How do companies control the litigation risk of a non-competition agreement?

How do companies control the litigation risk of a non-competition agreement?

An Analysis of the Essentials of the Litigation of Restriction of Competition

Recently, the high-level executives of the University of Science and Technology iFLYTEK quit to Tencent and were sentenced to compensation of 12 million yuan, which caused widespread heated debate, highlighting the importance of the competition restriction agreement.

It is generally believed that competition restrictions can be divided into statutory prohibition of competition and agreed restrictions on competition, as well as prohibition of competition during the period of employment and restrictions on competition after resignation. The prohibition of competition during employment is mostly statutory prohibition of competition, and the restriction of competition after resignation is basically equivalent to the agreed restriction of competition. The relevant provisions of statutory non-competition are mainly found in the field of commercial law. For example, the non-competition obligation stipulated in Article 148 of the “Company Law” applies to the directors and executives of the company; the relevant provisions of the stipulation on the prohibition of competition are mainly found in the labor law Fields, including Article 23, Article 24, Article 90 of the “Labor Contract Law” and corresponding judicial interpretations, applicable to all workers.

This article mainly discusses the content of the stipulated competition restriction, hereinafter referred to as the competition restriction. Competitive business restriction means that after the termination or termination of the labor contract, a specific employee does not get a job from another employer that produces or operates similar products or engages in the same business, or produces or operates similar products by himself or herself. Engage in similar businesses. As far as the legislative concept is concerned, the design of the competition restriction system focuses on protecting the legitimate rights and interests of the enterprise, including trade secrets and intellectual property-related secrets, as well as protecting the labor rights of workers and the right to freely choose jobs. In terms of practical significance, the implementation of the non-competition system is conducive to improving the business environment and encouraging honesty and credibility in the society.

The judgment logic of the courts in different regions is different. This article will combine the judicial practice of various regions and follow a logical sequence to discuss the effectiveness of the non-competition agreement, the determination of the violation of the non-competition obligation, and the form of liability for breach of the non-compete limit, and discuss how the enterprise should control it. Relevant details, deal with legal risks, and give corresponding suggestions.

1. The issue of the validity of the non-compete agreement

(1) The conclusion of a non-competition agreement

If the employer and the worker do not individually agree on the restriction of competition, but instead stipulate the obligation of restriction of competition in the corporate rules and regulations, is this provision binding on the worker? In judicial practice, the court generally does not support the investigation of the liability of the employee for breach of contract by the employer in accordance with the regulations on the restriction of competition. In the typical case (2014) Yizhong Min Zhong Zi No. 07989 issued by the Beijing No. 1 Intermediate Court in 2019, the court held that the provisions on competition restrictions in the “Employee Handbook” were not for Haoteng Jiake to require Shen to perform competition. The agreement on the obligation of restriction, that is, the obligation to restrict competition established by the enterprise through rules and regulations is not binding on workers. In 2019, Shanghai No. 1 Intermediate People’s Court also held this view.

Therefore, if an employer needs a specific worker to fulfill the obligation of restriction of competition, it should individually conclude a non-competition agreement with the specific worker, and the agreement on the restriction of competition must be specific and clear.

(2) The eligible subject of the non-competition agreement

According to the provisions of Article 24, paragraph 1, of the “Labor Contract Law,” eligible subjects for non-competition restrictions include three categories: senior management personnel, senior technical personnel, and other personnel with confidentiality obligations. The “Labor Contract Law” does not make specific provisions on how to define these three types of subjects. For the specific definition of “senior management personnel”, please refer to Article 216 of the “Company Law”; for “senior technical personnel” and “other personnel with confidentiality obligations”, the law does not clearly define them. Comprehensive determination of positions, job content, etc.

For example, in the judgment (2016) Guangdong 03 Min Zhong 2173, the Shenzhen court held that Xia, as the company’s human resources manager, did not possess the company’s business secrets or other confidential matters related to intellectual property rights, and the agreement on non-competition restrictions should be invalid . In the judgment of (2016) Zhejiang 02 Min Zhong 1259, the Ningbo court held that although Lu is an ordinary employee, the agreement between him and the company on the obligation to keep business secrets can prove that Lu is a “person with confidentiality obligations.” , That is, the eligible subject of the non-competition restriction, which in turn recognized the effectiveness of the non-competition agreement.

