Sencon Ltd v. Sencon (Holdings) Ltd and Others
Read the full judgment text of HCA 1555/2005 on BabelCite. This High Court CFI judgment was delivered on 2 September 2005.
1. The plaintiff claims an injunction against the defendants to restrain them from passing off their services as the services of the plaintiff, soliciting, canvassing or enticing away, etc. the plaintiff’s customers and soliciting, canvassing or enticing away, etc. the plaintiff’s employees. On 11 August 2005, Gill DJ granted an ex parte injunction against the actions complained of and an Anton Piller order, which was subsequently executed.
Cites 1 case
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HCA1555/2005 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE ACTION NO.1555 OF 2005 --------------------- BETWEEN
---------------------- Before : Deputy High Court Judge Muttrie in Chambers Date of Hearing : 2 September 2005 Date of Judgment : 2 September 2005 Date of Reasons for Judgment : 30 September 2005 ----------------------------------------------------------- REASONS FOR JUDGMENT ------------------------------------------------------------ 1.The plaintiff claims an injunction against the defendants to restrain them from passing off their services as the services of the plaintiff, soliciting, canvassing or enticing away, etc. the plaintiff’s customers and soliciting, canvassing or enticing away, etc. the plaintiff’s employees. On 11 August 2005, Gill DJ granted an ex parte injunction against the actions complained of and an Anton Piller order, which was subsequently executed. 2.That injunction restrained the defendants from :
3.On 2 September 2005 I ordered that the injunction continue against the 1st defendant until further order, and be discharged as against the 2nd and 3rd defendants and that the costs be the plaintiff’s costs in the cause. I now give reasons. 4.The plaintiff, which has its offices in Tsim Sha Tsui is a trading company in the paper products business. It is owned by a family named Ho, through a company named Man Sang Envelope Co. Ltd (“Man Sang”). The plaintiff’s shareholders and directors were Ms Chin Kuk Hung, Daisy, and the 3rd defendant who held their shares on trust for Man Sang. The 3rd defendant had been recruited some time in 2002 to be, he says, the public face of the plaintiff; he had been working in the paper products business for many years. He started work for the plaintiff in early 2003. He resigned with effect from 30 June 2005. 5.The 2nd defendant was the plaintiff’s sales manager. The 3rd defendant recruited him in late 2003. Before that, he had been working for another company in the same line of business. 6.The 1st defendant was incorporated on 19 April 2005. The 2nd defendant is its only shareholder and director. It has its registered office in San Po Kong. 7.According to Ms Chin, in early May 2005 it was found that there was a problem with the quality checking of products to be shipped to a customer, William E. Connor and Associates Ltd (“WECA”). The 2nd defendant told Ms Chin that he would follow the matter up but if the problem could not be resolved, WECA might cancel its orders. Ms Chin later discovered by chance from the shipping company that the products had been shipped but that that company had been told that she was no longer working for the plaintiff. She contacted the 2nd defendant who told her that he had set up the 1st defendant and delivered the products to WECA in its name. He asked her to amend a letter of credit issued by WECA in favour of the plaintiff so as to cancel it, but she refused. Then she met with representatives of WECA and was told that it had received a letter from the plaintiff to the effect that it had been restructured and its name changed to “Sencon (Holdings) Ltd”, and so WECA had transferred all its business to the 1st defendant. 8.The plaintiff put the matter in the hands of its solicitors, who advised WECA that there had been no re-organisation, and it had been deceived. Following a meeting on 15 June between WECA, Ms Chin and the 2nd defendant, the 1st defendant confirmed to WECA that payment for goods shipped to it in the name of the 1st defendant should be made to the solicitors, on trust, and that outstanding orders would be met by the plaintiff. The parties then had a meeting at which the plaintiff attempted to obtain the defendants’ consent inter alia to provide a full account of business taken away and a refund of the profits, to de-register the 1st defendant and restore all business to the plaintiff. No agreement could be reached. 9.At this stage, it appears, the involvement of the 3rd defendant was not known to Ms Chin. He had tendered his resignation to take effect from 30 June 2005. When he left, it was found that most of the e-mails had been deleted from his computer. Also e-mails on a computer used by a former employee, Raymond Tsang Wai Tong had been deleted. 10.On 6 July 2005 the plaintiff’s solicitors received a letter sent from WECA’s solicitors to the solicitors acting for the 1st and 2nd defendants. This enclosed the letter from the 1st defendant dated 4 May 2005, which had been referred to by WECA’s representatives in their meetings with Ms Chin, but which she had not yet seen. 11.This letter is on headed notepaper bearing the 1st defendant’s name along with the same logo as that used by the plaintiff and it is to the effect that :
