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CONFIDENTIAL INFORMATION AND CLIENT LISTS IN HONG KONG: A TRIUMPH FOR SELF-REGULATION? Rohan Price* 1

INTRODUCTION

In his book on Hong Kong, Roger Buckley quotes local legislator Martin Lee who says that “free markets and free trade are the lifeblood of Hong Kong‟s economic success”.1 When we consider employment law in the region it is undoubtedly free of a range of types of legislative intervention which are common in other developed economies, and this abstention is a contributor to Hong Kong‟s economic success. A particular feature of the employment model in Hong Kong is employee mobility. When times are good, many office workers are nimble and move frequently from one firm to another. A large quantity of local case law attests that it is common for ex-employees to take information, in the form of a client list or other data, to a new job or for use in the establishment of a new business. Telemarketers, real estate salespeople, financial sector employees and travel agents are all well represented in the case law. Moreover, there is a lively, if not always well-informed, debate among expatriate employees about what is a fair practice when it comes to client lists. Taking such lists raises legal questions that are relevant to many employees, business partners or affiliates who move from one job or role to another. They include: (1) what confidential information is the property of an employer or business partner; and (2) what can an employer, business partner or affiliate do to prevent misuse of their information by a former associate in a post-employment situation? The common law in this area is highly developed and provides reasonably satisfactory answers to both questions. It is notable that the law is perfectly clear about the standard of conduct to be expected of an employee. Moses LJ in Helmet Integrated Systems Ltd v Tunnard 2 observed that while an employee shall not compete with his or her employer while in employment, he or she is entitled to take the knowledge gained in employment and compete with the employer after the employment comes to an end, provided it does not involve the use or disclosure of protected confidential information or a trade secret. 3 It is the questions raised by the post-employment use by an employee of an employer‟s client or customer list that this article addresses; in particular, it is concerned with the issue of when such a list will be regarded as secret and thus protectable at the suit of an employer. There is little divergence from the English case authorities in either Hong Kong or Australia, however, the argument here is the that principles of law have a flavour of „time immemorial‟ precisely because such a wide permission is given by them to judicial discretion in each case. *

1 2 3

Assistant Professor (Visiting), School of Law, City University of Hong Kong. This article appears with kind permission of LexisNexis (Hong Kong) and forms a chapter in a forthcoming monograph by Rohan Price, The Employment Laws of Hong Kong and China (LexisNexis, 2009). The author thanks Professor Charles Rickett and Dr Jonathan Crowe of the University of Queensland for their assistance in the refereeing process. Roger Buckley, Hong Kong: The Road to 1997 (1997) 141. [2006] EWCA Civ 1735. Ibid, 26.

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In Hong Kong, the most common practical solution to confidential information leaving with a departing employee is for an employer to insist that he or she does not book faceto-face appointments with the employer‟s clients during the notice period. During the notice period there may also be increased vigilance on a departing employee, business partner or affiliate and a request that post-employment, he or she purchases from overseas a list of customers that is separate from that used by the employer for use in the new business. Neither practical approach is entirely satisfactory. The first approach by itself does not prevent solicitation of clients immediately post-employment, and the second often produces a situation in which the purchased list in any event contains many of the employer‟s customers. The problems with practical preventative approaches have made the issue of a departing employee the subject of an increasingly complex contract law. That is, an employer will require that the employee maintain the confidentiality of a client list as a term of their contract or include a covenant to stop the employee from working in the same industry for a certain period of time after termination. Both types of approach have figured in recent Hong Kong case law; however, there has been no precedent to emerge from the Court of Final Appeal on the topic of employees departing with confidential information and this is not for want of cases in the Court of Appeal or the Court of First Instance. This suggests a certain degree of self-regulation is occurring in Hong Kong employment relationships. This article concludes with some observations on why the courts are, in this instance, clearly leaving employment well alone. In particular, this article explores how judicial abstention from the legal question of client lists actually fits with the experience of employment in Hong Kong. 2

THE EMPLOYEE’S DUTY OF FIDELITY

English case law on employee fidelity and client lists has remained consistent for a long period of time and has been influential in both Australia and Hong Kong. Wessex Dairies Ltd v Smith4 is, along with Robb v Green,5 a landmark case as it recognised a general implied duty on an employee not to act in a manner hostile to his or her employer‟s interests through post-employment use of confidential information. Smith was employed as a roundsman who travelled to the customers of the dairy and, anticipating that in his final week of employment he would set up his own business, solicited the dairy‟s customers to give him their business once his employment with Wessex had concluded. It was held that while in the employment of the dairy and receiving wages from it, he was under an implied duty to act in the interests of the employer, not himself. Maugham LJ held that the issue to be decided was the nature of the term to be implied into the roundsman‟s contract in the absence of express agreement. 6 He followed the „general implication‟ recognised by Smith LJ in Robb v Green, namely: “I think that it is a necessary implication which must be engrafted on such a contract that the servant undertakes to serve his master with good faith and fidelity.” The common law approach has been that the contract of employment is one that relies on personal service and this in itself requires the employee to show fidelity. Hivac Ltd v 4 5 6

[1935] 2 KB 80. [1895] 2 QB 320. Above n 4, 86.

