Non-Compete in China

Maggie Jia

Maggie Jia is a partner and heads the firm’s Employment & Compliance practice.

Recently, DaWo assisted a client in winning a complex non-competition lawsuit. The case required three years of litigation and arbitration, all due to a non-compete issue. It took this long, in large part, because a significant amount of evidence was not properly dealt with at the beginning.

A non-competition mechanism is a system of post-employment obligations that may be imposed on employees who are involved in trade secrets or other confidential information of the company. In particular, senior management who hold important company secrets or some employees in sensitive positions with key market or technical information may be subject to. The number of such suits has increased recently, especially in the high-tech and services industries. So, our clients should take note.

While Article 24 of the Employment Contract Law limits the scope of non-competition to “senior management, senior technical personnel and other persons under a duty of confidentiality”, “other” employees are under valid confidentiality and non-competition however it is also difficult to define the scope of obliged “other” employees. It is not simply a matter of signing a non-compete agreement to make it valid. Other factors come into play, as discussed below.

Crafting a Valid Non-Compete

(1) First of all, there must be contractual provisions agreeing on such obligations, including scope, territory, duration, etc. In reality, the need for a non-competition obligation may not have arisen at the time of the employee’s on-board, and therefore there is no specific agreement in such aspect in the employment contract. When the company becomes aware of the need, it can arrange for signing of an annex, an amendment, or a separate non-competition agreement or a notice to be signed at the time of separating, all of which may be deemed to be contractual provisions.

2) The company needs to take reasonable confidentiality measures. In line with the first point, the signing of a special confidentiality agreement, or other contract terms might also be considered by the court as a reasonable measure. In addition, differentiated management of the confidential items, the removing secret procedures such as return or destruction in the separation procedures, and other similar measures, could also represent adequate measures.

(3) The purpose of a non-compete is that the company contractually restricts employees from providing services to a business that competes with its own. The obligation is only valid if it is directed at a business or industry in which there is a genuine competition. In order to avoid unnecessary burden in future disputes, the non-competition agreement should include an updated list in the form of “including but not limited to” to show that there is a clear scope of targets.

4) Also, the company shall undertake the obligation to pay compensation. There is a mandatory lower limit to the amount of compensation. As of January 2021, the lower limit is still 30% of the average salary for the 12 months prior to the departure (or local minimum salary standard, if the 30% amount is less than the local minimum standard, paid on monthly basis. However, the standard of 30% has been questioned in practice for years: the 30% of normal salary limit can hardly guarantee a normal life. Where employees sacrifice their job opportunities and their rights we cannot say that such limited compensation is equal.

Local judicial practice on the lower limit of compensation varies from place to place. For example, Jiangsu requires for a one-third proportion and Shenzhen requires for a one-half proportion. . In reality, it is highly possible that the practical attitude of judiciary will change as time develops. So, we suggest that companies learn about local regulations and the latest judicial practice when formulating non-compete agreements, but it still remains prudent to use the 30% standard as a reference for the lower limit.

It is also important to note that the failure to pay compensation promptly or in full does not necessarily lead to invalidation of the non-compete obligation. To be safe, this is something that must be determined through consultation and made clear in writing upon an employee’s departure.

Collecting Evidence

Provided that non-competition obligation is valid, if the employee commits a breach of contract, the company has the right to require the employee to pay liquidated damages, compensate for losses and continue to perform the obligation. However, in reality, there is often deliberate obfuscation by breachers of these agreements. This makes it difficult for companies to collect evidence, and without strong evidence it is often really hard to obtain support from the judiciary.

As mentioned in the introduction, direct evidence is extremely difficult to obtain when the employee was deliberately secretive and evasive. DaWo’s team has aided companies such as those mentioned above in emerging victorious under these circumstances.

We can help with investigation, constructing an evidentiary trail, and increasing the odds of success in cases like this, so if you have specific questions in this regard, please feel free to get in touch.