12.The letter is chopped with the chop of the 1st defendant and signed by the 2nd defendant as director. 13.Realising the involvement of the 3rd defendant, Ms Chin then put further inquiries in train, including the use of a computer expert to retrieve deleted e-mails. According to her it was discovered that a customer had cancelled various purchase orders placed with the plaintiff and dealt with by the 3rd defendant. The 3rd defendant had asked another customer to settle further invoices to the bank account of “New Sencon”. 14.Further investigations were carried out, and application was made for the ex parte order and Anton Piller order. When the latter was executed, documents came to light in the possession of the 1st defendant which appear to show that purchase orders apparently cancelled by one Concept Merchandiser Ltd (“CML”) in June 2005 had simply been transferred to the 1st defendant. The retrieved e-mails appear to show a pattern of communications between the 3rd defendant and this company, from about 11 May 2005 arranging for the diversion of its business to the 1st defendant. E-mails also appear to show the diversion of the business of a company named Form+pac from the plaintiff to the 1st defendant from April 2005. The 1st defendant was found to have a customer list, of which all the customers except one were those of the plaintiff. 15.In his affirmation the 2nd defendant says that he was recruited by the 3rd defendant to work for the plaintiff as a commission agent. He brought in the business of various of his existing customers; in other words, they followed him from his previous employer. He looked after their orders with the assistance of the plaintiff’s employees, Raymond Tsang Wai Tong and Ronald Chan Hoi Kit. Later, his relationship with the 1st defendant deteriorated. There were problems with the quality of goods ordered from the plaintiff’s designated supplier so the 2nd and 3rd defendant decided to change the supplier. However, the original supplier was associated with the Ho family and the change provoked animosity on their part. The relationship had broken down by March 2005, and in April 2005 the 3rd defendant accepted the termination of the 2nd defendant’s sales agency with the 1st defendant, although it was agreed that he would complete the existing orders on his account by the end of the month. 16.The 2nd defendant says that he decided to set up a new company for his business. He decided to use the name of “Sencon (Holdings) Ltd” because WECA’s complicated audit checking process necessitated it, and indeed some staff in WECA suggested this course to him. He says he did this without legal advice and did not intend to pass off the 1st defendant’s services as those of the plaintiff. In any event, he says, the services he and the 3rd defendant provided were personal to the customers they had brought in, and any goodwill attached to the defendants and not the plaintiff. Nor did he intend, in his letter of 4 May, which was sent to other customers as well as WECA, to say that the plaintiff had been re-organised. His English failed him in properly expressing himself. What he intended was that he would follow up orders placed with the plaintiff, and make sure that they were fulfilled, but that if the customers wanted to give him their future business, he would be happy to oblige them. 17.The 3rd defendant also says that he brought business with him when he was recruited. He gives much the same account of the deterioration in the relationship with his employer as does the 2nd defendant. He says that because of this he also decided to resign, and he agreed to join the 2nd defendant in his new business after he had sorted out all the existing business he had with the plaintiff. He too did not intend to solicit away the existing orders the customers had placed with the plaintiff but would follow them through. If the customers would give him their new business, he would take it. In fact CML decided on its own to cancel orders placed with the plaintiff and transfer the business to the 1st defendant. 18.It is not in dispute that the employees, Raymond Tsang Wai Tong and Ronald Chan Hoi Kit resigned from the plaintiff in May 2005 and went to work for the 1st defendant. They say that they were not solicited but went of their own accord. 19.In any event, there are no contractual provisions between the plaintiff and the 2nd and 3rd defendants or the other employees restraining them from competition after termination of employment. 20.It is not in dispute that the 1st defendant’s customer list consisted of 12 customers. The plaintiff had no such list. Of those 12 customers, all but one were brought in by the 2nd and 3rd defendants; one was new. Of the 11 customers so brought in, all but two had been customers of the 2nd or 3rd defendant in his previous employment. The other two were introduced to the 2nd or 3rd defendant by their other long term customers. There was no communication between the plaintiff and either defendant about the customers. The plaintiff’s claim 21.The Statement of Claim has not yet been filed but counsel advises that the plaintiff’s claims will be that in addition to fraudulent conduct by each or all of the defendants, the 2nd and 3rd defendants are in breach of their duty of good faith, confidence and fidelity to the plaintiff, in that they or both of them removed client data and set up a business, not just in competition with the plaintiff but fraudulently and dishonestly to take away its business, and they continued to use information from the plaintiff to carry on such business after leaving the plaintiff. Injunction 22.The principles are set out in the leading case of American Cyanamid Co. v. Ethicon Ltd [1975] AC 396, expanded in Fellowes & Son v. Fisher [1976] AC 122. In the first place, the plaintiff’s claim must not be frivolous or vexatious and there must be a serious question to be tried. Then the court should first consider whether if the plaintiff succeeds at trial he would be adequately compensated by damages for any loss caused by the refusal to grant an interlocutory injunction. If damages would be an adequate remedy, and the defendant would be