Natuzzi Spa v. De Coro Ltd

HCA 4166/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 4166 OF 2003

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BETWEEN

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Before: Hon Lam J in Court

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J U D G M E N T

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1.The Plaintiff and the Defendant are competitors in the upholstery business.  By this action, the Plaintiff claimed the Defendant had employed one of its former senior prototypist in breach of the agreement between the Plaintiff and that employee.  The Plaintiff also alleged misuse of its confidential information by the Defendant.  The action was tried together with another action between the same parties.  After the close of the Plaintiff’s evidence, the Defendant elected not to call any evidence in this action.  This court heard closing submissions in this action before it resumed to hear the rest of the evidence for the other action.

2.The employee in question is Mr Pennacchia [“Mr P”].  He had been employed by the Plaintiff from 1994 to early 2001.  He was re-employed by the Plaintiff in December 2001.  He tendered his resignation in September 2002.  When he was re-employed, Mr P signed a Non-competition Agreement with the Plaintiff.  This action concerns the alleged engagement by the Defendant of the service of Mr P from January to May 2003.  The Plaintiff’s case is that such engagement is actionable as procurement of breach of contract by Mr P.

3.Further, the Plaintiff alleged that Mr P had wrongfully disclosed to the Defendant certain confidential information belonging to the Plaintiff and the Defendant should be liable for breach of confidence.  In Paragraph 8 of the Amended Statement of Claim, the confidential information was pleaded as follows,

“	(a)	the Plaintiff’s designs for furniture, including but not limited to the designs of sofas and armchairs; and
	(b)	the Plaintiff’s furniture manufacturing process management system.”

4.In the Voluntary Particulars supplied by the Plaintiff on 5 March 2004, the Plaintiff identified the relevant designs as designs for model Nos. 2142, 2144, I139 and R681.  These were said to be items that had not been available in the market before Mr P resigned.

5.The Plaintiff also gave particulars in the same document regarding the furniture manufacturing process management system.  Two main components were identified: (a) the recording of time taken for each steps in the production process for costs accounting purposes; and (b) standardized “sewing and cutting schemes” used for production of furniture.

6.The Defendant denied that it had employed Mr P in breach of the Non-competition Agreement although it admitted employing Mr P from 1 June 2004.  It also denied the use of the alleged confidential information.  In his closing submissions, Mr Yan SC submitted that factually the Plaintiff had not even established a prima facie case on these matters.  Further, Mr Yan contended that the Non-competition Agreement was unenforceable as a restraint of trade and the information identified by the Plaintiff did not have the requisite degree of confidentiality to sustain any cause of action.

7.The following are the broad issues that have to be resolved by this court,

(a)	Whether the Defendant had employed Mr P during the prohibited period under the Non-competition Agreement;
(b)	Whether the Non-competition Agreement is enforceable in Hong Kong;
(c)	Whether the Defendant had used any information of the Plaintiff without authorization;
(d)	Whether the misuse of information is actionable on account of its confidential nature.

I. Did the Defendant employ Mr P at the material time?

8.The Plaintiff’s case is that Mr P’s employment ceased on 15 November 2002 and by reason of the Non-competition Agreement, he could not work for other competitors for a period of 18 months thereafter.  It is pleaded in Paragraph 12 of the Amended Statement of Claim that the Defendant engaged Mr P as a prototypist from about January to May 2003.  This is the period that we are concerned with.

9.The Plaintiff did not adduce any direct evidence of Mr P working for the Defendant during the relevant period.  Mr Smith SC invited the court to draw such an inference based on the following facts,

(a)	Mr P visited the unofficial factory of the Defendant on 4 May 2003 and stayed overnight;
(b)	Mr P visited the official factory on 5 May 2003 and stayed until late;
(c)	There was a noticeable increase in security activity when Mr P approached Defendant’s premises;
(d)	Mr P was a tenant of a domestic premises in Shenzhen since January or February 2003;
(e)	Documents found outside the unofficial factory connected Mr P with the Defendant.

I (1). Drawing adverse inference from election not to call evidence

10.Mr Smith SC further invited the court to draw adverse inference against the Defendant by reason of the latter’s election not to call any evidence.  In a nutshell, counsel submitted that the Defendant and Mr P could easily testify in the witness box about Mr P’s activities in Shenzhen at the material time and they chose not to take the opportunity to dispel the suspicion generated by the matters set out above.  In this connection, counsel referred to the judgment of Brown LJ in Benham Ltd v Kythira Investments Ltd [2003] EWCA Civ 1794.  At Para. 30, His Lordship said,

“The point is worth making too even in those cases where the defendant elects to call no evidence.  True, as Mance LJ made plain in Miller, the only issue then is whether the claimant has established his claim on the balance of probabilities.  But it must be recognized that he may have done so by establishing no more than a weak prima facie case which has then been strengthened to the necessary standard of proof by the adverse inferences to be drawn from the defendant’s election.  Such adverse inferences can in other words tip the balance of probability in the claimant’s favour.”

11.I have discussed the relevant principles regarding the drawing of adverse inferences in a civil trial where a party does not call evidence available to him in Ip Man Shan Henry v Ching Hing Construction Co Ltd (No 2) [2003] 1 HKC 256 at p. 307 Para. 155.  A prima facie case has to be made out by the other evidence before one talks about tipping the balance of probability by the omission to call available evidence.

