Recently, the District Court dismissed a claim from a former employer, noting that "it was apparent that the Plaintiff has been trying to unduly exert pressure on the Defendant".  The Court found that the Plaintiff failed to demonstrate any legitimate business interest to justify two post-termination restrictions, determining that they were not reasonably necessary for the protection of the interests claimed by the Plaintiff.

Background

The Plaintiff is a public relations agency based in Hong Kong, primarily serving clients from the fashion industry. The Defendant, who graduated from university in 2013, joined the Plaintiff in March 2014 under an employment agreement. This agreement included a second document outlining two covenants (“Post-Termination Restrictions”):

1. Restrictive Covenant: Prohibited the Defendant from joining another public relations agency for two years following her departure from the Plaintiff.

2. Non-Solicitation Covenant: Restricted the Defendant from contacting, liaising with, or soliciting business from the Plaintiff's existing customers or suppliers, and from interfering with any contractual or business relationships established by the Plaintiff.

The Defendant's employment was terminated in January 2018. Shortly thereafter, she took a position at the Hong Kong branch of an international public relations agency that also focused on the fashion industry. The Plaintiff attempted to enforce the Post-Termination Restrictions, initiating legal action against the Defendant for breaching these restrictions and for acting in breach of the duty of confidence.

Main Issue

Initially, the Defendant argued that the second document containing the Post-Termination Restrictions did not form part of her employment agreement and was unenforceable due to a lack of consideration. However, the Court disagreed, affirming that consideration existed since the Defendant was required to sign the documents concurrently, making the Post-Termination Restrictions an integral part of the employment contract.

Nonetheless, this does not imply that the Post-Termination Restrictions are enforceable.  The principal issue is whether these restrictions constitute a restraint of trade and are therefore unenforceable.  Generally, covenants restricting an ex-employee from joining a competitor are unenforceable unless the employer can demonstrate that these covenants are intended to protect legitimate interests in a manner that is both reasonable and necessary.

Regarding "legitimate interests", the Court referenced Winta Investment (Hong Kong) Ltd v. Ng Kam Chit (12/04/2018, DCCJ1620/2012) [2018] HKDC 342, establishing that legitimate interests do not merely pertain to an interest in avoiding competition, but rather to proprietary interests typically encompassing trade secrets and client relationships belonging to the employer.

The Court also cited PCCW-HKT Telephone Ltd v. Aitken (2009) 12 HKCFAR 114 and AXA China Region Insurance Co Ltd v. Pacific Century Insurance Co Ltd [2003] 3 HKC 1, emphasising that "trade secrets" must be clearly identified and that less significant information will not receive post-termination protection.  Key characteristics defining "trade secrets" include:

1. The information must be utilised in a trade or business.
2. It must be confidential and not already public information.
3. It should be easily isolated from other information that the employee is permitted to use, such that an ordinary person would recognise it as improper to use.
4. If disclosed to a competitor, it could cause significant harm to the owner.
5. The owner must actively limit its distribution and stress its confidential nature to the employee.

In evaluating "reasonable necessity", the Court considers various factors, including:

• The seniority of the employee.
• The duration of the restriction.
• The notice period for termination.
• The geographic scope of the restriction.
• The nature of the restricted activities.
• The type of further contractual restrictions.

Decision

The Court ruled in favour of the Defendant, rejecting the Plaintiff's application based on the grounds that the Post-Termination Restrictions represented unenforceable covenants in restraint of trade without adequate justification.

The Plaintiff could not prove that the Defendant had access to proprietary confidential information belonging to the Plaintiff, as she was hired as a public relations assistant directly after university—an entry-level position typically lacking access to critical trade secrets or significant influence over the Plaintiff’s customers to justify the restrictions imposed.

Moreover, the two-year Restrictive Covenant was deemed excessively lengthy, especially when compared to the one-month notice period required for termination post-probation. The Plaintiff argued that the Restrictive Covenant was not intended as a worldwide restriction; however, the absence of spatial limitations rendered it unreasonable. The Court declined to apply a “blue pencil” approach to introduce a spatial limitation to the Restrictive Covenant to make it more reasonable.

Additionally, the Restrictive Covenant broadly prevented the Defendant from joining any public relations agency, rather than only those specialising in the fashion industry. Similarly, the Non-Solicitation Covenant barred the Defendant from contacting all clients and suppliers of the Plaintiff, rather than focusing on those with whom the Defendant had direct interactions during her tenure.

Key Takeaways

This case serves as a critical reminder for employers that while post-termination restrictions may be enforceable, they must be reasonable and strictly necessary to protect the employer's legitimate business interests. These interests can differ among employees and will be evaluated on a case-by-case basis. Should a Court find that a restriction is overly broad, it will likely invalidate it entirely, as demonstrated in this instance, unless—very rarely—an unreasonable aspect can be severed without altering the fundamental nature of the clause (a process referred to as "blue pencilling").

(For the full text of the judgment: Moxie Communications Ltd v. Lai Cheuk Lok (Aka Charlotte Lai) (16/08/2024, DCCJ4624/2021) [2024] HKDC 1323)

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