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Park Royal Scientific Instruments Ltd 7 is authority for the rule that an employee must act in good faith towards his or her employer and that the duties of fidelity and confidential information can intersect. Hivac had a group of specialist technicians manufacturing hearing aids and Park Royal, without the knowledge of Hivac, employed the technicians in their spare time to manufacture hearing aids for Park Royal as well. When Hivac discovered this, it was worried that confidential information had been given to Park Royal. Hivac was granted an injunction to restrain the company from employing its technicians and although no confidential information had been divulged it was held that there was a distinct chance this could occur. It was further held that an employee‟s duty of fidelity to his or her employer includes the employee‟s activities during his or her spare time when, as in this case, there is a connection between the employment and the activity. In their judgments, both Lord Greene and Morton LJ approved of the principle in Wessex Dairies and held that it applied not only when the employee carried out such activities during work hours, but also during spare time. Another venerable authority in this area is Robb v Green. 8 This was a case about a list of purchasers of pheasant eggs. In it, the ex-employee argued that because the names and addresses of the customers were publicly available in directories, his action in taking the order book with him for use after the employment ended did not constitute a breach of confidence. Hawkins J disagreed. Rather, he found that the defendant would have incurred significant delay and expense in compiling his own book from public directories and that “[i]t is the compilation which made the book and the list so valuable to the defendant, and facilitated his endeavours to entice his master's customers to the detriment of the latter.”9 Roger Bullivant Ltd v Ellis10 was a case about an ex-employee who took a card index from his employer and used it very extensively after he ceased employment. He argued that many of the customers he contacted could have been reached without use of the index file. The Court of Appeal in followed Robb v Green. In particular, Nourse LJ ruled that: Having made deliberate and unlawful use of the plaintiffs' property, he cannot complain if he finds that the eye of the law is unable to distinguish between those whom, had he so chosen, he could have contacted lawfully and those whom he could not.11

Roger Bullivant makes it clear that in the English case law there is a bright line, so far as the courts are concerned, between what will be regarded as transgressing behaviour and what will not. 3

IMPLIED AND EXPRESS CONTRACTUAL RESTRAINTS

If an employee indicates to her or his employer an intention to tender for the employer‟s customers whilst still employed, it will be in breach of an implied duty of confidence and will operate as a defence to an employee‟s claim of unfair termination. In Adamson v B & L Cleaning Services,12 a foreman employed by a cleaning company had his 7 8 9 10 11 12

[1946] Ch 169. Above n 5. Ibid, 19. [1987] ICR 464. Ibid, 474. [1995] IRLR 193.

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employment terminated. He told his employer that he would tender in competition with the employer for a contract and would do so while still in its employment. The Employment Appeals Tribunal upheld his dismissal on the ground of breach of contract by saying that although tendering for the future business of an employer while employed is different from soliciting customers of an ex-employer once the employment has been completed, it is still a breach of a duty of trust and that “[a]n employer is entitled to expect an employee not to compete with him for contracts with the employer's existing customers.”13 There is, of course, a distinction between indicating the conduct of preparatory acts to set up a business in opposition to one‟s employer and engaging in actual competition, and this has been recognised in both the English 14 and Hong Kong15 courts. Each case it seems turns very finely on its own set of facts and, perhaps more to the point, the judicial characterisation of the facts in the particular case. It was observed in the introduction to this article that contractual restraints are a favoured approach of Hong Kong employers in preventing disclosure of confidential information. This usually requires the courts to determine which restraints are reasonable and which are not. In the recent case of Hu Yi Global Information Resources (Holding) Co Hong Kong Ltd v Hai Wai Ying 16 the employee undertook during her employment and after termination to “keep confidential all information in relation to the Company and its subsidiaries (the Group) coming into [her] knowledge during [her] employment and in the course of performing the employment contract.” The employee left the employer for another with technology-related information, and she argued against the employer‟s application for an injunction on the basis that the covenant relating to confidentiality was in restraint of trade and was unreasonable and unenforceable. The confidentiality clause was found to be a restraint of trade because it sought not only to stop ex-employees taking the employer‟s clients but also to prevent competition from the ex-employee for two years in businesses that would register a Chinese domain name. This was ruled to be so wide as to be unreasonable, but the interlocutory injunction was granted on the grounds that there was a serious question to be tried concerning whether the ex-employee was in fact abusing the plaintiff's trade secrets and interfering with its business. To avoid the very situation in Hu Yi Global, employers, particularly those in Hong Kong‟s financial sector, have resorted to increasingly complex and specific confidentiality clauses. A good example is found in the recent case of HSBC Bank Plc v Wallace.17 The covenant began with an acknowledgement by the employee that he or she had access to confidential information and the clients of the company, and the employee agreeing that the company‟s efforts to protect information would be considered reasonable in its application and nothing more than a sufficient measure to protect the company‟s interests. In subsequent clauses, the employee agreed for six months posttermination not to compete in similar businesses and not to solicit business for services similar to those of HSBC. The confidentiality clause also made it clear that one part of the clause could be invalid without it affecting the validity of any other clause.

