Non-competition Clause Valid without Compensation

In July 2005, a basic court in Beijing issued a decision on labor contract dispute. In this decision, the court made its decision on the ground that non-competition clause may be valid even if there is no compensation clause.

The articles of Company A have a non-competition clause, which stipulate that shareholders and board members of the company could not undertake any business or operation competing with the company during employment and within two years after leaving the company. Mr. Chen, shareholder, board member and deputy manager general of the company, signed a paper with similar wordings.

In the end of 2002, Mr. Chen quit and joined Company B, a major competitor of Company A, in January 2004 as vice president.

Company A initiated legal proceedings in a basic court in Beijing against Mr. Chen and Company B, claiming termination of employment of Company B and Mr. Chen, and compensation of RMB 2.5 Million (US$310,000).

Mr. Chen argued that firstly, the non-competition clause is groundless since Company A could not prove that they really have any trade secret which is a subject defined and protected under the anti-unfair competition law. Secondly, the non-competition clause is invalid since there is no any compensation provided for employees after leaving the company.

Company B defended itself as they did not know that there was such a non-competition clause when they signed employment contract with Mr. Chen. In addition, Company B argued that they never used any trade secret of Company A.

The court is of the opinion that non-competition clause may be valid no matter if there is any compensation clause. The validity of such a clause depends on if the living standard of the employee is deteriorated after leaving the company. In this case, Mr. Chen had actually got compensation in the way of high salary when he was with Company A and holding of shares of the company. Additionally, due to high degree and working experience, it is not difficult for Mr. Chen to find a job in non-competition business. Therefore, the non-competition clause is valid.

From the position of Mr. Chen, the court believes that he had access to trade secrets of Company A, which are protecable interests. Mr. Chen breached the non-competition clause and therefore, made the trade secrets of Company A in a position of easily being infringed. He is liable for infringement since his non-performance of non- competition obligation highly possibly damaged interests of Company A.

The court is of the opinion that Company B knew or should have known the non-competition clause when they signed employment contract with Mr. Chen. Therefore, Company B hired Mr. Chen in bed faith. The two defendants are jointly liable for infringement.

The court ordered the two defendants paying compensation of RMB500,000 (US$62,500) to Company A and rejected other claims of the plaintiff.