The recent Court of First Instance decision in Manulife Financial Asia Limited v Kenneth Joseph Rappold & ors [2024] HKCFI 989 emphasises the importance of carefully drafted non-compete restraints with regard to geographical scope, degree of specificity regarding confidential information and consequences of misuse, and duration. In assessing the justification for relief for alleged breach of a non-compete clause, the Court will take the course that carries a lower risk of injustice if it should turn out that it is wrong, based on the balance of convenience. This will include making a provisional view as to the plaintiff's prospect of success at trial.
Background
The 1st Defendant, Mr Rappold (the Employee) was employed as Chief Financial Officer, Asia, by the Plaintiff, Manulife Financial Asia Limited (the Former Employer). His employment terms included a 12 month non-compete clause, as well as confidentiality obligations.
The dispute concerned the Employee's alleged threatened breach of the non-compete clause. The Employee resigned in October 2023 and notified the Former Employer that he had accepted an offer as Chief Transformation Officer at Prudential (the 2nd Defendant), a competitor of the Former Employer.
The Former Employer did not agree to release the Employee from his obligations under the non-compete clause, which would not expire until October 2024, and sought injunctive relief against the Employee seeking to restrict his ability to work for the 2nd Defendant, pending the substantive determination of the action.
The main issue for the Court's determination was whether the interim injunctive relief sought was justified.
The Non-Compete Clause
The non-compete clause provided that for a period of 12 months following a voluntary termination of his employment, the Employee would not, without the Former Employer's prior written consent:
- be employed in a "Similar Capacity" by a "Competitor";
- own more than 10% of the equity in a "Competitor"; or
- act as a director of, or consultant or advisor to, any "Competitor".
"Similar Capacity” meant "the same or similar position, or having the same or similar responsibilities, accountabilities and duties that [the Employee] ha[s] or had in connection with [his] employment with the [Former Employer]".
A “Competitor” meant "any person or company engaged in or planning to engage in business that: (1) is the same or similar to the business of, in whole or in part, to those of the [Former Employer] and its affiliates and subsidiaries, including without limitation providing financial protection, wealth management, asset management and other financial products and services; or (2) involves the selling or offering of products, processes, programs, or services that are the same or similar, in whole or in part, to those of the [Former Employer] and its affiliates and subsidiaries or that were under active consideration by the [Former Employer] and its affiliates and subsidiaries during your employment with the [Former Employer] and which have not been abandoned in writing by the [Former Employer] and its affiliates or subsidiaries".
Decision
The Court applied the well-established test for granting interim injunctive relief in American Cyanamid Co. v Ethicon Ltd [1975] AC 396 (see our previous post), with a rider that the present case requires the Court to have greater regard to the plaintiff’s prospect of success, since the substantive trial was likely to take place only after the non-compete clause's expiry in October 2024. In such circumstances, the Court made clear that the plaintiff is generally required to demonstrate a "reasonably good prospect of success" or that the plaintiff would be "likely to succeed at trial".
Enforceability of the non-compete clause
Having regard to the merits of the Former Employer's claim, the Court made the following observations regarding the enforceability of the non-compete clause:
Legitimate business interest
The only legitimate business interest raised by the Former Employer was the protection of confidential information that the Employee was allegedly in possession of during the course of his employment. However, the Court was not persuaded by the Former Employer's examples of allegedly confidential information, which were characterised as "lacking in specificity […] couched in rather broad terms which are of limited assistance to the Court in assessing their alleged confidential nature and potential consequences of misuse."
In particular, the Court noted that no evidence was adduced by the Former Employer to explain the shelf-lives of the categories of allegedly confidential information, why the alleged categories of confidential information justified a 12 month restraint, and how such confidential information could be used to the material detriment of the Former Employer during the 12 month window.
Geographical scope
The non-compete clause did not contain a geographical limitation and was essentially worldwide in scope. Absent any proper justification, worldwide restraints are considered too wide to be enforceable. While the Former Employer argued that offending portions of the definition for "Similar Capacity" could be severed to limit the geographical scope of the non-compete clause to the Asia region, the Court held that it was not the function of the Court to rewrite the contract between parties and did not strain to give an artificial construction of the clause.
Scope of restraint
The absence of a "temporal backstop" in the non-compete clause meant that, effectively, the non-compete clause applied to all work done by the Employee throughout his five years of employment with the Former Employer. Although the Court recognised that this contention would merit fuller consideration at the substantive hearing, the extensive scope of the non-compete clause (which went beyond recent work/activities involving the Employee) contributed to the Court's view that the non-compete clause was likely wider than reasonably necessary and unenforceable.
Practical justice
In addition to the above, the Court held that the interim injunctive relief was not justified (applying China Shanshui Cement Group Limited v Zhang Caikui [2018] HKCA 409 to select the outcome that would afford practical justice on the balance of fairness) because:
- restraining the Employee from taking up employment with the 2nd Defendant would cause irreparable harm to the Employee, given the Employee's current age and the unlikeliness of retaining this "rare and attractive opportunity" (or finding another comparable role);
- any potential damage caused to the Former Employer due to divulgence of allegedly confidential information is mitigated by the Employee's express acknowledgement that he continues to be bound by his confidentiality obligations. The Employee also offered to provide a new confidentiality undertaking (having the force of a court order) which would provide the Former Employer with reasonable protection in the interim; and
- it was clear from the correspondence exchanged that parties' attempts to reach an amicable resolution in respect of the non-compete clause had broken down by 22 February 2024. If the Former Employer was indeed concerned with a breach of the non-compete clause, it could have applied for interim injunctive relief at a much earlier stage; there was no reason for the Former Employer to wait until 26 March 2024 to apply.
Key takeaways
Employers are reminded that overly broad and imprecise non-compete clauses may be unenforceable. Employers bear the burden of establishing that an non-compete clause is reasonable in the interests of the parties and in the interests of justice (see our previous post comparing the enforceability of post-employment restraints across Asia), and that it goes no wider (in geographical scope, level of generality and temporal duration) than is reasonably necessary for the protection of its legitimate business interests. Employers should regularly review and update their post-employment restraints to ensure that they continue to provide the best protection.
The decision also highlights that interim injunctive relief is an urgent temporary measure where the Court will prioritise practical justice and fairness (for an example of where the Court granted interim injunctive relief, see our previous post). Although the Court will not adhere to a strict merits threshold and is aware that the totality of evidence has not yet been adduced by the parties, it will nevertheless make provisional views as to the plaintiff's prospect of success at trial to determine whether to grant interim injunctive relief. Employers should also bear in mind the importance of acting swiftly and without delay when seeking interim-injunctive relief.
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