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Whether and how non-compete clause enforceable in China

As experienced China corporate lawyer, we frequently encounter the situation where clients inquire about non-compete clause and even independent non-compete contract.

Non-Competition provisions restrict individuals and organizations from providing services or engaging in businesses in certain markets and geographies for a period of time. The enforceability of these clauses varies from State to State. The examples are taken from agreements covering matters broader than just non-competition, such as employment agreements, acquisition agreements or license agreements.

On January 31, 2013, the Supreme People’s Court of the People’s Republic of China, China’s highest court, released Judicial Interpretation on Labor Disputes (IV) (“Interpretation IV”). The Court had published a draft of the Interpretation for public comments in June 2012. However, there are major differences between the final interpretation and the draft, which is intended to balance the interests of the employer and employee.Employers in China are under a statutory obligation to compensate employees for observing non-compete obligations after termination of the employment. Until recently, it was uncertain how much compensation the employer was required to pay. Some local regulations provided for indicative percentages, but most did not.

A new interpretation from the Supreme People's Court of China now provides that if a non-compete covenant is agreed, but the labour agreement or confidentiality agreement does not provide for compensation, the court can award compensation up to 30% of the employee's salary.If the employee fails to comply with non-compete restriction, the company is entitled to claim the liquidated damages as stipulated in a non-compete agreement. In the event that the liquidated damages stipulated in agreement are lower than the loss incurred, the company has the right to request the employee to assume the incurred loss. If the liquidated damages stipulated grossly exceed the loss incurred, the employee is entitled to petition the court or arbitration authority to reduce the amount of liquidated damages appropriately.

Regarding termination of the non-compete agreement, the interpretation clarifies that an employer may terminate the agreement during the non-compete period, but in that event the employee is entitled to claim an additional three-month compensation from the employer. An employee can request a court to remove his/her non-compete obligations, but only if the employer fails to pay the compensation for three months.

Employers simply need to face the fact that non-competition agreements have very limited utility under Chinese law. The better approach is to deal with the whole issue under the terms of a trade secrecy agreement. Employees are bound by the terms of any trade secrecy agreement they execute. Employees who will truly be exposed to trade secrets should be required to execute a non-disclosure and non-use agreement. Such an agreement will make the use of trade secrets in their new employment a contractual violation subject to action by litigation. The main issue is that the employer must prove that the employee is actually making use of trade secrets in the new position.

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I am a licensed China lawyer. Most clients are foreign nationals and companies. China Lawyer Blog have associates in Beijing, Shanghai, Tianjin, Guangzhou, Suzhou, Nanjing, Qingdao, Fuzhou, Hainan, Hefei, Wuhan, Xian, Changsha, Xiamen and Hangzhou. Learn More

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China Lawyer BLog AuthorPeter Zhu, an experienced China attorney licensed to practice law for more than ten years, the author of this China Lawyer blog, welcomes any enquiry or consultation related to Chinese law.