Restraint of Trade Clauses: Drafting Considerations

In a recent case before the Singapore High Court, Shopee Singapore Pte Ltd v Lim Teck Yong, the court declined to enforce certain restraint of trade clauses.

As the court's reasoning may have implications for drafting non-compete, non-solicit, and confidentiality clauses, this brief note may provide some guidance on how restraint(s) of trade should be structured.

Note: The case may still be up for appeal, but the takeaways from this case may prove useful.

Summary of Facts

Parties Involved:

• Claimant: Shopee Singapore Pte Ltd
• Defendant: Lim Teck Yong

Context

Lim, a former Shopee employee, joined ByteDance post his employment in Shopee. Shopee sought interim injunctions based on non-solicitation and non-competition clauses in Lim's contract, and alternatively, a springboard injunction to prevent Lim from working with competitors.

Note: A springboard injunction is used to prevent a former employee from misusing their former employer's confidential information. Do take note that generally springboard injunctions are connected to the misuse of confidential information. SG courts have stated that three requirements need to be fulfilled for a springboard injunction to be awarded: (a) confidential information had been misused or is at risk of being misused; (b) such misuse of confidential information had given an unfair competitive advantage to the respondent; (c) the “unfair advantage” was still being enjoyed by the respondent at the time the injunction was sought; and (d) damages would be inadequate to compensate the applicant.

Key Issues

• The enforceability of the restraint of trade clauses (non-competition and non-solicitation) in the employment contract.
• The validity of a springboard injunction against Lim.

Court's Decision and Reasoning

Non-Competition Restriction:

• The court was of the view that the restriction is not valid as Shopee didn't demonstrate a legitimate proprietary interest beyond the protection of confidential information already covered under a separate confidentiality agreement.
• The geographical scope of the restriction was deemed potentially unreasonable.

Non-Solicitation Restriction:

Shopee could not demonstrate a substantial case for Lim’s potential breach of these restrictions (i.e. Shopee could not demonstrate that there was a potential for Lim to breach these restrictions).

Springboard Injunction:

• The court did not find evidence of a risk of Lim misusing confidential information.

Overall Judgment:

• The court dismissed Shopee's application for interim injunctions. It was found that Shopee could not establish serious questions to be tried regarding the enforceability of the restrictive covenants or Lim's breach of them. Additionally, the balance of convenience did not favor granting the injunctions.

Drafting Considerations

Identify Legitimate Proprietary Interests: Clearly define the proprietary interests that the clauses are intended to protect, such as trade secrets, customer relationships, or a stable workforce. These interests must go beyond general knowledge or skills an employee might gain. The proprietary interest should have a strong link to the business model of the company.

Reasonableness in Scope and Duration: Ensure that non-compete and non-solicit clauses are reasonable in terms of geographic scope, duration, and activities restricted. They should not excessively inhibit an employee's ability to work in their field or region post-employment.

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Separation of Confidentiality Provisions: Confidential information should be distinctly protected in a standalone confidentiality agreement or clause, addressing what constitutes confidential information, obligations during and post-employment, and exceptions. This will help in delineating “legitimate proprietary interest” in the restrictive clauses from general confidentiality obligations.

Tailoring to Individual Roles: Customize the restrictions based on the employee’s role, access to sensitive information, and potential impact on the business if they join a competitor or solicit clients/employees. This is critical for c-suite roles.

Clarity and Precision: Use clear, precise language to avoid ambiguity in interpretation. Clearly define terms such as "competitor," "restricted territories," and "confidential information.

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Saravanan Rathakrishnan is a lawyer who specializes in investments funds, family offices, and mergers & acquisitions. He is the author of several journal articles focusing on the law, geopolitics, and finance/economics.