作者：刘琦 连煜雄 胡雪梅
I. Introduction
In practice, non-compete often refers to the restriction on employees from engaging in a business of the same kind as their employers'. A statutory non-compete obligation is a restriction prescribed by law that prohibits specific classes of employees from such engagement. Under the Company Law of the People's Republic of China ("Company Law"), a company's directors and senior management may not, "without receiving consent from the board of shareholders or in a shareholder meeting, (1) make use of his position to facilitate the acquisition of the company's business opportunities for himself or others, or (2) operate, for himself or others, a business of the same kind as the company's." (Company Law Article 148, Section 1, Item 5). Directors and senior management's special position and critical role in the company allow them access to substantial business secrets. A corporate employer should therefore be particularly attentive in ensuring directors and senior management's compliance with their statutory non-compete obligations.
II. Recovery for Breach of Statutory Non-Compete Obligations: Predicaments and Obstacles
While a company may, under the Company Law, demand from the employee in breach a disgorgement of illegal income (hereinafter "Right of Disgorgement") and seek recovery for its losses, a study of relevant cases reveals the following obstacles that corporate employers typically face in proving their cases to obtain full and effective remedy:
1. Failure to show that the employee in breach of non-compete obligation is a person that the law seeks to restrict. In civil case no. 14968 (2017) of Shanghai First Intermediate People's Court, the court held that chiefs and associate chiefs were not senior management as defined under the Company Law or under the company's articles of association, and therefore denied all claims of the plaintiff company.
2. Failure to prove director or senior management's engagement in a competing business. In civil case 4 (commercial) no. 109 (2014) of Shanghai First Intermediate People's Court, the plaintiff's demand for exercising the Right of Disgorgement was denied because the evidence only proved overlaps in the business scopes of plaintiff and defendant's company.  There lacked a showing of defendant's actual operation of a business of the same kind and defendant's exploitation of his position to steal the plaintiff's business opportunities.
3. Failure to establish the amount of illegal income. Due to both the secretiveness of directors and senior management's income and the availability of various methods to conceal such income (for example, by transferring money to a relative's bank account), proving illegal income is tediously difficult in legal practice. Furthermore, a court may make discretionary adjustment to the amount of disgorgement the plaintiff company is entitled to based on relevant factors. Taking civil case no. 13957 (2013) of Beijing First Intermediate People's Court as an example, it was found that defendant received greater than 1,790,000 RMB of income while his non-compete obligation lasted. But after considering the degree of overlap in the parties' business scopes, the court limited the award to 200,000 RMB by exercising its discretion.
III. How to Improve the Chances of Recovery Through Formulation of and/or Modification to Corporate Documents and Labor-Related Agreements
In view of directors and senior management's special position and critical role in the company as well as the difficulties corporate employers face in pursuing legal remedies, we suggest, based on our experience and current judicial practice, that employers take the following measures to improve their chances of recovery:
1. Clarify the scope of senior management. As discussed earlier, an ambiguous definition of the term "senior management" can bring about significant risk in litigations. A corporate employer may therefore consider, as practicable, clearly define "senior management" in its articles of association and other internal rules and regulations, as well as employment agreements, etc.
2. Stipulate employee's non-compete obligations with a written contract or unilateral undertaking. An employer could consider executing an agreement or have its directors and senior management sign a unilateral undertaking, setting a more precise series of obligations than those provided in Article 148, Section 1, Item 5 of the Company Law. Specifically, the agreement or undertaking should, first, enumerate those particular acts equivalent to a breach of non-compete obligations. And if possible, the employer should clearly define what constitutes "the company's business opportunity," "same kind of business," and other related concepts. Second, specify the extent of income to be disgorged. For example, an employer may stipulate that income obtained in breach of non-compete obligations accrue upon the employee's first competitive act, rather than on the date when the employee registers his competitive business or starts working for a competitor company. Third, provide a standard for measuring director and senior management's income, including income type, channel, and scope, received for their competitive acts. For example, the agreement may prescribe that all transfers from a competitor company to the employee's bank account and all revenues and profits on a competitive business's book are considered income subject to disgorgement.