13 14 15 16 17

Ibid, 194 (Pill J). Laughton & Hawley v Bapp Industrial Supplies [1986] IRLR 245. Oriental Machinery Ltd v Choi Kin On [2001] HKEC 1391. [2008] HKEC 1840. [2008] 1 HKLRD 613.

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At first blush, it may seem somewhat controversial to require an employee not to work in their chosen industry for a set period of time post-employment. However, speaking in the Court of Appeal in Littlewoods Organisation v Harris, Lord Denning MR explained the rationale behind restraining employees from working for a competitor. His Lordship opined that it is difficult to stop the disclosure of confidential information because distinguishing between what is confidential and what is not is difficult and the employee can take information away in his or her head.18 In the Hong Kong Court of First Instance, Gill DJ in HSBC Bank Plc v Wallace commented that if an employer believes that he or she has trade secrets that employees will inevitably commit to memory, then it is incumbent on an employer to protect him or herself by executing covenants with their employees to not work in a field of activity post-employment for a certain period of time and “not by asking the court to extend the general equitable doctrine to prevent breaking confidence beyond all reasonable bounds.”19 3.1

What is reasonably necessary

Under Hong Kong law, in determining whether a post-employment restraint is reasonably necessary to protect the business interests of an employer, a court has regard to the circumstances in which the restraint was agreed to, its objective and the position of both parties. 20 This is consistent with the English approach. Lord Parker said in Morris v Saxelby that: The reason, and the only reason for upholding such a restraint on the part of an employee is that the employer has some proprietary right, whether in the nature of trade connection or in the nature of trade secrets, for the protection of which such a restraint is to have regard to the duties of the employee which are reasonably necessary. Such a restraint has, so far as I know, never been upheld, if directed only to the prevention of competition or against the use of the personal skill and knowledge acquired by the employee in his employer's business. 21

In Coinopexpress.com Ltd v Cheuk Chun Fai, 22 approximately two months before the employee resigned, his employer planned to develop sales of a novelty entertainment item and the employee was requested to find a distribution agent for the item. After the employee resigned the employer discovered the item for sale through a competitor‟s website. The employee now worked for that competitor and the former employer claimed the employee had made use of its confidential information. This was in contravention of a restrictive covenant of eighteen months duration preventing the employee from working post-employment in the same line of business as the employer. The covenant was held reasonably necessary for the protection of the employer‟s legitimate trade interests and an interlocutory injunction was accordingly awarded. Each case will turn on its facts. In HSBC Bank plc v Wallace the duration of six months (less gardening leave23) was regarded as a not unreasonable period to expect of the employee 18 19 20 21 22 23

[1977] 1 WLR 1472, 1479. [2008] 1 HKLRD 613, [62]. Wealthy Realty Ltd v Cheng Yung [2008] 2 HKLRD 425, 429. [1916] AC 688, 710. [2007] HKEC 1872. „Gardening leave‟ refers colloquially to the practice of an employee, during their notice period, being paid but not being allowed to attend the workplace.

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and, the territory the covenant purported to cover – the Asia-Pacific region – was not too large.24 A court can sever from a covenant all that is necessary to make it reasonable if it is practicable and fair to do so in the circumstances. 25 The test applied is whether the proposed amendment to the clause would render the obligation created by it “substantively different.”26 If so, there will be no severance. There will be circumstances where a non-complete contractual restraint will usually be found to be reasonable and this includes cases where the nature of the ex-employee‟s duties necessitates an especially proximate relationship between an employee and a client of their employer. The rationale here is that when the employee departs to take up service for a nearby competing employer, the client feels compelled to follow. In HSBC Bank Plc v Wallace three such examples were given: a senior hairdresser, a real estate agent working alone in a small, developing country town and an insurance broker in a niche market.27 4

THE INFORMATION TO BE PROTECTED AND THE QUALITY OF CONFIDENTIALITY

There are three elements to satisfy in an action for breach of confidence: (i) the information must have the necessary quality of confidence about it; (ii) the information must have been imparted in circumstances importing an obligation of confidence; and (iii) there must be an unauthorised use of that information to the detriment of the party communicating it.28 The question often raised in cases is: which information of an employer is capable of being protected? In the New South Wales case of Freedom Motors Australia Pty Ltd v Vaupotic,29 it was found that the process of converting a particular vehicle so that it was capable of being used by people with disabilities was „novel‟ but that the techniques for doing so were „relatively standard‟ and in the public domain. Rather, in this case the employee‟s breach was not in setting up a new business using the same techniques as those of the former employer, but in taking with him quotation forms and order forms containing detailed pricing of items involved in the conversion, along with the terms and conditions of sale of the ex-employer and quotations and invoices. This information was held to be confidential to Freedom Motors. The decision in Freedom Motors is consistent with the approach of Lord Greene in Saltman Engineering Co Ltd v Campbell where the Master of the Rolls held that the ultimate test was whether the information taken “had the necessary quality of confidence about it, namely, it must not be something which is public property and public knowledge.”30 If an employer suspects that an ex-employee is misusing information, he or she will have the option of seeking an interlocutory injunction to restrain the person from further use of the information. Such an injunction will only be awarded on the basis that there is an identifiable and clearly evidenced loss arising out of the alleged breach of confidence, and that the information is in fact confidential. In Corrs Pavey Whiting & Byrne v Collector of Customs (Vic), Gummow J said that, to obtain an injunction, in 24 25 26