in a position to pay them, no injunction should be granted. If damages would not be an adequate remedy, the court should consider whether, if the injunction were granted, the defendant would be adequately compensated by the plaintiff’s undertaking as to damages. If so, and the plaintiff would be in a position to pay them, there would be no ground to refuse the injunction. It is where there is doubt as to the adequacy of the respective remedies in damages that the question of balance of convenience arises. Where other matters are evenly balanced it is prudent to preserve the status quo. The extent to which the disadvantages to each party would be incapable of being compensated if he succeeds at the trial is a significant factor in assessing where the balance of compensation lies. Serious question to be tried 23.I approach this in three parts; on the claims for injunction against passing off, injunction against what I will call, for the sake of simplicity, “poaching” the plaintiff’s customers, and injunction against poaching the plaintiff’s staff. 24.As to passing off, this requires the plaintiff to show some goodwill or reputation attaching to its goods or services in the mind of the purchasing public; misrepresentation by the defendant leading the public to believe that the goods or services offered by him are those of the plaintiff; and damage suffered thereby. 25.There is ample evidence of misrepresentation here, as well as evidence of damage. The defendants do not deny that there is a serious question to be tried as to the use of the plaintiff’s name and logo by the 1st defendant; and they offered an undertaking not to do so in future. But they do not accept that there is a serious question to be tried on passing off. They say that in this case the goodwill attached, not to the plaintiff, but to the 2nd and 3rd defendants who had brought in almost all of the customers. 26.It is true that some of the customers have since the institution of proceedings sent e-mails to the effect that they did business because of confidence in one or other of the 2nd or 3rd defendant. CML says so in terms. Unity Merchandise Co. says it is happy to continue its relationship with the 2nd defendant. Three others simply confirm a previous relationship with the 2nd defendant. WECA however clearly intended to deal with the plaintiff, even if it had dealt with the 2nd defendant before. There is no evidence as to whether the goodwill in respect of the other customers attached to the plaintiff or one or other of the defendants. In fact these customers had all been doing business with the plaintiff since, at the latest, the end of 2003 when the 2nd defendant brought his customers with him. I do not see how, in the circumstances, there could be no serious question to be tried on passing off, as against all three defendants because the 1st defendant could only act through the other two. 27.As to the poaching of customers, the defendants argue that the injunction sought is in restraint of trade. There was no contractual provision between the plaintiff and the 2nd and 3rd defendants in restraint of trade. They are no longer employed by the plaintiff so any implied term as to the duty of fidelity to the plaintiff no longer exists. There is no property in customers. A former employee can solicit them. The only way the employee can be prevented, absent a binding restrictive covenant, is where there is breach of a duty of confidence recognised by common law. Reference is made to Coco v. Clark [1969] RPC 41 where Megarry J (as he then was) set out the essential elements for an action for breach of confidence. In employment cases, in order to restrain an ex-employee from using confidential information, the information must not be merely confidential but must amount to a trade secret, or of such a high degree of confidentiality as to be equivalent to a trade secret; Faccenda Chicken Ltd v. Fowler [1987] 1 Ch 117. 28.Here, say the defendants, there was nothing confidential. The information about the customers was not a trade secret or equivalent to a trade secret. It was not confidential. It was not the plaintiff’s information; it was not communicated to the 2nd and 3rd defendants in the course of their employment; rather they had it already. So even if the information was confidential while the 2nd and 3rd defendants were working with the plaintiff it would not qualify for protection once they left. Therefore, it would be unjust to restrain the 2nd and 3rd defendants (and hence the 1st defendant) from using this information. 29.There is no dispute that, in the course of employment, (which I take to include agency or directorship) the employee (whom I take to include an agent or director) owes a duty of fidelity, whether express or employed, to the director; and this duty would preclude his using information belonging to the employer to the employer’s detriment. This means that he cannot set up in competition and poach the customers while he is still in the same relationship. He cannot do that, even if the customers are already known to him from before he took up the employment. Once he comes in, the information about them which he brings effectively belongs to the employer, while he is working for the employer. 30.Equally, I do not see that there is any dispute that, absent an enforceable covenant in restraint of trade, the employee may set up in competition once he has left. He can solicit and do business with customers whom he has come to know in the course of his employment, and whom he later remembers, as well as those he knew already. 