UK/Hong Kong: Injunctions and Trade Secrets

The English High Court recently considered the test to be applied when deciding whether to grant an interim injunction against a former employee to prevent them from using their former employer’s trade secrets. Given that the Hong Kong law on confidential information and trade secrets is heavily based on the English common law, the decision will be of interest to Hong Kong employers. The case is ESL Fuels Ltd v Fletcher [2013] EWHC 3726 (Ch) and, if followed, could have serious implications for employers.

Facts

The Claimant, ESL Fuels Limited (“ESL”), specialises in the blending and supply of innovative fuel products, including a heating fuel called ‘Ultra 35’.  Ultra 35 is one of ESL’s most successful products and is distributed pursuant to an exclusivity arrangement with its single-most important business partner and generator of revenue, Certas Ltd (“Certas”).  The First Defendant, Mr Fletcher, was employed by ESL as its General Manager. A significant part of Mr Fletcher’s role involved managing ESL’s relationship with Certas.

Mr Fletcher resigned from ESL on 3 September 2013 and his employment ended on 20 September 2013.  It was later discovered that Mr Fletcher had, in the interim period, set up Prema Energy Limited (“Prema”), and had approached Certas and offered to supply it with an Ultra 35 equivalent fuel called “Prema 35”. ESL claimed that the process for manufacturing Ultra 35 was a trade secret and highly confidential, and sought an injunction preventing the use of the confidential information by Mr Fletcher and Prema, pending trial.  Mr Fletcher, opposing the interim injunction, asserted that: (i) the process for blending Ultra 35 was widely known and did not amount to a trade secret; and (ii) ESL was merely trying to stifle competition in the market.

The test

In deciding whether to grant injunctive relief against Mr Fletcher and Prema, the Court applied the test laid down in American Cyanamid Co, namely whether the claimant had a strong or merely an arguable case, whether damages would be an adequate remedy, where the balance of convenience lay and whether the status quo should be maintained.

Application of the test  

The merits of the application.  Perhaps unusually for an interim injunction application, much of the argument centred on the first limb of the American Cyanamid test, namely whether there was a serious issue to be tried.  Mr Fletcher was never given a written contract of employment and so there was no express contractual post-termination restraint regarding the use of ESL’s confidential information.  ESL therefore had to demonstrate a real prospect of being able to establish at trial that the information it sought to protect was of a sufficiently high degree of confidentiality as to amount to a trade secret (Faccenda Chicken Ltd v Fowler [1987] Ch 117). 

Mr Fletcher argued that the Court should undertake some assessment of the merits rather than a simple determination of whether there was a serious issue to be tried (seeking to rely on the Court of Appeal’s comments in Lansing Linde Ltd v Kerr [1991] 1 WLR 251). The Court acknowledged the comments made in Lansing Linde, but held that such an assessment could only take place in exceptional circumstances and where it was possible for the Court to arrive at a clear view (Court’s emphasis) on the merits at the time of application for interim relief.  That was not the case here.

Identifying the relevant status quo.  Mr Fletcher argued that the status quo should be taken as at the date the claim form was served, by which time Prema had already started selling quantities of Prema 35.  The Court rejected this approach and, agreeing with ESL, accepted that the test requires the Court to look at the state of affairs that were in existence immediately before the most significant recent change.  In this case, the status quo meant the state of affairs that existed immediately before Mr Fletcher set up a competing business to sell Prema 35.

Balance of convenience.  Mr Fletcher argued that the grant of an injunction would seriously prejudice the growth and survival of Prema, which was a company still in its infancy.  ESL, on the other hand, was an established player in the market and there was no evidence that ESL had suffered any loss.  He also claimed that Prema had incurred significant overheads since start-up.  ESL argued that the continued trading of Prema 35 with one of its largest distributors would seriously damage the value and reputation of its business, whereas Prema had only started to trade.

Decision

Although the status quo lay in favour of ESL, the Court held that the balance of convenience lay in favour of Mr Fletcher and Prema.  It recognised that Prema was a fledgling company attempting to get its business off the ground and that it may well be “strangled at birth” if it was prevented from selling Prema 35.  It considered this to be a “weighty factor” to be borne in mind when considering the balance of convenience.

In light of these factors, the Court refused to grant the interim injunction as pleaded.  However, it did grant a limited interim injunction preventing Mr Fletcher and Prema from disclosing the confidentiality of the manufacturing process.  The Court also ordered Mr Fletcher and Prema to give an undertaking that they would preserve the net profits made on any sales of Prema 35 pending determination of the issues at trial.

Take-away points

Although ESL Fuels is a decision of the English High Court, given the similarity of Hong Kong employment law in this area, there are a number of take-away points that would be equally relevant in a Hong Kong context: 

• The American Cyanamid test does not prevent a Court giving proper weight to any clear view on the merits which it is able to form at the time of the application for interim relief.
• When considering whether or not the status quo should be maintained, the relevant status quo means the state of affairs that existed before the most significant recent change which is the subject of the litigation.
• The balance of convenience may fall more easily in favour of a defendant who can show that it is a newly incorporated company and would be “strangled at birth”  should an injunction be granted.

As such, the decision in ESL Fuels could have serious implications for employers, if followed.  The use of a newly formed company by a former employee to exploit trade secrets and confidential information is far from uncommon.  Indeed, it is exactly the type of situation in which one would expect the balance of convenience to lie in favour of the former employer (particularly where it also has the benefit of the status quo) and for injunctive relief to be granted pending determination of the issues at trial.  Thus we do not believe the decision, if followed, adequately protects employers from the misuse of their confidential information, if with an undertaking to preserve profits.   ESL Fuels remains a first instance decision and we wait to hear any news of an appeal to the Court of Appeal.

Please contact Gareth Thomas, Helen Beech or David Smail of the Employment Pensions and Incentives team if you have any questions.