Lilas Aromas Ltd v. Chan Ka Yan and Another

DCCJ 3868/2012

IN THE DISTRICT COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

CIVIL ACTION NO 3868 OF 2012

------------------------

Before : His Honour Judge Alex Lee in Chambers

Date of Hearing : 18 January 2013

Date of Reasons for Decision : 31 January 2013

-----------------------------------

REASONS FOR DECISION

-----------------------------------

Introduction

1.On 18 January 2013, I dismissed the plaintiff’s application for interlocutory injunctions against the 1^st and the 2^nddefendants (“D1” and “D2”) and said that the reasons were to be handed down in due course.  This I now do.

Background

2.The plaintiff is and was a limited company registered in Hong Kong running beauty and skincare salons at different places. 

3.The defendants were the plaintiff’s former employees and they had all along workedin theplaintiff’s salon at Metro City Plaza.   Before the defendants’ departure, their position was that of “Senior Beautician” which required them to personally provide skin care services and body treatments to customers as well as to be involved in training the plaintiff’s apprentice/junior beauticians.   Both D1 and D2 had signed employment contracts with the plaintiff which contained a covenant restricting their freedom of employment after leaving the plaintiff (“the Non-competition Clause”) and also a clause prohibiting them from using the plaintiff’s confidential information to the prejudice of the latter (“the Confidential Clause”). 

4.It is the plaintiff’s case that the defendants had received substantial amount training from the plaintiff when they first joined the company.  Although the defendants do not dispute that they had received some training from the plaintiff, they say that the training was short and simple.  The defendants saythat they acquired their respective skill as beautician largely on the job.  

5.On 4 May 2012, D1 tendered her resignation to the plaintiff by giving the latter one month’s notice. That was followed by D2 who, on 14 May 2012, too tendered her resignation by giving one month’s notice.   The plaintiff, however, discovered in or about July 2012 that the defendants worked at the salon of a direct competitor in Metro City Plaza.  That forms the basis of the plaintiff’s allegation that the defendants have breached the Non-competition Clause. 

6.Beside, the plaintiff also says that “on unknown dates during their employment with the plaintiff, the defendants had obtained the mobile telephone numbers of the plaintiff’s customers otherwise than for the benefit of the plaintiff.  Then after the defendants’ termination, in or about mid-July 2012 they had solicited business from the plaintiff’s customers through active contact and sending electronic invitations to the plaintiff’s customers’ mobile phones for the purpose of diverting the plaintiff’s business to the defendants’ current place of work.”[1]  That forms the basis of the plaintiff’s allegation that the defendants have breached the Confidentiality Clause as well as the defendants’ common law duty of confidence owed to the plaintiff as employer.   

The proceedings

7.The plaintiff took out a writ against both of the defendants on 2 November 2012 which bears only a general endorsement without any statement of facts provided in support of the claim.  The general endorsement, in turn, merely sets out the remedies the plaintiff is seeking, namely injunctions, damages, interests and costs, without spelling out the plaintiff’s cause of action.

8.The defendants filed the acknowledgments of service on 17 November 2012 indicating their intention to defence the claim against them.   Up to now, the plaintiff has yet to file any statement of claim.

9.On 27 December 2012, the plaintiff took out the summons for the present application and filed an affirmation in support.  The defendants each filed an affirmation in reply.  Although the plaintiff’s affirmation purports to set out in general terms the nature and basis of their claim, there has not been any formal application that the affirmation shall stand as the plaintiff’s pleadings.  Nevertheless, the present application was proceeded on the basis that the plaintiff’s case was the same as that contained in their affirmation. 

The applicable legal principles

Interlocutory injunction

10.I had the benefit of written skeletons from both sides which were supplemented by oral submissions.  There were no real disputes between the parties as to the relevant legal principles governing interlocutory applications similar to the present one.  The Court at this stage is not supposed to resolve any factual disputes between the parties on the basis of affirmation evidence.  The two major issues for the Court are: (i) whether there is a serious question to be tried and (ii) whether the balance of convenience lies in favour of granting an injunction: see American Cyanamid Co v Ethicon Ltd [1975] AC 396.  

11.However, there are also well-established case authorities that if it will not be possible to hold a trial before the period for which the plaintiff claims to be entitled to an injunction has expired, or substantially expired, then justice requires some consideration as to whether the plaintiff would be likely to succeed at a trial: see §29/1/9, Hong Kong Civil Procedure 2013 and also Midland Business Management Ltd v Lo Man Kui [2011] 1 HKLRD 470, at 477. 