(3) Agreement on Compensation for Restriction of Competition

In the non-competition agreement, if the enterprise and the worker do not agree on the non-competition compensation, or although the enterprise has agreed to pay compensation to the worker, the compensation standard is not clear, or the compensation standard is clear but the amount is too low, Will it affect the validity of the non-compete agreement? The “Labor Contract Law” and the corresponding judicial interpretation did not clarify this issue.

As far as judicial practice is concerned, the basic position of the local courts is that even if the non-competition compensation is not agreed, the agreement is unclear, or the agreed amount is too low, it will not affect the validity of the non-competition agreement. Local legal documents in various places basically hold this view, and most judicial judgments also support this conclusion. In (2014) Shanghai Yizhong Minsan (Min) Final Zi No. 2115, (2014) Zhejiang Yong Min Yi Zhong Zi No. 135, (2016) Yu 01 Min Zhong No. 4599 and other judgments, the courts of various localities expressed their opinions on the 2013 ” Article 6 of the Interpretation of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases (4) (Fa Shi [2013] No. 4, hereinafter referred to as “Labor Dispute Interpretation (4)”) all have the above understanding. At present, this judicial interpretation has been adopted by Article 36 of the 2020 “Interpretation of the Supreme People’s Court on Applicable Legal Issues in the Trial of Labor Dispute Cases (1)” (Fa Shi [2020] No. 26, hereinafter referred to as “Labor Dispute Interpretation (1)”) Replaced, the content has not changed.

The question that arises from this is, what is the reasonable standard of compensation? According to Article 36 of the above-mentioned “Labor Dispute Interpretation (1)”, the monthly compensation shall not be less than 30% of the average wage of the employee in the twelve months before the termination or termination of the labor contract, nor less than the place where the labor contract is performed. minimum wage standard. Local courts basically use this provision as the standard of judgment.

It is worth mentioning that some local laws and regulations and local government regulations stipulate compensation standards that are higher than the above-mentioned judicial interpretations. Which standard should be applied at this time? (2019) Zhejiang 0212 Minchu Judgment No. 17771 discussed the issue of the effectiveness of the judicial interpretation of the Supreme Law and local regulations, and believed that whether it is based on the principle of “the new law is better than the old law” or the “superior law is better than the lower law” principle , The judicial interpretation of the Supreme Court should be applied first (in fact , the judicial interpretation of the Supreme Court is regarded as law) . Although this view may not be reasonable, it has certain reference value.

(4) If the employer fails to pay the non-competition compensation in accordance with the contract, is the non-competition agreement valid?

First of all, according to the general theory of contract law, the failure of an enterprise to pay compensation in accordance with the contract is a problem at the level of contract performance, not at the level of contract effectiveness. If the enterprise fails to pay the non-competition compensation metal in accordance with the contract, the breach of contract by one party does not cause the agreement to be invalid. The worker can claim that both parties continue to perform, the enterprise pays compensation, or the cancellation of the non-competition agreement. In other words, the company’s failure to pay compensation constitutes a cause for the removal of the competition restriction rather than a cause for invalidation. The Shanghai court has made a detailed reasoning about this, see the opinion of the court of two instances in the case of (2016) Hu 01 Min Zhong No. 7931.

Secondly, this involves whether three months have passed since the resignation and whether the worker has fulfilled the obligation of non-competition during this period. According to Article 38 of the “Labor Dispute Interpretation (1)”, if an employee activates the non-competition clause after resignation, within three months thereafter, even if the employer has not paid the non-competition compensation, the non-competition agreement will not be affected If it loses its effectiveness, employees should still fulfill their obligation to restrict competition. After the expiration of three months, if the employer still fails to pay the compensation and the worker has fulfilled the obligation of non-competition during this period, the worker can lift the non-competition agreement and claim that the company pays the non-competition in the corresponding period Limit compensation. That is, the premise of the worker’s proposal of dismissal is that the enterprise has not paid liquidated damages for three months and that it has fulfilled its obligation to restrict competition during this period.

