Archives: Non competes

Earlier this year, China’s Supreme People’s Court of China promulgated various interpretations of various employment law issues.  These interpretations were intended to clarify and for the most part, they did.  In particular, what was once unclear about non-competes signed by China employees has now become much clearer.  I am not going to compare the old rules on China non-competes with the new rules, in large part because many of the old “rules” were less than clear.  This post is instead intended to set out what the new rules are so that you as a China employer can act accordingly.

Perhaps most importantly, the Supreme People’s Court has made clear the required compensation for a non-compete to be valid and to remain in effect.  If an employee agrees to a non-compete provision, but the labor contract or confidentiality agreement (signed by the employee) does not mention the compensation the employee must receive as consideration for not competing, and the employee has in fact not competed, the court can award the employee up to 30 percent of his or her average monthly salary. If a 30 percent award of the average monthly salary is less than the minimum salary standard in the city, the minimum salary must be paid instead. The Court also made clear that the employee is entitled to such compensation no matter what the reason is for the employee having not competed.  In other words, even if the employee’s not competing arises from the employee’s inability to find new employment, the employee is still entitled to compensation for not having competed.

The Court also clarified what it takes to terminate (or not) an employee non-compete:

  • An employer may terminate a non-compete agreement and thereby cease having to pay for that non-compete, so long as it pays the employee at least three additional months’ compensation for the non-compete.  In other words, three months notice is essentially required to terminate the compensation requirement
  • An employee may terminate a non-compete if he or she has not been paid for three the required non-compete compensation for at three months by requesting termination of the non-compete agreement. Note though that this non-payment has to be the fault of the employer; the employee cannot deliberately avoid payment in an effort to cancel a non-compete.

Certain aspects of non-compete agreements in China have not changed and remain important, including the following:

  • An employment agreement may include provisions intended to protect the trade secrets of the employer. A non-competition agreement may be included in support of such protections.
  • The employer must pay reasonable compensation on a monthly basis to the employee during the term of the non-competition period.
  • Non-competition agreements are limited to executives, technical personnel and other personnel who have access to trade secrets. Cases have held that senior sales staff are included in this category. On the other hand, blanket agreements that apply to all employees are invalid.
  • The terms of the non-compete restriction must be “reasonable” in length of restriction, business scope and geographic area. A term in excess of two years is prohibited. The scope requirement is strictly interpreted. It is not sufficient that the employee is working in the same general area as the former employer. Competition must be specific and direct.
  • If the employee violates the terms of the non-compete agreement, the employee can be held liable for a payment of contract damages to the employer. The amount of contract damages must be reasonable. Excessive damages that are clearly punitive will be rejected.

Just as is true of any contract that you will eventually seek to/need to enforce in China, your non-compete/trade secret/employee contract should be written in Chinese as the official language.

Many American companies (at least outside California where employee non competes are generally considered invalid) love non competes and they use them as a matter of course with most (sometimes all) of their employees.  Generally a non-compete agreement or a non-compete provision in an employee contract provides that the employee cannot work for one of the employer’s competitors and/or engage in the same business as the employer.

The well crafted non compete provision is usually limited to a certain period of time following the employee’s termination and also usually limited geographically. Just by way of example: if you own a small sushi restaurant in Peoria, Illinois, a well-crafted non-compete with your sushi chef might prohibit him or her from working as a chef at another sushi restaurant within a 25 mile radius. The poorly crafted non-compete provision might prohibit him or her from doing anything in the food business anywhere in the world for the next five years.

For obvious reasons, courts are loathe to enforce over-broad non-compete agreements simply because they do not think it fair or right to preclude someone from making a living at their profession or craft, especially when doing so poses no real threat to anyone.  China’s laws on non-competes are not so different on this point, but they are quite different on others.

China’s Labor Contract Law specifically permits employers to include non-compete provisions in labor contracts or confidentiality agreements with their employees. But these sorts of provisions are valid only if all of the following are the case:

  •   The employee is senior management or a senior technical person. China’s courts take this requirement very seriously and few employees will qualify.
  •   The period of the non-compete and its geographic scope must be reasonable and the non-compete period must be for less than two years.
  •   The employer must pay the employee during the non-compete period or the non-compete provision ceases to be valid.

Note again that for the non-compete agreement to remain valid after the employee has left the company, the employee must continue receiving compensation from the company.  In other words, the employee must get paid for not competing.

