“This is a success story where the relationship of the contributors has turned sour.” These are the opening words of a judgment delivered on 7 January 2013 by Judge Woo of the Hong Kong Court of First Instance (Emagist Entertainment Ltd v Nether Games (Hong Kong) Ltd, HCA 1659/2012).
The case arose in Hong Kong, the “Port of Fragrances” (香港), a city that has rapidly established itself as a thriving technology hub thanks to strong governmental support for innovation. Within this dynamic environment, a number of start-ups have achieved remarkable success. Emagist Entertainment Ltd. (“Emagist”) was one of them.
Emagist was a young company driven by a talented team consisting of three directors (A, F and E) and three creators (B, C and D). Together, they conceived, designed and developed the online game Ninja Saga. The game became an outstanding success on Facebook, generating substantial profits for the company.
Success, however, did not prevent conflict.
An internal dispute eventually divided the team. While director A was away, four members of the company (B, C, D and E) incorporated a new company under the name Nether Games (Hong Kong) Ltd. (“Nether”) and allegedly took control of the data necessary to operate Ninja Saga. According to the judgment, Emagist claimed that the defendants had moved the servers, changed passwords and transferred the databases, source code and graphic files. In practical terms, the company suddenly lost control of the very assets required to operate its flagship game.
Emagist and A therefore commenced proceedings against Nether, B, C, D, E and F, alleging, among other things, copyright infringement, breach of employment contracts and breach of confidentiality. Pending the determination of the action, the plaintiffs sought an interlocutory mandatory injunction requiring the defendants to return all the data necessary to operate the game. Their objective was straightforward: to restore the status quo ante bellum.
To support their claim, Emagist relied on section 14(1)(a) of the Hong Kong Copyright Ordinance, which provides that, where a literary, dramatic, musical or artistic work, or a film, is created by an employee in the course of employment, the employer is the first owner of the copyright unless otherwise agreed.
The three creators disputed that position. They argued that they were independent consultants rather than employees, that they owned the copyright in the game, that they had merely licensed those rights to Emagist and that they were entitled to terminate that licence by taking back control of the game’s operational data.
One of the central issues before the Court was therefore the nature of the legal relationship between Emagist and the three creators. Were they employees, independent contractors or shareholders?
On this point, Emagist presented compelling evidence. The documentation before the Court persuaded Judge Woo that genuine employment relationships existed between the company and the three creators. The Court also observed that, even if a licence agreement had existed, it could hardly be terminated in such a unilateral manner. Judge Woo therefore granted the mandatory injunction and ordered the delivery of all the data necessary to operate the game.
The judgment nevertheless suggests that the underlying dispute had less to do with copyright than with expectations surrounding the company’s ownership structure. According to the evidence, A had promised B, C and D that they would receive shares and participate in the profits generated by Ninja Saga. Disagreements of this nature are not uncommon in start-ups. Unfortunately, they can jeopardise highly innovative and profitable ventures unless they are addressed at an early stage.
This case illustrates the importance of thinking about dispute resolution before disagreements arise.
Mediation, in particular, might have offered the parties a constructive way of resolving their differences while preserving both their commercial relationship and the future of the business. Properly conducted, mediation enables parties to explore practical solutions that litigation is often unable to provide.
Hong Kong has firmly embraced mediation as a preferred means of dispute resolution. The Judiciary introduced Practice Direction 31 in early 2010, encouraging parties to consider mediation, while the Mediation Ordinance (Cap. 620), enacted on 22 June 2012, entered into force on 1 January 2013, providing a comprehensive legislative framework for mediation.
For start-ups, mediation offers several significant advantages. It can be initiated at an early stage, before disagreements escalate into full-scale disputes. It is generally faster and less costly than court proceedings. Perhaps most importantly, mediation is confidential. This confidentiality enables innovative businesses to protect commercially sensitive information, preserve trade secrets and minimise reputational risks.
Section 8 of the Hong Kong Mediation Ordinance expressly provides that mediation communications are confidential, while section 2(1) defines a mediation communication as anything said or done, any document prepared, or any information provided for the purpose of or during a mediation, excluding the mediation agreement itself and any settlement agreement reached.
For entrepreneurs, the lesson is clear. Designing an appropriate dispute resolution mechanism should not be treated as a mere contractual formality. It is an integral part of building a successful business relationship. When expectations are clearly defined and an appropriate mechanism is available to address future disagreements, businesses are often better equipped to overcome conflict without jeopardising the very success they have worked so hard to achieve.
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