Hong Kong High Court considers reasonableness of non-compete covenant

Applicable legal principles

In Hong Kong, it is well-established that restrictive covenants in employment contracts which restrict a former employee’s ability to work are unenforceable, unless the employer can show that it is reasonable in the interests of the parties and in the interests of justice, and that it goes no wider than reasonably necessary for the protection of its legitimate business interests. The greater the duration, geographical scope and restricted activities, the more difficult it will be to justify as reasonable. Furthermore, the time for ascertaining the reasonableness of the covenant is at the time of the making of the contract.

In considering an interim injunction application, the court will consider whether the plaintiff has demonstrated a reasonably good prospect of success, and where the balance of convenience lies.

Discussion

(1) Geographic scope

In this case, the non-compete covenant did not include a geographic restriction. It was therefore a worldwide restriction prohibiting the former employee from joining any entity falling within the definition of a “competitor”.

Manulife attempted to delete/blue-pencil certain phrases in the non-compete covenant to save its lack of express geographic restriction. However, the court noted that it would not imply terms into the non-compete covenant to preserve its validity and held that because the employment contract is a detailed document between sophisticated parties, if Manulife had intended for there to be a geographic restriction, this would no doubt have been expressly provided for as is commonly done in post-termination restrictive covenants.

(2) 12-month restriction

Manulife argued that the non-compete covenant sought to protect its confidential information which its former Chief Financial Officer had access to. It contended that if such information was disclosed to a competitor, it would cause great prejudice to Manulife’s legitimate business interests. However, the court was not satisfied with the evidence provided, noting that the examples of confidential information were lacking in specificity and were couched in broad terms which were of limited assistance to the court in assessing the potential impact and material detriment (if any) to Manulife’s legitimate business interest. In particular, the court noted that Manulife had not adduced evidence to:

1. explain the shelf life of each specific category of allegedly confidential information;
2. explain how such a shelf life warrants a 12-month restraint; or
3. articulate how any such confidential information could be used during the 12-month window to the material detriment of its business.

Furthermore, the court found that there was insufficient evidence to justify that the former employee’s possession of confidential information for the affairs in Asia presents serious confidentiality risks to Manulife’s business outside of Asia (which Manulife did not operate or have active plans to operate in). The court also determined that the necessity for the 12-month restraint was further diminished by the fact that the employment contract already contains an express confidentiality clause.

(3) Balance of convenience

The court weighed the following considerations and potential damage to the former employee should the interim injunction be granted:

1. whether the new job opportunity is rare and attractive;
2. whether it is highly likely for the new employer to terminate the engagement with the former employee if the injunction is in place; and
3. whether losing the new role would irretrievably affect the former employee’s career as an insurance executive considering his experience, age, and the nature of the insurance market.

On balance, the court found that there would be irreparable harm done to the former employee if the interim injunction was granted; whereas the potential damage towards Manulife due to the former employee’s previous access to confidential information was speculative.

Key takeaways

This case demonstrates the necessity to tailor restrictive covenants to each employee and the legitimate business interests of the company in terms of geographic scope, duration and restricted activities. The court will balance the former employee’s legitimate needs to earn a living and will be particularly mindful of restrictions against individuals employed in specialised industries from working against competitors. Furthermore, the terms of the restrictive covenant should be renegotiated periodically because the time for ascertaining the reasonableness is at the time of the making of the contract.