How much must the employer pay the employee during the non-compete period?  We used to advise our clients to put in the contract this amount and to make it between 30 and 50% of the employee’s salary, depending mostly on the locale.  China’s Supreme Court recently issued some national level guidance on these payments and it appears that the terminated employee’s monthly compensation should be 30% of the employee’s average monthly salary over the previous year, or the local statutory minimum wage, whichever is higher.  This 30% should be deemed the minimum; employees may be able to negotiate a higher amount when signing their employee contracts.

We used to tell our clients that they “might as well” put in a non compete clause into their contracts with their high level employees since they would always be free to back out of any payment post termination if they wished.  I now have my doubts as to that advice going forward as the Supreme Court has said that though employers are free to terminate a non-compete clause at any time, they must pay three months compensation to do so. We will now be advising our clients to think a little longer and a little harder before just throwing in non-compete provisions.

What are you seeing out there with non-compete provisions in employee contracts?

This is the final part of a series arising from a speech I gave last month at a biotechnology conference in Washington DC.

In How To Protect Your IP From China. Part 1, I mostly looked at the risks China poses to intellectual property and very generally on how companies can determine how those risks should influence their actions.

In How To Protect Your IP From China. Part 2, I mostly focused on what I, as a lawyer, look at in trying to protect my clients’ IP from China and what you, the company, should be looking at and doing to protect your own IP.

In How To Protect Your IP From China. Part 3, I looked at the negotiating tactics Chinese companies so often employ in an effort to take advantage of your intellectual property.

In How To Protect Your IP From China. Part 4, I wrote on the basics of what goes into Chinese contracts, particularly those related to protecting your intellectual property.

In this part 5, I discuss some of the most common situations companies face where they must focus on protecting their IP.

  • Employees

Confidentiality agreements. In China, unlike in the United States, it is the norm to have a written employment contract with all employees. This is because not having a written agreement can lead to having to pay a year or more in salary to anyone you terminate.  You should use the written contract to your advantage by putting in a confidentiality provision that sets out your company information that must be kept confidential. Confidentiality agreements can protect company information that may not rise to the level of a trade secret, but they cannot be so broad as to protect everything.  China actually has very sophisticated trade secret laws — they come the US’s Uniform Trade Secrets Act — and the courts there are not bad at all in ruling favorably in favor of employers on confidentiality and trade secret cases.  But for you to be able to prevail, just as in the United States, the information you are seeking to keep confidential must have commercial value and you must make a reasonable effort to keep it away from the public.

Non Compete Agreements – These generally work in China only with very high level employees.  Very high level. And even then, they are enforceable only if they are: (1) not too long in duration and no longer than two years; (2) not too large in terms of geographic scope: and (3) do not restrain too much the employee’s opportunity to pursue his or her occupation.  Now here’s the real kicker on these:  you must pay your employee for the non-compete after his or her termination.  Limited to two years.  Typically, you must pay 20 to 50% of the employee’s salary, with the amount depending on the location in China.

Nonsolicitation agreements. Nonsolicitation agreements prevent employees from soliciting customers, former co-workers and/or agents upon separation from the company. These are usually enforced by China’s courts so long as they only prevent solicitation of the employer’s customers or accounts that existed at the time the employee left and so long as they are limited in duration and in geographic area.

It can be critical — especially for your employees doing R&D — that your employee contracts set forth who owns any intellectual property your employees help develop. You want a provision in your contract making clear that all IP developed by your employees belongs to the company and you want that because in China you run the real risk of your employees claiming ownership of what they developed. We also like to see a provision in the employee manual saying that any IP developed by company employees belongs to the company.

Contracts with your Chinese Distributers, Manufacturers, Joint Venture Partners, and Licensees should include the same sort of provisions relating to non-compete, non-solicition, and non-disclosure and they also should be clear about who owns what with respect to any IP.

 

  • Licensing Contracts

Three things you should be thinking about if you are licensing your IP to a Chinese company.

  1. Be careful about getting paid based on sales, unless you have some really good way of knowing what the sales really are.
  2. Get what you need to do the deal before you relinquish the technology.  Figure that the Chinese company will stop paying you after it has secured your technology.
  3. Register your licensing agreement with the proper governmental agency.  If you don’t, you run the risk of not being able to sue on it.
  • IP Registrations 

Just as in the US, you should register your IP in China to protect it.  There is no way can I go into great detail on what you can and should do to protect your IP in China through registration, but what I can tell you is that it almost always makes sense to do something.  Earlier I talked about how bad China is on IP and that is true, but if you have not done the proper registrations, you pretty much have zero chance of protecting your IP.  If you have done the proper registration, your chances are considerably better.

