25 March, 2013

Legal News & Analysis – Asia Pacific – Hong Kong – Labour & Employment

Double Rise Development engaged in sourcing. The success of its business was based on keeping the supplier and the customer for the products apart.  Mr. Leung was employed by Double Rise Development in a senior position of trust (though not an executive role). He resigned and joined Liquid Global, a customer.  Liquid Global stopped placing orders with Double Rise Development, and instead placed orders directly with the suppliers Double Rise Development sourced. Liquid Global cut out the middle man. They achieved this by hiring Mr. Leung.  Double Rise Development argued that Mr Leung used confidential information in breach of the confidentiality provisions in his employment contract.

So what is confidential information? The contractual provisions said that confidential information was all non-public information relating to the business of Double Rise Development. The Court made clear that it would not follow blindly and adopt the meaning given to confidential information by the employer.  Rather it reinforced that different considerations apply during the period of employment, and the period after. During employment, an employee can divulge or use non-public information of the employer only for the employer’s benefit.  After termination, the Courts will only protect trade secrets.

And what, then, are trade secrets? They include secret processes of manufacture (for instance, the formula for Coke), secret designs or special methods of construction, and other highly secret and sensitive information. This leaves out quite a lot of things. For instance, price information, customer identity and details, and marketing information may be confidential, but are rarely trade secrets. Know how, skill and knowledge acquired on the job is not a trade secret. Also, the onus is on the employer to identify specifically the trade secret he seeks to protect.  The employee needs to know what he can use, and what he can’t, and the employer has to be very precise and lead the way to prove this.

The Court decided that there were no trade secrets capable of protection for Double Rise Development. There was no special formula for determining prices, whether for the supplier or the customer. The identity of the suppliers was known, even to customers. There was no evidence that Mr. Leung disclosed the spread of prices charged to suppliers and to customers.

All this makes sense, but it is surprising how often these principles are misunderstood by employers.  No employer can restrain a former employee from using his skill and knowledge for the benefit of himself and a new employer.  This is based on a public policy interest in freedom of labour.  The protection of trade secrets is an exception to a general rule; employers often believe it is the other way round.

The Court also made clear that it would not allow a confidentiality action be a back door to extending restrictive covenants.  Restrictive covenants are intended to stop former employees from competing, and from enticing of customers and employees. The starting point when assessing these provisions is that they are unenforceable on public policy grounds – freedom of labour again.  The Courts will only enforce restrictive covenants that are carefully limited to protect legitimate interests of the employer – such as trade secrets – and that are reasonable in scope.  Again, enforceable restrictive covenants are an exception to a general, and again, employers often believe it is the other way round.

There are many important lessons from this case:

• Understand what are trade secrets, and just as importantly, what are not.
• Be frank in your assessment of whether your business has trade secrets.
• Treat trade secrets internally with the care and level of protection that shows how important they are to the business.
• Know that only trade secrets are likely to be protected when employees leave.

Regularly review your contract provisions on confidential information and restrictive covenants.

This case is interesting because, at first glance, the conduct of Mr. Leung looks questionable. He joined a customer, and cut out the business of his former employer. In the eyes of the Hong Kong courts though, that can be tough but fair competition.

Double Rise Development Ltd –v- Lung Kit Chuen [2013] HKEC 1