HK employer warning on springboard injunction limitations

By Jacky Chan, LC Lawyers
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In the recent case of DCL Communications v Lam Yim Chi Julia and another, a court in Hong Kong refused to grant a springboard injunction against a former employee to protect the employer’s confidential information.

So, what is a springboard injunction, how can it benefit Hong Kong employers, and what are the pitfalls and limitations?

A DEFINITION

A springboard injunction removes any advantage a former employee or his subsequent employer may have obtained by misusing his former employer’s confidential information. An ordinary injunction is ineffective since the confidential information has already been used and may no longer be confidential.

The court will grant a springboard injunction if the former employer applicant can show:

  1. There has been unlawful activity by the former employee;
  2. The former employee has, as a result of that activity, gained an unfair competitive advantage over the former employer;
  3. The nature and period of the competitive advantage is not short term;
  4. The advantage still exists at the date the injunction is sought, and will continue unless the injunction is granted; and
  5. An injunction would be proportionate having regard to other protection that might be available to the former employer (i.e. existing restrictive covenants or damages).

The aim of the injunction is to restore the parties to the competitive position they would have occupied had the misconduct not occurred. The injunction should neither be used to penalise the former employee nor put the former employer in a better position than had there been no wrongdoing in the first place.

EXAMINING THE CASE

In the above-mentioned case, the employee (Lam) was employed by DCL Communications as an account executive responsible for dealing with DCL’s clients. She left DCL in September 2019, and was hired by a new employer 19 months later. Around December 2021, DCL lost its maintenance contract with a longstanding client.

Jacky Chan, LC Lawyers
Jacky Chan
Associate
LC Lawyers

DCL realised that the original sale contract with that client had been handled by Lam. A different client informed DCL that Lam, on behalf of her new employer, had attempted to sell similar services and products that DCL offered. DCL suspected that Lam had attempted to entice away its clients when the maintenance contracts were due for renewal.

DCL applied for a springboard injunction to stop Lam’s new employer from using or disclosing any of the DCL’s confidential information, which in this case included the client list, expiry dates of DCL’s contracts with its clients, and DCL’s profit margins for each contract.

WHY THE REFUSAL?

No unlawful behaviour. There was no evidence that Lam had misused any confidential information. Without any restraint of trade covenants, Lam was entitled to solicit business from DCL’s customers, using for her own purposes any information she carried in her head, provided that the information was acquired honestly in the ordinary course of her employment, and that she had not stolen, copied or deliberately memorised such information.

Competitive advantage is short term. There was no evidence that the confidential information would still be useful 19 months later, when Lam started working for her new employer, or after three years, when DCL applied for the injunction. The contracts would already be renewed and any information about profit margin would be outdated, thus any competitive advantage would not be present.

However, there was evidence that DCL’s clients usually ask for multiple quotations before renewing a contract. In some cases, DCL’s clients approached Lam and not the other way round. There was also evidence that competitors other than the new employer managed to provide quotations at a significantly lower price than DCL.

The court decided there was no unfair competitive advantage in this case. But if competitive advantage had existed, monetary damages would be adequate.

KEY TAKEAWAYS

First, to successfully obtain a springboard injunction, employers should gather concrete evidence of wrongdoing, and not mere suspicions and speculations. An employer may be unable to impose any contractual restraint on an employee to protect against mere competition.

However, post-termination restrictive covenants can be imposed on an employee to protect a legitimate interest, as long as the restraint is reasonable in all the circumstances to protect that interest.

Second, it should be noted that confidentiality clauses in employment contracts may be ineffective, as employees are free to use any information they honestly obtained and retained within their head.

Lastly, employers should be aware of the lifespan of confidential information, and timing of bringing a springboard injunction. Those who are concerned about the misuse or disclosure of their confidential information by former employees should act quickly while such information is still up to date and capable of providing a competitive advantage.

Jacky Chan is an associate at LC Lawyers

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