12.Although very often the court has to draw inference from some primary facts to come to a finding and it is possible for a prima facie case to be established in such a matter, there is always a line to be drawn between conjectures and inferences.  This was highlighted recently by Ribeiro PJ in Nina Kung v Wang Di Shin FACV No 12 of 2004, 16 September 2005, at Paras. 185 to 186.  From the Australian cases cited by His Lordship, I derive these two propositions that are pertinent for present purposes,

(a)	An inference can be drawn in a civil case if the evidence give rise to a reasonable and definite inference that is more probable than the other conflicting inferences;
(b)	But the facts proved must provide a reasonable basis for a definite conclusion before one enters the realm of inference.  The court should not make a finding on the basis that one guess is more probable than another.

I (2). The primary facts and evidence

13.Before I consider whether a prima facie case of Mr P working for the Defendant had been established, I need to examine at greater length the primary facts.  Of the several matters relied on by Mr Smith in Paragraph 9 above, I am of the view that some were not satisfactorily proved.  In particular, I am not satisfied that there was any noticeable increase in security activity on Mr P alleged approach on 4 May 2003 and I have doubts regarding the assertion that Mr P visited on that day and stayed at the unofficial factory overnight.  I also have difficulties in seeing the connection between Mr P and the documents found outside the unofficial factory.

14.Mr Elmer cannot give any first hand evidence about the so-called increase in security activity as he was not at the scene on 4 May 2003.  Mr Kuang, who seems to be the coordinator of the PRC team, was in a vehicle and therefore not an agent on foot that was being evicted.  Paragraph 9 of his statement referred to the information he had from someone called Jacky about dramatic increase of security in the vicinity of the main factory.  Jacky did not give any witness statement and he was not called as a witness.  I have no explanation why he was not called.  Without any details or particulars, I have no idea what he meant by dramatic increase in security.  I do not attach much weight to such hearsay assertion.  In any event, the main factory was not the one that Mr P allegedly visited on 4 May 2003.  Hence, no significance arises from the so-called increase in security thereat. 

15.Paragraph 10 of Kuang’s statement referred to what happened at the Pingshan factory.  Kuang was not called as a witness although his statement was produced by way of hearsay evidence.  On 9 June 2005, I directed pursuant to Order 38 Rule 21 that the Defendant be allowed to cross-examine Kuang and the Plaintiff were to make such arrangements as are necessary to secure his attendance at the trial.  As stated below, I am not satisfied with the explanation as to why he was not tendered for cross-examination.  Mr Yan submitted that in such circumstances, not much weight could be attached to his witness statement.

16.According to Paragraphs 10 and 11 of his witness statement, Kuang must have been busy with getting hold of the taxi driver and securing evidence from him after Mr P was allegedly dropped off at the Pingshan factory.  Hence, the time he had to observe the security at that place must have been a short one.  He said the vehicles and agents on foot were evicted from the area by factory security.  It is not clear to me what was the area he was referring to and what was the measure adopted by the security guard to “evict” them.  If the vehicles and agents had trespassed into private property, I see nothing suspicious arising from their eviction.  If they were at public place blocking access to the factory (Kuang himself said in Paragraph 10 that the entrance to the factory was very narrow), eviction is again not surprising.

17.In this connection, I note that at p. 6 of the private investigator’s report, there was reference to video taken on 4 May 2003 as regards the factory entrance.  That video footage was however not included in exhibit P-52 produced to the court.

18.This court is not going to speculate.  The state of evidence is that without any oral testimony from those who took part in the surveillance exercise, I do not have a clear picture as to what had happened.  I am therefore unable to find that there had been any increase in security at the Pingshan factory upon Mr P’s alleged arrival on 4 May 2003.

19.Regarding Mr P’s alleged visit to the Pingshan factory on 4 May, Mr Yan emphasized that Kuang did not say that he saw Mr P coming out of the taxi.  All along he just followed the taxi by reference to the registration number given to him by Mr Elmer.  The person who supplied the registration number of that taxi to Mr Elmer was not called to give evidence nor did he make any witness statement.  The statement from the taxi driver only referred to two white men.  It would have been quite simple for Kuang to show the taxi driver a picture of Mr P and ask him to confirm whether Mr P was on the taxi.  However, that was not done.

20.The video footage in P-52 only showed Mr P’s arrival at the Hong Kong International Airport on 4 May 2003.  The next footage showed a white vehicle arriving at the factory.  According to the chronology set out in the report, that would be the next morning on 5 May 2003.  Some time later, the white vehicle left the Pingshan factory and it was driven to a private estate of domestic residence known as Ngau King Fa Yuen [“the Estate”].  Up to that stage, contrary to what was suggested in the report at the entry relating to 12:00 pm on 5 May 2003, Mr P was not seen on the video.  He was only captured later as he emerged from the Estate and got into the driver’s seat of the white vehicle.  He drove back to another factory.

21.Kuang said in his witness statement that on 5 May 2003 he saw Mr P drive the white vehicle from the Pingshan factory to the Estate. 

22.Without Kuang testifying in the witness box, I have no evidence as to the quality of the observation by Kuang regarding Mr P driving out of the Pingshan factory.  It is apparent from the video tape that Kuang was in a car parking at some distance to the entrance of the Pingshan factory.  Kuang said in his own statement that the entrance was narrow.  It is unlikely that he had witnessed the driver boarding the white vehicle.  Neither did the tape show the same.  I have no explanation why the report mistakenly stated that Mr P was captured on the video as the driver driving the white vehicle out of the factory.

23.Kuang’s statement and the report were admitted as hearsay evidence.  However, I do not have any satisfactory explanation as to why Kuang was not called as a witness notwithstanding my direction of 9 June 2005.  Nor do I have any evidence as to the identity of the agents who supply the information for the relevant entries in the report and why such agents were not called to give evidence.  Mr Smith had faintly suggested that the absence of Kuang had something to do with the incident on 10 June 2003.  I do not accept that as satisfactory explanation.  To start with, the Plaintiff had not adduced any evidence in whatever shape or form from Kuang or anyone else to put this forward as reason for his absence.  Further, Kuang did not have any difficulty in providing the Plaintiff with his witness statement on 17 August 2004.  He was therefore expecting to testify notwithstanding what happened on 10 June 2003.  Also, that incident did not have any impact on Mr Elmer’s coming to court to testify.