China’s IP registration and protection system is in many ways not all that different from that in the US.  Just as is the case here, China has patents, trademarks and copyrights.

Patents. China has invention patents, utility patents and design patents.  Invention patents are thoroughly reviewed before they are granted and so they can take quite a while.  Because of this, many companies will secure a quicker utility or design patent while waiting until their invention patent comes through.  Couple things you need to know about patents in China. First, if you do not file for your patent in China within a year of filing for it in the United States, you will be too late. China is a signatory of the Patent Cooperation Treaty and the Paris Convention, but Chinese patent lawyers tell me that it is better to file your patent in China.

China has had compulsory licensing of patents since 2001, but earlier this year the Chinese government came out with detailed criteria for the granting of compulsory licenses and that threw many into a panic, believing that the government was instituting compulsory licensing for the first time. These new rules really did not change much of anything and as far as I know, China has not in the last ten years required any company to compulsorily license its IP.

Trademarks are unique names, symbols, or logos. Can include colors. We trademarked a particular color of screws for a client. Don’t underrate trademarks in China. These work in China. China is a first to file country, not a first to use country, so generally, whoever files first for a trademark gets it. Trademarks cannot be place names. This is a bigger problem than you might initially think.  Another problem is that the people at China’s trademark office usually view acronyms as images and so if your company name is something like EVO and someone else has already registered the company name ECO, there is a very good chance your EVO name will be rejected as conflicting with ECO, because to someone who cannot read English, the two names look too much alike.  What this means is that if you have a two or three letter company or brand name, you had better try to register it now because it will only get tougher.  We used to get these approved all the time, but in the last year, we are succeeding only around 50 percent of the time.

Copyrights.  A lot cheaper and easier to obtain than patents and they last a lot longer. Very similar to the US. You do not need to file for a copyright in China to have a China copyright, as they arise automatically upon creation of a work created or first published in China, but you do need to have a registered copyright to sue on it and that’s the catch. In China, it takes so long to secure the registration of a copyright that if you are going to want to protect your copyright in China, you should file for it right away, because if you wait until you have a problem to file for the copyright, you may have a one-year lag before you can do much about it. Just like in the US, you don’t have to reveal all of your material in the copyright filing.  This is particularly important for something like computer code.

Stopping IP Theft.  If you have registered IP, and someone in China tries to use it without authorization, you can seek an administrative remedy by trying to get the Chinese government to do something about it or you can sue for damages. You also can try to get Chinese customs to stop any violating goods from leaving the country and, if you have your IP registered here, you can try to get US customs to stop it from entering into the US.

 

A quasi-interesting discussion going on over at the Foreign Policy in Focus site regarding China’s proposed labor laws, entitled, “Debate on Labor in China.”  The discussion is between the US-China Business Council, which knows whereof it speaks, and Foreign Policy in Focus (which describes itself as “a think tank without walls”), which does not.

Foreign Policy in Focus (FPIF) started the fracas by falsely claiming AmCham opposes China’s proposed new labor laws. AmCham responded by pointing out that it opposes only certain of the proposed changes. FPIF responded to that by stating it stands by its story, proving it will not let facts get in the way.

FPIF then goes on to “analyze” the proposed changes to China’s labor laws and AmCham’s objections. I found FPIF’s reasoning so sophomoric and jejune (please note that this is the first time either of these words have been used on this blog, but they are warranted here) that after reading its views on just two of the issues, I simply could not continue.

Here are the two:

1.  “Non-compete Agreements and the Freedom to Change Jobs. Non-compete agreements are a regressive feature of U.S. and other western systems that have crept into the Chinese economy. They are especially common in high skilled jobs. They prevent workers from changing jobs easily if they have access to proprietary knowledge as determined by an employer. For a developing economy like China, knowledge transfer is essential.”

Let’s examine this first one, point by point.

  • Non competes impinge on the freedom to take a new job, they do not, as the title implies, prohibit taking on a new job.
  • “Non competes are a regressive feature of U.S. and other Western systems that have crept into the Chinese economy.”  Oh yeah, when it comes to labor rights, I always think of the U.S. and other Western systems as being so far behind non-Western countries like Bangladesh, Saudi Arabia, and Yemen. Western countries use non competes so as to encourage innovation and employment, both of which  appear to be anathema to FPIF.
  • “They prevent workers from changing jobs easily if they have access to proprietary knowledge as determined by an employer.”  I am not aware of any country that gives the employer full authority to unilaterally determine what constitutes proprietary knowledge. In the United States, courts generally will enforce non compete agreements only if they are reasonable in duration and geographic scope, and only if they are in fact necessary to protect the employer. Courts particularly disfavor them when they involve anyone other than higher level employees. For instance, I have never seen such an agreement with a factory worker, nor have I ever seen or heard of a case involving such an agreement.
  • “For a developing economy like China, knowledge transfer is essential.” So rival companies should just be free to steal it?

