The Supreme People’s Court has issued a new judicial interpretation to address the increasing number of disputes and systemic abuse surrounding non-compete clauses. Article 13 of Interpretation (II) of Issues Concerning the Application of Law in the Trial of Labour Dispute Cases (Interpretation (II)) clarifies this latest guidance for scrutinising non-compete clauses.
This article presents an in-depth analysis of the provision and its application, explaining its practical implications through case study to help employers and employees delineate their rights, mitigate legal risks, and protect their lawful interests.
Case study
Zhu Tao
Senior Partner
ETR Law Firm
In the case of Yue 0112 Min Chu 23987 (2024) before Huangpu District People’s Court of Guangzhou, company A sued its former employee, Zhao.
Zhao had been hired in November 2016 as a core employee managing warehouses, spare parts procurement and sales, and his contract included a two-year, same-city, same-industry non-compete clause with a RMB50,000 penalty for breach.
On resigning in February 2023, company A paid him no compensation for this restriction.
By July, he had established local company B, serving as its legal representative and sole shareholder. Company A subsequently claimed that company B had a nearly identical business scope, demanding the non-compete penalty plus interest.
Contesting the claim, Zhao and company B contended that Zhao was not a core employee, held no trade secrets, was never formally advised of the clause, and received no compensation, rendering the RMB50,000 penalty unfair.
In adjudicating, the court identified the core issue as whether the defendant was liable for the non-compete penalty.
Under articles 23 and 24 of the Labour Contract Law, the scope of employees subject to such restrictions is strictly defined. Specifically, employers must explicitly outline these obligations and liabilities when contracting with staff who have confidentiality duties.
The court noted the plaintiff bore the burden of proving the defendant was a senior manager, senior technician or other person bound to secrecy, who also possessed trade secrets or other confidential intellectual property.
In this case, the plaintiff merely detailed the defendant’s job description, failing to prove a contractual clause explicitly imposing and communicating these duties, or that the defendant was formally reminded to comply upon termination.
Pursuant to article 38 of Interpretation (I) by the Supreme People’s Court of Issues Concerning the Application of Law in the Trial of Labour Dispute Cases, an employee may petition the court to annul a non-compete agreement if the employer fails to pay the stipulated compensation for three months due to the employer’s fault.
As the plaintiff had never paid any compensation following the defendant’s departure, the court upheld the defendant’s argument that they were not bound by any non-compete or confidentiality obligations.
Practical guidance
Guo Zhiyan
Paralegal
ETR Law Firm
The legal enforceability of a non-compete clause in practice rests on three pillars: the legitimate subject; the appropriate scope; and a reasonable duration.
Legitimate subject.
Under the Supreme People’s Court’s latest Interpretation (II), a non-compete clause is unenforceable against an employee who had no access to trade secrets in their role. This clarifies the personal scope of such restrictions, preventing their arbitrary imposition by employers.
Furthermore, the employer bears the burden of proof to demonstrate that the employee was indeed bound to secrecy. This requires evidence of the existence of legitimate confidential data and the employee’s actual knowledge of it, going beyond merely producing a signed agreement.
A court’s assessment of a non-compete clause’s legality will hinge on the employer’s satisfaction of these criteria. Should the employer fail to meet this evidential burden, the clause may be deemed invalid for lacking a legal basis.
Appropriate scope.
Even for a qualifying employee bound by confidentiality, the terms of a non-compete – such as its business scope, geography and duration – must be appropriately aligned with the significance of the trade secrets exposed to the employee.
Specifically, the restricted business activities must be strictly confined to areas directly related to the employer’s actual operations and specific secrets known to the employee. Additionally, geographical limits cannot be excessively broad.
Reasonable duration.
A key judicial focus is the two-year statutory ceiling for non-compete periods under article 24 of the Labour Contract Law. Clauses contravening this are typically deemed invalid.
While this provides a clear rule, a separate view emphasises employer autonomy to set terms through mutual agreement with employers, who are then bound to honour them. The tension between these standpoints necessitates a case-specific analysis based on prevailing judicial practice.
Takeaways
In summary, the practice of imposing non-compete obligations on all employees is now obsolete. Employers face a significantly heightened burden of proof regarding the reasonableness and necessity of such clauses. When drafting non-compete agreements, their application must therefore be defined with precision, avoiding arbitrary expansion.
Regarding whom may be subject to such clauses, employees in relevant roles who do not actually know or have access to trade secrets, or intellectual property-related confidential information, should not be subject to non-compete restrictions.
Regarding scope, the restrictions must be closely aligned with specific trade secrets that the employee actually knows, avoiding excessively broad limitations.
Regarding duration, to ensure the agreement’s legality and validity, employers should comprehensively consider factors such as the protection period of the trade secret, market dynamics, and the reasonable time needed for the employee to be re-employed.
Zhu Tao is a senior partner and Guo Zhiyan is a paralegal at ETR Law Firm
ETR Law Firm
10 & 29/F, Chow Tai Fook Finance Centre
No. 6 Zhujiang Dong Road
Guangzhou 510623, China
Tel: +86 20 3718 1333
Fax: +86 20 3718 1388
E-mail: zhutao@etrlawfirm.com | guozhiyan1011@foxmail.com
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