24.I have the same problems with the reference in the report to identification of Mr P as driver parking the car at the Estate.

25.The movement of Mr P on 4 and 5 May 2003 had always been an issue in dispute.  It behoves the Plaintiff to prove its case properly.  The Plaintiff chose to discharge its onus of proof by relying on hearsay evidence that inherently raises questions with regard to its reliability.  Having directed myself to the matters I have to consider under Section 49 of the Evidence Ordinance, I come to the conclusion that I cannot accept the statements in the witness statement and report on their face value.  As I said, I see no reason why Kuang and other agents who have first hand knowledge cannot come to the court to testify.  The Plaintiff did not raise any objection to my direction of 9 June 2005.  There are certainly questions that could be asked of these witnesses that might cast a very different light as to their evidence.  The witness statement and report were not contemporaneous records but were made specifically for litigation purposes.  Statements in the report were multiple hearsay as Mr Elmer was not present at Shenzhen on 4 and 5 May 2003.  Whilst these people were private investigators and may not have any interest in misrepresenting things, there are always possibilities of innocent or negligent mistakes.  The agents had probably consulted each other in making the report and witness statement.  Although it might not be intentional, the absence of oral testimony from these witnesses does present a problem to this court in the evaluation of the weight of their written evidence.  Regarding the identification of Mr P as the driver driving out of the factory at noon on 5 May, the report does not seem to tally with the video tape produced.

26.In assessing the weight of the hearsay evidence, I bear in mind that the Defendant did not adduce any evidence.  Mr P and Mr Ricci could probably have told the court whether Mr P visited the Pingshan factory on 4 and 5 May and for how long did he stay there.  Mr Smith invited the court to draw adverse inference against the Defendant for failing to call such evidence.  However, the same argument can be applied with regard to the absence of Kuang and the other agents who were present at the surveillance.

27.I am prepared to conclude that the premises at Pingshan were the Defendant’s factory.  Apart from the evidence set out in the report of 17 June 2003 by the private investigator, the appearance of Mr Ricci on 10 June 2003 when the team of private investigators sought information from the landlord is indicative.

28.But I am not satisfied that Mr P visited the Pingshan factory on 4 May and stayed there overnight until 5 May.  I am however satisfied that Mr P had visited the Defendant’s factory on 5 May as he drove the white vehicle to the factory.  Mr Smith referred to the destination of Mr P as the official factory.  The video suggests that it was the Pingshan factory.  The agent who took the video commented on the video that he had passed the large factory (viz. the official factory) and headed to the factory where they had been at that morning, viz. the so-called unofficial factory.

29.I do not regard the occupation of Mr P of the domestic premises at Shenzhen and his appearance at the Estate as having any probative significance towards proving Mr P working at the Defendant’s factory.  The report contained conflicting statements as to who was the tenant.  In one paragraph at p. 8, it was suggested that Mr P was the tenant.  In the other paragraph, it was said that the unit appears to be rented by a female who was the girlfriend of Mr P.  I do not see how a visit by Mr P to his girlfriend’s residence could provide a reasonable basis for inferring that he was working for the Defendant.

30.Neither do I see any reasonable basis for connecting Mr P with the documents retrieved outside the Pingshan factory.  Mr Smith asked the court to infer that the documents were based on confidential information supplied by Mr P to the Defendant by reason of the letter dated 25 May 2002 from the Defendant’s solicitors to the Plaintiff’s solicitors.  In that letter, it was said,

“The proptotypists at De Coro do not prepare the sketches he refers to, although we understand that this was the practice of prototypists at Natuzzi … as well as at other sofa manufacturing companies.”

31.The sketches that were referred to were those mentioned in Paragraph 7 of the witness statement of Giuseppe Lella of 28 January 2002.  They were sketches prepared by prototypists based on full scale drawings of design.  The sketches were to illustrate how a prototypist will work with the foam, fabric and covering for the sofa.  It is however clear from the context of the whole paragraph in that witness statement that these were sketches prepared prior to the design being finalized and even before the prototype was built.  They were not the same as sketches used for production purposes since it was stated in the same paragraph that there could be modifications and adjustments after a prototype had been built.

32.Hence, what the Defendant’s solicitors asserted in May 2002 did not have much bearing on sketches used for production purposes.

33.The Plaintiff had the opportunity to clarify from Mr Lella in respect of the use of such sketches for production purposes in the Defendant’s factory.  In fact, he gave evidence about sewing charts similar to those retrieved by the agents in June 2003 on Day 7,

“	Q.	Then the seamstress would sew the pieces in group A together to form one piece?
	A.	Yes, she has a sewing chart.  There is a sewing chart.
	Q.	A sewing chart which is like a template to tell her which piece to sew with what?
	A.	Yes, this schedule, this chart is made on A4 paper and indicates the dimensions, reduced dimensions and with the exact shape of the template.
	Q.	That chart that the seamstress has shows how the various pieces match and fit together?
	A.	How they get stitched together.”

And then on Day 9,

“	MS TAM:		You need drawings for the foam because the foam has to be cut in a certain shape; is that right?
	A.	Me or the production?
	Q.	The company needs these drawings?
	A.	Of course, in order to maximise.  This is all to do with maximising.
	Q.	Any other drawings that might come into existence?
	A.	The sewing, the preparation.  There is some documentation, some photos to be made, such as for the elastic banding, for the preparation of the sofa.  It is like an ID practically, identity card.”

