Non-competition Agreement is a “Double-edged Sword”

Mr. Zhang was an automotive chassis engineer of an auto parts company (“S”), and his monthly salary was 20,000 Yuan. He had knowledge about some S’s trade secrets, such as chassis’ data and drawings. When Mr. Zhang departed, S and him signed an Non-competition Agreement (“Agreement”), in which stipulated that he should not work for a competing employer that produces the same type of products, or being engaged in the same type of business against S, or establish his own business to produce the same type of products or engage in the same type of business, within 2 years after he had departed. In addition, S would pay 5,000Yuan monthly to Mr. Zhang as the compensation, where he failed to fulfill the obligation, he should pay liquidated damages of 1,000,000Yuan to S. Shortly afterwards, Mr. Zhang established a filter sales company. Seeing this, S filed a labor arbitration asked Mr. Zhang to pay the liquidated damages, however, S failed to gain the arbitration committee’s support finally.

In recent years, the employers pay an increasingly attention to the value of trade secrets, and sign Agreement with employees is more and more popular. However, in practice, some employers may not achieve the purpose of Agreement, due to the validity disputes of Agreement. The reasons cover 3 aspects. Firstly, the provisions of Agreement shall be designed to meet the legislative intent. Article 24 of Labor Contract Law and the relevant laws and regulations clearly defined that Agreement shall regulate the employee whom shall undertake the confidentiality obligation, which means the two key points are: a) what are the confidential contents; b) whether the employee has the knowledge of trade secrets.

In this case, Mr. Zhang has the knowledge of trade secrets mainly related to chassis technology, after he has departed, he is involved in filter sale, although both belong to the auto parts industry, in view of S’s trade secrets is not involved in S’s filter related technical information and customer information, price information, and so on, Mr. Zhang’s behavior does not violate the confidentiality obligations of Agreement. Secondly, Agreement shall not make unreasonable restrictions on the right to life and the right of freedom to choose career. In this case, S has extended the scope of the same type of product or similar business to the same industry, which has unreasonably limited the right of freedom to choose career. Last but not least, the reasonableness of compensation, liquidated damages stipulated in Agreement. For example, the ratio of compensation to the original wage, the amount or proportion of liquidated damages, and etc, shall be reasonable.

Many employers take non-competition as a “Band-tightening Spell “worn on the employees’ heads, but non-competition is a “double-edged sword” in fact. If non-competition is well used, the employers can effectively restrict the behavior of employees; if it is poorly designed, the employers may have to undertake adverse consequences. Especially after the implementation of Interpretation of the Supreme People’s Court on Several Issues about the Application of Laws for the Trial of Labor Dispute Cases (IV), the employers shall pay more attention to the reasonable design of Agreement, and strictly supervise the execution of Agreement.