Privilege lost after cherry-picking: an undesired outcome of an employer’s tactical decision to waive privilege

The UK Employment Appeal Tribunal (EAT) recently ordered an employer to disclose its external lawyer’s comments in relation to the dismissal of an employee. The EAT held that the employer waived privilege in redacted parts of a draft dismissal letter setting out its lawyer’s comments, as a result of the employer’s decision to rely on other privileged material relating to the claimant’s dismissal: Kasongo v Humanscale UK Ltd [2019] UKEAT 0129_19_0909.

It is well established, both in the UK and in Hong Kong, that a party who chooses to waive legal professional privilege over selected documents may find that the waiver extends further than he intended. This is known as the principle of “collateral waiver” or, more colloquially, the cherry-picking rule. It is designed to prevent a party choosing to rely on favourable aspects of his privileged material while hiding behind legal professional privilege to avoid having to disclose less favourable aspects. Even with a break in time between communications, if the advice relates to the same matter or legal question, privilege cannot be selectively waived for some communications related to it, but not others.  In the present case, the EAT rejected the employer’s submission that the redacted comments represented a separate “transaction” from the legal advice given six days earlier and therefore were not caught by the cherry picking rule. It was held that they were all part of the same transaction, which was advising the employer on the claimant’s dismissal.

While the decision is not surprising on its facts, it acts as a reminder of the dangers of relying on privileged material (even where it appears on its face to be helpful to a party’s case) if there is related privileged material which is less helpful and may undermine the benefit obtained. The risk of waiving privilege over more than you wanted, and the difficulty of anticipating where the line will be drawn in a given case, gives reason to pause and think before deciding to disclose and rely on otherwise privileged material.

Background

The claimant was dismissed after 11 months’ service. She brought claims against her former employer for unfair dismissal and discrimination due to pregnancy, alleging that she informed her manager that she was, or might be, pregnant. The employer defended the claim on grounds that it was unaware of the pregnancy and that her dismissal was entirely due to performance issues.

Documents disclosed by the employer in the proceedings included the following, which appeared to corroborate its position that the claimant’s dismissal was already in hand before the date she says she told her manager she might be pregnant:

  • a contemporaneous note of a telephone call between the employer’s senior HR manager and its external solicitor setting out advice about the possible termination of employment;
  • an email sent by the HR manager to the employer’s in-house counsel later that day, explaining that the employer “would like to terminate an employee asap based on behaviour (issues with tardiness, attendance and quality of work)”, summarising the external legal advice received, and asking for views; and
  • a draft dismissal letter which had been prepared by the employer’s lawyers and sent to the employer 6 days later, from which certain comments by its lawyers had been redacted.

The claimant somehow managed to read the redacted words and sought to rely on them at the employment tribunal hearing. The employer objected. Amongst other points, the employment tribunal held that the claimant could not rely on the redacted part of the letter as it was covered by legal professional privilege and it would have been obvious to the claimant that the employer had not intended to disclose it. The claimant appealed.

Decision

The EAT allowed the appeal and held that the claimant could rely on the redacted words in the draft dismissal letter.

The EAT firstly held that the note and email were both privileged, however the employer had waived privilege by choosing to disclose them to assist his case. In respect of the draft dismissal letter, the employer submitted that there was a clear distinction and difference between the legal advice given earlier and the advice on the wording of the draft dismissal letter which came six days later.   Although the employer conceded that the waiver led to a risk of a partial or misleading picture, it argued that the draft dismissal letter was not part of the same “transaction” as the note and email, and therefore the redactions were not caught by the cherry picking rule and unaffected by the waivers of privilege.

The EAT agreed with the claimant’s submission that this was a “wholly artificial distinction”. The documents were all part of the same transaction, ie the giving of legal advice about the claimant’s dismissal and the possible legal implications. That was not affected by the six-day gap between the documents.

The EAT, however, did not provide any guidance on how to assess whether documents were part of the same transaction, but even a gap of six days was not enough to create ‘separate transactions’.

What does this mean for employers

This decision is interesting as it is not common for the EAT to deal with issues of privilege.  It provides a stark reminder to employers, not only in the UK but also in Hong Kong, that they ought to tread cautiously when deciding whether to waive privilege on communications made between an employer and its counsel or any evidence that is likely to support their claim.  Policies or strategies to use legal advice in a selective manner to obtain a forensic advantage will not be accepted by the courts.