34.Mr Lella said this was the practice adopted in all the furniture manufacturers he worked with.  Plaintiff’s counsel did not re-examine about whether such sewing charts were used in the Defendant’s factory.

35.Given such evidence, I do not regard the letter of 25 May 2002 as an admission by the Defendant that they did not use sewing charts for their production prior May 2002.

36.Of the matters relied on by Mr Smith, I find the following primary facts established but not the others,

(a)	the Pingshan factory was a factory of the Defendant in May 2003;
(b)	Mr P visited the factory on 5 May by driving there in a vehicle which had been driven from the factory to the Estate earlier.

I (3). Conclusions on inference 

37.Even taking into account of the admission that Mr P worked for the Defendant since 1 June 2004 and the submission of Mr Smith that it was likely that the Defendant took the risk to employ Mr P earlier in view of the Defence’s challenge as to the validity of the Non-competition Agreement, I do not regard these primary facts as sufficient to establish a prima facie case of employment of Mr P by the Defendant in 2003.  It is simply impossible to conclude that the purpose of Mr P’s visit on 5 May must be the provision of service for the Defendant.  It is equally likely that he went there to discuss with the Defendant about him being employed after the expiration of the Non-competition Agreement.  As Mr Yan submitted, had Mr P been working at the Defendant’s factory, it would not be too difficult for the private investigator to monitor his movement for a longer period to provide a reasonable basis for such inference.

38.By reason of that, the election of the Defendant not to call any evidence does not assist the Plaintiff.  There is simply insufficient evidence to enable this court to draw a reasonable inference that Mr P worked for the Defendant in 2003. 

39.That conclusion is sufficient to dispose of the claim based on procurement of breach of contract.

II. The enforceability of the Non-competition Agreement

40.Parties have agreed that this court should not be concerned with Italian law or PRC law and the only question that this court has to decide is whether the Non-competition Agreement is enforceable as a matter of Hong Kong law.  Although I am not sure if it is correct that I should ignore PRC law (since procurement of breach of contract is a tort and to be actionable in Hong Kong, a tort committed outside jurisdiction is subject to the double actionability requirement), given my above conclusion on the facts, I will confine myself in this judgment to enforceability in terms of Hong Kong law.

41.The Non-competition Agreement made on 5 June 2002 prohibited Mr P from competing with the Plaintiff for a period of 18 months after the termination of his employment.  It is drafted in very wide terms.  The material parts of Clause 1 stipulated that Mr P “will not carry out any work, either as an employee or consultant of any form whatsoever, whether on a full-time, and/or part-tile basis, whether on a subordinate or freelance basis, whether directly and/or indirectly through a third party, on behalf of or at companies … carrying on activities that directly compete with those carried out by the Natuzzi Group [and then a list of activities were set out by way of non-exhaustive examples]”.  It also prohibited Mr P from divulging information that may be useful in the creation or production of manufactured items similar to those produced by the Natuzzi Group and relating to the activities carried out by the Group.

42.The agreement covers activities in Europe, Americas and Asia.

43.In consideration of that restriction, the Plaintiff agreed to pay Mr P his full salary for the whole duration of the 18 months.

II (1). The relevant law on restraint of trade

44.Counsel have addressed the court at great length on the law on restraint of trade.  For present purposes, I accept the following propositions put forward by Mr Yan SC as correct (and I do not believe Mr Smith had much disagreement),

(a)	No employer is entitled to make use of a restrictive covenant to protect himself against competition per se.  A covenant against competition per se is not reasonable and accordingly void.
(b)	An employer is not entitled to prevent his ex-employee from using the skill and knowledge in his trade or profession which he learnt in the course of his employment.  Nor is he entitled to prevent his ex-employee from using in the service of some person other than the employer the general knowledge the employee has acquired of the employer’s scheme of organization and methods of business.
(c)	An employer is entitled to make use of a restrictive covenant to protect his interests in his trade secrets and in his trade connections.  However, the restrictive covenant, to be valid, must afford no more than adequate protection to the party in whose favour it is imposed.  It must be reasonable not only in reference to the interests of the parties concerned, it must also be reasonable in reference to the interests of the public.
(d)	The onus of proving the reasonableness of the restriction rests on the party who seeks to enforce the restriction.  The more onerous the restriction, the heavier the weight of the onus.

45.To these propositions, I would only add a little discussion on several cases.  The starting point is Herbert Morris Ltd v Saxelby [1916] AC 688.  The case concerned an engineer who first joined his employer as a junior draughtsman when he left school.  After 12 years’ employment, he left the employer.  The employer carried on business in manufacturing and sale of pulley blocks, runways and travelling cranes.  It sought to enforce a restrictive covenant in the contract of employer against the engineer.  The covenant contained a restriction barring the employee from working for others in the business of pulley blocks, runways and traveling cranes in the United Kingdom for a period of seven years.  The House of Lords held that the covenant was wider than that required for the legitimate protection of the employer and was not enforceable.

46.At p. 698-9, Lord Atkinson explained why a restraint wider than necessary is described as oppressive and why it is against public policy.

“…[I]t would, if enforced, deprive him for a lengthened period of the power of employing … that mechanical and technical skill and knowledge which … his industry, observation, and intelligence have enabled him to acquire in the very specialized manufacturing business of the appellant, thus forcing him to began life afresh, as it were, and depriving him of the means of supporting himself and his family.  …[S]uch oppression … does not concern him alone.  The general public suffer with him, for it is in the public interest that a man should be free to exercise his skill and experience to the best advantage for the benefit of himself and of all those who desire to employ him….”

