Hong Kong employer succeeds in enforcing a 6-month non-compete clause

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

Facts

Mr. Gareth John Mills (“Mr. Mills”) was employed by BFAM Partners (Hong Kong) Ltd (“Former Employer”) initially as a Technology Consultant but was later promoted to Head of Technology. He also stood in to assume certain duties of Chief Technology Officer. His employment contract with the Former Employer contained a 6-month non-compete clause preventing him from working for a competitor in respect of products or services with which he was materially concerned or connected, or for which he was responsible (“Non-compete”).

After leaving the employment of the Former Employer, Mr. Mills immediately joined Segantii Capital Management Ltd (“New Employer”), a competitor of the Former Employer, as Chief Technology Officer. As this was unbeknownst to the Former Employer, the Former Employer started making monthly payments to Mr. Mills for the Non-compete period as it had promised.

When the Former Employer subsequently discovered that Mr. Mills had joined the New Employer, it sought an injunction against both Mr. Mills and the New Employer to enforce the Non-compete against Mr. Mills and to restrain the New Employer from procuring a breach of the Non-compete.

Mr. Mills and the New Employer contested the injunction application. In particular, Mr. Mills argued that the Non-compete was unreasonable and therefore, it was unenforceable.

Issue

Was the Non-compete enforceable?

Judgment

The court held that the Non-compete was enforceable and granted the injunction for the following reasons:

1. The Non-compete protected the legitimate interests of the Former Employer

The Former Employer adduced sufficient evidence to show that Mr. Mills played an instrumental part in the development of certain bespoke technologies of the Former Employer and that the information to which he became privy in developing these technologies were confidential.
In defence, Mr. Mills argued that he did not possess confidential information as it was inherently impossible for him to retain confidential information in his head. The court disagreed and confirmed that confidential information was capable of being held in one’s memory.

Mr. Mills also argued that the reasonableness of the Non-compete should only be determined against matters that existed at the time the contract was made and not matters that happened after he was promoted. The court disagreed and confirmed that as long as the matters were contemplated at the time the contract was made, those matters could be taken into account. To this end, the court found that at the time the contract was made, it was already envisaged that Mr. Mills might be promoted and that he would have access to confidential information in carrying out his role. The wording of the Non-compete was also consistent with his role in developing products for the Former Employer.

2. The Non-compete went no further than was reasonably necessary

The Former Employer was able to justify why the Non-compete period needed to be 6 months by explaining that the life-cycle of trading strategies is usually around 6 months.

In defence, Mr. Mills argued that the Non-compete itself was excessive as the Former Employer’s interests were already adequately protected by other restrictions in the contract, such as the confidentiality and deliver up clauses. The court disagreed and held that the deliver up clause would only be useful against tangible information and would not afford protection against information held in memory, while the confidentiality clause alone would not be sufficient because it is often disputed whether information is confidential.

3. Mr. Mills would continue to be paid during the Non-compete period

In considering whether to grant the injunction, the court had to consider which outcome would carry the lowest risk of injustice. The court explained that in this case, granting the injunction would carry the lowest risk of injustice because there was no evidence to show that the Former Employer would not continue to pay Mr. Mills during the Non-compete period or that the livelihood of Mr. Mills would be affected. Even if Mr. Mills were to suffer any harm as a result, he would be compensable in monetary terms.

Key takeaway points

1. Non-compete clauses continue to be heavily scrutinized by the court. Employers need to stand ready to identify the specific interests it seeks to protect and prove that without the restriction their interests would be prejudiced. However, if well drafted and considered, they can be an effective means to protect business interests.

2. When hiring from competitors, employers need to be mindful of any non-compete or other continuing obligations which the candidate may owe to their former employer. As seen in this case, in suing the former employee, the former employer could also sue the new employer for procuring a breach of the former employee’s contract.

3. It is worth highlighting that the Non-compete in this case built in two features which are generally recommended to bolster a case for reasonableness:

a. The Former Employer agreed to pay Mr. Mills during the Non-compete period; and

b. The start date of the Non-compete period was brought forward to the date on which Mr. Mills went on garden leave. This meant that the Non-compete period commenced while he was still an employee of the Former Employer and so the post-termination portion of the Non-compete period was effectively shortened.

How we can help you

We would be happy to work with you to understand the interests you would like to protect and review your existing restrictive covenants or suggest a bespoke clause that might improve the chances of successful enforcement in the event of an attempted breach by a former employee. We could also work with you to review your hiring processes to try to mitigate the risk of being pulled into a dispute between a candidate and their former employer over their non-compete agreements.

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

BFAM Partners (Hong Kong) Ltd v. Gareth John Mills and Segantii Capital Management Ltd – judgment available here.