the NCC itself is a “remarkable feature” which warrants proper justification.
Despite the former employer’s attempt to justify the NCC by generally summarizing the confidential information which the ex-employee had access to during his employment, the Court was not satisfied that the former employer has a reasonably good prospect of success at trial in that, inter alia:-
- The ex-employee only acted as the CFO responsible for the business in Asia, and the confidential information which he had access to does not justify the worldwide restraint under the NCC.
- The former employer failed to justify the 12-month restraint by explaining the shelf life of the alleged confidential information, and how such confidential information could be used during this period of time.
- The need for a 12-month restraint was further diminished by the confidentiality clause under the ex-employee’s employment contract, and the ex-employee’s undertaking to comply with the same.
The Court also found that the balance of convenience was against granting the interim-interim injunction as it would prevent the ex-employee from taking up the new role, which may well have far-reaching ramifications on the ex-employee’s career prospects that cannot be quantified on monetary terms. On the other hand, the former employer’s interest is also protected by the express undertaking given by the ex-employee to comply with his confidentiality obligation under the employment contract. The former employer failed to demonstrate an appreciable risk of irreparable damage to its business even if no interim-interim injunction was granted. As a result, the Court refused to grant the said injunction pending further consideration of additional evidence at the substantive hearing.
