Enforcing non-competes in China: a review of model cases in 2024

With the business environment becoming more challenging, many companies are increasingly enforcing non-compete agreements and restrictive covenants against their former employees to protect themselves from business losses and competitive pressures. However, for non-compete clauses to be valid in China, they must meet certain criteria, including:

1. Non-compete should be imposed on senior managers, senior technicians and other employees with confidentiality obligations.
2. The company must compensate the former employee at least monthly during the restrictive period after employment ends.
3. The non-compete duration must not exceed 2 years after termination of employment.

In this article, we discuss some model cases published by Chinese courts and labour arbitration tribunals in 2024 to understand how they interpret the rules around non-compete agreements in China and decide whether to support employers in enforcing these obligations on their former employees. Although China does not follow the doctrine of binding precedent, courts publish model cases from time to time to illustrate judgments they endorse and would like the public and lower courts to reference.

This issue is also seen in other jurisdictions. For example, the Federal Trade Commission of the United States (“FTC”) announced regulations banning non-compete in April 2024 to promote competition, protect employees’ job mobility, foster innovation, and encourage new business forms.¹ However, recent court decisions in various states have prevented the FTC from enforcing the ban,² and the FTC has appealed these decisions.

 

What kind of employees can be subject to post-employment non-compete obligation

It is not rare for companies in China to execute non-compete agreements with all employees at the time of their respective recruitment regardless of their role. At this stage, employees often have little bargaining power to reject such agreements.

The Supreme People’s Court of China (“SPC”) published a model case emphasising that courts should examine whether an employee falls within the statutory category subject to non-compete obligations (as outlined in point 1 above). Illegal non-compete that infringes on employees’ right to employment should be rejected.³

In this model case, the company imposed a two-year non-compete on a masseur, requiring RMB50,000 in damages for breaches. The masseur left and joined a community health service centre. The company claimed the masseur had trade secrets, including client information and training courses, and thus fell under “employees with confidentiality obligations”. However, the court ruled that the masseur did not qualify as a senior manager or technician, and the information was general knowledge or obtained during service. The court overruled the company’s claim for damages.

 

Compensation standard for post-employment non-compete

An SPC interpretation states that if a non-compete agreement is silent on compensation, and the employee requests 30% of their average monthly salary for the 12 months before departure (not lower than the local minimum wage), the court should support the claim. Local rules may also stipulate compensation standards, but parties can negotiate within statutory limits.

In a Shanghai case,⁴ an employee sued for low compensation, as the company paid only the minimum wage, which was 5.8% of the employee’s previous salary. The court ruled this unfair and invalid, ordering the company to pay 30% of the normal monthly salary.

In Guangdong,⁵ a labour arbitration commission ruled that dividends from restricted share units should not be included in calculating non-compete compensation.

 

Employer should notify employee upon termination of employment

In a Guangdong case,⁶ a company did not pay non-compete compensation after an employee’s departure and issued a waiver three months later. The labour arbitration commission ruled that the company must pay compensation until the waiver was issued.

In a Beijing case,⁷ a handover checklist required the company to deliver a non-compete compensation notice, in order to validate the non-compete restriction. The company failed to do so within a reasonable period, and the court ruled that the employee did not have a post-employment non-compete obligation.

 

Senior technician should understand the non-compete territory

In a Jiangsu case,⁸ a Chief Software Scientist disputed the global scope of his non-compete obligation. The court ruled that as a high-end talent, he should have understood his obligation and could not restrict the territory.

 

Determination of breach based on employment nature

In a Tianjin case,⁹ a former employee worked for a competitor without a contract, claiming he was only providing consulting services. The court ruled that his actions constituted employment, breaching his non-compete obligation.

 

Spouse’s Involvement in Competing Enterprise

In another SPC case, a manager’s wife became the controlling shareholder of a competing enterprise after his employment ended. The court ruled that this breached his non-compete obligation but adjusted the liquidated damages.¹⁰

 

Enforcement of non-compete before litigation ends

The maximum duration for post-employment non-compete obligations in China is two years. Labour disputes may not conclude within this period, making enforcement challenging. In a Suzhou case, the court issued an act preservation ruling to stop a former employee from working for a competitor during the non-compete period, protecting the company’s interests during litigation.¹¹

 

Conclusion

The enforcement of non-compete agreements in China is becoming increasingly significant as companies seek to protect their business interests in a competitive environment. These agreements must meet specific criteria, including the employee’s role, compensation, and duration. Model cases from 2024 highlight the importance of adhering to these criteria and provide valuable insights into how non-compete clauses are interpreted and enforced. Globally, enforcement varies, as seen in the U.S. developments. These cases highlight the importance of drafting fair and legally enforceable non-compete agreements.

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¹FTC Announces Rule Banning Noncompetes, released by the Federal Trade Commission of the United States on 23 April 2024.
²Ryan LLC v. Federal Trade Commission, No. 3:24-CV-00986-E (N.D. Tex.) and Properties of the Villages, Inc. v. Federal Trade Commission, No. 5:24-cv-00316 (M.D. Fla.).
³The Supreme People’s Court Releases Model Cases of Labour Disputes (最高人民法院发布劳动争议典型案例), posted by the Supreme People’s Court of the People’s Republic of China on 30 April 2024, Case No.3.
⁴The Convergence of Adjudication and Trial | New Measures to Govern the Source of Labour Disputes (with Ten Model Cases) (裁审衔接 | 劳动争议诉源治理再出新举措（内附十大典型案例）), published by the Second Intermediate People's Court of Shanghai Municipality together with Shanghai Municipal Human Resources and Social Security Bureau on 26 April 2024, Case No.9.
⁵The Provincial High People’s Court and the Provincial Human Resources and Social Security Bureau Jointly Issued Model Cases of Labour and Personnel Disputes for the First Time (省法院、省人社厅首次联合发布劳动争议典型案例), posted by the High People’s Court of Guangdong Province on 30 April 2024, Case No. 10.
⁶ Id., Case No. 9.
⁷The Primary People's Court of Haidian District of Beijing Municipality Releases Eight Model Cases of Labour and Personnel Disputes (海淀法院发布八件劳动人事争议典型案例), posted by the Primary People's Court of Haidian District of Beijing Municipality on 16 May 2024, Case No. 8.
⁸Pre-Execution, Talent Awards, Non-Compete ...... These 10 Cases Focus on Labour and Employment Disputes (先予执行、人才奖励、竞业限制……这10个案例聚焦劳动人事争议), posted by the High People's Court of Jiangsu Province on 29 April 2024, Case No. 5.
⁹Announcement from the Municipal Human Resource Bureau and the Municipal High People's Court on the Joint Release of Model Cases of Labour and Personnel Disputes (市人社局市高级人民法院关于联合发布劳动人事争议典型案例的通知), published by the Municipal Human Resource Bureau of Tianjin Municipality together with the High People's Court of Tianjin Municipality on 6 June 2024, Case No. 5.
¹⁰ Supra note 3, Case No.4.
¹¹The Release of 2023 Top Ten Model Cases of Labour and Personnel Disputes Convergence of Adjudication and Trial in Suzhou (2023年度苏州市劳动人事争议裁审衔接十大典型案例发布！), posted by Suzhou Municipal Human Resources and Social Security Bureau on 28 April 2024, Case No.10.