Background

In the recent case of Johnson Electric International Limited and Others v. Li Yue and Others [2024], the Johnson Electric Group (“Johnson Electric”) commenced proceedings against 7 Defendants. The 1^st Defendant, Li Yue, was a senior employee at Johnson Electric holding the position of Senior Vice President of Corporate Engineering until his termination on 23 June 2022. Li Yue had been with the company since 2004 and was privy to sensitive business and group strategy decisions, as well as confidential information and trade secrets confined to senior management. He was employed in one of the most senior positions within the company and reported directly to the Chairman and CEO. In this role, he also served as a director of various subsidiaries of Johnson Electric during his tenure.

The 2^nd, 3^rd and 4^th Defendant, who were direct subordinates of Li Yue, were terminated on 29 June 2022. The 5^th Defendant, Li Yue’s wife, was a majority shareholder of the 7^th Defendant, a PRC company engaged in the research and development, manufacturing and sale of motor and motor control systems. This company was also a substantial shareholder of the 6^th Defendant, another PRC company with a similar business focus as Johnson Electric (collectively, the “PRC companies”).

 

Whistleblowing and Investigation

The proceedings began following a whistleblowing complaint received by Johnson Electric on 29 April 2022. The complainant alleged that Li Yue had conspired with his subordinates to set up a competing company for personal gain. This kickstarted Johnson Electric’s investigation into the defendants.

By January 2023, Johnson Electric obtained substantial evidence indicating that Li Yue and his team had misused and/or misappropriated company resources, assets, facilities, equipment, confidential information and trade secrets to develop products and businesses for the benefit of the PRC companies. In particular, this involved the implementation of 3 wrongful projects which included the use of patents developed during their employment at Johnson Electric (“Alleged Wrongful Patents”).

Johnson Electric was able to adduce evidence showing various stages of their scheme, and the paper trail which included the development of the Alleged Wrongful Patents being discussed by the Li Yue and his team during their employment (including using their company email accounts).

Johnson Electric ultimately concluded that this scheme had been orchestrated by Li Yue given the scale of the project, and that it would require someone of his seniority to mobilise the number of employees involved. This was made all the more clear through the involvement of Li Yue’s wife as shareholders of the PRC companies that were in a competing business with Johnson Electric.

Employment Agreement Clauses

Li Yue’s employment agreement contained several key clauses: the Confidentiality Clause, Invention Clause, and Non-Compete Clause.

The Confidentiality Clause prohibited Li Yue from disclosing any confidential information belonging to Johnson Electric during and after his employment.

The Invention Clause states that any proprietary rights to inventions, discoveries, design formulas, processes, adaptions or improvements developed during his employment would belong to Johnson Electric.

The Non-Compete Clause prohibits Li Yue from being directly or indirectly engaged as an employee, shareholder or otherwise in businesses competing with Johnson Electric during his employment and for 12 months after the termination date.

Court’s consideration of confidential information and trade secrets

Johnson Electric argued that Li Yue had clearly breached the terms of his employment contract. It also claimed that, as a Director of various subsidiaries of Johnson Electric, Li Yue owed fiduciary duties to Johnson Electric. Johnson Electric was able to show that Li Yue had also held the position of Director of one of the PRC companies between March and June 2022 during his employment with Johnson Electric in breach of his employment contract.

The defendants argued that Johnson Electric could not claim a breach of confidence based on the Alleged Wrongful Patents. These patents were registered with the China National Intellectual Property Administration (CNIPA) and owned by Li Yue’s wife and the PRC companies. The defendants argued that since the patents were already published in the public domain, any claim for confidentiality was invalid.

Confidential information and trade secrets

The Court considered whether the information in question constituted a misuse of confidential information and trade secrets. The Court stated that the duty of confidentiality post-termination only extends to trade secrets or the equivalent, and that confidential information falling short of the necessary high degree of confidentiality would not be protected after the end of employment. On this basis, an individual would be free to use their own skill and knowledge, including that acquired during the course of his former employment, for his own benefit or that of a new employer in direct competition with his former employer. However, the Court also considered the importance of the contractual agreement between Johnson Electric and Li Yue, noting that Li Yue had clearly agreed to the terms of the Confidentiality Clause and Invention Clause. The misuse of the Alleged Wrongful Patents was a clear breach of his obligations.

Unlawful Competition

The defendants argued that Li Yue’s wife and the PRC companies were entitled to develop patents and compete with Johnson Electric. They also claimed that any injunction would have lapsed by the time of the trial due to the 12-month restraint period in the Non-Compete clause. The court rejected this argument citing a lack of evidence that Li Yue’s wife and the PRC companies could develop such work independently without using Johnson Electric’s confidential information.

Court’s decision

The Court ultimately found in favour of Johnson Electric, granting an interlocutory injunction restraining Li Yue, his team and his wife from using, disclosing, exploiting, keeping records or copies of any documents containing confidential information and/or trade secrets of Johnson Electric. The Court also ordered the delivery up of all documents containing the Alleged Wrongful Patents.

Key Takeaways

This case reaffirms the importance of protecting confidential information and trade secrets even after the termination of employment. It also highlighted the necessity of robust confidentiality clauses and the legal remedies available in case of breaches. In this case Johnson Electric was able to successfully demonstrate that the information in question was of a high degree of confidentiality, warranting protection.

HR professionals and in-house counsel should ensure that employment contracts include comprehensive confidentiality, invention, and legally enforceable restrictive covenants. These provisions are essential for protecting a company’s proprietary information and maintaining its competitive edge.