Restrictive Covenants - Freshasia Foods Ltd v Jing Lu

Author: Pearson Scott Foresman
Reproduced with kind permission of the copyright owner
Source Wikipedia

Jane Lambert

Chancery Division (Daniel Alexander QC) Freshasia Foods Ltd v Jing Lu [2018] EWHC 3644 (Ch)

The first intellectual property judgment of the New Year is Mr Daniel Alexander QC's decision in Freshasia Foods Ltd v Jing Lu [2018] EWHC 3644 (Ch) (4 Jan 2019).  The learned deputy judge seems to have made his order on 19 Dec 2018 after a hearing that had taken place the previous day but he delivered the reasons for his order on 4 Jan 2019.

The Dispute
Mr Alexander described Freshasia Foods Ltd. ("Freshasia") as "a UK registered company which supplies food products, particularly dumplings and sliced meats, to Chinese retail shops and restaurants." He added that it has between 100 and 200 employees, a turnover in the millions of pounds and about 500 customers in total in the UK and the EU. He noted that there are only a few employers in the industry, which is a very specialist market of frozen and packaged food sold mainly to international student customers.

On 12 Jan 2015 Freshasia recruited one Jing Lu ("Mr Lu") as a marketing assistant.  Mr Lu rose quickly in the company to Marketing Advertising Manager.  His contract of employment contained the following clauses:

"For this reason [confidentiality] you hereby agree that you will not during your employment with the Company or any associated or subsidiary companies, for a period of six months (for non-senior employees) or twelve months (for senior employees) (hereinafter referred to as the "leaving period") in respect of any aspect of the business which the Company undertakes, solicit, or attempt to solicit the custom of, or sell, or deliver to or accept work for private gain and/or for any third party, from any private individual, firm or company or otherwise deal with any person who at the date of termination of this contract is a customer or potential customer of the Company to whom you have personally sold and/or delivered the Company's products on behalf of the Company or whom you had introduced to the Company, or approached on behalf of the Company, or with whom you had any business dealings or knowledge in the leaving period immediately prior to the date of termination of your employment.

............................

You agree not to directly or indirectly compete with the business of the Company and its associated companies during the period of employment and for the leaving period and notwithstanding the cause or reason for termination. […]

The term "not compete" as used herein shall mean that you shall not own, manage, operate, consult or be employed in a business substantially similar to or competitive with, the present business of the Company."

On 11 Sept 2018, Mr Lu handed in his notice. He told his line manager that he was returning to Hong Kong and an area manager that he was taking a job in IT. Instead, he joined Oriental Food Express Limited which trades as Kung Fu.  That company is a direct competitor of Freshasia.  Following Mr Lu's departure, Freshasia experienced a sharp drop in business which it attributes to the activities of Mr Lu.

Freshasia applied to Mr Justice Snowdon, the Chancery interim applications judge, for an interim injunction to enforce the restrictive covenants until trial on 29 Nov 2018. The judge stood over the application to be heard as an application by order refusing injunctive relief over the hearing of the application on the grounds that Freshasia had delated in bringing the application and had only allowed Mr Lu two days notice of the application.  The application by order came on before Mr Alexander on 18 Dec 2018 and the trial will take place on 4 March 2019.

The Issues

Relying on Lord Diplock's speech in American Cyanamid Co (No 1) v Ethicon Ltd [1975] 1 All ER 504, [1977] FSR 593, [1975] 2 WLR 316, [1975] UKHL 1, [1975] AC 396, Freshasia argued that it had an arguable case and that the balance of convenience favoured an interim injunction.  Referring to such cases as NWL Ltd v Woods [1979] 1 WLR 1294 (HL) and Business Seating (Renovations) Ltd v Broad [1989] 1 ICR 729, Mr Lu replied that the court should consider the merits.  He submitted that the restraints, which were for 6 months, would be on the point of expiring by the time the case came on for trial and that the interim injunction proceedings would effectively determine the issue. Mr Lu added that his immigration status depended on his employment status and that he could be required to leave the country if he was prevented from working for Kung Fu. As to the merits, Mr Lu contended that the covenants were too broad to be enforceable and that they could not be severed.

The Decision

Mr Alexander made an order in the following terms: 

"Until judgment following trial herein or further order in the meantime the Defendant must not (whether acting by himself, his servants or agents or by others acting on his behalf) do (or authorise, cause, assist, or enable others to do) the following acts of any of them without the consent of the Claimant:
…
In respect of food products sold to Chinese retail shops and restaurants in the United Kingdom or elsewhere in the European Union, solicit the custom of, or sell or deliver to any private individual, firm, company or other person who at 28 September 2018 was (a) a customer of the Claimant to whom the Defendant had personally sold and/or delivered the Claimant's products on behalf of the Claimant, or (b) whom the Defendant had introduced to the Claimant or approached on behalf of the Claimant".

The order contained other provisions on the use of confidential information and directions for the trial which were largely agreed.  As both parties had enjoyed a measure of success Mr Alexander ordered the costs of the application to be costs in the case.

