Legal update: Hong Kong High Court upholds a six-month non-compete clause

The Hong Kong High Court has recently upheld and enforced a six-month non-compete clause in BFAM Partners (Hong Kong) Limited v Gareth John Mills and Segantii Capital Management Limited [2021] HKCFI 2904, granting an injunction in favour of the applicant former employer, BFAM.

Background

1. BFAM, a company providing fund management services, employed Mr. Mills as a Technology Consultant under a fixed-term contract which contains a six-month non-compete clause (the “Non-Compete Clause”) and other post-termination obligations on non-solicitation, non-dealing and confidentiality (the “1st Offer Letter”).
    
2. Prior to the expiry of the fixed-term contract, Mr. Mills was promoted to the position of Head of Platform Technology and became a permanent employee of BFAM. It is stated in the letter converting the fixed-term employment to a permanent employment that save the change in salary all other terms and conditions would remain the same. Since the promotion, Mr. Mills had been materially involved in developing various IT platforms and tools for BFAM.
    
3. Mr. Mills resigned after working for BFAM for approximately two years. BFAM chose to trigger/enforce the non-compete and in turn were to pay Mr. Mills a sum equivalent to his monthly base salary during the six-month restriction period. Three days after the cessation of his employment with BFAM and unbeknownst to BFAM, Mr. Mills joined Segantii as the Chief Technology Officer.
    
4. Around two months after Mr. Mills had joined Segantii, BFAM commenced injunction proceedings against Mr. Mills and Segantii and sought an interlocutory injunction against Mr. Mills to enforce the Non-Compete Clause.

Assessing the reasonableness of a restrictive covenant

1. Having submitted detailed evidence on the IT platforms and tools Mr. Mills developed for and the services he provided to BFAM during the 12 months preceding the commencement of his garden leave period, BFAM submitted that Mr. Mills was privy to its confidential information which it had a legitimate interest to protect. Mr. Mills argued that BFAM had wrongly relied on matters subsequent to the time of contract (i.e. the date of the 1st Offer Letter) to assess whether the Non-Compete Clause is reasonable as the IT platforms and tools identified by BFAM were not matters within the parties’ contemplation at the time of contract when he was first employed as a Technology Consultant.  
    
2. It is trite that the time for ascertaining the reasonableness of a restrictive covenant is the time of the making of the contract. The court held that it might, however, take into account evidence about matters which happened subsequent to the making of the contract in determining the reasonableness of a restrictive covenant provided it was within the parties’ intentions or contemplation at the time of the contract to anticipate such matters from arising subsequently.
    
3. The court rejected Mr. Mills’ argument and held that at the time of the 1st Offer Letter it was within the intentions or contemplation of the parties that Mr. Mill’s position might change to a permanent one or that there would be a promotion; further that he would develop products for BFAM and would come across BFAM’s confidential information.

Confidential information “in his head”

1. It was heavily disputed whether Mr. Mills possessed confidential information belonging to BFAM. Mr. Mills argued that it is inherently improbable for him to have retained such information in his head, that he had delivered up BFAM’s confidential information before he left BFAM’s employment and that the confidential information would be so complex and sophisticated that he has no recollection of it.
    
2. The court reiterated the distinction between two types of information: (1) an employer’s confidential information (such as trade secrets or information of a similar nature) and (2) the skill, experience, know-how and general knowledge acquired by an employee as part of his job during his employment. Only the former is capable of protection.
    
3. Regarding the delivery up of confidential information, the court took the view that such could only take place if the information existed or was contained in a form that could physically be handed over. This would not include confidential information which had been retained in an individual’s memory, whether consciously or not.
    
4. The court held that BFAM had adduced sufficiently cogent evidence to identify the confidential information which Mr. Mills was privy to and accessed and for which it could legitimately claim protection by enforcement of the express Non-Compete Clause. In dismissing Mr. Mills’ argument, the court stated although he may not remember every piece of confidential information precisely, it is not inconceivable that he may still have a general impression of the information.
    
5. The court further held that a non-compete clause may still be necessary to protect an employer’s confidential information even if there is a confidentiality clause because it is often difficult to prove whether the information is confidential or not, especially where the information is of such a character that can be carried away in the employee’s head. In the circumstances of the present case where there were serious disputes on whether Mr. Mills came across the information in question and whether such information as confidential, the court considered the Non-Compete Clause reasonably necessary to protect BFAM’s confidential information

Key takeaway

The Hong Kong courts have been reluctant to enforce post-termination non-compete clauses, given such clauses may be prohibiting pure competition and restrict former employees from making a living. The above case, however, demonstrates that there are circumstances in which the court will enforce a non-compete clause if drafted in reasonable terms and if they can be shown to be necessary to protect employers’ legitimate interests, in particular genuinely confidential information. 

Employers are advised to carefully consider the scope, nature and limits of the non-compete clause to ensure it goes no further than is reasonably necessary to protect the employers’ legitimate business interests. A non-compete clause, as with other post-termination restrictive covenants, should be tailored to the circumstances of the relevant employee by taking into account his position, the nature of his job duties and the information and documents he will come across and access in the course of employment.

Russell Bennett and Agnes Lau

If you would like to discuss any of the matters raised in this article, please contact:

Russell Bennett
Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.