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China: Competitive Relations in Non-Compete cases shall be Determined on a Comprehensive Basis

Authors: Carol Zhu and Yinbing Chen

Mr. Wang (“employee”) joined the information technology company (“Company A”) in 2018 and served as an intelligent data analyst. The two parties signed a non-compete agreement which imposed post-employment non-compete obligation upon the employee. After the employee resigned from Company A, he joined an internet company (“Company B”). Company A noted that its registered business scope overlapped with Company B’s scope; thus it determined that it had a competitive relationship with Company B and that the employee had violated the non-compete obligation. On this basis, Company A filed labour arbitration and litigation against the employee and demanded payment for liquidated damages.

The Shanghai No. 1 Intermediate People’s Court heard this dispute and eventually dismissed the case. The Court came to its decision based on: i) any review of the competitive relationship shall not be limited to comparing the business scopes registered in business licenses; ii) a comprehensive judgment on competitive relations shall be adopted and the actual operations, audiences and other factors of the companies shall be taken into consideration; iii) there were significant differences between Company A and Company B in terms of business model, target markets and audiences and therefore a competitive relationship did not exist; and iv) by joining Company B, the employee did not violate the non-compete obligation he owed to Company A.

Key Action Points for Human Resources and In-house Counsel

According to previous judicial practices in Shanghai, the determination of competitive relations between two companies in non-compete cases is mainly limited to comparing the registered business scopes. However, the above case manifested that the court adopted a comprehensive review for determining competitive relations. Therefore, it is advisable for employers in Shanghai to be aware of this potential change of judicial practice.