While a pure reference to the existence of the privileged document may not constitute a waiver, a reference to and reliance upon the content of the document is more likely to result in a loss of privilege.  Where privilege is waived in relation to parts of a document, or in relation to one document amongst a number of documents relating to the same issue, this may result in the waiver of privilege in relation to the whole document and/or other related privileged documents as a result of collateral waiver.

 

Gareth Thomas
Gareth Thomas
Partner, Hong Kong
+852 2101 4025
Tess Lumsdaine
Tess Lumsdaine
Senior Associate, Hong Kong
+852 2101 4122
Priya Aswani
Priya Aswani
Professional Support Lawyer
+65 6868 8077

Hong Kong: Court considers extended scope of springboard injunctions

The scope for springboard injunctions in Hong Kong has been confirmed by the Hong Kong Court of First Instance (CFI) as extending to circumstances where contractual or fiduciary duties have been breached. The CFI found, in McLarens Hong Kong Ltd v Poon Chi Fai Corey, that a breach by senior employees of their fiduciary duties and/or duty of good faith and fidelity are grounds on which springboard relief may be sought under Hong Kong law.

Traditional scope of springboard injunctions

Springboard injunctions are usually sought to prevent a former employee who has used confidential information to his/her own advantage from gaining a head start (or springboard) in competition with the former employer. An ordinary injunction may not be effective in such circumstances where the confidential information has already been used and may no longer be confidential. Springboard injunctions can be particularly useful when dealing with team moves as they can form the basis for restraining parties from certain conduct where there are no express contractual restrictive covenants (for example, non-compete or non-solicitation covenants) or where such covenants are otherwise enforceable. To obtain a springboard injunction, the applicant employer must satisfy the Court that:

  • there has been an unlawful activity by the defendant (the former employee);
  • the former employee has, as a result of that activity, gained an unfair competitive advantage over the employer;
  • the nature and period of the competitive advantage are more than “ephemeral” or “short term;
  • the advantage still exists at the date the injunction is sought and will continue unless the relief is granted; and
  • an injunction would be proportionate having regard to the other protection which might be available to the plaintiff, for example, existing restrictive covenants or damages.

The aim of the injunction is to restore the parties to the competitive position they would have occupied had the misconduct not occurred. It must not be used to punish the former employee, nor should the employer be put in a better position than had there been no wrongdoing in the first place. The length of time that an injunction may be granted for is the length of time that it would have taken the wrongdoer to achieve lawfully what he/she achieved unlawfully, relative to the victim.

Extended scope of springboard injunctions

For a number of years there was debate over whether springboard relief could be granted in cases other than where there had been misuse of confidential information. The English High Court has now established that a breach of fiduciary duties and/or the duty of good faith and fidelity by a senior employee may be a ground upon which springboard relief may be sought.

This development may be particularly useful in cases where a team moves en masse. Before leaving their employment, employees are likely to discuss the proposed move with the new employer and this conduct may amount to a breach of the duties owed to their existing employer. English case law has confirmed that an employee’s implied duties include a duty not to compete, including a particular duty not to entice employees, a duty of confidentiality, and possibly the duty to disclose wrongdoing.

McLarens Hong Kong Ltd v Poon Chi Fai, Corey [2019] HKCFI 1550

The scope of springboard injunctions was recently considered in Hong Kong in McLarens Hong Kong Ltd v Poon Chi Fai, Corey [2019] HKCFI 1550.

Background

The Plaintiff, an insurance firm, applied for a springboard injunction against its nine former employees and their new employer (Charles Taylor PLC). The former employees made up the majority of the Plaintiff’s construction and engineering division in its insurance business. Their new employer was a competitor of the Plaintiff.

The employees resigned en masse and undertook to make a payment in lieu of their notice period to the Plaintiff. The weekend they resigned, the employees met together in the Plaintiff’s offices at which point they copied vast amounts of information, including client lists, lists of files and projects being managed and handled for those clients, and an excel spreadsheet with the Plaintiff’s budget. The Plaintiff claimed loss of profit on revenues, costs and expenses incurred in mitigating the damage caused which was ongoing, and time and opportunity costs arising from the disruption to its business. The Plaintiff also claimed that the new employer was party to the conspiracy to injure the Plaintiff.

Subsequently, the employees signed undertakings to the Plaintiff agreeing not to use confidential information relating to the Plaintiff’s business or to any of the Plaintiff’s customers which they had obtained on or before the date they resigned. The Plaintiff argued that these undertakings were not sufficient and that the former employees should be restrained for a period of six months from, amongst other things, being engaged in the insurance business in the UK, Hong Kong or China. The Plaintiff asserted that, in addition to the misuse of confidential information, the duty of fidelity owed by the employees required them to inform the Plaintiff about the actions of other employees which were detrimental to its interests.

