High Court refuses to enforce a 12-month non-compete covenant against former Manulife employee

Background

Mr Rappold was Manulife’s Chief Financial Officer, Asia, from January 2018 to October 2023. In October 2023 he left the company, having relinquished his CFO duties since August 2023 when his replacement was hired. In December 2023, Prudential, a competitor of Manulife, offered Mr Rappold the position of Chief Transformation Officer which Mr Rappold accepted. He informed Manulife of the same in January 2024.

A series of correspondence was exchanged between the solicitors of Mr Rappold and Manulife, wherein Mr Rappold repeatedly acknowledged that the confidentiality covenant in his employment contract with Manulife was binding on him and offered to provide an undertaking in similar terms to Manulife to allay its concerns. Manulife stated it would not accept Mr Rappold joining its competitor before the 12-month duration of the NCC expired and stated it would apply for injunctive relief in the event that he joined Prudential. Mr Rappold through his solicitors notified Manulife his employment would start on 2 April. Nine days later, Manulife sought to obtain an interim-interim injunction by an ex parte on notice application. At the ex parte hearing, the court was told by Mr Rappold’s solicitors that although Mr Rappold had signed an employment contract with Prudential, he was taking a period of unpaid leave and would not start onboarding with Prudential until 22 April 2024. An undertaking was given to the court that he would not start work prior to the summons hearing date of 5 April 2024.

At the Friday summons hearing on 5 April 2024 Deputy High Court Judge Sara Tong SC (“DHCJ Tong”) heard arguments for the parties.

The NCC

The NCC provided that:

“You agree that you will not at any time during your employment with the Company and for a period of 12 months following a voluntary termination of your employment, be employed in a Similar Capacity by a Competitor, own more than 10% of the equity in a Competitor or act as a director or consultant or advisor to, any Competitor without the Company or Manulife’s prior written consent.

“Similar Capacity” means the same or similar position, or having the same or similar responsibilities, accountabilities and duties that you have or had in connection with your employment with the Company or Manulife.

A “Competitor” is any person or company engaged in or planning to engage in business that: (1) is the same or similar to the business of, in whole or in part, to those the Company or Manulife and its affiliates and subsidiaries, including without limitation providing financial protection, wealth management, asset management and other financial products and services; or (2) involves the selling or offering of products, processes, programs, or services that are the same or similar, in whole or in part, to those of the Company or Manulife and its affiliates and subsidiaries or that were under active consideration by the Company or Manulife and its affiliates and subsidiaries during your employment with the Company and which have not been abandoned in writing by the Company or Manulife and its affiliates or subsidiaries.”

The Decision

In considering the enforceability of the NCC, the court took account of the following factors:

1. The NCC contained no geographical limitation. Despite Manulife’s attempt to salvage the clause by deleting certain words i.e. “blue-pencilling” the clause, the NCC was clearly a worldwide non-competition covenant. Manulife failed to provide evidence that could justify a worldwide restriction imposed by the NCC, especially in light of the fact that Mr Rappold’s role with Manulife was limited to Asia whereas the new role with Prudential was a global one.

2. No evidence had been adduced by Manulife to justify the duration of the NCC. Manulife’s description of allegedly confidential information which it claimed Mr Rappold carried around in his head was “lacking in specificity” and “couched in broad terms”. Manulife not only failed to identify the exact nature of the confidential information but also failed to state the life cycle of each category of confidential information.

3. The NCC lacked a “temporal backstop” and applied to all work done by Mr Rappold throughout his 5-year employment with Manulife which rendered the NCC unreasonably wide.

Balance of Convenience

4. The risk of Mr Rappold losing the new job if the interim-interim injunction was granted was not fanciful and the ramifications on Mr Rappold could not be quantified in monetary terms. In contrast, Manulife failed to demonstrate an appreciable risk of irreparable damage to its business given that Mr Rappold undertakes to abide by his confidentiality obligations.

Delay

5. It should have been clear to Manulife on 22 February 2024 when it received Lewis Silkin’s letter offering a confidentiality undertaking as “a final attempt to resolve matters”, that a mutually agreeable resolution was not possible. There was delay on Manulife’s part in failing to make an application for injunctive relief until the end of March 2024.

Take away points for employers

1. A non-competition covenant should always be no wider than necessary to protect the legitimate business interests of the ex-employer. An employer should ensure it has specific and cogent evidence to justify the covenant’s duration, geographical scope and temporal backstop. Broad terms and business jargon set out in an affirmation would not satisfy the court that confidential information was at risk. Evidence was needed to show not only what was the confidential information in question but also to justify the shelf life of the confidential information which needed protecting.

2. Where there are other post-termination covenants protecting the employer, such as confidentiality and non-solicitation clauses in the employment contract, the employer would need to demonstrate why those other covenants were not sufficient to protect the employer and why a non-compete covenant is still necessary.

3. An employer who wants to enforce a non-compete covenant should act quickly in applying for injunctive relief. Where there is doubt as to whether an agreement can be reached to avoid court proceedings, an employer should give the employee an ultimatum and make an application for injunctive relief without delay absent any satisfactory response.

Interestingly, Manulife’s solicitors in their arguments placed heavy reliance on the case of BFAM Partners (Hong Kong) Ltd v. Gareth John Mills and Segantii Capital Management Ltd [2021] HKCFI 2904. This case was decided two years earlier and also concerned a former C-suite employee, Mr Mills, who left BFAM and later joined a competitor. Mr Mills ran similar arguments to Mr Rappold’s against BFAM, namely, that the evidence adduced by it failed to pinpoint what confidential information he supposedly carried in his head and that the life cycle of any confidential information in his head did not warrant a 6-month non-compete covenant. Mr Mills also complained of delay on BFAM’s part as it did not put in place an interim-interim injunction at the earliest available opportunity. In that case, the court found in favour of BFAM granting it an injunction to enforce the 6 months non-compete clause.

Despite the heavy reliance by Manulife on BFAM Partners as a precedent, DHCJ Tong did not refer to the case at all in her decision and was clearly not persuaded by Manulife’s arguments based on the case. We consider it is unlikely that BFAM Partners will be followed in future cases.