A non-compete clause is designed to protect trade secrets but it should not be entered into in violation of people’s right to free choice of employment. With non-compete arrangements becoming popular with enterprises today, how do we achieve a balance between the two? Are non-compete agreements instantly effective upon their execution?
For a noteworthy example, employers may look to a recent non-compete case heard by the Shanghai No 1 Intermediate People’s Court.
Case overview
In this case, company A was a telecoms operator and company B was an IT company that undertook company A’s home broadband business in Minhang district, Shanghai. In September 2020, an employee named He joined company B as an installation and maintenance engineer. He was tasked with home broadband installation and maintenance in Meilong county, Minhang district, and signed a non-compete agreement on 6 December 2021 – more than a year after joining company B.
On 28 December 2021, company A terminated its co-operation agreement with company B. In February 2022, He joined company L, company A’s new supplier, and proceeded to carry out the same duties in the same area as before.
Subsequently, company B filed for labour arbitration. It demanded He be held liable for breaching his non-competition obligations. In both arbitration and the first-instance court, He was deemed liable for breaching his obligations. However, the court of second instance declared the non-compete agreement void, and ruled that He was not required to fulfil the non-compete obligation.
Reasons for judgment
The centre of the dispute was whether He was an eligible subject for a non-compete obligation.
The first-instance court adopted the standards of formal review, which emphasises respect for a party’s autonomy. Since He was frontline staff, he would logically be obligated to keep confidential any of company B’s dealings that he learned during his work, making him an eligible subject.
The second-instance court, on the other hand, adopted the standards of substantive review. It focused on whether He constituted “senior managers, senior technicians and other employees who have the obligation to keep secrets” under article 24 of the Labour Contract Law.
He was a leader of the installation and maintenance engineering team, carrying the training assessment certificate issued by company A, but no other professional and technical titles or vocational skills certificates. This does not fit the profile of either a senior manager or a senior technician.
Could He be one of the “other employees” that likewise need to keep secrets? This question can be answered by asking two more:
- Does the company have any specific trade secrets?
- Was it possible for He to be in contact with such trade secrets?
To answer the first question – according to the co-operation agreement between companies A and B, the community broadband line equipment that company B invested in and constructed, as well as the client list in the region, were derived from technical and operational data under the direct management of company A. They were neither exclusive to company B nor trade secrets able to bring it a unique competitive edge.
Also, the technical solutions, hardware management, business plans, marketing plans, and the company and customer standard operating procedures claimed by company B were overly broad, proving neither that they constituted trade secrets nor the possibility that He came into contact with other trade secrets.
Finally, on the matter of the time and context of execution, company B did not request He to sign a non-compete agreement at the beginning of his employment. Rather, this did not happen until more than a year later, when the co-operation with company A began. This suggests that He was not a senior technician, nor any other type of personnel with an obligation of confidentiality.
In the end, the second-instance court determined that He was not an eligible subject for the non-compete obligation, and that the non-compete agreement signed between himself and company B was void.
Legal advice
In the matter of non-compete eligibility, as well as determination of a competitive relationship between an employee’s new and original employers, recent judicial trends suggest that courts are generally shifting from formal review to substantively review, keeping a closer eye on the nature of things.
Additionally, considering regional differences in terms of non-compete adjudication criteria, the author recommends that employers prudently gauge the local judicial tendencies and reasonably assess the legal risks before signing any non-compete agreements with their staff.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice.
You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com
