Hong Kong: HR Investigation Insights: Prompt and thorough investigation justifies summary dismissal for secret business

In the recent case of Cosme De Net Company Limited v Lam Kin Ming [2021] HKDC 445, [2021] HKEC 1655, an employee had been engaging in secret business in contravention of his employment terms. Upon discovery of the potential misconduct, an internal investigation was carried out revealing compelling evidence of serious misconduct leading to the employee’s summary dismissal. Given the high threshold required to justify summary dismissal, this case reinforces the importance of conducting a prompt and in-depth internal investigation for the sake of preserving evidence before it is deleted or removed by the wrongdoers and therefore reducing litigation risk.

Background

The Plaintiff, Cosme De Net Company Limited (“Cosme De Net”), was a Hong Kong company which sold cosmetics and beauty products on its website as well as on third party e-commerce platforms. The Defendant, Lam Kin Ming (“Employee”), was employed by Cosme De Net as a Senior Business Development Manager (E-Commerce) pursuant to a written employment agreement, which was subsequently varied by a letter signed by the Employee with the Staff Handbook enclosed (the “Employment Terms”). The Defendant was in charge of the overall implementation of Cosme De Net’s e-commerce business, including management and maintenance of Cosme De Net’s websites.

In February 2016, Cosme De Net discovered that the Employee had been involved in a secret business conducted under the name of Best Online Cosme, which sold cosmetic products identical to those traded by Cosme De Net, but at a lower price. Following an investigation, Cosme De Net terminated the employment without notice for breach of the employment terms, the fiduciary duty of good faith and infringement of the company’s intellectual property rights.

Cosme De Net claimed against the Employee for engagement in secret business and infringement of its intellectual property rights (as many product images and descriptions used by that Best Online Cosme, belonged to Cosme De Net) in breach of his employment agreement and fiduciary duties. The Employee counterclaimed against Cosme De Net for wrongful dismissal claiming that Best Online Cosme was not owned by him but by a wholesale customer of Cosme De Net by the name of Miss Angel Yu, and he only sold to her.

The Employment Terms

Pursuant to the Employment Terms:

1. all files, records and documents used or prepared by the Employee during his employment were the property of Cosme De Net;
2. any violation of the intellectual property rights of Cosme De Net would lead to summary dismissal;
3. the Employee undertook not to disclose any confidential information obtained or which had come to his knowledge during and after his employment; and
4. during his employment, the Employee was not permitted to engage in any outside employment, trade, business, occupation or activities without the prior approval of Cosme De Net.

Investigation and dismissal

The wrongdoing was first discovered by the Employee’s immediate subordinate in early 2016, who carried out some preliminary factual investigations and subsequently escalated the matter to the Head of HR in late February 2016.

In early March, the Head of HR initiated an in-depth internal investigation into the matters which included reviewing the employee’s IT usage and looking at online records related to Best Online Cosme. The investigation established that purchases using an email account linked to the Employee, were entered manually onto Cosme De Net’s order system as wholesale orders, instead of being remotely placed through the website (as was the usual case). The sales records of Best Online Cosme, obtained from eBay for the investigation, matched to these wholesale transactions. Furthermore, Cosme De Net retrieved files from the company computer assigned to the Employee which included designs for a business card of Best Online Cosme in the name of the Employee and a virtual office agreement entered into by Best Online Cosme (HK) Co Ltd with the Employee as the contact person. Cosme De Net also retained an external investigator who made a purchase from Best Online Cosme and inspection of the purchased products further verified that they were products sourced from Cosme De Net.

As Cosme de Net provided compelling evidence of the connection between the Employee and the secret business which supported the summary dismissal, the Court accepted the claim put forward by Cosme De Net over the Employee’s version. The Court found that the Employee was in breach of the Employment Terms and his fiduciary duty to act in good faith in the best interest of his employer. The Court also ruled that the Employee’s counterclaim of wrongful dismissal lacked factual footing and summary dismissal was justifiable in the circumstances.

Key takeaways

The case provides a good reminder of the following:

• Have an internal whistleblowing or ‘Speak Up’ process in place so that employees can raise any irregularities or conduct concerns so these can be investigated promptly.
• Upon discovery of any potential misconduct, a thorough internal investigation should be carried out with a view to capturing relevant information and preserving evidence before it is deleted or destroyed. The investigation process may involve coordinating IT analysis and retrieval of digital data and, in some cases, retaining an external investigator.
• To protect the best interest of the company, it is prudent to clearly set out employees’ duties of fidelity and good faith in their employment terms, as well including clear provisions requiring employees to avoid conflicts of interest and, where appropriate, impose post-employment non-competition and non-solicitation obligations.
• Where any breach of the employment agreement is discovered, prompt steps should be taken to enforce these contractual obligations (see our previousarticle).