11 Nov 2015

How to protect an employer's customer connections

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In this case, the court enforces non-solicitation and non-dealing clauses to stop a senior employee from joining a competitor and using the customer connections of ​her ex-employer.

GFI (HK) Securities LLC v Gyong Hee-kang and ICAP Equities Asia Limited

Court of First Instance, HCA 1319/2015

Deputy High Court Judge Saunders

Date of hearing: 19 June 2015

Date of Reasons for Decision: 23 June 2015

Facts

Gyong Hee-kang, the first defendant, was employed by the plaintiff, GFI (HK) Securities, as “a senior broker and head of Korea fixed income”. The first defendant’s employment contract contained post-termination restraints prohibiting her, for six months from the termination of her employment, from competing with the plaintiff or accepting orders, instructions or soliciting business from any person who had been a client of the plaintiff in the previous 12 months. The first defendant resigned from her job on February 17, 2015.

On May 18, 2015, the plaintiff discovered that the first defendant’s Bloomberg account had been activated with ICAP, the second defendant. The plaintiff subsequently learned that the first defendant was listed as an employee of the second defendant and licensed to deal in securities with the SFC. A phone call to the second defendant provided evidence that the first defendant was employed at the company.

On May 19, 2015, the plaintiff’s lawyers wrote to the defendants, warning them that they would seek an injunction if required to protect their client’s interests. Messages between brokers showed that, in the week commencing May 27, 2015, the first defendant was in South Korea and had contacted four clients of the plaintiff.

On June 16, 2015, the plaintiff applied for an injunction to restrain the first defendant from being employed by the second defendant, and soliciting and dealing with the plaintiff’s clients, for the duration of the contract. The plaintiff listed the clients which it sought to restrain the first defendant from dealing with. However, at the hearing, the plaintiff dropped its application to restrain the first defendant from being employed by the second defendant.

The first defendant argued that the application be dismissed, as the plaintiff had delayed in applying for the relief, the restraints were unreasonable, and that she had been pressured into accepting the contract containing the restraints.

Decision

The judge granted the injunction against the first defendant, prohibiting her from soliciting business from, and having business dealings with, the plaintiff’s clients until August 17, 2015. The plaintiff had threatened legal action the day it learned that the first defendant’s Bloomberg account had been activated, which was 17 days later that the plaintiff had evidence that the first defendant was in breach of the agreements. The plaintiff applied for an injunction 13 days later.

Under the circumstances, the judge considered that the delays did not justify the dismissal of the application. The plaintiff was justified in waiting to obtain evidence to substantiate its allegations.

The judge then found that the restraints the plaintiff was seeking to enforce were plain and unambiguous. Furthermore, it had legitimate interests to protect through the restrictive covenants. The first defendant’s position gave her access to confidential information, such as brokerage rates and spreads offered by the plaintiff, as well as influence over clients.

The judge considered the plaintiff had a reasonable prospect of success in establishing at trial that, partly due to the first defendant’s seniority, the restraints were reasonable and no more than necessary. The judge considered past cases involving workers in the finance industry, in which restraint periods of six months or more were allowed. A period of six months would allow a replacement employee to be found, and for their trade connections to be built. The judge found that there had been no undue influence or pressure on the first defendant to sign her employment contract, as she had had the opportunity to take legal advice and had not done so.

If an injunction was not granted, the plaintiff risked losing clients to the first and second defendants. If the first defendant used confidential information, then the plaintiff had no prospect of recovering the information and it was difficult to see how damages might be assessed. Conversely, any wrongly imposed injunction could be compensated by damages to the first defendant.

Take-away points for HR professionals

1. Hong Kong courts are willing to uphold restrictive covenants to stop employees making use of their ex-employer’s customer connections and confidential information. A non-dealing and non-solicitation clause will be upheld provided the court is satisfied that the restrictions are clear and unambiguous and are reasonably necessary to protect the employer’s legitimate business interests. In the above case a six-month period for a senior position in the finance industry preventing them from soliciting or dealing with named clients was considered reasonable to protect the legitimate interests of the employer.

2. Employers, when they draft restrictions in their employment contracts, should take into account how long it will take to hire a replacement employee, train them and build a rapport with existing customers to secure their loyalty in the period in which a departed employee is prevented from soliciting clients.

3. Non-dealing and non-solicitation clauses which are longer than six months will only be enforceable and considered reasonably necessary to protect an employer’s legitimate interests where the employer can provide evidence that the recruitment and settling in time of a replacement employee will take longer than six months. If such evidence is not available, the clause is likely to be unenforceable and will be considered beyond what is reasonably necessary to protect an employer’s legitimate interests.

4. Employers should not delay in notifying an ex-employee and their new employer of any potential breach. They should investigate immediately to ascertain if agreements have been breached and seek legal advice.

This article has also been published in both Chinese and English in the October issue of Human Resources; the official journal of the Hong Kong Institute of Human Resource Management.

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