27 28

29 30

[2008] 1 HKLRD 613, [63]. Mason v Provident Clothing & Supply Co Ltd [1913] AC 724, 745 (per Lord Moulton). Natuzzi Spa v De Coro Ltd [2006] HKEC 1077 citing Sadler v Imperial Life Assurance Company of Canada [1988] IRLR 388 and TFS Derivatives Ltd v Morgan [2005] IRLR 246. [2008] 1 HKLRD 613, [59]. Coco v A H Clark (Engineers) Ltd [1969] RPC 41 applied in Li Yau-Wai Eric v Genesis Films Ltd [1987] HKLR 711. Freedom Motors Australia Pty Ltd v Vaupotic [2003] NSWSC 506, [50]. [1963] 3 All ER 413, 415.

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addition to these two requirements an employer also needs to prove that the employee was in receipt of the information in circumstances of confidence and that there has been or will be misuse of the information. 31 4.1

Client lists

In Faccenda Chicken Ltd v Fowler, the English Court of Appeal said that while the employee remains in the employment of the employer, the obligations of the employee are included in the implied term that imposes a duty of good faith and fidelity. The Court also added that: The duty of good faith will be broken if an employee makes or copies a list of the customers of the employer for use after his employment ends or deliberately memorises such a list, even though, except in special circumstances, there is no general restriction on an ex-employee canvassing or doing business with customers of his former employer.32

Thus, an employee is not to take the employer‟s client lists with him or her when leaving employment. However, the case is quite clear that it is the requirement of an employer to adduce evidence to demonstrate clearly that the information sought to be protected is in fact a trade secret. Mere confidential information is not protected, but a trade secret is. More particularly, in Faccenda Chicken the trial judge described three types of information that an employee can be exposed to while in employment: (1) commonly available information; (2) information that is confidential to his or her employer; and (3) information that can only be described as a trade secret. The Court of Appeal held that unless there are express terms to the contrary, information of types (1) and (2) cannot be disclosed or otherwise used during the employment. In respect of trade secrets – the third category – the restriction on use continues post-employment. Faccenda Chicken has become a well-established authority for a post-employment injunction under English common law.33 The Faccenda-type injunction has been granted in Hong Kong on numerous occasions to restrain a post-termination employee from using or disclosing trade secrets or other information that is of a sufficiently high degree of confidentiality so as to amount to a trade secret.34 4.2

What constitutes a trade secret in Hong Kong?

The law concerning what is a trade secret has been developed by reference to the English position exclusively by the Court of First Instance in Hong Kong. Why this should be so will be considered shortly; the present purpose is to to spell out what a trade secret is under Hong Kong law. The Hong Kong position on what constitutes a trade secret is 31 32 33

34

(1987) 14 FCR 434, 443. [1987] 1 Ch 117. Balston Limited v Headline Filters [1987] FSR 330; Lawrence David Ltd v Ashton [1989] IRLR 22; Lock International Plc v Beswick [1989] IRLR 22; Lancashire Fires v Lyons [1996] FSR 629 and In Re a Firm of Solicitors [1997] Ch 1. See, for example, PCCW-HKT Telephone Ltd v David Matthew McDonald Aitken [2008] HKEC 1747; Slik Hong Kong Co Ltd v Gerald Merlyn Rhoslyn Evans [2005] HKEC 1730; and Sencon Ltd v Sencon (Holdings) Ltd [2005] HKEC 1523.

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little different from that stated by Staughton LJ in Lansing Linde Ltd v Kerr35 and has been followed by the Court of First Instance on numerous occasions. 36 The Lord Justice considered a trade secret as information used in a trade or business which, if disclosed to a competitor, would be liable to cause real or significant harm to the owner of the secret and that the owner must limit its dissemination or at least not encourage or permit its widespread publication. In this context, trade secret includes secret formulae for manufacture of products (trade secret properly or compendiously so called) and names of customers and goods they buy (equivalents of trade secret or information of a sufficiently high degree of confidentiality as to require the same protection as a trade secret).37 The question of what information is so secret that it justifies the impostion of a postemployment restraint was considered by To J in Toto Toys Ltd v Lee Man Shu.38 His Honour‟s approach is broadly consistent with the English authroities. After reviewing the authorities it was found that a trade secret has the following traits: (1) it is used in a trade or business; (2) it is confidential (that is, not already in the public domain); (3) it can be easily isolated from other information which the employee is free to use so that any person of average intelligence and honesty would think it is improper to use the information at the disposal of his or her new employer; (4) if disclosed to a competitor, it would be liable to cause real or significant harm to the owner; and (5) its owner must have limited its dissemination or at least must not have encouraged or permitted its widespread publication or must have otherwise impressed upon the employee the confidentiality of the information. These same criteria were applied by To J in Kuoni Travel (China) Ltd v Kelly Frances Richards.39 Four employees left Kuoni Travel (China) Limited, a tour operator with a number of branches in Hong Kong and joined a competitor, Plan-Travel Limited (PTL). After their departure, Kuoni discovered that the former employees had misused confidential information and switched business and clients to their competitor. Kuoni requested PTL‟s views on this conduct. PTL reportedly responded that the employees were a „package deal‟ hired to bring in fresh business. An injunction was issued to restrain the use by the defendant of the client list which had been taken by the employees. There is some authority in support of a broader approach to trade secrets. In Lansing Linde Ltd v Kerr it appears that Staughton LJ accepted that the identity of customers and the products they purchase could be protected as a trade secret although not usually referred to as one40 and Butler-Sloss LJ said that in an age of global business where senior company employees are often in possession of information which could do serious harm to their employer‟s competitors if disclosed, and suggested that information should not be regarded as other than a trade secret merely because it is not technical or scientific in nature.41 A similar approach was taken by Mummery LJ in FSS Travel & Leisure