47.What is reasonable depends on the legitimate interest to be protected.  In this connection, Mr Yan urged this court to bear in mind what was said by His Lordship at p. 702,

“He [referring to the employer] is undoubtedly entitled to have his interest in his trade secrets protected, such as secret processes of manufacture which may be of vast value.  And that protection may be secured by restraining the employee from divulging these secrets or putting them to his own use.  He is also entitled not to have his old customers by solicitation or such other means enticed away from him.  But freedom from all competition per se apart from both these things, however lucrative it might be to him, he is not entitled to be protected against.  He must be prepared to encounter that even at the hands of a former employee.”

See also Lord Parker at p. 709.

48.In the present context, for reasons I shall explain further below, the following remarks of Lord Atkinson at p. 703-4 about what an ex-employee is entitled to use for the benefit a new employer are pertinent,

“The respondent [ex-employee] cannot … get rid of the impressions left upon his mind his experience on the appellants’ works; they are part of himself; and in my view he violates no obligation express or implied arising from the relation in which he stood to the appellants by using in the service of some persons other than them the general knowledge he has acquired of their scheme of organization and methods of business.”

Further down p. 704, the following dicta of Farwell LJ in Sir W C Leng & Co v Andrews [1909] 1 Ch 763 at 773 were cited with approval,

“That doctrine does not mean that an employer can prevent his employee from using the skill and knowledge in his trade or profession which he has learnt in the course of his employment by means of directions or instructions from the employer.  That information and that additional skill he is entitled to use for the benefit of himself and the benefit of the public who gain the advantage of his having had such admirable instruction.  … I apprehend that a man who goes into an office is entitled to make use in any other office, whether his own or that of another employer, of the knowledge which he has acquired in the former of details of office organization, such as the establishment of one department with a chief or head and grades of subordinates under him, the desirability of establishing local centers of information in various towns and villages … To acquire the knowledge of the reasonable mode of general organization and management of a business of this kind, and to make use of such knowledge, cannot be regarded as a breach of confidence in revealing anything acquired by reason of a person having been in any particular service, although the person may have learnt it in the course of being taught his trade …”

See also the discussion of Lord Parker at p. 710-2.

49.It is emphasized in Herbert Morris that not only must the restraint be reasonable with reference to the interests of the parties, but also reasonable with reference to the public interest.  Hence, adequacy of consideration as between the parties is not significant as far as the latter is concerned, see in particular the comments of Lord Parker at p. 707.

50.In Commercial Plastics Ltd v Vincent [1965] 1 QB 623, the Court of Appeal followed Herbert Morris in holding that scheme of organization and methods of business could not be regarded as trade secrets (p. 641D).  However, the element of continuing new discovery of further advantageous methods or devices for producing the sheeting for adhesive tape were held to be sufficient to justify a reasonable restraint (p. 642G).  Yet, the restraint was found to be too wide and therefore not enforceable.

51.The next case I shall discuss is Printers & Finishers Ltd v Holloway [1965] 1 WLR 1.  It was a case where the employer did not extract any restrictive covenant from its employee.  The employer’s claim was based solely on breach of confidence.  Injunction was granted in respect of documentary materials taken away by the employee upon termination of his employment.  However, Cross J refused to grant injunction in respect of information carried in the head of the employee concerning the plants of the employer.  This was not because such information was only carried in his head.  At p. 5, His Lordship acknowledged,

“If the information in question can fairly be regarded as a separate part of the employee's stock of knowledge which a man of ordinary honesty and intelligence would recognise to be the property of his old employer and not his own to do as he likes with, then the court, if it thinks that there is a danger of the information being used or disclosed by the ex-employee to the detriment of the old employer, will do what it can to prevent that result by granting an injunction.”

Secret chemical formula and customer list were given as examples for this category.

52.The injunction was refused because the relief sought was so generally and widely framed that it might encroach upon knowledge that an ex-employee might quite honestly and legitimately use for the benefit of his new employer.  At p. 6, the rationale of the decision was given as follows,

“The employee might well not realise that the feature or expedient in question was in fact peculiar to his late employer's process and factory; but even if he did such knowledge is not readily separable from his general knowledge of the flock printing process and his acquired skill in manipulating a flock printing plant, and I do not think that any man of average intelligence and honesty would think that there was anything improper in his putting his memory of particular features of his late employer's plant at the disposal of his new employer.  The law will defeat its own object if it seeks to enforce in this field standards which would be rejected by the ordinary man.  After all, this involves no hardship on the employer.”

53.His Lordship continued with the following obiter that is pertinent for our purposes,

“Although the law will not enforce a covenant directed against competition by an ex-employee it will enforce a covenant reasonably necessary to protect trade secrets ... If the managing director is right in thinking that there are features in the plaintiffs' process which can fairly be regarded as trade secrets and which their employees will inevitably carry away with them in their heads, then the proper way for the plaintiffs to protect themselves would be by exacting covenants from their employees restricting their field of activity after they have left their employment, not by asking the court to extend the general equitable doctrine to prevent breaking confidence beyond all reasonable bounds.”

54.It was not necessary for Cross J to discuss whether the features relied upon by the plaintiff in that case justified protection by a properly drafted restrictive covenant.  Nothing said in that judgment can be taken as departure from what had been decided in Herbert Morris.  

