Newsletter
CLA ISSUES NON-COMPETITION CLAUSE REFERENCE HAND-BOOK
With a view to reducing disputes arising out of non-competition agreements between employers and employees, the Council of Labor Affairs (CLA) has compiled a collection of opinions on the subject, including commentators' writings and judgments from courts at various levels. The CLA published the collection on 31 March 2002 and named it "Non-competition Clause Refer-ence Handbook." The main points of the hand-book are as follows:
I.Definition of a non-competition agree-ment
A non-competition agreement means an agree-ment under which a business entity, in order to protect its trade secrets and operating interests or to maintain its competitive advantage, requires that a specific person not conduct the same or similar business activities, whether for himself or as an employee of another entity, for the duration of his employment, or for a specific period within a specific geographical area after leaving employment. The restrictions imposed on em-ployees by non-competition agreements can be divided into those that apply during the term of employment, and those that apply thereafter.
II.Restrictions on competition during em-ployment
As long as the employment relationship exists, an employee not only has a duty to provide ser-vices, but also has fiduciary duties, i.e. the em-ployee must keep the company's secrets confi-dential, and may not hold other employment or conduct competing activities. For this reason, employers often incorporate such restrictions in employment contracts or work rules. An em-ployee who violates such contractual obligations or rules may be subject to some disciplinary ac-tion, or in serious cases, the violation may con-stitute grounds for dismissal.
III.Restrictions on competition after leaving employment
An employee's duty to maintain confidentiality and not to compete with the employer ceases when his employment contract expires or ter-minates. If an employer wishes to further protect its business interests or competitive advantage beyond such time, it must stipulate special pro-visions in the employment contract. Such pro-visions often state that within a specified period after leaving employment, the ex-employee may not work in the same or a similar line of business as the employer, and that upon violating this re-striction, the ex-employee becomes liable to pay damages in a specified amount.
To determine whether a post-employment non-competition agreement would be accepted and enforced by the courts, the following factors should be considered:
When concluding a non-competition agreement, in addition to considering whether the employer has substantive interest which requires protec-tion, if the legal interest requiring protection is a trade secret, the trade secret in question must meet the definition of a trade secret under the Trade Secrets Law; for example, a technology that the employer has expended considerable efforts or funds to its research and development, or a business interest that it has expended con-siderable efforts or funds to create.
If an employer wishes to conclude a post-employment, non-competition agreement with an employee, the employee must be one who performs certain duties thereby giving him the access to the company's trade secrets, or participates in the company's technological re-search and development, etc. There should be no need to impose competition restrictions on em-ployees in relatively low positions involving only general skills, or whose duties do not give them the access to the technology or business interests that the company wishes to protect.
A non-competition agreement should be con-cluded in accordance with the principle of free-dom of contract. An employer must not use co-ercive or threatening means, or exploit the in-experience of a new employee, or of a prospec-tive employee's urgent need to gain employment, to unreasonably impose upon an employee a non-competition agreement.
A non-competition agreement must explicitly define the duration, geographical area, and scope of business activities covered by the restrictions, and such restrictions must be reasonable in ac-cordance with general societal attitudes and commercial practice, such that they will not se-riously restrict a person's right to work, or jeop-ardize his ability to survive in terms of financial means. The following are brief explanations of the types of restrictions considered acceptable in current practice:
Duration:
The duration of the non-competition restrictions should be clearly stated. At present, the terms most commonly imposed, and accepted by the courts, are periods of up to two years.
Geographical area:
The geographical area within which a non-competition agreement applies should be clearly stated, and limited to the area and scope of the employer's business operations; the em-ployee's right to work and right to choice of work must not be unfairly restricted. Based on the principle of free competition, markets that the employer has not yet developed, or geographical areas that it may develop in the future, should not be the subject of any restrictions.
Business scope:
A non-competition agreement should stipulate the types of work or businesses from which an employee is barred after leaving employment, and the businesses that compete with the em-ployer (such as the specific industry or profes-sion).
Compensatory measures refer to those measures by which an employer compensates an ex-employee for the losses incurred from not engaging in competing activities. In terms of the amount of such compensation, the German Commercial Code (Handelsgesetzbuch) pro-vides that for the duration of a post-employment non-competition agreement, the annual com-pensation payable to the ex-employee by the employer should not be less than one half of the contractual remuneration last received by the ex-employee; and the British system of "gar-dening leave" provides that during the term of a non-competition agreement, the former em-ployer should continue to pay salary to the ex-employee but the ex-employee does not have to perform any duties.
An employer may agree to an amount of dam-ages with its employee for the employee's breach of a non-competition agreement, but if it wishes to do so, it should first consider whether the damages amount is reasonable for the duration of the non-competition agreement, and also whether compensation is granted to the em-ployee. In other words, if the employer has provided compensation to the employee, but the employee nonetheless willfully violates the agreement, this would be regarded as a serious breach, to justify a greater damages amount. However, if the employer provides little or no compensation to the employee, the culpability of the employee would also be reduced, and the legitimacy of requiring damages at all would be debatable. Therefore, to avoid excessively lim-iting or infringing the employee's right to work, a determination on the amount of any damages should be made after taking into account the relevant facts, the economic situation at the time of the violation, and the possible damage to ei-ther party.
A non-competition agreement should come into play only if the competing activity by a former employee clearly constitutes a breach of trust or a violation of the principle of good faith. For example, if a former employee illicitly obtains large volume of the former employer's customer data or other information, or the content or type of the competing activity is relatively pernicious in nature, or the competing activity is otherwise a clear violation of the principle of good faith, then the former employee's actions can be defined as a material breach of the principle of good faith. Also, a non-competition agreement should not be evoked if the reason for the employee's leaving employment was due to the fault of the em-ployer.