35 36

37 38 39 40 41

[1991] 1 WLR 251 Kuoni Travel (China) Ltd v Kelly Frances Richards [2006] HKCFI 1373, [9]; Fong’s National Engineering Co Ltd v Wong Wai Yuk [2003] HKCFI 301, [51]; and XCHRX AXA China Region Insurance Co Ltd v Pacific Century Insurance Co Ltd [2001] HKCFI 912, [34]-[39]. [1991] 1 WLR 251, 259-269. [2005] HKEC 561. [2006] HKEC 2201. [1991] 1 All ER 418, 425-6. Ibid, 435.

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Systems Ltd v Johnson & Chauntry Corp Ltd 42 - the problem of distinguishing between what knowledge is an employee‟s and what is an employer‟s is primarily one of definition and a question of fact; that the information is likely to cause commercial injury to the employer through its use or disclosure and that the employer has tried to restrict its publication are both relevant to determining whether the information is secret and accordingly the employer‟s property. This approach is not perfect. The circumstances in which an employee comes into receipt of the knowledge are surely as important. Confidential information is that information that the employer, in dealings with the employee during employment, has always regarded as secret and private in nature. Hong Kong case law contains examples of both the „subsequent damage‟ and the „confidential because treated as such‟ approaches. The case of Deacons v White Limited Liability Partnership43 concerned lawyers who departed their employment with figures detailed in their employer‟s business plan. This information was held to amount to information confidential to their employer which was a trade secret and that, while by itself, the disclosure of the names of the departing lawyer‟s clients was not confidential, such disclosure was confidential when ten of those clients were categorised as clients whom the departing lawyers believed would follow them to the new practice at the time of their move. In contrast, in Harvard Addhair Technologies Ltd v Samson Professional Hairweave Centre 44 a plaintiff hair weaver‟s customer list was found to be confidential in the sense of it being a trade secret due to the employment terms of the plaintiff's staff and the culture of confidentiality regarding the list and the restriction of access to it. This approach mirrors the position in the US as seen in Gordon Employment, Inc v Jewell,45 namely that a client list will have difficulty in attaining the status of a trade secret if it is left in a reception area in an unlocked filing cabinet and is not marked as a confidential file. At this point in the analysis it will be clear to the reader that the District Court of Hong Kong and the Court of First Instance play a non-contentious enforcement role in relation to client lists and other confidential information which is seldom questioned in higher courts on appeal. Clearly, departing with a client list is from an employee‟s point of view a risk worth taking. However, when a matter ends up in court the law is clear and applied in a clear cut manner, usually to the benefit of the former employer. The authority of the higher courts has not been called on and this rather suggests that a measure of selfregulation is permitted to employers and employees on the issue of client list transfer, which is, after all, a „life blood‟ issue to businesses in the region. It will be recalled that Deacons v White Limited Liability Partnership, the case about poaching, by one legal practice from another, of partners, senior associates and a substantial client base, was disposed of by Deputy High Court Judge Gill in the Court of First Instance and this, in itself, underlines the proposition that lawyers themselves, once a ruling is given, see little value in pursuing such matters on appeal. This is both because the law is sufficiently well settled and self-regulation is widely enough agreed upon to work reasonably well. Arguably, a reasonable interpretation is that the system is not regarded as broken enough to warrant a higher court fixing it.

42 43 44 45

[1997] EWCA Civ 2759 (per Mummery LJ). [2003] 3 HKLRD 670. [1999] HKEC 579. 356 NW 2d 738 (Minn App 1984).

