Employer's Claim to Enforce Non-Compete and Non-Solicitation Obligations Dismissed by Hong Kong Court
In the recent case of Moxie Communications Limited v. Lai Cheuk Lok [2024] HKDC 1323, an employer (the "Company") sought to enforce two post-termination restrictive covenants ("PTRs") against a former employee (the "Employee").
In Hong Kong, PTRs are generally void for being in restraint of trade and contrary to public policy, unless the employer can show that the restrictions are necessary to protect their legitimate business interests, and are reasonable in all the circumstances to protect such interests.
The District Court found that the Company failed to demonstrate any legitimate interests justifying the imposition of the two PTRs on the Employee, and held they were unenforceable at law.
Facts
The Employee commenced employment with the Company as a PR assistant in 2014 shortly after graduating from university. Under her contract of employment, she was paid a monthly salary of HK$10,000 and was required to give 1-month's notice of termination.
She was also subject to:
- a "Non-Compete" PTR prohibiting her from joining another public relations agency for two years; and
- a "Non-Solicitation" PTR prohibiting her from contacting, liaising with or soliciting business from the Company's existing customers or suppliers, or interfering in any contractual or business relationship between the Company and its suppliers or customers (collectively, the "Relevant PTRs").
In late 2017, the Employee resigned. In January 2018 she subsequently joined an international public relations agency focusing on the fashion industry.
The Company commenced legal proceedings against the Employee and claimed that the Employee had breached the Relevant PTRs.
The Employee denied the claim on the basis that (among others) the Relevant PTRs were unenforceable for being in restraint of trade.
The Decision
In considering whether the Relevant PTRs were enforceable, the Court reiterated the following key legal principles:
- Covenants restricting the freedom of the employee to compete with their former employer are unenforceable, unless it can be shown that they are designed to protect the employer's legitimate interests, and extend no further than is reasonably necessary to protect those interests;
- In assessing the reasonableness of the restrictions, the Court may take into account, among other things, the seniority of the employee, duration of the restriction, the length of the employee's notice period, geographical scope of the restriction and nature of the restricted activity. The reasonableness of the restriction is to be judged at the date that the contract was made; and
- The employer is not entitled to protect itself against competition per se but only against unfair exploitation of the ex-employer's trade secrets or trade connections, and also to protect the stability of its workforce.
Applying these principles, the Court held that the Company was unable to show there were any legitimate business interests that would justify imposing the Relevant PTRs on the Employee.
In particular, the Court noted that the Employee was only a fresh graduate taking up an entry-level job when she secured her employment with the Company and so it would be unlikely for her to have access to the Company's trade secrets, or influence over the Company's customers that could justify subjecting her to the Relevant PTRs.
The Court also held that the scope of the Relevant PTRs (e.g. the duration and the geographical scope of the "Non-Compete" restriction) was too broad for them to be reasonable in the circumstances.
All in all, the Court found that the Relevant PTRs were in restraint of trade and unenforceable. The Court also separately dismissed the Company's claim that the Employee had breached her duty of confidentiality.
On the issue of costs, the Court accepted that even though there was scope for legal argument as to the enforceability of the Relevant PTRs, it was apparent to the learned Judge that the Company had been trying to unduly exert pressure on the Employee by (among other things) making baseless accusations against her. For this reason, the Court awarded indemnity costs to the Employee.
Key Takeaways
Employers looking to impose PTRs on an employee should carefully consider the legitimate interests they are seeking to protect and ensure that the PTRs they adopt are reasonably necessary to protect those interests.
Where the legitimate interests are not apparent, it may be necessary to identify them in the contract of employment; while at the same time being careful not to leave out any genuine legitimate interests.
When drafting PTRs, it is important for an employer to tailor the clause to the employee and not adopt a one-size-fits-all approach.
Employers are also reminded that PTRs are interpreted at the time the contract was entered into. So if the employee's situation changes, for example, when they are promoted and are provided with access to more trade secrets and confidential information, employers should consider reviewing and updating the PTRs as appropriate.
The judgment is available here.
For a more detailed discussion on the relevant legal principles on PTRs, please refer to our earlier insight at: https://www.mayerbrown.com/en/insights/publications/2024/07/restrictive-covenants-hong-kong.
