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The Importance of Right Timing – No Delay in Application for Injunction to Restrain Former Employees from Competing

  • Hong Kong
  • Employment law

18-01-2021

In the recent case AB Club Ltd & Anors v Chan Yin Ki Cubie & Anors [2020] HKCFI 2769, the Court of First Instance refused to grant an interim interim injunction to restrain the former employees of the Plaintiffs from competing with the Plaintiffs’ business for a delay of three weeks in applying for the injunction.

Background

The plaintiffs are a group of companies engaged in the business of marketing and selling overseas properties to buyers in Hong Kong, and the defendants are the plaintiffs’ former employees and two companies incorporated by the former employees. It is alleged that four of the defendants had incorporated two companies in direct competition with the plaintiffs’ group in April and May 2020 respectively. Between May to mid-July 2020, most of the other defendants resigned and commenced employment with the two newly incorporated companies.

The plaintiffs claimed that the defendants, who were their former employees, had, among other things, solicited clients and employees of the plaintiffs, and applied for an injunction with the Court in September 2020. The matter to be decided in the case was whether the Court should impose an interim interim injunction pending resolution at hearing in relation to:

  • an injunction from carrying on certain business for 6 months (“Non-compete”); and
  • an injunction from soliciting clients and employees of the Plaintiffs (“Non-solicitation”).

The Issue of Delay - Timing as an Indicator of Urgency

Interim interim injunctions (i.e. an interim relief pending the outcome of an interim injunction application) is meant to be an urgent temporary stop-gap measure to preserve the status quo pending the hearing of the interim injunction, which in the context of post-termination restrictive covenants, will usually be determinative of the outcome due to the short duration of the restrictions.

The Court refused to grant an interim interim injunction on the Non-compete because there was an inexplicable three week delay on the plaintiffs’ part to make the application for injunction, which showed there was no real urgency to put an immediate stop to the business of the two companies incorporated by the former employees.

The key events are as follows:

  • in early August, the plaintiffs started carrying out private investigation and collected evidence to substantiate their claims;
  • on 24 August 2020, the plaintiffs issued a demand letter to the ringleader of the defendants;

  • on 28 August 2020, the ringleader of the defendants replied and asked the plaintiffs to withhold taking action for 14 days;

  • on 11 September 2020, the ringleader gave a formal reply denying allegations of breaches and refusing to desist;

  • on 25 September 2020, the plaintiffs took out the application for injunction.

The Court observed that:
  • by 15 August 2020, the plaintiffs would have been in a position to seek injunctive relief if they had considered that there was genuine urgency. However, there was a delay of more than a week before issuing the demand letter to the ringleader of the defendants;

  • although the plaintiffs had waited for the defendant’s response after issuing the demand letter at the defendant’s request, on 11 September 2020, after receiving the defendant’s response, they should have taken immediate action against the plaintiffs if there was a real urgency.

The above two periods of delay add up to a delay of more than three weeks, while pursuant to case law, a delay in two weeks is considered sufficient to refuse interim relief.

Last not but not least, the plaintiffs suggested that the injunctive order should only take effect from 5 October 2020 given one of the two entities incorporated by the defendants were to host an event to promote a project on 3 October 2020 and time, and money had already been incurred for the event. The Court considered that, though the plaintiffs were trying to be fair, their suggestion showed there was no real urgency to put an immediate stop to the two companies’ business.

On the other hand, in respect of the Non-solicitation injunction, the Court ruled that the plaintiff’s evidence had established, at least on a provisional basis, a good arguable case of alleged contractual breaches, and the defendants had yet to argue otherwise or adduce evidence in opposition. As the Court saw very little prejudice, if at all, to the relevant defendants, it granted the order restricting the defendants from solicitation.

Key Takeaways for Employers

  • The Court will only grant an interim interim injunction when there is a real urgency to do so, and the timing of application for injunctive relief is significant in indicating urgency. Therefore, in the case of an employee’s breach of non-compete or non-solicitation clauses, employers should apply for injunction as soon as it has grounds to make the application.

  • If the injunctive relief can take effect at a later stage and the plaintiffs will not be substantially affected, this shows that there may not be a real urgency to grant the relief.

  • To protect the interests of the company, after an employee resigns, the employer should review the activities of the employee before resignation to uncover any suspicious arrangement in breach of the non-compete or non-solicitation obligations as soon as possible.

  • This case also shows the Court’s general tendency to uphold a non-solicitation restriction but not a non-compete restriction. Even though the facts are identical, as Courts are more cautious in enforcing restrictions which may prevent the former employees from making a living.

  • While well-considered concessions in Court may save the parties’ time and costs and advance a party’s case by avoiding the need to take unsustainable or unreasonable positions, in this case it appears that the concession backfired and harmed the former employer’s case that it is necessary for the interim interim injunction to be granted to prevent irreparable damage to the former employer. There are inherent risks in litigation but such risks can be mitigated by carefully balancing the potential benefits of making the concession against the potential harm causing by the concession on the party’s primary case.