Does a non-compete obligation not apply to ordinary employees during their employment?

• Citation: jd0250
• Published date: 15 November 2016
• Date: 15 November 2016
• Subject Matter: Labor & Employment Law

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By Junlu JIANG(partner), Kaitian LUO(managing associate), Di WU (legal assistant)

In September 2008, Mr. Li signed a three-year fixed-term employment contract and

a non-compete agreement with Company A, an internet finance business. It was

agreed that, as a business specialist in Company A, during his employment and for

one year afterwards, Mr. Li would not engage in any competitive conduct without the

consent of Company A. There was a liquidated damage clause for breach of the

non-compete obligation.

In May 2010, Mr. Li and a third party set up a joint venture (“Company B”) doing the

same type of business as Company A. Company A alleged that Mr. Li had violated

his non-compete obligation during his employment and claimed liquidated damages.

Mr. Li argued that, as he was not a director or senior manager, under the Company

Law of the People’s Republic of China (“Company Law”), he should not bear a

matter-of-course non-compete duty during employment, and the non-compete and

liquidated damages obligations should not apply to ordinary employees until after

termination of the employment contract as set out in the Employment Contract Law

of the People’s Republic of China (“Employment Contract Law”) . Therefore, the

agreement regarding non-compete and liquidated damages during the employment

of an ordinary employee is in conflict with laws and is invalid.

In response to Mr. Li’s argument, the in-house counsel of Company A looked at the

Company Law and the Employment Contract Law, and deliberated on the non-

compete provisions. The assertion of Mr. Li seemed reasonable, yet unconvincing.

Should Mr. Li be right, the dramatic conclusion would have been that agreement

between employers and ordinary employees on non-compete during the

employment was useless.

15 November 2016

Does a non-compete

obligation not apply to

ordinary employees during

their employment?