55.Littlewoods Organisation Ltd v Harris [1977] 1 WLR 1472 was a case where the Court of Appeal held that a restrictive covenant was enforceable and reversed the judge on his finding that there was no legitimate interest to be protected.  At several parts of the judgment, the expressions “trade secret” and “confidential information” seem to have been used interchangeably, see p. 1478F; p. 1484F.  The information that the court was dealing with is described at p. 1479H to 1480C and p. 1484H to 1485B.  Those were specific information derived from experience and market research that were acquired by the plaintiff at great expense and by great expertise, such as which items to be included in the catalogue, the prices and quantities at which items were bought and sold.  They were not general knowledge as to how the plaintiff ran its business.  Megaw LJ acknowledged at p. 1485B that the latter kind of knowledge was insufficient to justify a restrictive covenant.

56.It is also apparent from the citation by Lord Denning MR of Herbert Morris at p. 1478G to 1479A that His Lordship did not intend to undermine what had been said in the earlier decision.

57.Faccenda Chicken Ltd v Fowler [1987] 1 Ch 117 was another case where the plaintiff did not have the protection of any restrictive covenant.  The claim was again based on breach of confidence.  The judgment of the Court of Appeal highlighted the difference between the duty of fidelity owed by an employee whilst the employment subsisted and the duty of implied duty of confidence owed by an ex-employee to his former employer.  On the facts of the case, it was held that the sales information and information relating to prices were not trade secret subject to protection under the latter duty.

58.The Court of Appeal expressly disagreed with Goulding J on whether an employer can protect the use of information other than trade secret by a restrictive covenant.  At p. 137G to 138C, after referring to Herbert Morris and Holloway Neill LJ said,

“It is clearly impossible to provide a list of matters which will qualify as trade secrets or their equivalent.  Secret processes of manufacture provide obvious examples, but innumerable other pieces of information are capable of being trade secrets, though the secrecy of some information may be only short-lived.”

His Lordship identified the following matters as being relevant to determine whether the information could be protected,

(a)	The nature of the employment;
(b)	The nature of the information;
(c)	Whether the employer impressed on the employee the confidentiality of the information.
(d)	Whether the relevant information can be easily isolated from other information which the employee is free to use or disclose.

59.Mr Smith submitted that subsequent cases have cast doubt on the Court of Appeal’s disapproval of the classification by Goulding J. in Faccenda Chicken: Balston Ltd v Headline Filters Ltd [1987] FSR 330 at p. 347-8; Lancashire Fires Ltd v Lyons & Co Ltd [1996] FSR 629 at p. 666-7; Lansing Linde Ltd v Kerr [1991] 1 All ER 418 at p. 425-6 where Staughton LJ regarded it as a problem of defining what are trade secrets and His Lordship’s preferred view was,

“It can thus include not only secret formulae for the manufacture of products but also, in an appropriate case, the names of customers and the goods which they buy.  But some may say that not all such information is a trade secret in ordinary parlance.  If that view be adopted, the class of information which can justify a restriction is wider, and extends to some confidential information which would not ordinarily be called a trade secret.”

60.In Lansing Linde at p. 435 e to g, Butler-Sloss LJ said,

“Finally, I wish to make a brief comment whether the information known to the respondent was capable of being treated as ‘trade secrets’.  The starting point is Herbert Morris.  But we have moved into the age of multinational businesses and worldwide business interests.  Information may be held by very senior executives which, in the hands of competitors, might cause significant harm to the companies employing them.  ‘Trade secrets’ has, in my view, to be interpreted in the wider context of highly confidential information of a non-technical or non-scientific nature, which may come within the ambit of information the employer is entitled to have protected, albeit for a limited period.”

Staughton LJ also referred to Herbert Morris as the starting point and expressly adverted to the distinction between general skill and knowledge and secret or confidential information at p. 425c to f.

61.There are of course other decisions cited by counsel on the topic.  However, I do not think there is a single decision that cast doubt on the correctness of what had been said in Herbert Morris.  Even though the categories of information that might justify reasonable protection by an appropriately drafted restraint may be expanded as the level of sophistication in the commercial world continuously to develop, I am of the view that general knowledge as to the employer’s business organization and management of the kind referred to in Herbert Morris remains as the general stock in trade acquired by an employee who could legitimately use the same for the benefit of his new employer.  In the words of Cross J, I do not think that any man of average intelligence and honesty would think that there was anything improper in so doing.

II (2). The pleadings and the conduct of the case at the trial  

62.In the pleadings, the Plaintiff did not plead clearly what legitimate interests it would rely upon to justify the restraint as set out in the Non-Competition Agreement.  In reply to the challenge to the enforceability, the Plaintiff pleads in Paragraph 6 of the Reply that the agreement is enforceable by reference to decisions by the Court of Bari, the interlocutory decision of Recorder Wong and the payment of full remuneration during the restraint period.  At the trial, Mr Smith did not advance any arguments that the decisions by the Court of Bari and Recorder Wong had any significance in terms of the enforceability issue.  Instead, counsel relied on the matters set out in Paragraphs 3 to 5 above.  No objection was taken by the defence and the trial had been conducted on that basis.  To be fair to the pleader, particulars of those matters were pleaded as voluntary particulars of the knowledge acquired by Mr P in the course of his employment with the Plaintiff.

63.Since the burden of establishing the enforceability of a restrictive covenant rests on the Plaintiff, it should have pleaded the same with full particulars including all facts and matters relied upon by it to assert that the covenant is enforceable.  A bare assertion that the clause is enforceable is not enough.  It should plead the interests it relied upon and how such interests reasonably warrant a protection as wide as that embodied in the contract.  If a plaintiff intends to put forward a case of severance, whether by way of alternative argument or primary argument, it should also be pleaded.  As it would be apparent from what I said below, to some extent, the failure to plead the issues properly in the instant case had led to a failure on the part of the Plaintiff to adduce adequate evidence on some relevant issues.