12.In the present case, the injunctions, if granted, would expire in 5 months’ time as the plaintiff is only seeking to restrain the defendants up to 3 June 2013 (in D1’s case) and 13 June 2013 (in D2’s case).  There has not been any application by the plaintiff for an early trial.   Even if there were such an application, I have reservations whether it would be granted, given that there are still a lot of things to be done before the case can be set down for trial.   As such, it is unlikely that the trial can be heard in or before June this year.  As submitted by Ms Leung, counsel for the defendants, the current state of affairs is such that it is proper for the Court to have a greater regard to the plaintiff’s prospect of success.  As to this, MrCheung, counsel for the plaintiff, did not disagree. 

Restrictive covenants

13.The plaintiff’s prospect of success regarding the Non-Competition Clause depends on its validity.  Again, the relevant legal principles are summarized in Midland Business Management Ltd v Lo Man Kui, [2] namely:

(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 for 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 legitimate interests such as his trade secrets and 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; and

(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.

Prospect of success

The Non-competition Clause

14.The relevant clause in the contracts is as follows:

“12戊、 入職三個月後，不論任何原因離職，該僱員由離職日計一年內，不能在所屬分店的同一商場或同一區內，作有與美容行業相關的工作，否則本公司有權控告該員侵犯公司利益，而要求作出賠償。[3] ”

15.The parties agreed that the reasonableness of a covenant is to be judged as at the time of the execution of the contract: Rock Refrigeration Ltd v Jones [1997] 1 All ER 1.  Despite the fact that the defendants had only served the plaintiff at Metro City Plaza, Clause 3.1 of the said contracts stipulated that D1 and D2 belonged to every salon of the plaintiff.[4]   At the time of D2’s contract, the plaintiff had salons in Tsimshatsui, Metro City Plaza, Park Central and Ma On Shan Centre.[5]  At the time D1’s contract, the plaintiff no longer had a salon in Tsimshatsui but still had the salons at Metro City Plaza, Park Central and Ma On Shan Centre.[6] The parties agreed that the combined effect of the Non-competition Clause and Clause 3.1 would be to prevent the defendants from competing with the plaintiff not only in Metro City Plaza but also in other places as well.  However, the parties disagreed on the reasonableness and validity of the geographical restriction.

16.As to the natures and kinds of legitimate interests that the plaintiff says are protected by the Non-competition Clause, Mr Cheung relied on the following:

(i)  Tseung Kwan O forms an important part of its business and the competition is keen there;

(ii)  there are rarely walk-in customers there and they tend to attach to the beauticians they like; and

(iii)  the amount of time and resources the plaintiff invested in training the defendants and the importance of maintaining a stable work force.  

17.I am unable to accept Mr Cheung’s submissions that the plaintiff has legitimate interests to be protected by the Non-competition Clause.  As regards (i), no matter how the importance the business in Tseung Kwan O is to the plaintiff, it cannot rely on the restrictive covenant to protect itself from competition.  As regards (ii), according to the plaintiff’s affirmation, the services provided by different beauty/skincare salons are not the same and that once a customer is satisfied with the service provided by the plaintiff’s beautician, the customer would purchase a beauty/skincare service package and becomes a regular customer.[7] In other words, customers adhere to the plaintiff because of its different services and also of the packaged services that customers have purchased.   As to (iii), the fact that the plaintiff had provided training and opportunities to enable the defendants to gain popularity among customers, in itself, is not a legitimate interest to be protected by a restrictive covenant: see Phillip M Levy Pty Ltd v Christopoulos [1973] VR 673, where it was held that the reputation gained by an employee as a result of the employer’s promotion of him as a salesman was not a proprietary interest which the employer was entitled to protect by imposing limits upon the use of his professional skill and reputation as a real estate agent.

18.As regards the terms of the Non-competition Clause itself, I have the following observations:

(i)  it purports to prohibit the defendants from working not only as beautician but also from working in the skin care and beauty business altogether;

(ii)  reading the clause together with Clause 3.1, the covenant purports to prohibit the defendants from working even in shopping malls and places at which the defendants had not worked before; and

(iii) the word “district” used in the clause is not defined and is imprecise.  I note that Mr Cheung is unable to articulate and there is no evidence before me as to the geographical boundaries of Tseung Kwan O.  As such, it would be difficult for the defendants to know the exact geographical scope of the covenant so as to comply with it.   

19.In my judgment, based on the materials before me, even if the plaintiff has any legitimate interests to be protected by a restrictive covenant, still the Non-competition Clause is wider than what is reasonably necessary.  Mr Cheung submitted that the Non-competition Clause could be saved by using the “blue-pencil approach”, ie, by deleting the offending parts so that what is remained can comply with the requirement of reasonableness.   In my view, although this approach may address point (i) above, it cannot assist the plaintiff in relation to points (ii) and (iii), as the geographical restriction of the covenant cannot be changed or clarified without rewriting Clause 3.1 of the contracts.  I note that the plaintiff in the summons is only seeking to prevent the defendants from doing certain things in “Tseung Kwan O”.   This, in my view, is tantamount to an attempt to rewrite Clause 3.1 and is therefore not viable: see Sadler v Imperial Life Assurance Co of Canada Ltd [1988] IRLR 388 and Midland Business Management Ltd v Lo Man Kui, supra, at §38-41.

