international employment law firm alliance L&E Global

China: The Supreme People’s Court clarified substantive examination of competitive relationship in non-compete disputes

Mr. Wang (“Employee”) joined the Company W (“Former Employer”) on July 2, 2018, working in the position of intelligent data analysis. The registered business scope of the Former Employer included: development and sale of computer hardware and software, technical development, technology transfer, technology consulting and technical services in the field of computer expertise and products.  On July 23, 2019, the Employee signed a Non-Compete Agreement with the Former Employer, agreeing that the non-compete period is 24 months after the termination of the employment relationship with the Former Employer.

After one year, the Employee resigned from the Former Employer and later joined Company B (“New Employer”) on August 6, 2020, whose registered business scope includes: information technology, computer hardware and software, technology development, technology transfer, technical consulting, technical services in the field of network technology, etc.

The Former Employer then applied for arbitration to the Labor Arbitration Commission of Shanghai Pudong New Area, claiming the Employee to perform the non-competition obligations, return non-competition compensation, and pay liquidated damages for non-competition.

The case went through arbitration, first instance and second instance. The arbitration committee and the court of first instance both held that the Employee had violated the non-competition obligation and shall bear the corresponding liability for breach of contract.  However, the court of second instance held that the existence of a competitive relationship should be judiciously and substantially examined and determined, and its effective judgment concluded that there was no competitive relationship between the Former Employer and the New Employer. Therefore, the Employee did not violate the non-competition agreement and did not need to return the non-competition compensation or pay the liquidated damages. This case was cited by the Supreme People’s Court as a guiding case.

Key Action Points

To a certain extent, the guiding cases show a change in the courts’ attitude towards the determination of competition in non-competition disputes from the previous formal examination based only on the registered business scope to the substantive examination of the actual business scope. It is conducive to protecting the legitimate employment rights of employees and maintaining social equity, but it also increases the company’s obligation to review the competitive relationship. Therefore, for the employer, it is suggested that the company shall describe the actual business scope in detail when setting the non-competition obligation on the employees and delineate the scope of competitors based on the actual business scope.