II (3). The furniture manufacturing process management system

64.With the authorities and these remarks in mind, I turn to the interest relied upon by the Plaintiff in the course of the trial to justify the Non-Competition Agreement identified in Paragraphs 3 to 5 above.  I shall first deal with the furniture manufacturing process management system.  I confess I have great difficulties in understanding how the ideas of recording time for each step in production for cost accounting purposes and the use of sewing and cutting schemes could be anything other than general business management of the Plaintiff.  A number of witnesses deposed that similar methods were employed by other furniture manufacturers apart from the Plaintiff although Mr Lella said the Plaintiff had pursued the same more vigorously.  I do not consider the ideas of adopting such systems in a furniture manufacturing business as remotely having the necessary secrecy or confidentiality to support a post-employment restraint of trade.

65.Mr Smith cited several cases for the proposition that the fact that some trade rivals already had the same information does not necessarily negate its confidential nature.  I have no quarrel with that as a proposition of law.  However, one must still ask whether the information relied upon by the Plaintiff in the present case possess any quality that could legitimately support a restraint of trade.

66.Mr Smith submitted that the Plaintiff’s methodologies are about the use of standardized documents to facilitate the assessment and reduction of production costs and the assembly of sofas in the manufacturing process.  He also reminded this court of the evidence of Mr Difilippo as to the techniques and codification system of the Plaintiff.  Based on the evidence of Mr Lella, counsel suggested that the other furniture manufacturer’s production systems were not as sophisticated as that of the Plaintiff.

67.The particulars of confidential information set out in the Plaintiff’s pleadings did not refer to the codification system and Mr Difilippo was not asked to explain specifically what that was.  Given the state of the pleadings, parties did not explore much about the codification system in evidence and Mr Difilippo only referred to it by way of a passing remark.  Insofar as the codification system was the same as the identification of different components in the templates by designated alphabets, it cannot be sufficient to justify a post-employment restraint of trade.  In the circumstances, I do not think the Plaintiff could rely on the codification system to uphold the validity of the Non-Competition Agreement.

68.It does not take a lot of sophistication to come up with the ideas of recording time spent on a process by a time sheet and setting out relevant information for production in sewing scheme and diagrams.  One cannot hide away from the fact that these are features of the general system of business operation which an employee of the Plaintiff can reasonably be expected to learn about and incorporate as part of his stock in the trade and general skill.  He is therefore entitled to use the same for the benefit of his new employer after he left the Plaintiff’s employment.  To hold contrary will lead to an absurd result that no competitor can legitimately adopt these simple methods for his business so long as he employs an ex-employee of the Plaintiff.

II (4). The new designs

69.Turning to the designs for furniture, I accept that a prototypist might acquire knowledge as regard new designs which could provide a proper justification for a suitably drafted restraint of trade provision.  In this context, the question has to be considered by reference to the situation at the time of the contract.  Although a lot of the designs of the Plaintiff were created by different mix and match of recurrent features as highlighted by Mr Yan in his cross-examination of Mr Pontrandolfo and in his closing submissions, one cannot say that all the new designs of the Plaintiff were so devoid of novelty that no restraint can be justified. 

70.The selection of a particular mix and match could be an indication of the Plaintiff’s perception as to the market trend.  Even though an unpublished design might not have been tested in the market, the prediction of a market leader could sometime provide useful guidance for others.  This could be valuable information in a competitive industry like the furniture manufacturing field.

71.However, the usefulness of the information would only last for a very limited duration.  Once a new design is published by way of new model being displayed in trade exhibition and showroom or being advertised in trade magazines, it would be known to all the competitors. The confidentiality of the information would be spent.

72.The Plaintiff has not adduced any evidence as regards the time frame for which a new design would generally remain unpublished and its confidentiality preserved.  As Mr Yan submitted, the burden of proving the need for protection as wide as that prescribed by the Non-Competition Agreement falls fairly and squarely on the Plaintiff, see Herbert Morris at p. 715; Commercial Plastics Ltd v Vincent [1965] 1 QB 623 at p. 644-5. 

73.There is evidence that the Plaintiff had a new model produced every two or three days and some were models based on modifications to existing models.  Mr Scarati was said to have produced seven and eight design drawings every day.  Less experienced designers could produce five or six drawings a day.  It took a prototypist about seven or eight days to make a prototype after the full scale drawing had been prepared.  Judging from these matters and the evidence relating to the lead time on preparation for Highpoint exhibitions, in the absence of specific evidence from the Plaintiff pertaining to the issue, I conclude that the duration of confidentiality of a new design could not have been longer than 6 months.

74.In contrast, the Non-competition Agreement provided for a restraint of 18 months.  I cannot detect any justification from the evidence for such a long period of restraint.  The bare assertion by Mr Campanale is of no assistance.  His evidence did not shed much light on how the Plaintiff had determined the relevant duration of restraint for each employee.

II (5). Payment of remuneration in full 

75.Mr Smith relied on the fact that the prototypist was remunerated at full rate during the period of restraint.  In my judgment that is not a good answer.  It does not begin to address the legitimacy of the restraint from the public interest point of view.  In this connection, the Court of Appeal’s decision in JA Mont v Mills [1993] IRLR 172 is relevant.  That case concerned a restrictive covenant for one year supported by payment of full remuneration.  It was held that it was unenforceable as it was framed too widely and notwithstanding the payment of consideration, there was a distinction between ‘garden leave’ restraint and post termination restraint.  At p. 177, Simon Brown LJ analysed the distinction as follows at Paras. 37 and 38,

“And the essence of the distinction is that because employees [on garden leave, by reason of him being still employed] owe a duty of good faith, the courts can, irrespective of the existence of any express contractual covenant, enjoin against its breach by preventing their employment by trade rivals.  That is simply not the case once the contract of employment ends.  … The duty of good faith, in my judgment, arises out of the obligation of loyalty inevitably owed by an employee to his employer.  Once the employment relationship ceases, there is no continuing occasion for loyalty.”

