Legal News & Analysis – Asia Pacific – Singapore – Labour & Employment

Introduction

 
A firm’s most valuable assets are often neither physical nor financial; they exist in the form of trade secrets and trade connections, which are the driving force behind the business vehicle. The protection of these assets thus becomes of vital importance.

 
However, the greatest threat often comes from within the business itself. Disputes often arise over employees leaving the organisation with its trade secrets and trade connections, intending to use them in competition against their former employer.

 
In this article, we examine the extent to which trade secrets and trade connections can be protected by restrictive covenants in employment contracts, taking lessons from recent Singapore case law.

 
Trade Secrets

 
Employment contracts typically contain restrictive covenants prohibiting employees from acting in competition with their former employer. However, such restrictive covenants will only be enforceable if they seek to protect a legitimate interest of the employer, and if the scope of the clause is reasonable.

 
The list of legitimate interests is an open one, but in Man Financial (S) Pte Ltd v Wong Bark Chuan David [2008] 1 SLR(R) 663(“Man Financial”), the Singapore Court of Appeal held that the protection of trade secrets (or confidential information akin to trade secrets) is one of the common legitimate interests. To assess if the information in question is confidential and thus capable of protection, the court will consider:

 
(i) The nature of the employment;
(ii) The nature of the information;
(iii) Whether the confidential nature of the information was impressed on the employee; and

(iv) Whether the information can be isolated from other non-confidential information.

 
However, where trade secrets or confidential information are protected by other express provisions in an employment agreement, the employer must identify a legitimate interest “over and above” the protection of trade secrets in order to justify a restrictive covenant. This was held by the Court of Appeal in Stratech Systems Ltd v Nyam Chiu Shin (alias Yan Qiuxin) and others [2005] 2 SLR(R) 579 (“Stratech”).

 
In the recent Singapore case of Lek Gwee Noi v Humming Flowers & Gifts Pte Ltd [2014] SGHC 64 (“Humming Flowers”), the High Court questioned why the use of dual provisions to protect confidential information should reduce the legitimacy of a restrictive covenant, particularly where confidentiality obligations are notoriously difficult to police. The court also highlighted UK decisions which recognise that a restrictive covenant protecting trade secrets may still be enforceable even where such information is simultaneously protected by other clauses in the agreement.

 
The case of Humming Flowers is due to go on appeal before the Court of Appeal, and it will be interesting to see whether the Court of Appeal will maintain the position in Stratech or shift towards the UK position.

 
Trade Connections

 
The protection of an employer’s trade connections is another common category of legitimate interests capable of supporting a restrictive covenant, as identified in Man Financial. The court will consider:

 
(i) The scope of the employee’s knowledge of and influence over the customers;
(ii) The extent of “institutional hold” and “customer inconvenience”;
(iii) The frequency and venue of the employee’s contact with the customer;
(iv) The employee’s seniority and the nature of his relationship with the clients.

 
There has been some judicial debate over whether an employer has legitimate interest in an employee’s trade connections when such connections predate his employment. In Humming Flowers, the High Court held that the answer depends on the facts of each case.

 
In the case at hand, the employee was working at Company A for many years before Company B bought up the business of Company A, including its goodwill. The employee’s trade connections formed part of this goodwill, and was thus capable of protection through a restrictive covenant, even though it technically predated her employment with Company B. However, the situation might have been different had it been a simple case of employing an individual from an unrelated competitor.

 
Concluding Words

 
The protection of trade secrets and trade connections requires meticulous drafting of the terms of each employment contract. It must be ensured that only legitimate interests are protected under restrictive covenants, and that the scope of protection only stretches as far as is reasonable.

 
For this reason, companies should ensure that they are properly advised before entering into employment agreements, especially where the employee in question has access to trade secrets and trade connections. 

For further information, please contact:

Mohammed Reza, Partner, Rajah & Tann
[email protected]

 
QingHui Luo, Partner, Rajah & Tann

[email protected]

Jonathan Yuen, Partner, Rajah & Tann
[email protected]

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