31.This means that if the 2nd and 3rd defendants had left the plaintiff and set up on their own account, or through a company which was clearly different from the plaintiff, to try to trade with the same customers as before, but openly and above board, the plaintiff could have had no claim against them. 32.However, where has been some breach of the duty of fidelity in the course of the employment, such as by the copying or deliberate memorising of customer information, the position is different. The former employee may be prohibited from using that information in competition with the former employer. See Robb v. Green [1895] 2 QB 315 and Wessex Dairies Ltd v. Smith [1935] 2 KB 80. 33.The point is that this is not a case of the innocent use by a former employee of information which, while confidential as between him and his employer in the course of employment, cannot be regarded as such once the employment terminates. Here the evidence points to breach of duty of fidelity in that the 2nd and 3rd defendants while in employment conspired, probably with their colleagues who later went to work with them, to divert the plaintiff’s customers to the 1st defendant. They did this while the 3rd defendant was still a director. Although the 2nd defendant says that he had told the 3rd defendant that he was leaving, he does not appear to have made this known to anyone else; according to Daisy Chin, he was still working with the plaintiff at least up to the time the problem with WECA came to light, and thereafter he simply disappeared. 34.If that is what happened, it means that the 1st defendant was conceived in fraud and received the information belonging to the plaintiff, as a result of the breach of the 2nd and 3rd defendants’ duty to the plaintiff. It must have known, for its alter ego was the 2nd defendant, of the breach of duty. It could not be regarded as an innocent recipient of the information. 35.As to the other employees, if there was such a conspiracy it would mean that the 2nd and/or 3rd defendants had committed the tort of interfering with the contracts between the plaintiff and those other employees; no matter how well this was covered by the apparently innocuous resignations on their part. Again, the 1st defendant would have taken on the employees in the knowledge of such tort. 36.There is obviously a serious question to be tried, on the question of a permanent injunction against passing off, poaching customers and poaching employees as against the 1st defendant. As against the 2nd and 3rd defendants, the position is perhaps less clear but I think there would be grounds for restraining them at least for a period from benefiting from the “springboard effect” of their breach of duty to the plaintiff. The question of “springboard effect” was not specifically argued, nor was a fixed period of injunction, rather than injunction until further order suggested, but the concept is referred to in some of the cases cited, and the plaintiff’s claim in the writ is for injunctions for a two-year period. Damages as an adequate remedy 37.If damages would be an adequate remedy, and the defendant would be in a position to pay them, no injunction should be granted. If the defendants were permitted to go on dealing with the plaintiff’s customers by passing off the 1st defendant as the plaintiff, and the plaintiff’s former “team” of customer support personnel including the 2nd and 3rd defendant as still working for the plaintiff, then obviously damages would not be an adequate remedy. In any event, it is unlikely that the 1st defendant could pay damages. As to whether damages would be an adequate remedy against the 2nd and 3rd defendants, I think it probably would be, because given that they cannot be restrained from approaching the customers or employing the employees honestly and above board once the employment has ceased, the only damages obtainable would be for the breach of duty while in employment. Balance of convenience 38.If the 1st defendant is allowed to continue to do the acts complained of, there will obviously be continuing losses to the plaintiff brought about as a result of fraud and misrepresentation. 39.It is said that the 1st defendant cannot fulfil existing orders (not placed with the plaintiff before) from the customers, which will damage its reputation and goodwill with customers beyond repair. Since it has just commenced business this is a crucial period for it to get on its feet. The continuation of the injunctions will be a commercial death warrant. 40.I do not see why the 1st defendant should have any reputation and goodwill at the expense of the plaintiff, given that on the evidence it appears to have been conceived in fraud against the plaintiff; and in any event, if, as is argued for the defendants, the customers’ goodwill attaches to the 2nd and 3rd plaintiffs, the 1st defendant has no goodwill anyway. 41.There is no question that the balance of convenience and justice is in favour of the plaintiff as against the 1st defendant. 42.If I am wrong and damages are not an adequate remedy against the 2nd and 3rd defendants, it is necessary to consider balance of convenience as between them and the plaintiff. The object of injunction is not to punish; no doubt that can be achieved by damages and costs at trial. Given that there is no objection to their honestly setting up on their own, either on their own account or through a legitimate company, to trade with those customers who will follow them and employing the same employees to do so, I think it would be wrong to restrain them from those acts. They would suffer considerable hardship and loss of livelihood. 43.For these reasons I continued the injunctions against the 1st defendant but discharged them against the 2nd and 3rd defendants.
Ms Mairead Rattigan, instructed by Messrs Wong & Fok, for the Plaintiff Mr Martin Liao leading Miss Joyce Leung, instructed by Messrs Haldanes, for the 1st, 2nd and 3rd Defendants |
Cases cited in this judgment