Hong Kong court upholds summary dismissal in light of employees secret business

Co-authored by Catherine Leung, Partner, Gladys Ching, Senior Associate and Tanya Mirchandani, Paralegal of Lewis Silkin

Facts

Cosme De Net Co Ltd (“Cosme”) runs an online store selling cosmetics and beauty products.

Mr. Lam Kin Ming (“Mr. Lam”) was employed by Cosme as a senior business development manager and was responsible for overseeing Cosme’s e-commerce business.

Mr. Lam’s colleagues became suspicious of Mr. Lam when he started asking them for certain information that were not related to his job duties, including product listings which contained product images. This was reported to Cosme and Cosme commenced an internal investigation into the matter.

Through the investigation, Cosme discovered that Mr. Lam was involved in running a separate online business named “Best Online Cosme” without its knowledge or consent (“Best Online Cosme”). Best Online Cosme sold identical products to those traded by Cosme but at a lower price and used product images and descriptions that were identical to those used by Cosme. In addition, the products were sourced from Cosme through Mr. Lam supplying them to Best Online Cosme at a margin of 5% or less.

Cosme summarily dismissed Mr. Lam on the basis that he had acted in breach of his employment agreement and fiduciary duties by operating a secret business and infringing the intellectual property rights of Cosme.

Mr. Lam denied the breaches and claimed that he had been wrongfully dismissed.

Issue

Was Cosme’s decision to summarily dismiss Mr. Lam justified?

Findings

Yes.

The court accepted the evidence adduced by Cosme which showed that Mr. Lam was involved in the operations of Best Online Cosme.

In particular, Cosme was able to show that the product images used on Best Online Cosme belonged to Cosme because they could be traced back to a specific code assigned by Cosme to the images. Cosme had also hired a freelance photographer to help photograph its products which Cosme was able to prove by presenting the invoices for the services it engaged.

Further, it was held that Mr. Lam’s involvement in Best Online Cosme without Cosme’s prior knowledge together with the offer to supply products to Best Online Cosme at a margin of less than 5% only benefited Best Online Cosme and was not in the best interest of Cosme.

The court therefore held that Mr. Lam had breached his fiduciary duty to act in good faith as well as the intellectual property and confidentiality provisions in his terms of employment.

The court also held that such breach existed irrespective of whether Mr. Lam had benefitted financially from running Best Online Cosme.

Key takeaways

1. The bar for summary dismissal remains high and employers need to be prepared to prove that summary dismissal was justified in the event it is challenged by an employee. Employers should conduct a thorough investigation into any suspected misconduct and gather evidence to show that there had been a serious breach by the employee before taking any action to summarily dismiss an employee.

2. To better protect the interests of the employer, it is advisable to expressly set out the employee’s duty of good faith in the employment contract and include express provisions that require an employee to avoid conflicts of interest and maintain confidentiality of the employer’s information and intellectual property so that employees have a clear understanding of their duties owed to their employer. This would give employers better leverage to prove their case when there has been a breach.

How we can help you

We would be keen to work with you to review your employment contracts and employee handbooks to ensure that an employee’s duty of good faith is expressly set out and include express provisions that require an employee to avoid conflicts of interest and maintain confidentiality of the employer’s information and intellectual property. We could also advise you on your rights and options in the event of suspected employee misconduct and assist you in managing any potential exit in such circumstances.

Please reach out to us if you wish to know more.

Cosme De Net Co Ltd v Lam Kin Ming [2021] HKDC 445 – full judgment here.