In the recent decision of Manulife Financial Asia Limited v Kenneth Joseph Rappold & Ors [2024] HKCFI 989, the High Court of Hong Kong considered the Plaintiff’s application to prohibit the Defendant its former employee to work for a competitor. The Plaintiff relied on a 12-month non-compete clause in the employment agreement for the application and the detailed discussion on enforceability of the non-complete clause is relevant and should be carefully considered by employers and human resource personnel.
Brief Facts
The Plaintiff is an insurance company operating in the Asia segment of Manulife (“Manulife”). The 1st Defendant was the Chief Financial Officer, Asia of Manulife (“Mr Rappold”) pursuant to an employment agreement dated January 2018 (“Employment Agreement”) which contains the following non-compete covenant (“NCC”) :-
“You agree that you will not at any time during your employment with the Company and for a period of 12 months following a voluntary termination of your employment, be employed in a Similar Capacity by a Competitor, …… without the Company or Manulife’s prior written consent.
“Similar Capacity” means the same or similar position, …… that you have or had in connection with your employment with the Company or Manulife.
A “Competitor” is any person or company engaged in or planning to engage in business that: (1) is the same or similar to the business of, in whole or in part, to those of the Company or Manulife and its affiliates and subsidiaries, including without limitation providing financial protection, wealth management, asset management and other financial products and services; or (2) involves the selling or offering of products, processes, programs, or services that are same or similar, in whole or in part, to those of the Company or Manulife and its affiliates and subsidiaries or that were under active consideration by the Company or Manulife and its affiliates and subsidiaries during your employment with the Company ……”
After around 5 years of working with Manulife, Mr Rappold resigned voluntarily and terminated his employment with Manulife on 31 October 2023.
In around mid-January 2024, Mr Rappold informed Manulife that he intended to join Prudential. Mr Rappold’s solicitors also sought consent from the Plaintiff that Mr Rappold could commence employment with Prudential on 1 March 2024 (ie. within 12 months of the NCC period) but Manulife did not agree.
Prior to Mr Rappold joining Prudential on 2 April 2024, Manulife commenced action by Writ of Summons on 26 March 2024 and filed its Summons for interim injunctive relief. On 28 March 2024, Manulife applied ex parte on notice for an interim-interim injunction.
Considerations of the Court
At the present stage of the case, the Court accepted that there was no strict merits (on the prospect of success) threshold to consider on whether to grant an interim-interim injunction pending determination of a full hearing of Manulife’s Summons. The proper approach is to take whichever course appears to carry a lower risk of injustice if it should turn out that it is wrong.
At the same time, the Court’s provisional views on the relative merits of the parties’ respective cases would be relevant for the purpose of deciding where the balance of convenience lies, and which course would carry the lower risk of injustice.
Applicable Principles
The principles regarding enforceability of restrictive covenants in employment contracts were not in dispute between the parties and they are as follows :-
(a) Any NCC is unenforceable unless the employer seeking to enforce it can show that (i) it is reasonable in the interests of the parties and in the interests of justice; and (ii) it goes no wider than is reasonably necessary for the protection of the employer’s legitimate business interests;
(b) The time for ascertaining the reasonableness of the NCC is the time of the making of the contract;
(c) the greater the duration of the covenant and the wider its geographical extent, the more difficult it will be to justify that it is reasonable.
Court’s Findings
In refusing the application of the interim-interim injunction, the Court considered the following :-
1. The NCC’s enforceability
The NCC lacks a geographical limit thereby making it a worldwide covenant, which by itself is a “remarkable feature”. This prima facie warrants justification by Manulife and is “far too wide to be enforceable”. The Court was of the view that the restriction put on Mr Rappold was not reasonable nor necessary to protect Manulife’s legitimate business interests.
The Judge was also not satisfied with the state of the evidence that Manulife had a reasonably good prospect of being able to show at trial that a 12-month restriction was reasonable or justified.
2. Manulife’s justification
Manulife argued that the NCC was to protect confidential information and knowledge possessed by Mr Rappold during his employment with them, which if disclosed to the new employer would cause material detriment to Manulife’s business. However,
(a) Manulife could not justify a worldwide non-compete covenant that restricts Mr Rappold from being employed in countries and territories in which Manulife did not operate or have active plans to operate;
(b) there was no justification for the NCC’s 12-month restriction shelf life and how the alleged confidential information could be used during the 12 months to cause material detriment to Manulife;
(c) as there was an express confidentiality clause in the Employment Agreement (“Confidentiality Clause”), the need for a 12-month restraint is further diminished; and
(d) there was a lack of “temporal backstop” in that the NCC applies to all work done by Mr Rappold throughout his 5-year employment with Manulife, as opposed to work in which Mr Rappold carried out more recently. Therefore, putting a restriction in respect of activities in which the employee had no recent involvement would not be reasonable.
3. Balance of Convenience
On the question of balance of convenience,
(a) restraining Mr Rappold from taking employment with Prudential will cause him irreparable harm as he would lose a rare and attractive opportunity. It is “highly likely” that Mr Rappold would lose such opportunity if he had to wait out the 12-month period and if Mr Rappold loses the executive role with Prudential, there may be more far-reaching ramifications on his career prospects which cannot be quantified in monetary terms.
(b) Manulife had not demonstrated an appreciable risk of irreparable damage to its business even if no interim-interim injunction is granted.
(c) Given that Mr Rappold expressly acknowledged that he continues to be bound by the Confidentiality Clause and had also offered to provide a confidentiality undertaking, the Court found that it would give Manulife reasonable protection in the interim period.
As an obiter comment, the Court pointed out that Manulife could have applied for interim injunctive relief much earlier if it was indeed concerned with a breach of the NCC after the parties’ negotiations on an amicable solution had broken down. Instead, Manulife waited for a month to issue the Summons. Manulife’s delay in seeking interim injunctive relief had already cause disruption to Mr Rappold’s employment plans, with the deferral of his start date with Prudential from 2 April 2024 to 22 April 2024.
Takeaways
As a non-compete clause is often included in employment agreements, it is important to note that the Court would not redraft a restrictive covenant nor imply a term in order to save a covenant restraining an employee’s conduct after termination of employment. The non-compete clause therefore must be carefully drafted to meet the legal principles stated above in terms of reasonableness, duration and geographic scope. Overly general non-compete clauses may be unenforceable. Employers should also review non-compete clauses from time to time to ensure they are relevant and up to date for the protection of their legitimate business interests. Also, time is of essence when applying to the Court for interim injunctive relief as it was found that the delay in Manulife’s application did not put Manulife in a favourable position if they were indeed concerned with the breach of the NCC.
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