This article was first published on China Business Law Journal , authorised reprint.
Evolving economic environments and market competition have seen a sharp rise in the number of non-compete disputes. These cases now feature a broader range of parties, diverse dispute types, increased complexity, and prominent issues regarding breach penalties. Drawing on judicial cases of non-compete disputes, this article offers a holistic overview of the legal issues at play and summarises key review points in practice.
Legally bound
Assessing whether an employee is legally bound by non-compete restrictions. Article 24.1 of the Labour Contract Law stipulates that only senior executives, senior technicians and others with confidentiality duties are subject to non-compete obligations.
Despite the lack of a generalised standard on the specific roles, judicial precedents show the courts are favourably disposed to substantive examinations and comprehensive assessments in view of the industry of business, the employee’s responsibilities and the nature of their work.
This approach goes beyond the limit of job titles and levels and monthly salaries, and has proved more flexible in identifying the obligors in more than half the cases.
Assessing whether an employee has entered into a valid non-compete agreement with the employer. When evaluating the validity of a non-compete agreement, the employee typically argues that the agreement does not comply with statutory requirements, was secured under the employer’s fraudulent or coercive tactics, was fabricated by the employer, or contains clauses that exclude the employees’ rights and exempts the employer from liability. The argument is, under any of these circumstances, that the agreement should be considered void.
Non-compete compensation
The absence of a stipulated non-compete compensation does not undermine the agreement’s validity, nor does the employer’s failure to pay compensation justify the employee’s non-compliance with non-compete obligations.
The employee may seek appropriate economic compensation separately while adhering to these obligations. However, if the employer fails to pay compensation for three months due to its own reasons, the employee has the right to request the termination of the non-compete agreement.
Breaches
Identifying a competitive relationship. The Labour Contract Law defines a competitive relationship as one in which two parties are “producing or dealing in similar products, or engaging in similar business activities”. In practice, the courts adopt a hybrid approach of formal and substantive reviews to assess whether a competitive relationship occurs between former and current employers.
Factors typically considered include the registered business scope per business registration records or the business licence, undisclosed but actual business operations, the business activities of affiliated companies, products and services offered, company website promotions, supplier and customer testimonies, and whether the non-compete agreement specifies these details.
Identifying whether an employee has joined the former employer’s competitor. This is a common challenge in non-compete disputes. As market dynamics evolve, employees circumvent non-compete restrictions in a more concealed way. Direct employment or investment in rival companies is now rare, with more individuals opting for labour dispatch, nominal employment by another entity, working through a personnel agency, or nominee shareholding.
Drawing from judicial practices in high-incidence areas like Beijing, Shanghai and Shenzhen, the courts recognise various forms of evidence that substantiate an employee’s employment at a rival company, including but not limited to: the employee’s own statements; photos or videos of the employee working at the rival company; photos or videos of the employee’s vehicle parked near the rival company; public statements or event participation on behalf of the rival company; social security and housing fund payment records; social media or self-media information; and records of the employee receiving deliveries at the rival company.
When the employer presents initial evidence, the judges may, in the principle of free evaluation of evidence, either require further proof from the employer to substantiate the employee’s breach, or demand justification and supporting evidence from the employee regarding the suspicious activities. The legal facts will then be comprehensively assessed and determined based on the standard of high probability.
Liability
Return of the non-compete compensation. If the non-compete agreement contains clauses on the return of the non-compete compensation, the courts tend to support these contractual terms. In the absence of such a clause, the courts will evaluate the specific circumstances of the case to the extent of liabilities in the agreement.
Ongoing fulfilment of non-compete obligations. If the employer files a lawsuit requiring the employee’s adherence to the non-compete agreement and the restriction period is still in effect at the time of judgment, the courts typically support the request, provided the duration of performance is explicitly specified.
Penalties. Non-compete restrictions represent one of the rare instances in employment relationships where penalties can be stipulated. However, the law does not impose restrictive regulations or reference standards for such penalties.
In practice, employers tend to set the penalties for breach of non-compete obligations as a fixed sum, a multiple of the compensation, or a multiple of the employee’s total salary over a certain period before departure. Yet employees usually argue for a reduction, claiming the penalties are excessively higher than the actual losses.
Based on practical experience, adjudicating bodies typically consider actual losses, the performance of the non-compete agreement, severity of the breaching party’s fault, expected benefits, the signing time of the non-compete agreement, the employee’s previous position and income, duration of the unfulfilled period, and the employer’s payments for the non-compete compensation. Adjustments will also be made in the principle of fairness and good faith.