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4.3

Problems posed by memorising

A question asked in more than a few of the cases concerns which information, acquired in employment and kept in an employee‟s head, will attract protection from disclosure under the duty of confidentiality. In Louis v Smellie, Kekewich J ruled that unless a list is taken, copied or deliberately committed to memory for improper use during or after the employment, no criticism could be made of an ex-employee who approached and engaged the services of his ex-employer's agents whom he merely happened to remember: “There would be nothing dishonest in that; and, if this were allowable in one case, it is difficult to see why it should not be allowable in a dozen or more.”46 In Printers & Finishers Ltd v Holloway,47 there was elaboration on the distinction between what knowledge is an employee‟s to take with him or her and what is rightfully an employer‟s. It was noted that “a man of ordinary honesty and intelligence” can differentiate between what in his knowledge is owned by his former employer and that which is not and that on this ground an ex-employee can be restrained from using or disclosing a chemical formula or a list of customers which he has committed to memory. The quality of confidence of the information and the propriety of purpose of the departing employee is more important than the format in which the knowledge is contained. Moreover, simply because an employee can memorise a client list does not absolve the employee from refraining from using it in a post-employment context if the list has the necessary quality of confidence. In the South Australian case of NP Generations Pty Ltd v Feneley (NP Genrations) it was held that the vital question is whether the employee has memorised the information for a purpose which is inconsistent with their obligation to their employer. 48 It is arguable that familiarity with the names and contact details of former clients through their use over a number of years is unavoidable and, as a part of the general stock of knowledge of an employee, is not confidential in the sense that an employer can protect him or herself against its subsequent use. The United States cases give a measure of support to such a proposition. In Fleming Sales Co v Bailee,49 a client list was not actually compiled but rather gradually built up throughout the employment and was held not to be a trade secret. However, in Allen v Johar Inc,50 it was held that because a client list was memorised rather than written down did not prevent its being regarded as a trade secret and this is consistent with the postion in NP Generations, namely that the intention of the employee in commiting a list to memory is a relevant consideration. 4.4

Documents

In regard to the role played by the intention of an employee, Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd 51 is worth considering. In it the use of written documentation, or copies of it, acquired by an employee for the express purpose of using it post-employment was restrained by injunction. Two employees of Ansell joined with an accountant to form the defendant company. Both the employees were familiar with a 46

47 48 49 50 51

[1895] 73 LT 226 (cited with approval in Gilman Engineering Ltd v Ho Shek On Simon [1986] HKCFI 257, [27]). [1965] 1 WLR 1, 5 (per Cross J). [2000] SASC 240. 611 F Supp 507 (ND Ill 1985). 823 SW 2d 824 (Ark 1992). [1967] VR 37.

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machine of their former employer‟s which manufactured rubber gloves. This included details as to its design, construction and operation. These details gave the employer company an edge on its competitors and led to a substantial market share. The employees used the information to set up a new factory and did so in breach of a duty of confidentiality owed to their employer. They were restrained by an injunction from using the secret processes and ordered to deliver the machine to the employer for destruction. In Ansell Rubber, it was observed that there is a difference on one hand between information and knowledge acquired in confidence by an employee during his employment and, on the other, “information which forms part of the employee‟s stock of general knowledge, skill and experience, and which should fairly be regarded as a separate part of the employee‟s stock of knowledge (whether it be identifiable as „particular‟ or „detailed‟ or „special‟).”52 In Morris v Saxleby Lord Shaw said: Trade secrets, the names of customers, all such things which in sound philosophical language are denominated objective knowledge-these may not be given away by a servant; they are his master's property, and there is no rule of public interest which prevents a transfer of them against the master's will being restrained. On the other hand, a man's aptitudes, his skill, his dexterity, his manual or mental ability-all those things which in sound philosophical language are not objective, but subjective-they may and they ought not to be relinquished by a servant; they are not his master's property; they are his own property; they are himself. 53

The Australian concept of a „stock of general knowledge‟ is tolerably close to the „aptitude, skill and dexterity‟ referred to in Morris. Both concepts are concerned that an employee‟s general ability or accumen to do a task not be restrained, but they also recognise that if an ability relies on specific information acquired in a previous employment then that will be a different matter. 5

REMEDIES AND INFORMATION

POST-EMPLOYMENT

USE

OF

CONFIDENTIAL

On the one hand, the law tries to protect an employer‟s property and, on the other, has some regard for the right of an employee to not be placed under a restraint of trade through unreasonable application of a post-employment restriction. An employer may possess a machine, design, process, list or plan which is legally recognised as confidential to the point where it is a trade secret.54 An employee who has, during their employment by an employer, acquired such confidential information of the business which would be damaging to that business if made known to the employer‟s competitors, can be made subject to an implied duty not to make use of such information in post-employment situations irrespective of whether he or she has agreed to a post-employment restraint. On such a basis, the employee can be made to deliver back to the employer the device, plans, list or formulae.55 In addition, or as an alternative, the employee can be put to an account of profits if he or she has made use of the information56 and/or placed under an 52 53 54 55 56

Ibid, 40 (per Gowans J). [1916] AC 688, 714. Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117. Ormonoid Roofing and Asphalts Ltd v Bitumenoids Ltd (1930) 31 SR (NSW) 347. Halliday and Nicholas Insurance Brokers Pty Ltd v Corsiatto (2001) 11 ANZ Insurance Cases 61-505; Timber Engineering v Anderson [1980] 2 NSWLR 488.