Decision

The Court held that the Plaintiff had made a strong case to restrain the nine former employees until trial from making use of, disposing of or dealing with the confidential information. However, the Court held that the undertakings signed by the former employees were as good as an interim injunction, and therefore declined to grant an injunction.

The judgment reiterated the important distinction between breach of the duties of confidentiality and/or fiduciary duties and the use of such information. Whilst the Court agreed with the Plaintiff that it was very likely the information was taken from the Plaintiff to be used for the employees’ own benefit, this was a different issue as to whether the information had been used or whether it needed to be used by the former employees to their advantage. In this regard, the Court held that the Plaintiff had failed to show causation between the information taken and the competitive advantage.

More importantly, the Court noted that there were no enforceable restrictive covenants in the former employees’ employment contracts which could have prevented them from soliciting employees, nor did the Plaintiff show that failing to notify it of the planned team move would enable the Defendants to build a springboard. On the whole, the Court considered that the balance of convenience weighed in favour of not granting an injunction and that damages would be a sufficient remedy.

Deputy Judge Wong SC remarked that he saw no reason why springboard relief should be limited to misuses of confidential information and that such relief would be available to prevent any future or further economic loss to a previous employer caused by former employees taking an unfair advantage of any serious breaches of their employment terms.

Key takeaways

Following the English position, the Hong Kong court has confirmed springboard injunctions have an extended scope which covers circumstances where contractual or fiduciary duties have been breached and will not be limited to circumstances relating to misuse of confidential information. However, springboard relief will not be granted as mere substitute relief to assist an ex-employer who has not insisted on express and enforceable contractual covenants to protect its confidential information and to regulate employee’s obligations both during and following the employment relationship. Employers should, therefore, review their employment contracts to ensure they include robust and enforceable post-employment covenants and clearly set out the broader duties of employees including, for example, a duty to act in the employer’s best interests.

This also serves as a reminder of the high bar that plaintiffs who seek relief of this nature must meet in terms of demonstrating the precise nature and period of competitive advantage. Where team moves are anticipated or have occurred, employers must move promptly to obtain clear evidence of the actions that the employees have taken which amount to a breach of their duties and the impact that these actions have had or may have on their business.

For more information, please contact Gareth Thomas, Tess Lumsdaine, Katharine McPherson, Giselle Yuen, or your usual Herbert Smith Freehills contact.

Gareth Thomas
Gareth Thomas
Partner, Hong Kong
+852 2101 4025
Tess Lumsdaine
Tess Lumsdaine
Senior Associate, Hong Kong
+852 2101 4122
Katharine McPherson
Katharine McPherson
Senior Associate, Hong Kong
+852 2101 4219
Giselle Yuen
Giselle Yuen
Associate, Hong Kong
+852 2101 4191

 

HONG KONG: EXTENDING EMPLOYMENT BENEFITS TO SAME-SEX COUPLES

On 6 June 2019, the Hong Kong Court of Final Appeal ruled that the Hong Kong Government could not deny spousal benefits to employees because they are in a same-sex marriage.

The Court’s decision only applies to the provision of employee benefits to government employees, but it has increased local focus on discrimination based on sexual orientation.

While many businesses in Hong Kong already recognise the value to their people and their business from having a diverse and inclusive workforce, all employers should review their policies and practices in light of this decision. Continue reading

HONG KONG: DATA ACCESS REQUEST OR PRE-ACTION DISCOVERY IN DISGUISE?

Employers control the extent of information that they provide employees – from how well they are meeting KPIs, to internal discussions about grievances, remuneration and disciplinary actions. In the majority of cases, employers have no obligation to provide to employees information setting out the basis for remuneration or disciplinary outcomes including information which is part of internal investigation or notification to a regulator. A lack of access to such information may make it more difficult for an aggrieved employee to bring a claim against their employer. Increasingly, employees are issuing data access requests (DARs) under the Personal Data (Privacy) Ordinance (PDPO) to seek information related to internal investigations and remuneration or disciplinary outcomes of which they have been the subject.  This information may then be used to form the basis of a claim against the employer. We consider the obligations of employers when receiving a DAR and how DAR may be used as a litigation strategy by aggrieved employees. Continue reading

HONG KONG: RECOVERING MONEY FROM DELINQUENT EMPLOYEES

Employers can suffer significant financial and reputational damage from the actions of their employees. While dismissal with or without notice is the most common recourse for serious misconduct or negligence, increasingly employers are looking to take stronger action by recovering their losses from employees guilty of wrongdoing. An employer did just that in the recent matter before the Hong Kong District Court. We consider the Court’s decision and other remedies employers may consider pursuing against employees who have engaged in serious misconduct or negligence. Continue reading

Employees & privilege: dominant purpose, waiver and iniquity

Two recent English decisions highlight the particular challenges when managing legal professional privilege in the context of resolving employee issues.

