Hong Kong: Summary Dismissal Upheld of Employee Involved in Competing Business

Summary dismissal cases are usually interesting because of their facts, and even more interesting if one is upheld by the court. In Cosme De Net Co Ltd v Lam Kin Ming [2021] HKDC 445, the District Court upheld the summary dismissal of an employee who was involved in a competing business without his employer's knowledge and consent.

Fundamental Breach of Contract by Competing Can Justify Summary Dismissal

The employer operated an online trading business. The employee was employed as a senior business development manager in charge of the overall implementation of the employer's e-commerce business. 

In early 2016, the employee approached members of the employer's marketplace team for details of the employer's sales through an online platform, including the uploading of its listings of products, item descriptions, customer services and contacts. The marketplace team members became suspicious since these technical matters were outside the scope of the employee's role. The marketplace team then searched and discovered an online store selling products the employer was also selling (the "Competing Business"). Most of the product images the Competing Business used were also almost identical to those the employer used which were created by hired professional photographers. Upon further investigation, the employee was found to be involved in the operation of the Competing Business. 

The court accepted on the facts that the employee had set up a scheme where the employer's products were sold to the Competing Business at a low profit margin of less than 5% and sometimes at a loss. The Competing Business then sold these products. 

The employer summarily dismissed the employee for breach of his contract of employment and fiduciary duty of good faith, and for infringement of the employer's intellectual property rights. 

On 14 April 2016, the employee commenced proceedings in the Labour Tribunal for payment in lieu of notice, year-end payment (bonus) and damages for wrongful dismissal. On 20 April 2016, the employer commenced proceedings in the High Court in respect of the employee's engagement in a secret business and infringement of its intellectual property rights. The Labour Tribunal proceedings were subsequently transferred to the High Court and the two actions were consolidated and in turn transferred to the District Court. 

The employer claimed against the employee for, among other things: 

1. Damages, alternatively, liquidated damages pursuant to the contract of employment equivalent to one month's salary of the employee, 
2. An account of profits received by the employee in breach of his fiduciary duty, 
3. Damages for infringement of intellectual properties, 
4. An injunction restraining the employee from further breach, and 
5. An injunction mandating the delivery up of copies of the articles that infringed the employer's intellectual property rights and the destruction of all electronic copies of those articles. 

The court held that the summary dismissal was justified.

The employee was held to have breached the implied terms of his contract of employment, the relevant intellectual property, business information and confidentiality clauses contained in the employment agreement and his fiduciary duty to act in good faith and the best interest of the employer.

However, despite the employer succeeding in some of its claims, it was unable to recover any damages. There was no evidence of loss of business or customers as a result of the employee's breach. As for the liquidated damages provision in the employment agreement, it was set out under the post-termination restraint of trade clause and there was no breach of those clauses in the current case. On the claim for account of profits, it was found that the employee was not involved in a way that entitled him to a share of the financial gains from the Competing Business during its short period of operation. 

The employer however was granted an injunction enjoining the employee or his servants or agents from using the employer's intellectual property, i.e., the images and descriptions of the product listings created by the employer and an injunction to return and destroy all copies of that property. These orders were of little practical consequence since the Competing Business had already ceased operation on the evidence. 

Takeaways for Employers

1. Although there are duties of fidelity and good faith implied into every contract of employment, employers should consider setting out what these duties entail in the contract of employment, particularly for senior employees. This will not only manage the employee's expectations but also make it easier for the employer to refer to an express term where there has been a breach. 
2. In the present case, fortunately, a member of the marketplace team followed up on the employee's suspicious request for data. Having clear roles within the business may help with this. It is also important for employers to have in place a process where issues and concerns can be raised and be investigated in a timely manner. The evidence gathered will help the employer to make informed decisions and, should the need arise, the evidence and credibility necessary to defend any summary dismissal claim. 

The judgment is available at the following link: https://legalref.judiciary.hk/lrs/common/search/search_result_detail_frame.jsp?DIS=135209&QS=%2B&TP=JU