China: The agreed scope of non-competition is held valid even if it is broader than Employer’s registered business scope

The Employer and the Employee established employment relationss and signed a Non-Competition Agreement (the “Agreement”). The Agreement stipulates the scope of non-competition that includes inclination and acceleration sensors, which are not specifically registered by the Employer in its business scope. The Agreement also stipulates that if the Employee violates the Agreement, the liquidated damage of RMB 500,000 should be paid. It was later discovered by the Employer that, during the non-competition period, the Employee served as shareholder and executive director of one company that has a sensor business. The Employer then filed a case against the Employee and claimed for Employee’s payment of the liquidated damage. During the case hearings, the Employee rebutted that the agreed scope of non-competition is broader than the Employer’s registered business scope and thus the Agreement shall be deemed as invalid. The Court ruled the final decision, determined the validity of the Agreement and held the Employee liable for violation of non-competition. The Court came to this decision based on: (1) the agreed non-competition scope manifests both parties’ true intention and is valid; (2) the Employer did business related to sensors although not officially registered; and (3) the Employee’s engagement in the sensor business shall be deemed as competing with the Employer and a violation of non-competition.