Pacific Concepts (HK) Ltd v. Michel Brennion and Others

HCA 2672/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 2672 OF 2008

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BETWEEN

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Before : Hon A Cheung J in Chambers

Date of Hearing : 13 March 2009

Date of Judgment : 13 March 2009

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J U D G M E N T

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1.This is an application to continue some injunctions originally granted ex parte by Deputy High Court Judge Toh in December last year.

2.The first three defendants are former employees of the plaintiff and, in fact, the 1^st defendant is also a former director of the plaintiff.  The 4^th defendant is a company set up by the 3^rd defendant.  The 3^rd defendant remains the shareholder and director of the 4^th defendant, whereas the 1^st and 2^nd defendants were at one stage shareholders and directors of the 4^th defendant.  Importantly, all three individual defendants were involved in the 4^th defendant during the period of time when they were still in the employment of the plaintiff, which carries on business in the design, production and sale of watches (including their packaging). The 1^st defendant was the plaintiff’s general manager and chief operating officer, whereas the 2^nd and 3^rd defendants were its products designer and project manager respectively.

3.In gist, the plaintiff’s complaints against the four defendants is that the individual defendants have, through the 4^th defendant, misappropriated or attempted to misappropriate business opportunities belonging to the plaintiff by siphoning off those opportunities to the 4^th defendant. 

4.There is, in particular, an allegation that the defendants have obtained business opportunities from three particular customers or potential customers of the plaintiff.  In addition, designs said to be belonging to the plaintiff or to the plaintiff’s customers and entrusted to the plaintiff have been misused by the defendants. 

5.Furthermore, it is said that when his directorship and employment was terminated in November last year the 1^st defendant deleted a substantial number of files from his laptop that was supplied to him by the plaintiff for the purposes of his employment.  It is said that those deleted filed – some of which have been retrieved through technology available on the Mainland, and some of them are in the course of being retrieved through expert help in the States – contained evidence or materials of the wrongdoings of the 1^st defendant in conjunction with the other defendants whilst they were all in the employ of the plaintiff.  In those circumstances the plaintiff has successfully obtained interlocutory injunctions against the defendants, as well as Mareva injunctions against them. 

6.I have heard submissions from the respective parties on the continuation of the injunctions which have, I should add, been continued with some minor variations since they were first granted. 

7.I will deal firstly with the interlocutory injunctions.  Focusing on the actual terms of the injunctions before me, I will take Part A, para 1(1) to (3) together.  They relate to two subject matters, namely the customers and the designs.

8.So far as customers are concerned, we are essentially concerned with the three customers named by the plaintiff and pleaded in the statement of claim.  Despite some disputes coming from the side of the defendants, and even some evidence, directly or indirectly, from these customers, having considered the evidence as a whole I am persuaded that there is an arguable case, to put it at the lowest, that the defendants have, during their employment, contacted these customers with a view to obtaining business from them. 

9.I am also persuaded that it is at least arguable that these were, at the material times, already customers of the plaintiff or potential customers which the plaintiff was attempting to establish business connections with.  I have also got some invoices which indicate arguably that the defendants have done business with these customers.  In my view, so far as the actual business opportunities which the defendants have obtained from these three named customers during their periods of employment with the plaintiff are concerned, the plaintiff is at this stage quite entitled to an injunction to prevent the defendants from benefiting from these opportunities.

10.In other words, for opportunities already secured or opportunities which first presented themselves to the defendants prior to their departure from the plaintiff, the plaintiff must be, applying the relevant test for granting an interlocutory injunction in this type of situation, entitled to some interlocutory relief.  It will take the form of an injunction restraining the defendants from benefiting from these opportunities pending trial.  I recognise it is not entirely the same as the injunctions that have already been granted in favour of the plaintiff, so some re-drafting would be required.  But so far as these opportunities are concerned, I have no doubt that the plaintiff is entitled to relief. 

11.The more tricky question is in relation to dealing with these customers post-departure in relation to business opportunities that had not presented themselves to the defendants prior to departure; in short, new business with these customers.  Normally it is true that, in the absence of any binding and enforceable covenants, an ex-employee is quite free in law to compete with his former employer for business, whether from new customers or from customers of his former employer.   But there are indeed authorities, in Hong Kong and in the United Kingdom, to the effect that if the ex-employee’s relationship with a customer belonging to his ex-employer was established whilst he was in the latter’s employment, then, even though he has left the employment of the ex-employer, he is not entitled to ‘instant freedom’ to use for himself such relationship if he had already misused it before his departure: Thomas Marshall (Exports) Ltd v Guinle [1979] 1 Ch 227, 245 B-E; GSL Engineering Ltd v Yau Hon Yin Sammon [1990] 2 HKC 360, 366 E-G, where the English case was applied. 