Reasons for the Decision

Reminding himself of the dicta of Lord Diplock in  NWL Ltd v Woods, Lord Justice Staughton in Lansing Linde v Kerr [1991] 1 WLR 25 and Mr Justice Hiffmann (as he then was) in  Films Rover International Limited and Ors v Cannon Film Sales Limited [1987] 1 WLR 670 and the decision of Sir Ross Cranston in  Ideal Standard International SA and another v Herbert   [2018] EWHC 3326 (Comm)  the learned deputy judge directed himself as follows:

"[22] First, the court should always take account of the practical realities in cases of this kind. If a preliminary injunction is likely to be final in effect, the court should be particularly convinced that the course it adopts at the interim stage is likely to be justified. It seems to me, in principle, that Lord Diplock's approach suggests that the merits should be taken into account in cases where, even if the covenant would or may still have a period to run at trial, the impact of a preliminary injunction would be effectively final for other reasons. Such a case may be one in which an injunction would mean that a defendant would lose his or her new job altogether and would, as a result lose a home or residence status meaning that no trial would take place because the defendant would not be in a position to pursue an arguable defence at all.
[23] Second, there is no fixed way in which the merits must be taken into account. In some cases, where an injunction would have a particularly severe impact, it may only be appropriate to grant it if reasonably satisfied that the claim will succeed. In other situations, the merits may be taken into account as a factor in attempting to take the course least likely to lead to injustice.
[24] Third, in considering the approach to be taken, it is necessary to take account of the nature of the injunction sought. An injunction preventing employment altogether with a particular undertaking or kind of undertaking for a lengthy period may require more intensive justification at the interim stage than an injunction merely restraining dealing with certain specific individuals with whom the ex-employee has previously dealt but which leaves the employee free to work in the industry more generally. Intensity of scrutiny of the merits should be proportional to the impact of the order sought."

Mr Alexander concluded at [25]:

"This case is illustrative. Even if there is a serious issue to be tried as to its validity, the impact of enforcing the non-compete clause would, it is said by Mr Lu, be very severe. A serious issue to be tried is not enough. In contrast, the cut down non-solicitation clause would have a much more modest impact on Mr Lu and third parties, only limiting specific dealings with specific former customers/contacts. In such a case, even if the court is not satisfied that the case is a winning one, it may be appropriate to grant protection for a few months to trial, if the case is reasonably arguable and the balance of convenience otherwise favours such a course."

The deputy judge decided at paragraph [66] that the non-solicitation clause of Mr Lu's contract of employment did protect a genuine and legitimate interest of Freshasia, namely its connections with his customers.  Mr Liu denied that he had very much to do with those customers but that was an issue to be decided at trial. However, the scope of the prohibited activities was, in Mr Alexander's judgment, "greater than reasonably necessary" to protect that interest.  After considering the Court of Appeal's judgments in Beckett Investment Management Group Ltd and others v Hall and others [2007] EWCA Civ 613 (28 June 2007) and Tillman v Egon Zehnder Ltd  [2017] EWCA Civ 1054, [2017] IRLR 906, [2017] WLR(D) 492, [2018] ICR 574 and noting that Tillman is on appeal to the Supreme Court, the learned deputy judge decided that the objectionable provisions of the clause could be severed.

It was different with the non-compete clause. The deputy judge was not persuaded that it was no wider than reasonably necessary to protect the confidential information or trade connection of Freshasia. The clause was too wide to be enforceable;e and could not be cured by severance. It was unlikely to be upheld at trial and an interim injunction could not be justified.

Comments

The is not the first time the court has had to consider extensively the issues on which a case is likely to turn upon an application for an interim injunction.  In Series 5 Software Ltd v Clarke and others [1996] 1 All E.R. 853; [1995] 12 WLUK 361; [1996] C.L.C. 631; [1996] F.S.R. 273; (1996) 19(3) I.P.D. 19024; Times, January 19, 1996 Mr Justice Laddie appeared to challenge  Diplock's approach in Cyanamid:

"Accordingly, it appears to me that in deciding whether to grant interlocutory relief, the court should bear the following matters in mind. (1) The grant of an interlocutory` injunction is a matter of discretion and depends on all the facts of the case. (2) There are no fixed rules as to when an injunction should or should not be granted. The relief must be kept flexible. (3) Because of the practice adopted on the hearing of applications for interlocutory relief, the court should rarely attempt to resolve complex issues of disputed fact or law. (4) Major factors the court can bear in mind are (a) the extent to which damages are likely to be an adequate remedy for each party and the ability of the other party to pay, (b) the balance of convenience, (c) the maintenance of the status quo, and (d) any clear view the court may reach as to the relative strength of the parties' cases."

That decision was cited to Mr Justice Robert Walker (as he then was) in Barnsley Brewery Company Limited v RBNB  [1997] F.S.R. 462.  His lordship said on page 472:

"That decision is sometimes, it seems, regarded as surprising or even heretical. I do not see it that way. I see it as a valuable reminder of the background and context of American Cyanamid and indeed of its basic message. The basic message is that applications for interlocutory injunctions cannot be mini trials of disputed issues of fact and that the court has to do the best it can on a provisional basis, with the relatively modest aim of reducing so far as possible the risk of the provisional decision ultimately proving to have produced an unjust result."

He added on the next page:

"That is what the successive enquiries as to arguable case, adequacy of damages and the rather ineptly named balance of convenience are ultimately aimed at. On that approach the conclusion that the plaintiff appears not to have a strong case cannot, to my mind, possibly be regarded as irrelevant to reducing the risk of ultimate injustice."

It seems to me that Mr Alexander's judgment is entirely in accordance with Mr Justice Robert Walker's approach. The obligation of the court is to minimize the risk of injustice and that sometimes requires in-depth consideration of the cases on construction of restrictive covenants in employment contracts, the law on restraints of trade and the severability of offending provisions. There may be some who will say that the deputy judge made very heavy weather of a relatively common and straightforward case and that he even made a Christmas dinner of it, but I am not one of them. I am grateful for his analysis of the case law and for his useful restatement of the law relating to applications for interim injunctions, 

Further Information

Anyone wishing to discuss this case or interim injunctions generally should call me on +44 (0)20 7404 5252 during office hours or send me a message through my contact page.