ENFORCEABILITY OF RESTRAINT OF TRADE CLAUSES (2)
This week’s blog covers MoneySmart Singapore Pte Ltd v Artem Musienko [2024] SGHC 94, a High Court (the “Court”) case on the enforceability of non-compete clauses. This case endorses the principles in the recent case of Shopee Singapore Private Limited v Lim Teck Yong [2024] SGHC 29 and also clarifies other aspects of the law for restraint of trade clauses.
Our blog post on the case of Shopee Singapore Private Limited v Lim Teck Yong [2024] SGHC 29 (“Shopee Singapore“) can be found here.
Facts. The Defendant, Mr. Artem Musienko (“Artem”), was a former employee of the claimant, MoneySmart Singapore Pte Ltd (“MoneySmart”) ([1]).
Mr. Artem had resigned from MoneySmart and joined CAG Regional Singapore Pte Ltd (“CAGRS”), a subsidiary of MoneyHero Limited (“MoneyHero”), a rival firm of MoneySmart ([1]).
MoneySmart sought to stop Mr. Artem from working for CAGRS ([1]).
MoneySmart took out an ex parte summons for two interim injunctions to stop Mr. Artem from working for CAGRS based on two covenants in the employment agreement between Mr. Artem and MoneySmart ([2]).
The interim injunctions were granted with the caveat that they must not be enforced until the judge had heard the defendant in a subsequent inter partes hearing ([2]).
Subsequently, about a week after the interim injunctions were granted, Mr. Artem took out an application to set aside the interim injunctions ([2].
Issue: This blog post will focus on the Court’s decision on whether the interim injunctions should continue or be set aside.
The relevant covenants: The two clauses of the employment agreement relevant to the present proceedings are Clause 8 (the “Non-Compete Clause”):
“8. Non-Competition and Non-Solicitation
8.1 Non-Competition. The Employee covenants and agrees that during the term of the Employee's employment with the Company and for the following Restraint Period, the Employee shall not directly or indirectly engage with any business or organisation in South-East Asia or any other country where MoneySmart (or associated companies) operates which provides online financial product comparison services (the “Business”) and thereby engages in competition with the Company or the Company’s holding companies or subsidiaries (if any).
…
8.3 For the purposes of clauses 8.1 and 8.2, “Restraint Period” means:
(a) a period of twelve (12) months from the date of termination of your Employment; but if a court of competent jurisdiction determines that any restriction in this clause 8 is unenforceable for such a period, then
(b) a period of six (6) months from the date of termination of your Employment; but if a court of competent jurisdiction determines that any restriction in this clause 8 is unenforceable for such a period, then
(c) a period of three (3) months from the date of termination of your Employment.”
And Clause 9 (the “Confidentiality Clause”):
“9. Confidential Information
9.1 Non-Disclosure. The Employee agrees not to use other than for the benefit of the Company and to keep confidential, at all times during the term of the Employee's employment and thereafter, all information about the Company (“Confidential Information”), including information relating to the business, operations (financial or otherwise), capital and operating budgets, business plans, research and development activities, product designs and operating characteristics, products, manufacturing and production costs for materials and labour, field labour costs, product pricing and gross margins, product inventories, properties or employees or the Company's relationships with its representatives, customers, subcontractors and suppliers, including information relating to the business, operations and properties of such, representatives, customers and suppliers to the extent known to him. The Employee shall not, except in the performance of his duties hereunder, at any time, directly or indirectly, without the prior written consent of the Company, use or disclose to any third party any Confidential Information.
…”
The law on interim injunctions. The test concerning the grant of an interim injunction is to show that (a) there is a serious question to be tried; and (b) whether the balance of convenience lies in granting the injunction (see [19]).
The law on Restraint of trade clauses. And per the Court of Appeal case of Man Financial (S) Pte Ltd (formerly known as E D & F Man International (S) Pte Ltd) v Wong Bark Chuan David [2008] 1 SLR(R) 663 ("Man Financial”), restraint of trade clauses are prima facie void and unenforceable unless they pass a “two-step” test ([23]):
The restraint of trade protects a legitimate proprietary interest of the employer; and
The restraint of trade is reasonable in the interests of the parties and reasonable in the public interest.
Established categories of legitimate proprietary interests for the employer are ([23]):
Stopping the employee from misusing trade secrets (i.e. confidential information);
Protecting the special trade connections established by the employee with the employer’s customers; and
Maintaining a stable, trained work force.