12.Having considered the evidence, I think again it is arguable that the relationships that the 1^st defendant in particular has managed to establish with the customers in question were by reason of his former employment with the plaintiff.  I put it no higher than that because there is evidence to the contrary contesting the plaintiff’s claim.  But at this stage all I am concerned with is whether the plaintiff has an arguable case here. 

13.That being the case, even in relation to new business or new opportunities that only arose after the departure of the defendants from the plaintiff, the legal principle that I have outlined would seem to apply.  I note that in both Thomas Marshall and GSL, the court, in order to deprive the ex-employer of the instant freedom to use the relationship in question, granted an interlocutory injunction against the ex-employee until trial so as to preserve the status quo.  I can understand why the court should want to impose an interlocutory injunction in the type of situation under discussion.  I do not think either justice or reason requires that invariably any such injunction should be made to last until after the trial of the action, which, depending on the facts of a case, may take a long time to come on. 

14.Rather, I think the alternative submission of Ms Lok, appearing for the plaintiff, is more attractive.  She submitted that a legitimate way of explaining the authorities is that the courts were there trying to prevent the defendant from having an unfair head start.  What should be done, she submitted, by way of an alternative to an injunction lasting until after trial, is to make up for the period of time lost to the plaintiff during which the defendants had secretly made use of the relationships with the customers for their own benefit.  According to counsel’s calculation, her client has lost a total period of 8 months and 20 days.  There is, of course, no exact science in the type of matters under consideration.  But, in my view, what counsel has calculated gives a reasonable and fair estimate of the time that would be required to enable the plaintiff to overcome the disadvantage that it has suffered as a result of the wrongful acts of the defendants that the plaintiff is complaining about.

15.So returning to the general principles on granting interlocutory injunction, there having been established, in my view, an arguable case, I take the view that the balance of convenience would lie in favour of the Court granting an injunction to prevent the defendants from dealing with these three named customers for a period of time.  That period I would, in the circumstances of the case, put at 9 months from the departures of the defendants, or from the departure of the 1^st defendant, for ease of computation.

16.So for a period of 9 months from the departure of the 1^st defendant, the defendants shall not be allowed to – and an injunction is therefore granted for that purpose – have any business relationship with the three customers in question.  After the lapse of the period the defendants would be as free as anyone on the street to solicit business from the customers.  I think that would do justice to all parties concerned at this interlocutory stage when the allegations and counter allegations cannot be sorted out.  Plainly, there is no way the Court can resolve these factual disputes on paper.  Again, this is not the way the injunctions in question have been granted, so some re-wording of the injunctions would be required.

17.Turning to the designs, all I need say is that, having considered the evidence, it is at least arguable – and I think it is more than fair to put the case of the plaintiff at that level – that the defendants have made use of the designs complained about by the plaintiff for their own purposes during their employment.  Now, so far as these designs are concerned, they are either the designs of the plaintiff or arguably designs entrusted to the plaintiff by its customers.  So even though the defendants are no longer in the employ of the plaintiff, they are not entitled to make use of the designs. 

18.Therefore, a further injunction should be granted against these defendants to prevent them from making use of the designs for any purposes, save with the consent of the plaintiff, until after the trial of the action or until further order.  Again in doing so I have firmly borne in mind the general principles for granting an interlocutory injunction and, amongst other things, I have borne in mind not only the arguability of the plaintiff’s case but also factors pertaining to the balance of convenience, including the size of the plaintiff, the fortification that the plaintiff has provided, and the circumstances of the defendants, including the stage which the 4^th defendant has reached in terms of its new business.

19.I believe that deals with Part A, para 1(1)-(3).  So far as the poaching of the plaintiff’s employees is concerned, I am afraid on the evidence presented before the Court the plaintiff has not made out an arguable case.  So there is no question of the Court continuing the injunction in this regard in its favour.  The injunction is therefore not continued to that extent. 

20.Finally, as regards Part A, para 1(5), concerning destruction, tampering with and removal of documents, samples and so forth, the only hard evidence before the Court is in relation to the deletion of files from the laptop supplied to the plaintiff formerly.  But that, in my view, is already past history.  There is no evidence of any further risk or threat of destruction of documents and records or of tampering with the same.  Moreover, one simply cannot work on suspicion – ie, just because the 1^st defendant has done something in the past, he, or even the other defendants, would likely repeat it in future.  That sort of reasoning is no good for the continuation of the injunction in question, nor would it help the plaintiff in practice, because in the absence of any specifically identified subject matter it would simply be impossible to police the injunction.  So in relation to Part A, para 1(5), I refuse to continue the injunction.

