China Law Blog

I received the following email (modified slightly to protect anonymity):

Steve,

I wanted to pass some information to you, which you might want to use on your blog, but please keep my name and my company name out of it.

We have been dealing with a staff issue under the new Labor Law. Essentially one of our staff has taken us to the Labor Bureau for unfair dismissal. We have now been trying to pay her off and get a contract signed that she has no further claims against us. One clause we wanted in the contract was to basically get her to keep confidential about our business and especially the business of our clients. The Labor Bureau has advised us that for this to have any legal effect, we need to pay her for the period we wish her to maintain confidentiality.

My reading of this is that all of our confidentiality agreements with our employees are now meaningless because we can no longer ensure our ex-staff keep confidentiality. This must impact all consultancy firms. I thought you might find it worthwhile investigating/blogging on this.

Here is the basic situation. A trade secrecy and confidentiality agreement should be included in every employment agreement. It must be a stand alone agreement, separate from the employment agreement itself. Such agreements only work, however, where the company has a secrecy/confidentiality policy that is clearly documented and enforced by the company. A mere agreement is of only minimal benefit.

It is a major mistake to combine a secrecy/confidentiality agreement with a non-compete agreement. Under the new Labor Contract Law, non-compete agreements are highly disfavored. Only management level employees and employees with special status can be subject to a non-competition agreement. The non-compete agreement can extend for only two years and must be limited in scope, both in terms of geographic area and restricted activity. Finally, the employee must be paid during the entire period that the non-competition agreement is in effect. Failure in any of these areas will cause the labor bureau and courts to reject the agreement as void. We typically advise our clients to restrict their use of non-competes to truly high level employees with significant management responsibilities.

In the case mentioned above, there a several possible explanations:

-- The confidentiality provision was combined with a non-compete. In that case, the labor bureau interpretation was probably correct.

-- If the confidentiality agreement was an entirely separate agreement, then the labor bureau official was not correct. This area of law is frequently misunderstood in China, so this would be disappointing but not a surprise. If the labor bureau has it wrong, the solution is to take the matter to court. That is, if the employee did violate his or her confidentiality agreement and has made improper use of trade secrets, then the employer should consider suing the employee in the appropriate court.

My approach is to use non-compete agreements only in the relatively rare cases where they are truly necessary and are likely to be enforced. On the other hand, I work with my clients to carefully document and enforce confidentiality and trade secrecy agreements with all appropriate employees.

In response to the concerns of the writer of the email above: If the confidentiality agreement is combined with a non-compete agreement, you are correct that the confidentiality provisions are of little benefit to you. On the other hand, if you have separate and properly drafted confidentiality agreements, they are still fully valid. However, they are only useful to the extent that your company has a formal secrecy program that you have carefully implemented, monitored and enforced.