China: Beijing High People’s Court Clarifies Non-Compete Rules for Employees with Confidentiality Duties
Mr. Yang joined Training Company A on January 1, 2018, and signed an employment contract with it, which was valid from January 1, 2018 to December 31, 2020. He held the position of a full-time lecturer. Meanwhile, the two parties signed a Confidentiality and Non-compete Agreement. It stipulated that: the non-compete period should end on the day after 24 months from the termination of the employment relationship; during the non-compete period, Company A must pay Mr. Yang the non-compete compensation on a monthly basis; if Mr. Yang violated the agreed non-compete obligations, he should not only immediately cease the breach but also pay liquidated damages specified in the agreement for the period of the breach.
On August 31, 2020, Mr. Yang resigned from Company A, and started working at another Training Company B as a lead teacher on September 1, 2020. Company A paid Mr. Yang the non-compete compensation for the period from September 2020 to June 2022 at a monthly rate of RMB 13,120.63, with a total payment of RMB 273,625.56.
Company A claimed that Mr. Yang had violated the non-compete obligations by joining Training Company B who operates the same business as Training Company A after resigning from Company A, which seriously breached the non-compete agreement. Therefore, Company A initiated labour arbitration, requesting Mr. Yang to perform the non-compete obligations, return the non-compete compensation, and pay liquidated damages for violating the non-compete obligations. Subsequently, both parties respectively filed a lawsuit, an appeal, and a retrial with the People’s Court.
The court of first-instance held that, first of all, Mr. Yang had signed the Confidentiality and Non-compete Agreement with Company A, which explicitly stipulated that Mr. Yang should bear confidentiality obligations for Company A’s management systems, business processes, industry reports, planning schemes, course systems and content, verification results, and other related information. During his employment, Mr. Yang worked as a training lecturer at Company A, and his position allowed him to access the confidential information specified in the aforementioned agreement. Therefore, Mr. Yang should be regarded as an employee with confidentiality obligations. The agreement between the two parties also specified the non-compete period, the payment of non-compete compensation, and the liability for breach of non-compete obligations. Since the agreement does not violate laws and regulations, it is legally valid, and both parties should consciously and fully perform their obligations under the agreement. Secondly, after resigning from Company A, Mr. Yang joined Training Company B as a lead teacher. His work at Training Company B was relevant to that at Company A. Thus, the court determined that Mr. Yang had violated the non-compete obligations and should pay liquidated damages to Company A for such breach in accordance with the agreement.
The court of second-instance held that, in accordance with the provisions of the Employment Contract Law, the scope of personnel subject to non-compete obligations is limited to senior managers, senior technical personnel, and other personnel who bear confidentiality obligations regarding the employer’s trade secrets and confidentiality matters related to intellectual property rights. The scope of personnel with whom non-compete agreements can be concluded shall not be expanded to other employees without distinction. If an employer claims that an employee falls into the category of other personnel with confidentiality obligations but the employee disagrees, the employer shall bear the burden of proof to demonstrate that the employee is aware of the employer’s trade secrets or confidentiality matters related to intellectual property rights. The existing evidence alone is insufficient to confirm that Mr. Yang belongs to the three categories of personnel specified in the Employment Contract Law with whom post-employment non-compete obligations can be agreed. Therefore, Company A shall bear the adverse consequences of failing to fulfil its burden of proof.
The court of retrial held that, given that Company A acknowledged that Mr. Yang was an ordinary full-time lecturer and that his teaching content covered public basic knowledge and common-sense judgement, Company A should bear the burden of proof to demonstrate that Mr. Yang knew or ought to have known the Company’s trade secrets or confidentiality matters related to intellectual property rights, and that Mr. Yang fell into the category of other personnel with confidentiality obligations. Therefore, the determination in the second-instance judgement was correct.
Key Action Points
The core issue in this case is whether the employee falls under the category of “other personnel with confidentiality obligations” as stipulated in Article 24 of the Employment Contract Law, and consequently, whether the non-compete agreement signed with the employer is valid.
In this case, the court of first-instance held that by signing the Confidentiality and Non-Compete Agreement, which stipulated the employee’s access to the employer’s relevant information, the employee bore confidentiality obligations. This ruling did not involve a substantive review of whether the information accessed constituted trade secrets. However, the second instance and retrial courts concluded that a substantive review of this precise issue was necessary. They emphasized that the employer bears the burden of proving: (1) the existence of a legally protectable trade secret, and (2) that the employee had access to said trade secret, thus qualifying as personnel with confidentiality obligations. The agreed non-compete obligation is legally effective only if these preconditions are met.
The recently issued Compliance Guidelines for Enterprises Implementing Non-Compete Restrictions also stress that companies must not arbitrarily expand the scope of personnel subject to non-compete agreements. When entering into such agreements with “other personnel with confidentiality obligations”, the company must inform them in advance of the reasons and specify the concrete content of the trade secrets to be protected. Generally, the spirit of these provisions, along with recent judicial trends in similar cases, indicates a unified view: the purpose of non-compete obligations is to protect employers’ trade secrets; their application should be confined to a reasonable scope; opposing the generalization and abuse of such restrictions to safeguard ordinary employees’ right to employment.
Against this backdrop, in cases where an employer seeks compensation from an employee for an alleged breach of non-compete obligations, the employer will bear a heightened burden of proof. Employers establish and further improve their trade secret protection systems, paying close attention to the interactive relationship between safeguarding trade secrets and managing non-compete restrictions.