3. Refine relevant non-compete provisions in current agreements. In practice, a labor contract with senior management, senior technical officers, and other personnel owing a duty of confidentiality often includes a non-compete section in accordance with Article 23 and 24 of the Labor Contract Law of the People's Republic of China ("Labor Contract Law") (sometimes the non-compete obligation would be stipulated in a separate agreement). To protect a corporate employer's essential interest, we suggest broadening the timeframe of non-compete obligations in their existing non-compete agreements to include the employee's current employment period, in addition to setting the specific standard of liquidated damages for breach. A point of interest is that, although the Labor Contract Law does not specify whether a contract can be consummated to forbid employees' competition during their current period of employment, in practice, the courts commonly hold the view that agreements based on parties' mutual assent should be honored. Beijing, Shanghai, and Guangdong's court verdicts in the past three years confirm the judicial departments' concurrence on this view. It is also worth noting that numerous jurisdictions including Beijing and Guangdong have upheld the validity of the provisions in these agreements concerning the liquidated damage imposed during the employment period. Thus, it is in the best interest of corporate employers to at least contemplate our suggested refinement, which furnishes remedies in addition to those provided by statutory non-competition obligations.
A further noteworthy point to suggestion 2 and 3 above is that, a corporate employer may also file a claim against directors and senior management, with whom the employer has executed a labor contract prohibiting competition during their employment period, for harming the employer's interest and for violating the agreed non-compete obligations under the employment related agreements, respectively. An employer that follows both suggestions (that is, having not only executed a non-compete agreement governed by Company Law Article 148, Section 1, Item 5 but also improved relevant provisions based on Labor Contract Law) would enjoy the option to sue either under the Company Law, based on the employee's harm to the employer's interest, or under the Labor Contract Law, based on their violation of employment related agreements. The choice would turn on how the employer weighs competing factors such as the strength of evidence in possession, litigation risk, amount of potential losses, and prospect of each claim's success.
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作者介绍
 刘琦  
合伙人
021- 2613 6125
[email protected]
刘琦律师毕业于华东政法大学和德国法兰克福大学，分别获得法学学士和法学硕士学位。刘律师具有超过10年的法律从业经验，主要业务领域为劳动与雇佣法律和外商投资并购。
刘律师拥有丰富的涉外法律服务经验，曾在一流国际、国内律师事务所工作十余年。刘律师擅长为跨国企业提供高质量的人力资源法律服务，包括提供日常法律咨询，高管解雇谈判，法律风险评估，人力资源合规，劳动合同、规章制度及其他雇佣相关的法律文件的起草与修订，劳务派遣与人力资源外包，员工安置及遣散，外国人在华就业和居留相关事宜，劳动争议解决等方面的法律服务。
 连煜雄  
顾问
021- 2613 6129
[email protected]
连煜雄律师毕业于中南财经政法大学和厦门大学，分别获得法学学士和法学硕士学位。连律师具有超过10年的法律从业经验，主要业务领域为劳动与雇佣法律和外商投资并购。
连律师擅长为各类内外资企业提供高质量的人力资源法律服务，包括日常法律咨询，法律风险评估，提供合规整体方案，审查、起草和修改劳动合同、规章制度及其他劳动法律文件，处理外国人在华就业和居留的相关事宜，为客户及其员工提供培训服务，设计员工安置方案，高管解雇/离职等。
胡雪梅
律师
021- 2613 6121
[email protected]
胡雪梅律师毕业于四川大学和英国格拉斯哥大学，分别获得法学学士和国际商法硕士学位。
胡律师具有超过6年的法律从业经验，主要业务领域为劳动与雇佣法律。
胡律师通过长期劳动仲裁、诉讼的代理工作积累了大量实务经验，擅长为各类内外资企业提供高质量的人力资源法律服务，包括代理劳动争议案件，劳资谈判，处理竞业限制与商业秘密争议，处理长病假员工，设计员工安置方案，审查、起草和修改规章制度及其他劳动法律文件，高管解雇/离职，外国人在华就业等。
声明 DISCLAIMER
本文观点仅供参考，不可视为竞天公诚律师事务所及其律师对有关问题出具的正式法律意见。如您有任何法律问题或需要法律意见，请与本所联系。
This article is for your reference only and not to be deemed as formal legal advice given by Jingtian & Gongcheng or its lawyers. Please contact us directly for formal legal advice or further discussion about the relevant issues.
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