21.So far as Part A, para 2 is concerned, that relates to the injunction against the 4^th defendant.  Apart from para 2(2), the remainder of para 2 is simply a mirror image of Part A, para 1.  So in relation to para 2, I would continue the injunction on similar terms that I have described against the 4^th defendant.  But so far as para 2(2) is concerned, about assisting the individual defendants in committing dishonest breaches of fiduciary duties, since the individual defendants have all left the employment of the plaintiff there is no question of the 4^th defendant assisting them in their breaches of fiduciary duties at all.  I say so bearing in mind the interlocutory injunctions that I have said I will continue.  So there is no question of any further assistance.  So to that extent I am not continuing this part of the injunction.

22.I now move on to the Mareva.  It is trite that the plaintiff has to establish a good arguable case on the evidence, and has to prove, by way of evidence, a real risk of dissipation of assets.  So far as a good arguable case is concerned, of course there is a difference between an arguable case and a good arguable case.  I will not repeat myself in relation to the merits of the plaintiff’s claim.  For the purposes of the interlocutory injunctions, I have been speaking in terms of the plaintiff having an arguable case. 

23.But for present purposes, ie for the purposes of the Mareva injunctions, I would indicate that, having considered the evidence before me, the plaintiff does not only have an arguable case against the defendants; in my view, the plaintiff has a good arguable case against the defendants for the matters that it is complaining about.  This is not to say that I have ignored the evidence put forward by the defendants.  And the evidence includes, as I said, direct or indirect evidence from the customers concerned.  But, having considered the evidence as a whole, I am of the view that the plaintiff has overcome the necessary threshold here, and any further disputes regarding the merits of the plaintiff’s case will have to take place at trial, where all assertions now made on paper will have to be tested by oral examination in the witness box. 

24.I move on to the question of risk of dissipation of assets.  It is quite true that the plaintiff cannot put forward any direct evidence of such risk.  That is not surprising.  In many cases a plaintiff in a similar position is simply not able to put forward direct evidence of risk of dissipation of assets.  The burden is very often discharged by means of inferential evidence.  In the present case, so far as the case against the 1^st defendant is concerned there are two matters against him.  One is his deletion of the files in the laptop.  The second is the way he, in conjunction with the other defendants, has gone about doing things, ie setting up a company in secret competition with the business of the plaintiff.  I say all this at the level of a good arguable case only.  Of course I am not prejudging the issues between the parties, which can only be decided at trial. 

25.Returning to my point, there is good authority, at least in Hong Kong, that when a defendant has displayed a fairly low commercial standard or standard of morality in dealing with the plaintiff, that by itself is some evidence of a risk of dissipation of assets.  Honsaico Trading Ltd v Hong Yieh Seng Co Ltd [1990] 1 HKLR 235.  In my view, this is by no means a proposition of law.  It is really a proposition of common sense.  So when one is dealing with such a person, ie a person of low commercial morality, or with a dishonest person, the risk of that person seeking to render himself judgment proof, as it were, by one means or another, is always there.  So the task of the Court in the present case is to assess that risk in the light of all the evidence before it.

26.So far as the 1^st defendant is concerned, I must also bear in mind that he is a French citizen, although he has spent a substantial amount of time in the last decade in Hong Kong or on the Mainland.  The risk of dissipation is real in his case.  That is also evidenced by the fact that his assets in Hong Kong are liquid and fluid.  So all things considered, I do conclude that there is a risk of dissipation on his part. 

27.Moving on to the other defendants, the 2^nd defendant’s case is not complicated by any deletion of files, but equally she has joined in with the other defendants in competing secretly with the plaintiff whilst in the employment, full-time or part-time, of the plaintiff.  She is also a French national.  She is now in Hong Kong.  She has been residing in Hong Kong for a substantial period of time.  Apparently she does not have too many assets in Hong Kong.  Marginally, I would say, there is established a risk of dissipation of assets in her case to justify the grant of a Mareva.

