Customer lists are part of a business' strongest assets. Expect them to be guarded as such.

Customer lists are part of a business’ strongest assets. Expect them to be guarded as such.

One evening in early July 2005, Penny Chen spotted her colleague, together with a male friend, taking possession of several boxes from the beauty treatment centre where they worked. This colleague was Irene Chin, the centre manager of the Petaling Jaya branch.   At the time, Irene had already resigned and was serving her notice. Three months later, she was running her own beauty treatment business.

The July 2005 incident is important because of what was inside those boxes taken by Irene. According to Penny, they were filled with the customer treatment cards belonging to her current employer, Bella Beauty Business. Shortly after this, Bella Beauty was also notified by some of its customers that Irene had been in contact with them; she was telling them that her new business was open and invited the customers to go over. This was puzzling to the customers because they had never disclosed their contact details to Irene.

Incensed by this discovery, Bella Beauty commenced legal action against Irene to restrain her from contacting or corresponding with all or any of their present customers (Svenson Hair Center Sdn Bhd v Irene Chin Zee Ling) Bella Beauty sought to rely on their employment agreements with Irene, where she had expressly agreed to certain prohibitions and strictures regarding confidentiality and non-solicitation of customers.

In an attempt to defend herself, Irene claimed that any contact of Bella Beauty’s customers was based on a relationship that developed over time, and the contact was largely initiated by the customers themselves. She further claimed that she should be allowed to fully use her skill and knowledge for her own benefit in competition with her former employer.

The Court sided with Bella Beauty and granted the interim injunction.  While the Court recognised that there is no general restriction on an ex-employee canvassing or doing business with customers of his former employer, this also has to be viewed in the context of the employee’s duty of good faith to his employer.

The Court held that customer names, lists and details have been judicially recognised as being confidential in nature, and could not become part of an employee’s skill, knowledge or business experience.  Wrongful utilization of such particulars warrants injunctive relief.  In particular, even “list of names and addresses of customers and suppliers” can be classified as trade secrets, and an employee would have broken his duty of good faith to his employer if he makes or copies a list of the customers for use after his employment ends, or deliberately memorises such a list.

This decision also has to be read in line with Section 28 of the Contracts Act 1950, which provides that any agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind, is to that extent void. Notwithstanding Section 28, the Court took the view that it is not permissible for competition to be pursued by wrongfully utilizing the confidential information (ie list of customers belonging to the ex-employer), and the Courts have to be vigilant to protect the employer’s interest in this regard.

A similar position was taken in Agensi Pekerjaan Talent2 International Sdn Bhd v Kenneth Yong Fu Loong & Anor. There, the employer attempted to restrain the ex-employee from, among other things, making use of the employer’s confidential information in order to solicit their customers.  The Court granted the injunction on the basis that the employer would otherwise suffer incalculable damage in terms of losing its market share for which it had expended significant time and money to develop its customer and candidate lists, as well as the erosion of the reasonable expectation in the fidelity of its employees.

The key takeaways from these cases are:

  • The law recognises customer lists and customer information as being confidential in nature. Wrongful or unauthorised use of this information may justify injunctive relief.
  • While there is no general legal prohibition against competing with a former employer, such competition must be pursued using the right channels and without using information or trade secrets belonging to the ex-employer.
  • Covenants in employment agreements relating to confidentiality and non-solicitation of customers are enforceable under Malaysian law, subject to sufficient evidence being adduced of the breaches of those covenants.

 

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ABOUT THE AUTHOR. Donovan Cheah is a partner at Donovan & Ho. He is an advocate and solicitor of the High Court of Malaya, and his writings have been featured in publications like The Star, the American Chamber of Commerce updates, and Asialaw.

 

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