Why employers should regularly review and update post-termination restrictive covenants agreed with employees

In a recent judgment handed down by the District Court on 16 August 2024,¹; the court refused to enforce a two-year post-termination restrictive covenant against a junior employee who had left her former employer to join a competitor.

Shortly after graduating from university, Ms Lai (the Defendant) started working for Moxie (the Plaintiff), a public relations agency. At the same time as signing an employment contract, she was also requested to sign a separate document titled "Protection of Company Information and Materials", which stipulated that she could not:

• join another public relations agency for two years after termination of her employment with Moxie; and
• contact, liaise or solicit business from Moxie's existing customers or suppliers, or interfere in any contractual or business relationship which Moxie has established with its suppliers or customers.

After approximately four years, Ms Lai decided to resign. The event that triggered the law suit by Moxie against Ms Lai appears to be the allegation that Ms Lai approached H&M (a major fashion brand) and procured its business for the benefit of her new employer, also a public relations agency. Moxie's case is that H&M was its client and that, by wrongfully utilising Moxie's trade secrets and confidential information relating to its public relations agency business, Ms Lai breached the non-compete and non-solicitation clauses. Interestingly, no damages were sought by Moxie against Ms Lai.

At trial, Ms Lai first tried to argue the "Protection of Company Information and Materials" was not enforceable against her due to a lack of consideration. This argument was rejected by the court because, although it was a separate document, it was given to Ms Lai at the same time as the employment contract for execution and it is therefore part and parcel of the terms and conditions of the employment agreement.

Ms Lai then further sought to argue the non-compete and non-solicitation clauses were unenforceable because they were wider than necessary to protect Moxie's legitimate business interests. The court agreed.

The court, in citing Winta Investment (Hong Kong) Ltd v. Ng Kam Chit,² reiterated that an employer's "legitimate interests" do not mean an interest in avoiding competition. They mean some interests of a proprietary nature which are usually in the form of trade secrets and customer connections belonging to the employer. Information which qualifies as "trade secrets" for the purpose of enforcing a covenant in restraint of trade:³

• must be used in a trade or business;
• is confidential, meaning it is not already in the public domain;
• can be easily isolated from other information which the employee is free to use so that any person of average intelligence and honesty would think it is improper to use the information at the disposal of their new employer;
• if disclosed to a competitor, would be liable to cause real or significant harm to the owner; and
• must be limited in its dissemination by the owner of it or at least not encourage or permit its widespread publication or otherwise impress upon the employee the confidentiality of the information.

Furthermore, trade secrets must be identified with precision and information of lesser significance will not be afforded post-termination protection.⁴

As to the factors the court would take into account when determining the reasonableness of a post-termination restrictive covenant, these include the seniority of an employee; duration of the restriction; period of notice for termination; geographic scope; nature of the activity restricted; and nature of further contract restricted. Taking into account these factors, the court found Moxie had failed to prove the covenants were reasonably necessary for the protection of its "legitimate interests" and, as such, found in favour of Ms Lai. The court awarded indemnity costs against Moxie because it found that "it was apparent that the Plaintiff has been trying to unduly exert pressure on the Defendant. Such oppressive and high-handed manner in conducting litigation should be discouraged with indemnity costs".

The judgment helpfully sets out a comprehensive summary of the relevant principles governing the enforcement of post-termination restrictive covenants in Hong Kong and acts as a helpful guide to HR professionals and their legal advisers at both the commencement and the cessation of an employee's employment.

In particular, employers should be reminded that they should not apply a one-size-fits-all approach to imposing post-termination restrictive covenants - they must be tailor-made for employees. One of the reasons the court refused to enforce the covenants against Ms Lai was because she joined Moxie as a fresh university graduate and junior employee. To impose a two-year restriction with no spatial limitation was unreasonable. The reasonableness of the restriction is to be judged at the date the contract was made and not when the employment ceases. Instead, what employers should do is to regularly review and update the covenants as an employee grows through the ranks. An opportune time to review and add or bolster post-termination restrictive covenants would be when an employee is awarded a promotion and pay raise - the pay rise would act as consideration for the amendment of the terms.

1. Moxie Communications Ltd v. Lai Cheuk Lok [2024] HKDC 1323.
2. [2018] HKDC 342.
3. Citing DHCJ To in Axa China Region Insurance Co Ltd v. Pacific Century Insurance Co Ltd [2003] 3 HKC 1.
4. Citing Riberio PJ in PCCW-HKT Telephone Ltd v. Aitken [2009] 12 HKCFAR 114.