His Lordship continued to explain in Paras. 38 to 43 why the analogy with ‘garden leave’ had to be rejected on grounds of authority, principle and practicality.

76.Some of the cases cited by Mr Smith relate to restraint of trade in the context of sale of business or other commercial arrangement.  I do not think those cases provide useful guidance in a different context, viz. restraint regarding ex-employee.  I respectfully agreed with the following observations by Sir Christopher Slade in Office Angels Ltd v Rainer Thomas & O’Connor [1991] IRLR 214 at Para. 22,

“A distinction is, however to be drawn between (a) a covenant against competition entered into by a vendor with the purchaser of the goodwill of a business, which will be upheld as necessary to protect the subject-matter of the sale, provided that it is confined to the area within which competition on the part of the vendor would be likely to injure the purchaser in the enjoyment of the goodwill he has bought, and (b) a covenant between master and servant designed to prevent competition by the servant with the master after the termination of his contract of service.”

The same point was made by Lord Parker at p. 708-9 and Lord Shaw at p. 713-4 in Herbert Morris.

77.Mr Smith referred to the judgment of Waung J in BSC Building Materials Supply Co Ltd v Cheung Chi Hung [1998] 2 HKC 425 at p. 438E to H.  Unlike the usual scenario where restraint was built into the employment contract at the beginning or upon the renewal of the same, the case concerns a restraint imposed under an agreement made between the employee and the employer upon his departure.  The employer agreed to pay the employee an ex gratia bonus of $13 million even though he was not entitled to retirement pension.  The employee had been a principal officer of the company.  The company sought to enforce the restraint (which was for 2 years).  The employee applied to strike out the claim.  His Lordship took into account of the $13 million paid by the company to the ex-employee in deciding whether the claim should be struck out.  His Lordship also found arguable three heads of legitimate interest to justify the restraint on the facts of the case, see p. 433-5.  It is also clear from the judgment that whether those interests could justify a restraint of two years would be matters that had to be investigated at the trial.  Bearing in mind that it was a decision on a striking out application, and the case of JA Mont v Mills [1993] IRLR 172 was apparently not cited, I do not regard BSC Building Materials as authority for the proposition that even if the legitimate interest of an employer were inadequate to justify a restraint too widely drafted, it could somehow be saved by payment of full remuneration during the period of restraint.

78.In my judgment, even though the payment of full remuneration might have some bearing in a marginal case, particularly when the question is the reasonableness of the restraint as between the employer and the employee, it can never be treated as the substitute for establishing the need for protection as wide as the restraint set forth in the contract by reference to the legitimate interest of the employer.

II (6). Conclusions on enforceability

79.In the present context, I am of the view that the Plaintiff fails to discharge the burden in satisfying this court that a 18 months restraint is required in the contract with Mr P to protect its legitimate interest in terms of the confidentiality of new designs.

80.I therefore hold that Clause 1 of the Non-competition Agreement is unenforceable as a matter of Hong Kong law.  In the light of my conclusion on unenforceability by reason of the failure to justify the duration of the restraint in any event, it is not necessary for me to deal with the unpleaded argument of severance advanced by Mr Smith in his Closing Submissions.  That argument does not assist the Plaintiff in any way with regard to the unduly lengthy period of restraint.  I would just briefly mention that I agree with Mr Yan that as a matter of construction, it is impossible to read down Clause 1 of the Non-Competition Agreement by deleting the words “by way of example and are not exhaustive”, “bed bases and metallic furnishings”, “working and tanning of leather, production and sale of polyurethane and other materials used in the packaging of furniture” in the clause.  It would change the substantive meaning of the earlier part of that clause.  In other words, the deletion of those words would render the obligation created by the clause substantively different, particularly in terms of construing what are the “activities that directly compete with those carried out by the Natuzzi Group” referred to by the first part of the clause.  As such, the proposed severance cannot satisfy the test set out in Sadler v Imperial Life Assurance Company of Canada [1988] IRLR 388 para. 19 applied in the recent case of TFS Derivatives Ltd v Morgan [2005] IRLR 246.

III. Misuse of confidential information

81.I propose to deal with the remaining two broad issues together.  The Plaintiff’s claim on breach of confidence is based on contract as well as the equitable duty of confidence.

82.Of the information relied upon (identified in Paragraphs 3 to 5 above), for reasons given in the discussion above in the context of the legitimate interest of the Plaintiff in respect of the Non-competition Agreement, there cannot be any claim by reference to the furniture manufacturing process management system.  As a matter of law, such information cannot be regarded as confidential since it is information falling within the scope of the general stock in trade of an employee who should be free to exploit the same for the benefit of his new employer.

83.As regards the new designs for furniture, there is not a single piece of evidence suggesting that the Defendant had made use of such designs.  In his Closing Submissions, Mr Smith did not refer to the designs in the context of misuse of confidential information.

84.In the circumstances, the Plaintiff’s claims based on confidential information also fail.

IV. Result

85.The Plaintiff’s claims are dismissed.  I also make a costs order nisi that the Plaintiff shall pay the Defendant’s costs of this action, such costs to be taxed if not agreed.

Mr Clifford Smith, SC leading Mr Anson Wong, instructed by Messrs Robertsons, for the Plaintiff

Mr John Yan, SC leading Ms Winnie Tam, instructed by Messrs Baker & McKenzie, for the Defendant