Non-compete agreements are widely used by employers in certain industry sectors in China to protect their trade secrets and confidential information.
In China, employers may require the employee to continue to perform the non-compete obligation and pay liquidated damages in accordance with the non-compete agreement after breach occurs.
In the past, however, the following uncertainties could impede the employer from obtaining effective remedies against the departing employee.
First, although it is clear that an employee breaching a non-compete agreement must continue to perform his/her obligations under the agreement regardless of whether he/she has paid liquidated damages, it was unclear whether the courts would provide for mandatory enforcement when the employee refuses to perform such obligation.
Second, although the employer is entitled to liquidated damages from the employee breaching the non-compete agreement, courts tend to adjust the amount of the liquidated damages by considering the actual loss of the employer, and the salary as well as the non-compete compensation received by the employee. In many cases, employers may not receive the full amount of the agreed liquidated damages.
Two recent Shanghai cases demonstrate that employers may now obtain more complete remedies for breach of non-compete agreements.
In the first case, the Shanghai Labor Dispute Arbitration Committee issued an arbitration award requiring the employee to continue to perform the agreed non-compete obligation owed to the former employer. However, the employee refused to perform such obligation after the arbitration award took effect. Upon the request of the former employer, the People’s Court of Pudong District in Shanghai issued an order to mandatorily enforce the arbitration award, which forced the employee to terminate employment with the new employer, which is a competitor.
In the second case, the People’s Court of Xuhui District in Shanghai found in favor of the employer on its claim for the agreed liquidated damages (RMB 150,000) to be paid by the former employee for her breach of the non-compete duty. Compared with the salary and non-compete compensation of the employee, the employee’s agreed liquidated damages was much higher. In other cases, courts have lower the agreed liquidated damages based on the principle of equality and fairness. However, in this case, the court held that since the actual loss to the employer was difficult to calculate, the liquidated damages should be paid in accordance with the amount agreed by both parties. In principle, employees are obliged to continue to perform the non-compete agreement regardless of whether liquidated damages are payable. In this case, since the non-compete agreement had expired, the employee was only obliged to pay the agreed liquidated damages.
These two recent Shanghai decisions provide employers with authority for more effective remedies for breach of non-compete agreements. The first case demonstrates that injunctive relief for breach of non-compete agreements is available. The second case demonstrates that the court will support the liquidated damages agreed by the two parties. In addition to liquidated damages, the employee is obliged to continue to perform his/her non-compete obligation until the agreed term expires. We will keep a close eye on other significant non-compete and trade secrets cases in China.