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Keep staff close but trade secrets closer

Published on Saturday, 28 Jun 2014
Gareth Thomas is head of the Hong Kong Commercial litigation team and responsible for the Greater China employment practice.
Helen Beech is a senior member of the Hong Kong employment practice and has a wide range of experience in employment matters.

The Case

Confidential information and trade secrets are increasingly valuable assets for any business. A recent Hong Kong Court of First Instance judgment, Dextra China Limited v Lam Wing Kit, shows the difficulty employers face in trying to guard information from misuse by disgruntled or over-ambitious staff. It is also a reminder of the threat posed by staff with ulterior motives, and should encourage employers to consider steps to protect themselves.

The Details

Lam had been employed by Dextra - a maker of construction products - since 1992 and became its general manager in 2000. Part of Dextra's business involves making and selling "Sonitec" sonic tubes - tubes that are encased in building foundations to allow for testing of concrete integrity. The tubes employ a special type of push-fit assembly - a confidential trade secret which sets Sonitec tubes apart from competing products.

In or around September 2009, the managing director suspected Lam was setting up a business to compete directly with Dextra. In Lam's office he found a hard disk with documents in a "Personal Doc" folder indicating Lam was creating a firm called Agility to make and sell steel tubes with the proprietary Sonitec assembly system. They also seemed to show Lam had induced some 15 Dextra staff to leave and join his business.

Lam was summarily dismissed on the grounds he had breached duties implied in his contract of good faith, trust and confidence, and duties regarding the fiduciary duty he owed Dextra and the obligation to not misuse confidential information.

Dextra sought injunctions restraining him from acting in breach of the express and implied duties in his contract and from making further use of confidential information. It also sought delivery up of the confidential information which Lam had misappropriated and damages for loss of profits for when he was employed by Dextra but acted in competition.

Lam denied this version of events and issued his own claim for wrongful termination. But the court decided he had not been wrongfully terminated and had acted in breach of his contract duties. Of relevance were the existence of draft board minutes for Agility's creation, structure charts identifying Lam as the major shareholder, planning and timetable documents detailing Dextra staff resignations, Sonitec sales spreadsheets, and confidential pricing information.

The court ordered Lam to pay Dextra about HK$5.1 million in lost profits and return the information, and issued an injunction against him from making further use of the information.

The Lessons

Not all employers will be as fortunate as Dextra in terms of the proof it found that Lam had misappropriated its confidential information, induced the departure of its employees and breached his contact of employment by competing with Dextra.

Employers can take several steps to ensure the best chance of discovering this sort of misconduct and imposing disciplinary action. These include educating staff on the importance of protecting confidential information and acting in the company's best interests; introducing a written policy on the consequences of misconduct; and inserting provisions into contracts prohibiting misuse of confidential information, acting in competition or enticing away staff. Make it clear the consequences may result in termination.

Employers should also ensure that staff, especially seniors or those with access to vital confidential information, are subject to restrictive covenants, tailored to the circumstances involved; limit access to key documents via password protection, encryption or approval and to create alerts to indicate when staff access critical documents; and pay attention to disgruntled staff, especially in senior or fiduciary posts. For example, both sides recognised that Lam and Dextra's managing director had fallen out over changes to the business.

Finally, remember to be proactive rather than reactive, and take steps early to limit the potential damage a rogue employee can cause.

Herbert Smith Freehills has 2,800 lawyers and 460 partners in over 20 offices globally. It advises on dispute resolution and employment, among other areas.

The information contained in this article should not be relied on as legal advice and should not be regarded as a substitute for detailed advice in individual cases. If advice concerning individual problems or other expert assistance is required, the service of a competent professional adviser should be sought.

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