We consider these decisions and how the principles may apply in Hong Kong and other common law jurisdictions in relation to dominant purpose, waiver and iniquity and the lessons that they provide to employers in the context of employee investigations and disciplinary actions. Continue reading

HONG KONG: UNLAWFUL DISMISSAL REINSTATEMENT RIGHTS FROM OCTOBER

Amendments to the Employment Ordinance (“EO“) which strengthen the Labour Tribunal’s (“LT“) powers to make an order for reinstatement or re-engagement where an employee has been unreasonably and unlawfully dismissed have been passed and are to take effect from 19 October 2018. This represents a move away from the current position where both the employer and employee must agree to reinstatement or re-engagement. We anticipate that applications for reinstatement will increase; including as a strategy by employees seeking to leverage greater settlement payments from employers unwilling to take them back.

Strengthening the power of the LT

Previously, the LT was only able to make an order for reinstatement or re-engagement with the consent of both the employer and the employee. From October, where the employee has been found to have been unreasonably and unlawfully dismissed under section 32A(1)(c) of the EO (“Unlawful Dismissal”), the LT can order reinstatement or re-engagement without the employer’s agreement. Unlawful Dismissal will occur where an employee is dismissed without a valid reason and one or more of the following is present:

  • the employee is pregnant or on statutory maternity leave;
  • the employee is on statutory sick leave or is suffering from a work-related illness or injury where an assessment of compensation due under the Employees’ Compensation Ordinance is pending;
  • the dismissal is due to the employee being a member or officer of a trade union or having engaged in lawful trade union activities; or
  • the dismissal is due to the employee having given or agreed to give evidence in relation to:
    • an alleged breach of the EO, the Factories and Industrial Undertakings Ordinance or any work safety obligations; or
    • a workplace accident.

In all other cases, an order for reinstatement or re-engagement will still require the consent of both parties.

Additional financial compensation and criminal liability

In the event the employer fails to comply with an order for reinstatement or re-engagement, they must pay compensation to the employee of the lesser of HK$72,500 or three times the employee’s average monthly wages.

If it later becomes no longer ‘reasonably practicable’ for an employer to re-instate or re-engage the individual, it can apply for relief against the payment of compensation provided that it can show that the circumstances making compliance ‘no longer reasonably practicable’ are ‘attributable to the employee’, or due to a ‘change in circumstances beyond the employer’s control’. This application for relief must be made within seven days from when the reinstatement or reengagement was to occur.

Non-compliance with an order for reinstatement or re-engagement is not itself an offence, however, if the employer then fails to pay the compensation due wilfully and without reasonable excuse, they will be guilty of a criminal offence and may be subject to fine of up to HK$350,000 and three years’ imprisonment.

Retrospective effect

The amendments to the EO will not have retrospective effect and will only apply to dismissals (or notice of dismissals) where the employee was informed of the dismissal after 19 October 2018.

Key takeaways

As noted above, the ability for the LT to order reinstatement without the consent of the parties is limited to Unlawful Dismissal cases. However, it may be that, where the relationship between the employer and employee has broken down, former employees may pursue applications for reinstatement as leverage in settlement discussions. Accordingly, to avoid increased risks of claims and the time and costs associated with responding to them, employers must take additional care when dismissing employees to ensure that they have a valid reason for doing so and the termination cannot be argue to be an Unlawful Dismissal.

Gareth Thomas
Gareth Thomas
Partner, Head of commercial litigation, Hong Kong
+852 2101 4025
Tess Lumsdaine
Tess Lumsdaine
Registered Foreign Lawyer (New South Wales)
+852 2101 4122

Hong Kong: who owns employees’ work product

The law recognises that employees may create valuable intellectual property during their employment, ownership of which should ordinarily rest with their employer. The recent case of Acron International Technology Ltd v Chan Yiu Wai [2017] 3 HKLRD 799 demonstrates how the law can protect an employer’s rights in respect of such intellectual property from misappropriation by an employee after the employment relationship ends. Continue reading