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injunction to prevent continuing use of the information. 57 Prudent counsel will „cover the field‟ of remedies options, albeit specifically, and leave it up to the court to decide. A claim against an employee can include a request for an injunction to restrain the defendants from divulging, using or exploiting the confidential information and one to restrain the employee from breaching the terms of the employment agreement. In addition, claims can be made for damages for breach of employment agreements and/or breach of confidence and an account of profits made by the employee as the result of their breach of their employment agreement and/or a breach of confidence. 5.1

Interlocutory injunctions

As an award of injunctive relief is equitable in nature, in the exercise of its discretion a court will, in the interests of justice, consider a wide range of factors. There are a number of well-established principles to determine when a court will award an interlocutory injunction and they are outlined in American Cyanamid Co v Ethicon Ltd.58 The applicant‟s claim must not be frivolous or vexatious- it must disclose a serious issue to be tried. If the court is persuaded that there is a serious question to be tried, the next consideration is whether the balance of convenience favours granting or refusing the injunction. If damages at common law are an adequate remedy and the defendant is sufficiently wealthy, an interlocutory injunction will not be usually granted. If damages at common law are inadequate or if the defendant is impecunious, the court decides whether the claimant‟s undertaking for damages would be adequate if the defendant were successful in establishing his right to do that which he is being restrained from doing. It has been noted above that the employer is put to a stringent requirement to specify exactly what information an employee is not to use before an injunction is to be granted. In Lock v Beswick59 it was said that the terms of an injunction must be such as to enable the employee to know what information he or she can or cannot use in the new employment. In Gilman Engineering v Simon Ho, it was also observed that unless the employee is given the specifics of what cannot be used, he or she “would be placed in a most embarrassing if not altogether a hopeless situation, particularly in the narrower meaning of confidentiality as given in Faccenda. Any injunction order granted in broad general terms would be impractical in the extreme.”60 Thus, an injunction sought under the principle in Faccenda must be specific and practically possible or a court will decline to use its discretion to award one, or alternatively, author the exact terms of the relief itself after requesting more particulars from the parties. Below we will note a particular judicial concern that an injunction sought in respect of an employee‟s breach of fiduciary duty be highly specific as to the very kind of conduct it is to capture. 5.2

Breach of fiduciary duty

In University of Nottingham v Fishel Elias J said that fiduciary duties of an employee “arise not as a result out of the mere fact that there is an employment relationship. Rather they result from the fact that within a particular contractual relationship there are specific obligations which an employee has undertaken which have placed him in a situation 57 58 59 60

Ansell Rubber Co Pty Ltd v Allied Rubber Industries Pty Ltd [1967] VR 37. [1975] AC 396, 407-409 (per Lord Diplock). [1989] 1 WLR 1268, 1274 (per Hoffmann J). (1986) 8 IPR 313, 324 (per Liu J).

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where equity imposes these rigorous duties in addition to the contractual obligations.” 61 This approach was affirmed by Moses LJ in Helmut Integrated Systems Ltd v Tunnard:62 “in determining whether a fiduciary relationship arises in the context of an employment relationship, it is necessary to identify with care the particular duties undertaken by the employee, and to ask whether in all the circumstances he has placed himself in a position where he must act solely in the interests of his employer. It is only once those duties have been identified that it is possible to determine whether the fiduciary duty has been breached.” The significance of this discussion is that a judicial position based on a broader view of what sums ought to be accounted for is apt to make an equitable remedy awarded to an employer misconceived. In Timber Engineering v Anderson, 63 employees Anderson and Toy commenced selling their employer‟s products as if they were their own and diverted the proceeds to their own company. A constructive trust was imposed on the employees as a means of achieving an account of profits. Kearney J said: It seems to me that the obligations arising in a case of constructive trust such as the present are to be considered as being commensurate with the duties applicable to the fiduciary relationship, the breach of which has brought the constructive trust into existence. It does not seem to me that the imposition of the constructive trust should be treated as having the effect of super-imposing wider obligations upon the constructive trustee than are necessary in order to afford to the plaintiffs the restoration of their property to which they became entitled upon the breach of the fiduciary duties of the personal defendants as their employees. 64

Hanbury and Martin make much the same point: “it is not safe to make the attractive over-simplification of saying that a fiduciary must always account for all gains which come to him by reason of his fiduciary position.”65 In light of such authorities it is tenable to argue that when an employee, in a notorious position of trust, takes a profit or a payment intended to be their employer‟s, he or she transgresses a fiduciary duty which is imposed on an employee party to every such transaction. Furthermore, in relation to the employer‟s recovery, the object of the remedy is to protect or restore their property rather than to penalise the employee. 5.3

The recent Australian position

Kearney J‟s view in Timber Engineering is that the remedy for breach of a fiduciary duty of an employee must be kept within the bounds of the transactions that defrauded the employer and not be conflated into some broader duty which would incline the bench to penalise employees and is against „super-imposing wider obligations‟. These views remain to be reconciled with recent developments in the New South Wales Supreme Court, particularly in Coordinated Industries Pty Ltd v Elliott66 („Coordinated Industries’) and also in Integration Management Pty Ltd v Soo.67 In Coordinated 61 62 63 64 65 66 67

[2000] IRLR 471, [91]. [2007] IRLR 126, [37]. [1980] 2 NSWLR 488. [1980] 2 NSWLR 488, 504. H G Hanbury and J Martin, Modern Equity (17th ed, 2005) 618-619. (1998) 43 NSWLR 282. [2004] NSWSC 908 (Unreported, Hamilton J, 30 September 2004).