20.As to the terms of the injunction sought against the defendants, they are couched in the following terms:

“[the Defendant] be restrained from (a) carrying on, being employed or otherwise engaged, concerned or interested in any capacity (whether for reward or otherwise) or in any way assisting [the competitor] or any other individual, firm or corporation operating or engaged in the beauty business within (i) Metro City Plaza, Tseung Kwan O; and (ii) The Tseung Kwan O District …” (Emphasis supplied)

21.It can immediately be seen that the scope of the injunction is much wider than the Non-competition Clause.  For example, the injunction sought would have the effect of prohibiting the defendants from not just working as beautician but also investing in any beauty business.   There is simply no basis for the plaintiff to seek an injunction which is beyond the scope of the restrictive covenant upon which the application for injunction is based.

The Confidentiality Clause

22.The relevant clause in the defendants’ contracts is as follows:

“9.2: 僱員在按本合同聘用期間或終止合同之後，均不得(除非在履行其職責的正常過程中)向任何人泄露或者利用(並應盡其最大努來防止公布或披露)與公司或其供應商、代理商、分銷商或顧客的業務有關的任何商業秘密或任何保密信息用作任何公司以外的目的。” [8]

Apart from the above clause, the plaintiff also relies on the defendants’ common law duty of confidential owed to the plaintiff as employer.

23.In my view, the issues here are (i) what the information is that the plaintiff seeks to protect; (ii) whether the information is confidential; and (iii) whether the defendants have breached their duty of confidence, whether contractual or at common law.

24.The present case is not about any trade secret or technical know-how.  The plaintiff says the confidential information in question is the names of customers and their mobile phone numbers.  However, the only evidence that the plaintiff puts forward to support its case in this aspect is what was allegedly said by 4 to 5 of its (unidentified) regular customers that the defendants had kept their mobile phone numbers and contacted them through sending instant messages to their mobile with a view to enticing them away from the plaintiff.   To put the matter in context, according to the plaintiff’s affirmation, prior to January 2012, there had been about 200 regular customers attended by the defendants.[9] However, apart from the 4 or 5 (unidentified) customers mentioned above, there is no evidence as to whether the defendants have also possessed or made use of the mobile phone numbers of other customers, regular or otherwise.

25.Furthermore, there is no evidence as to when the defendants got to know the 4 or 5 customers concerned, how they obtained their mobile phone numbers and in what circumstances the information was obtained.  There is also no allegation by the plaintiff that the defendants’ source was the plaintiff’s notes or records.   

26.In my judgment, based on the materials before me, the plaintiff has failed to show that the names and mobile phone numbers in question is confidential in nature: see Douglas v Hello! (No 3) [2008] 1 AC 1, at §11.

Balance of convenience

27.Mr Cheung submitted that the balance of convenience is in favour of the granting of the interlocutory injunctions sought.  It is because what the defendants are doing, namely diverting business away from the plaintiff to their new employer, constitute a continuing damage to the goodwill of the plaintiff.

28.It is pertinent to note that although the contracts only impose a time limit in respect of the Non-competition Clause but not the Confidentiality Clause, the plaintiff is content with restraining the defendants in relation to both clauses for a period of up to one year (from end of employment) only, ie, in D1’s case “from the date hereof to 3 June 2013” and in D2’s case “from the date hereof to 13 June 2012”.  That means that the injunctions would expire in about 5 months’ time in any event.

29.I note also that the plaintiff’s case is that it came to know the Defendant’s new employment in or about July 2012.  However, the summons for the present application was not filed until 27 December 2012.  This is a long delay in view of the “maximum lifespan” of the proposed injunctions.  Furthermore, by now the defendants would have already settled down in their new employment.  In any event, if any of the plaintiff’s customers would like to turn to the competitor because of the defendants, it is likely that they have already done so.  

30.In my assessment, the balance of convenience is in favour of maintaining the status quo rather than granting the injunctions sought. 

Conclusion

31.In my assessment, based on the materials before me, the plaintiff does not have a good prospect of success in relation to either the Non-competition Clause or the Confidentiality Clause. Besides, the plaintiff has also failed to show that the balance of convenience is in its favour. 

32.For these reasons, the application is dismissed.

Mr Lincoln Cheung instructed by Cheng, Chan & Co for the plaintiff

Ms Shannon Leung instructed by Tim Chan & Co for the 1^st and 2^nd defendants