28.Moving on to the 3^rd defendant, like the 2^nd defendant he is not affected by any deletion of files.  Unlike the 1^st and 2^nd defendants, he is a local.  He has a family here.  He has a flat here.  Apparently he has lived all his life in Hong Kong, apart from those times when he worked on the Mainland.  On the other hand, Ms Lok has pointed out, quite correctly from the evidence, that the 3^rd defendant does have some connections on the Mainland, and there is therefore a risk of his leaving the jurisdiction with whatever assets he may be able to take away with him.  His case is even more marginal than that of the 2^nd defendant.  But in light of what has happened, and in light of the evidence before me, I am not at all at ease with not continuing with the Mareva injunction against the 3^rd defendant.  In my view, the true way to do justice between the parties is to adjust the ceiling of the injunction, which I will immediately turn to.

29.I have great difficulty in following the original ceiling set.  It was based on the decrease in turnovers of the plaintiff’s business by way of a multiplicand.  It was also based on the supposed gross profit margin of the plaintiff’s business by way of a percentage multiplier.  I have difficulties in accepting either.  In my view, one is concerned with the business or business opportunities that have been siphoned off to the 4th defendant by the individual defendants.  This has no direct relationship to the plaintiff’s decrease in turnovers during the last year.  And, as it turns out, there is evidence before the Court to explain why the plaintiff has suffered a substantial decrease in turnovers last year, which has nothing to do with the loss or alleged loss of business from the named customers.  So the decrease in turnovers cannot be used for the purpose of estimating the loss that the plaintiff has suffered by reason of the defendants’ breach or the profits that the defendants have made out of their own wrongdoings. 

30.The gross profit margin is also unsatisfactory because it bears no relationship to how much the defendants can earn from the secret deals that they have made.  Admittedly, it may bear some relationship to the plaintiff’s loss in case the plaintiff should opt for an assessment of damages if successful at trial. 

31.So much for the ceiling that has been used thus far.  But what about the ceiling to be used when continuing the Mareva injunctions?  Ms Lok has, in her submission, referred me to some invoices which evidence dealings between the defendants and the customers in question.  They point to some figures.  But before one makes use of the figures one has to bear in mind that these are invoices that the plaintiff has thus far been able to uncover.  There may be some other invoices or dealings.  Moreover, as Ms Lok has submitted, by reason of these dealings the plaintiff may have lost other business opportunities even after the departure of the defendants.  On the other hand, I bear in mind that there is no rule which requires a court, in granting a Mareva, to give, as it were, a 100% security, although a Mareva is, of course, not a means to give the plaintiff any security.   

32.Doing the best I can, and making use of the figures suggested by the invoices, and bearing in mind the profit margin (for what it is worth), I think the ceiling should be very much reduced.  The original ceiling is near HK$3 million.  I would reduce it to HK$1 million.  Furthermore, since we do have three defendants here, as I indicated to the parties during argument, it is simply unfair to the defendants that there should be a ceiling of the amount that I have indicated in relation to the three Mareva injunctions that I am going to continue against the three individuals respectively.  This is because in calculating what they can do with the remainder of their assets, they cannot rely on the assets that are also subject to an Mareva injunction in the case of the other defendants.  And there lies the injustice, in my view.

33.On the other hand, I think the plaintiff’s position will not be jeopardised by lowering the ceiling in the case of each individual defendant so long as the total ceiling amounts to the amount that I have indicated.  But here there is one further complication.  Except in the case of the 1^st defendant, the values of the assets of the 2^nd and 3^rd defendants in Hong Kong are not great.  Looking at the evidence in question, all I can do is to reduce the ceiling in the case of the 1^st defendant because his assets in Hong Kong are far in excess of the ceiling that I have indicated, ie HK$1 million, by the amounts available in Hong Kong from the assets of the 2^nd and 3^rd defendants which shall be the revised ceilings for the Mareva injunctions against these two defendants respectively. 

34.So, subject to counsel’s submission, that is what I am going to do in relation to the ceilings.  But the purpose is to achieve a total ceiling of HK$1 million in favour of the plaintiff.  I do not think that would produce any injustice to the 2^nd and 3^rd defendants, because their cases are restricted by the amounts of assets they do have in Hong Kong.  So I will leave it to the parties to work out the amounts.   

35.Of course, the Mareva injunction would be continued until after trial or further order. 

36.The 4^th defendant is now wholly controlled and owned beneficially by the 3^rd defendant, so it stands in the same position as the 3^rd defendant.  The Mareva injunction against the 4^th defendant will be continued on the same terms, but there will not be any additional ceiling.  I am treating the 3^rd and 4^th defendants as one.

37.Costs in the cause.

Ms Frances Lok, instructed by Oldham, Li & Nie, for the plaintiff

Ms Peony Wong, instructed by K B Chau & Co, for the 1^st & 2^nd defendants

Mr Chan Chung, instructed by Adrian Yeung & Cheng, for the 3^rd and 4^th defendants