Hong Kong: Court reaffirms its robust approach to the applicability of non-compete clauses in an employment context

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A recent Hong Kong Court decision reaffirmed the robust approach taken by the Court in examining the applicability of a non-compete clause in an employment context even at the temporary stage.

A former employer has the burden of proof to present evidence to establish that a non-compete clause is reasonable and necessary to protect the former employer’s legitimate business interests for it to be enforceable. The court will take a very strong approach in examining the scope of the restriction and the specific basis of justification of a non-compete clause even at the temporary interim stage when a former employer seeks to prevent the former employee from joining the new employer. the competitor relying on the non-compete clause in the employment contract.

The Court reiterates that it will not redraft a non-compete clause for the parties, nor will it imply a deadline to preserve an agreement that restrains an employee’s post-employment conduct.

• It is of paramount importance that adequate consideration be given to the drafting of restrictive covenants, including a non-competition clause. The golden rule is to ensure that the scope is reasonable and necessary to protect the employer’s legitimate business interests.
• Reference must be made to all relevant circumstances, including (a) the employee’s position and duties; (b) the employer’s business model and geographic market; (c) the type/scope of confidential information known to employees; and (d) the duration and geographic coverage of the restriction.
• The burden is on the employer seeking to enforce the non-compete clause to provide specificity and clarity on the confidential nature of the information and the potential consequences of misuse so that the Court can properly assess whether the non-compete clause is reasonable and necessary to protect the employee. legitimate business interests of the employer.

The claimant, a former employer, is an insurance company operating the Asian business of a wider international group. The dispute between the parties concerned the alleged threatened breach by the former employee, who was the plaintiff’s CFO, of a 12-month non-compete agreement (NCA) contained in his employment agreement.

According to the CCC, the former employee is prohibited from being employed by the competitor of the former employer and other companies of his group for a period of 12 months after the termination of the employment relationship.

About six months after the KKK became operational, the former employee informed the former employer of his intention to join a putative competitor. The ex-employer applied for an injunction to prevent him from doing so relying on the CCC, claiming that there was a risk that the ex-employee would leak confidential information he obtained during his previous employment to the ex-employee’s material detriment . the interest of the employer if he is allowed to join a competitor before the expiry of the CCC.

In considering the request, the Court reaffirmed the following legal principles regarding the applicability 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) does not go further than is reasonably necessary to protect the former employer’s legitimate business interests.
• The time for determining the reasonableness of a non-compete clause is the time of the conclusion of the contract.
• The longer the duration of the restriction and the wider its geographical scope, the more difficult it is to justify its reasonableness.

The court noted that it would not apply the strict merits threshold of the order (ie, a reasonably good prospect of success on the part of the former employer) by reference to the evidence presented at the interim stage. However, the Court held that if it is provisionally of the 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 injunction.

The court first found that in the absence of any express wording of the geographical limitation, the CCC seeks to impose a worldwide limitation on the former employee. The very worldwide nature of the NCC is an “extraordinary feature” that warrants adequate justification.

Despite the ex-employer’s attempt to justify the CCC by generally summarizing the confidential information to which the ex-employee had access during his employment, the Court was not satisfied that the ex-employer has a reasonably good prospect of success at trial in that, among others:-

• The former employee acted only as the CFO responsible for the Asia business and the confidential information to which he had access does not justify the worldwide restriction under the NCC.
• The former employer failed to justify the 12-month limitation by explaining the duration of the allegedly confidential information and how such confidential information could be used during that time period.
• The need for a 12-month limitation was further reduced by the confidentiality clause under the former employee’s contract of employment and the former employee’s undertaking to comply with the same.

The court also found that the balance of convenience was against granting the interim injunction as it would prevent the ex-employee from taking up the new role, which could have far-reaching consequences on the ex-employee’s career prospects that cannot be quantified in monetary terms. On the other hand, the interest of the former employer is also protected by the commitment expressed by the former employee to fulfill his obligation of confidentiality under the employment contract. The former employer failed to demonstrate a substantial risk of irreparable harm to his business even if a temporary injunction had not been granted. As a result, the Court declined to grant said order pending further consideration of additional evidence at the substantive hearing.