One of the things we always consider whenever we draft any contract, is where disputes that arise under the contract should be resolved. Arbitration in China or outside China? Litigation in China or outside China? In determining the best jurisdiction for our clients, our goal is usually to choose the fastest, easiest, cheapest and fairest jurisdiction, or some combination thereof, depending on the needs of our particular client and the particular contract. Sometimes though, we want the exact opposite — if, for instance, our goal is to make suing and winning as difficult as possible for the other side.
The right jurisdiction for China employee non-compete agreements seldom lends itself to an “off the shelf” kind of answer. The reason being that Chinese law is unclear as to whether parties can take a dispute regarding an employee non-compete agreement straight to court without having to go through labor arbitration first. The answer to this question is a very important one and it usually depends on the locality of the employer.
Chinese law distinguishes labor law disputes from intellectual property (IP) disputes and some places treat disputes under non-compete agreements as labor law disputes while others treat them as IP disputes. The distinction matters because if they are treated as labor law disputes, the parties must first go through labor arbitration before they can file a lawsuit. To be clear here, labor arbitration means arbitration at the local labor dispute arbitration center, not China International Economic and Trade Arbitration Commission (CIETAC) or other arbitration institutions where commercial disputes are usually resolved.
In practice, different places in China have different understandings of how to categorize employer-employee non-compete disputes. For example, some courts in Zhejiang province and in Hangzhou are of the opinion that such dispute are labor law disputes and without a labor arbitration award, neither party can bring a suit in court. In Shanghai, generally speaking, employer-employee non-compete cases must first go through labor arbitration (note each district within Shanghai may have different requirement). However, some courts in Beijing believe that not every non-compete dispute must go through labor arbitration before litigation, and instead have ruled that claims for violating a non-compete agreement are “normal civil disputes” that can go straight to litigation.
What is important to note here is that under Chinese law, the statute of limitations for labor law disputes is one year while for IP disputes it is two years. This means if a non-compete dispute is treated as a labor law dispute, the statute of limitations will be “shortened” by half. Consider this scenario: the employer thinks the employee violated the non-compete agreement, but and waits just under a year to bring its case to the court. The court thinks that the dispute requires the parties first use labor arbitration and so it sends the parties there. However, by this time, more than a year has passed and the local labor arbitration center declines to hear the case because the one year statute of limitations for labor law disputes has already passed. This may sound extreme but it could happen under the current legal regime, especially if the employer does not have a clear dispute resolution clause or is slow to pursue its non-compete claims.
Bottom line: If you as an employer want to be best positioned to be able to enforce your China non-compete agreement against your employees, you need to have an dispute resolution provision appropriate for your particular locale and situation. You also should not delay pursuing your non-compete claims, should they arise.
Note: Yunwei Liang assisted with this post. Yunwei is an attorney licensed in both China and New York. Yunwei has a Master of Laws degree from USC School of Law and she formerly worked at a law firm in Shanghai, focusing on litigation, real estate law, employment litigation and international investments.