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Industries, the employee, Elliot, was responsible for the fit out of business premises in Sydney and to obtain building approvals from the Sydney City Council in respect of the premises. He did this as an employee on behalf of Coordinated Industries for its client MSB. He reached an advanced stage with both tasks but then resigned and wrote to the Council advising it to send future correspondence to him at a new address. He also faxed MSB a short form of the contract for the fit out. By doing this he ultimately realised a profit in the order of $20,000. Chief Justice Hodgeson (CJ in Eq) said that: Elliot deprived the Plaintiff of the chance and thereby precluded the Plaintiff from being paid for the work he had done on its behalf. The chance of obtaining that contract is fairly regarded as an asset of the Plaintiff as to which Mr Elliot continued to have a fiduciary obligation after his employment because he had contributed substantially to that asset and had been paid by the plaintiff for that contribution. 68

Put plainly, Coordinated Industries indicates that an opportunity is property and an employee is precluded from enjoying any co-ownership of that property by the employer‟s act of paying of wages. Thus, if on their resignation a former employee takes an opportunity with him or her then he or she takes something that is not theirs. The Court in Coordinated Industries found that even though a trade secret existed, on top of this, an equity was recognised as arising from Elliot‟s employment so as to prevent him from profiting by his taking of the opportunity. Of course, the Chief Justice was careful to keep the discovered equity under close reign and added that: “the duty I am finding relates only to the particular job, and not to the customer generally or to any other use which Mr Elliott might wish to make of his knowledge or skill.” 69 At first glance it might appear that the Court wrongly attached its newly discovered equity to the relationship of employment, but in forbidding Elliot to engage in a particular transaction with a particular customer it acknowledged that it was the circumstances of his transgression which gave rise to a fiduciary duty which he had breached and needed to be restrained from breaching in the future. 6

CONCLUSION

We noted in the introduction that in Hong Kong cases on confidential information are almost always disposed of by the Court of First Instance. To a certain extent this reflects how routinely heard client list cases are in the territory and how well settled the law is seen to be. It must be observed, however, that it would only take a single high profile case in the Hong Kong Court of Final Appeal to disabuse local employees of any sense of entitlement to their former employer‟s client list. However, this would be to ignore the basic and pragmatic concerns of employment in Hong Kong. The local culture of employment frequently hinges on what business the new employee can bring to the firm; in recruiting an ex-employee‟s replacement, a former employer is in the same competition as the ex-employee‟s new employer. From an employee‟s point of view, a legal suit from one‟s former employer is presumably only likely when the equilibrium is lost between what the departing employee is presumed to have taken and what their replacement can be presumed to bring.

68 69

(1998) 43 NSWLR 282, 288-289. Ibid.

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Confidential Information and Client Lists in Hong Kong

Moreover, many Hong Kong employers in effect refresh their client list by simply swapping employees among each other. This is an example the peculiar genius that has made the Hong Kong model of capitalism so widely envied. Employers rely on the fact that business is generated by fitting the best salesperson to a potential customer. Thus, only through a frequent turnover of salespeople who fail to connect with a particular client base can a firm hope to maximise sales opportunities. In the current downturn, however, employees are resisting the idea of moving or of being turned over because opportunity is in limited supply everywhere. The questionable value of employee autonomy is doubtless becoming apparent to a number of Hong Kong employees because so little can be gained by moving. Gill DJ without doubt expressed Hong Kongâ€&#x;s particular contribution to the law aptly when he spoke in HSBC Bank Plc v Wallace about an employer preventing the memorising employee from departing with information by being specific in their contract about what exact information is regarded as off-limits. Indeed, the fact that the bench is advocating that parties come to their own contractual solutions to the problem of confidential information seems yet more assurance for the view that the courts are pleased to leave the issue to the forces of the free market to decide. The courts of Hong Kong do not typically get involved unless there is a confidentiality clause being snubbed by an employee or an employer without specific contractual protection that comes before the law for a remedy in a most egregious circumstance. In the absence of either situation, a certain commercial amorality must be said to be obtained. In that miasma, neither employer nor employee expects the other to behave like an angel. In answer to the question posed in the title of this article, self-regulation can only triumph when there is no-one in need of protection against an abuse of power by the strong against the weak. Confidential information is to be seen as a rare example of equilibrium being achieved in the employment relationship. Such power is reposed in an employee by Employer X through the divulgence of information that the employee is transformed into a commodity in the eyes of Employer Y. Hong Kongâ€&#x;s experience shows that the true tension is, of course, between Employers X and Y but the law regards the justiciable dispute as being between Employer X and the departing employee. It will be fascinating to see whether, in this jurisdiction, departing employees will be regarded increasingly as messengers and not instigators in disputes about confidential information. In this way, in the absence of a specific contractual restraint, the approach in Coordinated Industries, namely that the departing employee is to be censured for taking something which is not theirs, will be replaced with a view that, rather, Employer Y is to be scrutinised for the use of the information so conveniently put at its disposal by a new employee.

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CONFIDENTIAL INFORMATION/CLIENT LISTS (HK)  

Confidential information, client lists and fiduciary dutues in HK

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