Further, “where the protection of confidential information or trade secrets is already addressed by another contractual clause, the covenantee (ie, the employer) will have to demonstrate that the restraint of trade clause in question covers a legitimate proprietary interest over and above the protection of confidential information or trade secrets” (see [23]).
The law on interim injunctions in respect of restraint of trade clauses. The Court also endorsed the three-step test set out in Shopee Singapore on what an applicant application for an interim injunction in respect of a restraint of trade clause must fulfil (see [25]).
The Non-Compete Clause. In this case, MoneySmart had argued that the Non-Compete Clause protected (see [28] – [30]):
Its “confidential information and trade secrets” which Mr. Artem had access to while employed by MoneySmart. MoneySmart further argued that even if Mr. Artem does not disclose the confidential information to third parties, he may use it in the course of his current employment at CAGRS.
Its interest in maintaining a stable and trained work force. In doing so, MoneySmart argued that all the skills that Mr. Artem would bring to his next job are attributable to the training provided by MoneySmart.
Both arguments were rejected.
On the protection of confidentiality information, the Court found that the Confidentiality Clause protected this proprietary interest, and per Man Financial, this argument was unsustainable (at [32] – [33]).
Importantly, the Court stated thus at [33]:
“... However difficult it may be to police the breach of the Confidentiality Clause, it remains the case that the legitimate proprietary interest to be protected by the Non-Compete Clause is that of the protection of confidential information or trade secrets. In fact, the claimant’s argument itself accepts this premise. Put another way, because the claimant may be unable to obtain the desired protection over its confidential information through the Confidentiality Clause (since a breach is hard to police), the Non-Compete Clause should be allowed to operate to deliver greater protection over its confidential information. This, therefore, means that the legitimate proprietary interest is not over and above the protection of confidential information or trade secrets.”
(emphasis in original)
As for the argument on maintain a stable and trained workforce, MoneySmart relied on the case of PH Hydraulics & Engineering Pte Ltd v Intrepid Offshore Construction Pte Ltd and another [2012] 4 SLR 36, which held that an employer in the marine winch industry (which was said to be a “relatively small and specialized one”) had a legitimate interest to maintain employees skilled in the employer’s “system of work” after investing “much time and resources” in training up and building the expertise of its employees (see [34]).
This argument too was rejected by the Court. The Court found that:
The “digital insurance industry” was not small in size or number of market participants (at [35]);
While MoneySmart and MoneyHero are in fact competitors offering rivaling online financial product comparison services, the relevant industry would not be that of “online financial product comparison services” since Mr. Artem was not involved in that area of MoneySmart’s business (at [36]);
MoneySmart failed to demonstrated that it had invested much time and resources by providing Mr. Artem with specialized training (see [37] – [40]).
Therefore, the Court held that MoneySmart failed to show that the Non-Compete Clause protected a legitimate proprietary interest and thus, it was held to be unenforceable (see [41]).
The cascading clauses in the Non-Compete Clause. The Court also noted that the Non-Compete Clause was drafted in a “cascading manner” to accommodate the doctrine of severance to arrive at the longest permissible restraint period (i.e. a minimum of three months if a court determined that the prohibition periods of twelve or six months were unenforceable) (see [56]).
The Court noted that such a clause was “plainly unjust” as it seemed to be drafted to let the employer have “multiple bites of the cherry” in relation to determining the duration of the Non-Compete Clause. As such, the Court stated that such a clause “cannot be said to be reasonable as between the parties or in the interests of the public” (see [56]).
Significance. Recently, much attention has been drawn to restraint of trade clauses.
This case endorses the principles in the recent case of Shopee Singapore, i.e., that restraint of trade clauses are prima facie unenforceable, and that the party seeking to enforce the clause must demonstrate how the clause ought to be upheld.
In this regard, the critique of the “cascading manner” in which the restraint of trade clause was drafted is interesting. Strictly speaking, it was unnecessary for the Court to opine on it, as it goes towards the reasonability of the restraint of trade clause.
Nonetheless, the critique is important as drafters may wish to take into account the Court’s comments.
We take this opportunity to note that the Court also critiqued on how the Non-Compete Clause dealt with the scope of activities and geographical scope and held that the relevant clauses were too wide in their scope.
So interested readers may wish to read the judgment in full.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.