2.  Limited Probationary Periods. “Currently corporations can set probationary periods unilaterally, often for an entire year, keeping people in a highly precarious employment status. This is a major problem for workers since it leaves them with little or no protections. The new law sets standard probationary periods of from one to six months depending on the type of job. The USCBC argues against limiting the probationary period from one to six months because it “[will make] it more difficult for employees and employers to properly evaluate the work relationship.” Instead, it should therefore be left to the sole discretion of employers to set probationary periods for all employees — including the most unskilled — for up to six months.”

All AmCham is asking is for employers to be able to determine for themselves whether to have a probationary period of up to six months. I will note that probationary periods are of less import in the United States because it is typically so easy to fire someone here because employment is “at will.” Firing in China is already very difficult and is primed to become more so. If employers are limited to a one month probationary period for their employees, I am quite certain they will become more reluctant to hire.  As the Indian Economy Blog so succinctly puts it, “Hard to Fire is Hard to Hire.

In addition to being “a think tank without walls,” FPIF appears to be without brains as well.

What do you think?

I hate draft laws.  Hate ’em, hate ’em, hate ’em.

We American lawyers are trained to “think like a lawyer” (for what that may mean, go here, here, here, or here), not to learn laws by rote.  And if we lawyers are not expected to know laws by rote that have already been enacted, why even bother with proposed laws?

One reason.  It is not good lawyering to tell a client to do something today if there is a good chance there will soon be a law that will make the recommended action nonsensical or expensive a short time later. Sometimes it even makes sense to delay action until a new law passes or is tabled.  The law is a seamless web, and nowhere is it more complicated than China where laws (i.e. antitrust, equalizing the domestic and foreign corporate tax rate, and property reform, to name a few) seem always to be on the “verge” of enactment and where enactment does not always equal enforcement.

The latest buzz is on China’s proposed sweeping changes to its labor laws. The World at Work blog recently did an excellent post on this issue.

Entitled, “China sticks it to The Man?” the post opines that these new laws would substantially increase workers’ rights in China:

A comprehensive reform of China’s labor laws is on its way to the Chinese People’s Congress. It is not yet complete, but if enacted into anything close to its current form — and enforced — the bill would substantially increase worker’s rights in China. For starters, under the new “Labor Contract Law” workers would be harder to fire and, if laid off, would receive greater severance pay. Safety and workplace inspections would be bolstered. Employers would be forced to consult with trade unions over proposed job cuts. Overtime pay would be increased, and a shorter work week enforced.

The post goes on to criticize how The London Times for presenting these potential new laws as likely to drive away foreign business:

The [Times] headline: “Foreign investors may quit if China tightens up labor law.”

The lead sentence: “A reform of Chinese labor laws may lead foreign investors to leave the People’s Republic in favor of rival Asian nations with weaker labor standards, employers have said.”

(A side note: the article does not actually quote any named employers. It includes one mealy-mouthed whine from the European Chamber of Commerce and another quote from a Chinese relations expert in the U.K. saying the law was “long overdue.” This suggests that the top of the story may have been rewritten by some Rupert Murdoch ideologically inspired editorial flunky.)

But, but, but — one can only splutter! This is news? Employers threatening to pack up and move if labor laws are strengthened? Here we have an absolutely critical development in the ongoing development of China — a decision to resist the rampant exploitation of workers that, up until this point, both local governments and national leaders have implicitly supported, and the Times delivers unsourced speculation that paints the entire thing as bad for business.

If the current draft labor laws are enacted (and enforced), they will likely have major ramifications for doing business in China.  The laws make it harder to fire employees without severance and they will increase the role of labor unions.  To their credit, however, they are quite comprehensive and will likely bring clarity to the employer-employee relationship, which ought to help minimize employer-employee disagreements.

I found the proposals on covenants not to compete (also called non-competes) particularly interesting because we so often counsel our own clients to write such provisions into their employment contracts as an additional method for protecting intellectual property and trade secrets.  The draft law requires employers pay the equivalent of the employee’s annual salary for the non-compete provision to be enforceable.

The current consensus is that the current labor law draft will not be enacted without substantial changes.  However, because this is exactly the sort of law that can have immediate ramifications if and when it is enacted, we will be monitoring it closely.