Court discusses legal requirements to enforce restraint of trade clauses
The General Division of the High Court of Singapore recently dealt with Shopee’s case against its former management member who joined its industry rival, TikTok Shop.
Shopee Singapore Pte Ltd, a leading e-commerce platform, filed a legal action against its former employee, Lim Teck Yong. Lim, who had been with Shopee from August 2015 to August 2023, joined ByteDance Pte Ltd in September 2023, specifically in a role related to TikTok Shop, an e-commerce arm of ByteDance.
Shopee sought interim injunctions against Lim. These injunctions aimed to prevent Lim from accepting employment with ByteDance and from soliciting Shopee's clients and employees.
It based its claims on contractual clauses agreed upon by Lim during his employment with Shopee. Alternatively, Shopee sought a springboard injunction to restrain Lim from joining any of Shopee's competitors.
Employment with Shopee
Lim held various positions during his tenure at Shopee, including roles in regional operations and management in different markets. He resigned in mid-2023 and joined ByteDance shortly after. Disputes arose regarding the similarity of Lim's responsibilities at Shopee and ByteDance.
The dispute centered around clauses in the Restrictive Covenants Agreement ("RCA") and the Employee Confidentiality Agreement ("ECA") that Lim signed during his employment with Shopee. These clauses prohibited Lim from engaging with competitors, soliciting clients, or disclosing proprietary information post-employment.
Shopee initially demanded compliance from Lim, alleging breach of contractual obligations. Lim disputed these allegations, leading to Shopee filing legal claims seeking enforcement of the contractual clauses and damages.
Shopee’s claims
Shopee contended that Lim breached the contractual clauses, justifying the need for interim injunctions. They argued that Lim had not demonstrated significant hardship in complying with his contractual obligations.
On the other hand, Lim argued against the enforceability of the clauses, claiming they were unreasonable and lacked protection of legitimate proprietary interests.
The court applied the American Cyanamid test, evaluating whether there was a serious question to be tried and assessing the balance of convenience.
This involved examining the likelihood of success of Shopee's claims and considering whether damages would suffice as a remedy.
Restraint of trade clauses
The decision discussed that the enforceability of restraint of trade clauses, especially in employment contracts, is subject to scrutiny due to public policy concerns against unduly restricting trade.
The court established a two-stage test:
“Legitimate Interest: The clause must protect a legitimate interest of the employer.
Reasonableness: The clause must be reasonable in the interests of both parties and the public.”
The court recognized legitimate proprietary interests such as protecting trade secrets, special trade connections with clients, and maintaining a stable workforce.
It also said that courts adopt a stricter approach when evaluating restrictive covenants in employment contracts, as compared to business sale contracts. This is due to the greater inequality of bargaining power in employment relationships.
If protection of confidential information is already covered by another contractual clause, the covenantee must demonstrate that the restraint of trade clause serves a legitimate proprietary interest beyond safeguarding confidential information.
Legal test for interim injunctions
The court said that to obtain an interim injunction related to a restraint of trade clause, the applicant must demonstrate:
- Serious questions regarding the validity and enforceability of the clause;
- Serious questions regarding breach of the clause.
- Balance of convenience favors granting the injunction.
Shopee's counsel clarified that the non-competition restriction seeks to protect confidential information based on Shopee's submission regarding "Restricted Territories.”
Shopee argued that this restriction is reasonable in terms of geographical area, activity, and duration. They claim Lim breached this restriction by working for ByteDance, which operates in the "Restricted Territories."
Meanwhile, Lim contends that his work at TikTok Shop differs from his role at Shopee Brazil and that TikTok Shop wasn't available in Brazil. Lim argues that Shopee failed to demonstrate a legitimate proprietary interest beyond protecting confidential information already covered by the ECA.
He also challenged the wide scope and duration of the non-competition restriction, stating it is unenforceable. Shopee has not provided specific evidence of Lim breaching the non-solicitation restrictions but claims a risk of breach based on Lim's refusal to provide undertakings. Lim argues there is no evidence of him threatening to breach these restrictions.
Court rules on Shopee’s case
The court found that Shopee failed to demonstrate serious concerns about the validity or breach of the restrictions. Regarding the request for an injunction, the court concluded that there was insufficient evidence to suggest that Lim intended to misuse confidential information.
Additionally, the court considered the balance of convenience and decided against granting the interim injunction, citing the weak case presented by Shopee and the disruption to Lim's employment with ByteDance.
Consequently, the court dismissed the case and instructed both parties to submit written submissions on costs.
