Article 23 of the Labor Contract Law of the People's Republic of China clearly stipulates that the employer may agree on non compete clauses with the employee. If the employee violates the non compete clause, the employer shall pay a penalty to the employer in accordance with the agreement. As a system for protecting enterprise trade secrets and regulating senior management and technical personnel, non compete restrictions are widely used in China. There are also many disputes in non compete cases in judicial practice, especially the issue of liquidated damages, which has led to different judicial tendencies. In order to further clarify the application of the non compete restriction system, this article will attempt to clarify common controversial issues related to non compete restrictions.

1、 Who is the real person who should compete? ——Inventory of Applicable Objects of Non compete Restrictions

Article 24 of the Labor Contract Law of the People's Republic of China stipulates that "personnel subject to non compete restrictions are limited to senior management personnel, senior technical personnel, and other personnel with confidentiality obligations of the employer." Generally, for senior management personnel, they can be identified in accordance with Article 265 of the Judicial Yuan, which covers the company's management, financial officers, secretaries of the board of directors of listed companies, and personnel specially stipulated in the company's articles of association. However, for some very large companies, I believe that even if they are not designated as executives by the company's articles of association, those who actually manage a large number of departments and employees should still be recognized as executives. Senior technical personnel need to be comprehensively judged through multidimensional indicators such as professional title level, job hierarchy, technical attributes of job content, and salary level.

However, it is relatively unclear how to determine "other personnel with confidentiality obligations". Many people may believe that as long as the company signs a non compete agreement with employees, employees should fulfill their non compete obligations. However, this is not the case. In recent years, more and more precedents tend to focus on "substantive examination", which means not only whether the agreement has been signed, but also whether the employee has truly been exposed to confidential content. In other words, "the existence of trade secrets+the possibility of employee exposure" is used as the criterion for judgment, rather than "the agreement is signed and counts".

So who should provide evidence in litigation or arbitration? Although civil cases generally follow the principle of "who asserts, who provides evidence", in non compete cases, the court will also reasonably allocate responsibility based on the ability of both parties to provide evidence. If the employer claims that the employee should bear the non compete penalty, it is necessary to first prove that both parties have signed a non compete agreement and that the employee has violated the terms of the agreement. If the employee refutes that they are not subject to non compete obligations and attempts to overturn the effectiveness of the agreement, corresponding evidence needs to be provided. After the employee provides valid evidence, the burden of proof shifts to the employer, who needs to further prove that the employee is indeed a qualified subject for the non compete obligation.

2、 How to identify competing units? ——What exactly do you see when identifying competing units and how do you provide evidence

Competitive units refer to other employers who have a competitive relationship with their own units in producing or operating similar products or engaging in similar businesses. In non compete disputes, whether the two companies constitute a competitive relationship is often one of the focal points of the dispute. There are roughly two review approaches in judicial practice when determining whether two companies have a competitive relationship:

1. Formal review: Check if the registration scope of the business license overlaps. But the limitations of this method are also evident. Due to the often broad scope of business registration, the actual business content may not be fully covered. In addition, in recent years, China has shown a trend of relaxing the registration of company business scope. Judging competition solely based on the content of the business license can easily lead to excessive application of non compete restrictions, which is not conducive to the protection of workers' employment rights. Therefore, the scope of application for formal review is gradually shrinking.

2. Substantive examination: Starting from "whether there is overlap in actual business", that is, conducting substantive comparison based on the actual operating situation of the enterprise, mainly including the following dimensions:

(1) Comparison of Business Content

By reviewing the official websites, promotional materials, trademark registrations, and patent information of both companies, analyze whether their core products or services belong to the same type. For example, although both companies are engaged in "software development", if one focuses on office productivity tools while the other focuses on gaming applications, it may not necessarily constitute direct competition. Some courts may even refer to similar trademark classification methods in practice to determine whether they belong to "business under the same category".

(2) Customer group analysis

If the service objects or product audiences of both parties are highly overlapping, it may also be considered a competitive relationship. For example, if both companies provide medical equipment for hospitals or sell learning platforms to college students, there is a high possibility of competition. On the contrary, if the target user groups are significantly different (such as one targeting financial professionals and the other targeting the entertainment needs of ordinary consumers), the likelihood of competition is relatively low.

(3) Market scope assessment

The court will also make a comprehensive judgment based on industry attributes and business areas. For example, whether both parties participate in the same industry association, conduct business in similar markets, or whether their customers are concentrated in the same region. The "list of restricted enterprises" listed by enterprises in non compete agreements, although not decisive, can to some extent serve as a subjective cognitive reference for enterprises regarding the scope of market competition.

Overall, the court tends to make multidimensional comprehensive judgments based on whether there is competition in essence, rather than being confined to the statements on the business license.

3、 Where is the boundary of 'not allowed to go'? ——How to define the scope of non compete restrictions

Article 24, Paragraph 2 of the Labor Contract Law stipulates: "The scope, territory, and duration of non compete restrictions shall be agreed upon by the employer and the employee, and the agreement on non compete restrictions shall not violate the provisions of laws and regulations." The usual circumstances for violating non compete restrictions include:

1. Jumping jobs to work for a "competitor" company

This type of situation is the most common. For example, if you join a company that operates the same product or business as your original employer after leaving, whether you sign a labor contract directly, outsource, dispatch, or even work as a part-time consultant or technical support, as long as you "contribute" to your competitors, you may fall short.

2. I did my own job and engaged in "competitive business"

This type is slightly more covert, but it is also very typical in practice. For example, if you register your own company after leaving, and the business scope highly overlaps with your original unit, or hire relatives to hold equity or act as legal persons on your behalf, it may seem like "relatives are doing it", but in fact, you are "behind the scenes" - once this situation is verified, the court may also find that you have violated non compete restrictions.

In short, whether you are a worker or an entrepreneur, as long as your behavior essentially constitutes competition with the original company for a job, you may be deemed to have violated non compete obligations.

However, in non compete disputes, it is not necessarily included in the scope of non compete as long as it is clearly stipulated in the non compete agreement. In some non compete agreements, there are extensive restrictions on the geographical location of employees, stipulating that they are not allowed to engage in competitive work within a certain geographical area. In some cases, the court may consider such territorial restrictions too broad and beyond the reasonable scope of preventing competition. Moreover, the non compete period after resignation under the Labor Law is a maximum of two years, and any agreement beyond this period is invalid. The non compete period does not necessarily have to be two years, and employers and employees can shorten it by mutual agreement.

In the next article "Non compete Matters: The Game between Corporate Defense Lines and Employee Boundaries (Part 2)", we will further dissect the core battlefield of the game between companies and employees: from the dispute over how employers prove that employees have violated their non compete obligations, including the legal boundary and judicial acceptance scale of "illegal recording of evidence", to the rationality review of sky high penalty clauses and the court's discretion logic; The practical distinction between labor arbitration and contract dispute jurisdiction, and the complex interweaving of "labor attributes" and "commercial agreements" in expiration rights disputes. The key details and latest judicial developments in legal practice will reveal the underlying logic and offensive and defensive strategies of the final battle of non compete. Coming soon!