Dentons US LLP
Dentons US LLP
06/05/2024 | News release | Distributed by Public on 06/05/2024 10:20
Hong Kong High Court refused to grant an injunction to enforce a 12-month worldwide non-compete clause against former employee
May 6, 2024
In a recent High Court Decision1 handed down in April 2024, Deputy High Court Judge Sara Tong SC refused to grant an interim-interim injunction against a former senior employee of Manulife Financial Asia Limited (Manulife) to prevent him from starting employment with Prudential Services Limited (Prudential).
Mr Rappold was the Chief Financial Officer of Manulife in Hong Kong for some five years when he resigned in October 2023 with a view to moving to Thailand and pursuing a different career in executive coaching. However, in December 2023 he learned of a "once in a blue moon opportunity", a role of Chief Transformation Officer offered by Prudential, which was enough to entice him to change his plans and stay in the insurance industry. Prudential offered him the role and the only obstacle to him starting work with Prudential was the 12-month non-compete clause in his employment contract with Manulife, which stipulated that he could not work for a competitor of Manulife (and it was not seriously disputed that Manulife and Prudential are indeed competitors) in a similar capacity for a period of 12 months after voluntary termination of his employment i.e. he would be required to "sit out" until October 2024 before joining a "Competitor". Importantly, the clause did not stipulate any geographical limitation and the court determined that this meant the clause was "in substance a worldwide non-compete covenant that prohibits the 1st Defendant from being employed by any person that falls within the definition of a 'Competitor'".
Mr Rappold was forthcoming with Manulife and informed Manulife in mid-January 2024 of his intention to join Prudential. He then engaged solicitors who sought to negotiate a release of the non-compete clause by offering a suitable undertaking to Manulife that he will not use or disclose any confidential information of Manulife which he may have in his head. It should be noted that his employment contract with Manulife already contained an express confidentiality clause which survived the termination of employment.
After some inter-solicitor correspondence, Manulife refused to release Mr Rappold from the non-compete clause and maintained that it would be able to show that the clause is necessary, reasonable and enforceable. Mr Rappold and Prudential, on the other hand, were insistent that Mr Rappold would still go ahead and commence his employment with Prudential in April 2024. This led to Manulife issuing proceedings against both Mr Rappold and Prudential to enforce the non-compete clause, which included an application for an interim injunction until the matter could be heard substantively.
The Decision arises from the call-over hearing of Manulife's application for an interim injunction and the court was careful in pointing out that, at the interlocutory stage, the court's view of the merits of Manulife's claim must be treated as provisional in nature, because the issues can only be properly determined following a full substantive hearing. However, it is difficult to ignore the sage observations the court made in refusing to grant the injunction and those observations serve as a reminder to legal practitioners and their clients on the dos and don'ts when considering the issue of enforceability of a non-compete clause. They are:
- When drafting, always consider the scope of a restrictive covenant in terms of (a) duration, (b) geographical span and (c) scope of activities. Here the absence of any geographical limitation in the clause was found by the court to mean it was a worldwide covenant which of itself was a "remarkable feature" and "far too wide to be enforceable".2 This fact in and of itself was sufficient to persuade the court that the restriction was not reasonable or necessary to protect Manulife's legitimate business interests.
- The relevant clause also lacked a "temporal backstop", in that it applies to all work done by Mr Rappold throughout his five-year employment with Manulife (as opposed to work which he carried out more recently before his resignation). This fortified the court's view that the restriction went further than necessary for the protection of Manulife's legitimate business interests.
- The burden is on the party seeking to enforce a covenant to show, with cogent evidence identifying with precision and clarity, the items of protectable confidential information or knowledge possessed by the employee that, if disclosed to his new employer, would cause material detriment to the old employer's business. Manulife was only able to give broad descriptions of the kinds of confidential information, which lacked specificity and clarity.
- Where the employment agreement also contains separate clauses on confidentiality which survive the termination of employment, that would likely be taken into account by the court, when determining the reasonableness and therefore enforceability of a covenant.
- The effect of an injunction on an employee would also be taken into consideration by the court, when deciding whether or not to grant an injunction. In this case, in refusing to grant the injunction, the court took into account the "far-reaching ramifications" on Mr Rappold, which cannot be quantified in monetary terms, if it meant that he would lose the job opportunity with Prudential at his age of 54.
- It took Manulife just over a month, from learning that the parties' negotiations on an amicable solution had broken down on 22 February 2024, to issue its Summons on 26 March 2024 and this was considered a delay by the court that also influenced its decision in refusing to grant the injunction. According to the court, what Manulife should have done was to give Mr Rappold an ultimatum and, absent any satisfactory response, make an application for injunctive relief shortly thereafter.