Introduction

Once again, the movement of a team of senior lawyers from one prestigious law firm to another in Hong Kong has hit the headlines as well as adding to the substantial body of decided cases on employment law.

In this widely publicized case, culminating in a 28 day trial, the judgment focused not just on the enforceability of restrictive covenants in partnership agreements, employment contracts and merger agreements but also on the implied duties of partners and employees under common law.

The lengthy judgment by Deputy Judge Gill in Deacons v. White & Case and others was published on 24 October 2003 and makes fascinating reading with a sufficient undercurrent of underhand dealings and intrigue to form the plot for a John Grisham bestseller.

The case

Deacons brought an action against White & Case alleging, inter alia, that it had breached a non-solicitation clause in a merger agreement dated 1999 when several members in Deacons’ insolvency team (including 3 partners and 2 associates) left Deacons and joined White & Case in 2002.  Under the terms of the merger agreement, such a move was forbidden for a period of 1 year from the date of termination of merger discussions.

Deacons also claimed that two of its former partners (one being an equity partner and the other a salaried partner) had breached their obligations and duties to Deacons by passing on confidential information to White & Case and persuading some of its major clients, such as Standard Chartered Bank and KPMG, to transfer to White & Case.

As a result, Deacons applied for injunctive relief to restrain White & Case from representing Deacons’ clients as well as damages and an account for profits among other remedies.

The Court’s Decision

The court held that there was no solicitation by White & Case in respect of employing the members of Deacons’ insolvency team and thus no breach of the non-solicitation restrictions in the merger agreement.  The partners were in fact "recruited", instead of "solicited" or "approached" by White & Case.  The court stated that it was important to appreciate the difference between being "recruited" and "solicited", as partners or employees cannot be prevented from advancing their careers as they choose without any undue restraint.

Apart from any breach of the partners’ contractual duties stated in their partnership agreement or employment contract with Deacons, there were certain fiduciary duties owed to Deacons in their capacity as partners which are implied in every contract of service (unless stated to the contrary).  These include having a duty of loyalty, fidelity and good faith to one’s employer during one’s employment and a duty not to disclose confidential information obtained in the course of one’s service during employment and afterwards. Whether or not there is a breach of these duties depends on the circumstances and facts of each case.

In the above case, it was held that the partners who solicited the firm’s clients to leave Deacons and to transfer to White & Case while they were still employed by Deacons, had breached their duties of good faith and loyalty owed to Deacons.  It did not matter whether the clients initiated the transfer or chose to remain loyal to an individual rather than the firm, as an employee generally cannot compete with his firm’s business while he is still working for the firm. This principle was also referred to in another Hong Kong case between a law firm and a lawyer, Kao Lee & Yip v Koo Hoi Yan Donald [2003] 2HKC. In order to avoid breaching  an employee’s duty in the event that a client approaches the employee with the intention to transfer its business to such employee, it is advisable to inform the employer first and to seek its consent.

The implied duty not to disclose or misuse confidential information survives the termination of employment.  During employment, an employee may not disclose a variety of information obtained during his course of employment; whereas after termination, the information which cannot be disclosed is restricted to data amounting to trade secrets, as a former employee is entitled to continue to use the skill and knowledge he acquired during his employment.

The partners in this case were found to have disclosed to White & Case during their recruitment process :- (i) financial information which could only be accessed through Deacons’ intranet by equity partners and its accounts department; (ii) a list of Deacons’ key clients and (iii) names of clients which would be likely to follow the partners upon their transfer to White & Case. Other than item (ii) being information that could be obtained from published periodicals, the judge held that item (i) amounted to information confidential to Deacons being the equivalent of trade secrets and item (iii) was information which ought to have been disclosed to Deacons instead of a competitor.  The disclosure of Deacons’ confidential information to a competitor represented a material breach of the duties of good faith and fidelity owed by the partners at common law.

The injunctive relief pleaded by Deacons was not allowed mainly because of the lapse of time since the lawyers moved firms, and Deacons is now seeking substantial damages and legal costs as a result of the breaches committed by its former partners.

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