Noncompetition Agreements in China

I’m just sitting in the library killing some time, and I picked up the latest issue of The China Business Review. The focus is on human resources, and there was one article that caught my particular attention, Noncompete Agreements: Clarity amid Uncertainty by K. Lesli Ligorner (available from the link above, but subscriber access only). Following a short intro to noncompetes in the US, I’ll jump into Ms. Ligorner’s analysis.

In the US noncompete agreements (NCAs) are governed by State law, and differ widely depending upon your jurisdiction. The general rule in the US is that NCAs are allowed if they are reasonable in scope (both subject matter and geographic area), and reasonable in duration. California’s a bit different, though. In California VCs and tech firms lobbied strongly, and judges agreed, that NCAs were bad for business. NCAs lock up ideas, and if you get rid of NCAs, then it forces companies and individuals to compete on the basis of newer faster ideas. California eliminated NCAs, except where ancillary to the sale of a business, and even prevented legal workarounds by disregarding choice of law provisions in employment contracts.

In China, the Labor Contract Law includes restrictions on NCAs, but similar to the States the law is different in every district, city, and province and province depending on the local regulations.

Ms. Ligorner outlines the 6 restrictions on NCAs imposed by the LCL:

1. “[O]nly senior managers … , senior technicians and other employees who have access to business secrets may be subject to noncompetes.”
2. “[L]imits noncompete restrictions to employees engaged in business activities identical to those of the former employer, whether on their own behalf or that of a competitor.”
3. “[L]imits the maximum duration of a noncompete to two years.”
4. “[L]eaves the definition of the noncompete’s scope to the contracting parties–the employer and the employee–as a matter of negotiation.”
5. “[W]hen the employment contract is terminated, the employer must pay financial cosideration [money] to the former employee monthly within the non-competition period for the noncompete to remain enforceable.”
6. A “former employee who violates the noncompete may be liable to pay the employer a penalty for the breach.”

The key issue is the consideration paid to the employee. The minimum amount that must be paid to the employee per year is outlined in the relevant regulation for the area of employment. Ms. Ligorner outlines three questions that the courts are going to inquire about if a case ends up in court or arbitration:

1. “[I]s consideration stipulated in the employment contract?”
2. “[I]s the amount reasonable given the interests of the employee?”
3. “[D]id the employee receive separate financial consideration?”

There is a lot of other great stuff in this article including info on strategy, damages, enforcement, and specific differences between China’s jurisdictions.