In a judgment handed down on 16 August 2024,1 the District Court refused to enforce a two-year post-termination restrictive covenant against a junior employee who left to join a competitor.
Shortly after graduating from university, Ms Lai (the Defendant) started working for Moxie (the Plaintiff), a public relations agency. At the same time as signing an employment contract, she was also requested to sign a separate document titled “Protection of Company Information and Materials”, which stipulated that she could not:
- join another public relations agency for two years after termination of her employment with Moxie; and
- contact, liaise or solicit business from Moxie’s existing customers or suppliers, or interfere in any contractual or business relationship with them.
After four years, Ms Lai decided to change jobs. Moxie alleged that Ms Lai approached H&M (a major fashion brand) and procured its business for her new employer, another public relations agency. Moxie alleged that, as H&M was its client, Ms Lai had wrongfully utilised Moxie’s trade secrets and confidential information and breached the non-compete and non-solicitation clauses. Interestingly, Moxie did not seek damages against Ms Lai.
At trial, Ms Lai first tried to argue the “Protection of Company Information and Materials” was not enforceable due to a lack of consideration. This argument was rejected by the court because, although it was a separate document, it was given to Ms Lai to be signed at the same time as the employment contract and therefore formed part of the employment agreement.
Ms Lai further argued the non-compete and non-solicitation clauses were unenforceable because they were drafted more widely than necessary to protect Moxie’s legitimate business interests. The court agreed.
The court, citing Winta Investment (Hong Kong) Ltd v. Ng Kam Chit,2 reiterated that an employer’s “legitimate interests” does not include avoiding competition. It covers interests of a proprietary nature, usually an employer’s trade secrets and customer connections. Information which qualifies as “trade secrets” for the purpose of enforcing a covenant in restraint of trade:3
- must be used in a trade or business;
- is confidential, meaning it is not already in the public domain;
- 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 their new employer;
- if disclosed to a competitor, would be liable to cause real or significant harm to the owner; and
- must be limited in its dissemination by the owner of it or at least not encourage or permit its widespread publication or otherwise impress upon the employee the confidentiality of the information.
Furthermore, trade secrets must be identified with precision and information of lesser significance will not be afforded post-termination protection.4
As to the factors the court would consider when determining the reasonableness of a post-termination restrictive covenant, these include the seniority of an employee; duration of the restriction; period of notice for termination; geographic scope; nature of the activity restricted; and nature of further contract restricted. Taking into account these factors, the court found Moxie had failed to prove the covenants were reasonably necessary for the protection of its “legitimate interests” and, as such, found in favour of Ms Lai. The court awarded indemnity costs against Moxie because it found that “the Plaintiff has been trying to unduly exert pressure on the Defendant. Such oppressive and high-handed manner in conducting litigation should be discouraged with indemnity costs”.
The judgment helpfully sets out a comprehensive summary of the relevant principles governing the enforcement of post-termination restrictive covenants in Hong Kong. It identifies issues legal practitioners should consider when drafting restrictive covenants at the beginning of the employment relationship and when deciding to enforce against these covenants post-termination.
In particular, practitioners must not treat post-termination restrictive covenants as boilerplate clauses. One of the reasons the court refused to enforce the covenants against Ms Lai was because she joined Moxie as a university graduate and junior employee. To impose a two-year restriction with no spatial limitation was unreasonable. The reasonableness of the restriction is to be judged at the date the contract was made and not when the employment ceases. Practitioners should therefore advise employers to regularly review and update covenants as an employee moves through the ranks. A good time do this would be when an employee is awarded a promotion and pay rise – the pay rise would act as consideration for the amendment of the terms.
1 Moxie Communications Ltd v. Lai Cheuk Lok [2024] HKDC 1323.
2 [2018] HKDC 342.
3 Citing DHCJ To in Axa China Region Insurance Co Ltd v. Pacific Century Insurance Co Ltd [2003] 3 HKC 1.
4 Citing Riberio PJ in PCCW-HKT Telephone Ltd v. Aitken [2009] 12 HKCFAR 114.