Typical cases in various regions basically support the above understanding. In the (2019) Jing 01 Minzhong Judgment No. 2016, the Beijing court held that although Boen Xingzhi Company had not paid Jiang Xingzhi’s compensation for competition restriction in two months, it had made up in time, so Jiang had no right to lift the competition restriction agreement. (2018) Shanghai 02 Min Zhong 11655 Judgment, the Shanghai court held that Ge joined a competing company within two months of resignation, which constituted a breach of contract; although Melaleuca did not immediately pay economic compensation after Ge resigned, it was competing. The restriction agreement is still in effect. (2019) Zhejiang No. 02 Minzhong 2924 Judgment, the Ningbo court held that even if Dimag Company did not issue financial compensation to it within the statutory three months, Yao could not propose to lift the agreement on competition restrictions between the two parties on this ground. Instead, it should be bound by a non-compete agreement.

In addition, if the compensation has not been paid for more than three months and the worker has not violated the obligation of non-competition during this period, if the worker advocates the cancellation of the non-competition agreement, must he have the right to confirm, or notify the unit to release it on his own? At present, local courts have different opinions on this. The Supreme People’s Court tends to recognize that workers can dissolve themselves in this situation. See the first batch of typical labor dispute cases jointly issued by the Ministry of Human Resources and Social Security and the Supreme People’s Court in 2020. Case 12.

(5) The payment method of non-competition compensation

Article 23, paragraph 2 of the “Labor Contract Law” only clearly stipulates the payment method of “compensation paid on a monthly basis after resignation”. If the employer and the worker agree to pay compensation while the worker is on the job, or pay the compensation in one lump sum upon resignation, is the relevant agreement valid? Theoretically speaking, as long as the agreed compensation for competition restriction can be effectively distinguished from other labor remuneration, its effectiveness should be recognized.

If the competition restriction compensation is paid during the period of employment, as long as it can be effectively distinguished from wages and salaries and does not reduce the worker’s normal income, its effectiveness should be recognized; similarly, if the competition restriction compensation is paid in one lump sum upon resignation, As long as this payment method is not more harmful to workers than monthly payment after resignation, its effectiveness should also be recognized.

In practice, if the employer pays the compensation for non-competition and wages during the period of employment, the enterprise will most likely bear adverse consequences in the judicial judgment. The person in charge of the First Civil Division of the Supreme People’s Court mentioned in a reporter’s question in the 2013 “Labor Dispute Interpretation (IV)”: “Competition restriction economic compensation cannot be included in wages. It can only be used after the end of the labor relationship. It is given to workers on a monthly basis within the restricted period.” This reflects the Supreme Court’s position on this issue.

In judicial practice, the court may consider this practice as the employer’s failure to pay compensation, and then rule that the employer must pay the compensation or has no right to claim the return of the compensation; it may even invalidate the non-competition agreement. For example, in the judgment of (2017) Zhejiang 02 Min Zhong No. 2212 and (2016) Zhejiang 02 Min Zhong No. 3026, the Ningbo court held that the employer included the economic compensation for non-competition restriction in the salary, which was equivalent to the employer’s failure to pay the worker. Compensation for non-competition is paid, and the relevant agreement is invalid.

Therefore, in order to reduce legal risks as much as possible, it is recommended that companies use “monthly payment after resignation”, a method that strictly complies with the provisions of Article 23, paragraph 2 of the “Labor Contract Law” to issue non-competition compensation.

In addition, in practice, the form of payment of compensation is not limited to cash, but can also include restricted stocks, stock options, etc. The court will recognize its effectiveness in light of actual conditions. For example, in the well-known (2018) Hu 01 Min Zhong No. 1422 “Competition Restriction No. 1 Case”, the Shanghai court recognized that the restricted stock issued by Tencent to Xu Zhenhua has the nature of compensation, and finally ruled that Xu Zhenhua should pay Tencent High liquidated damages of more than 19.4 million yuan.

(6) Agreement on the scope of competition restriction

How should companies agree on the scope of competition restrictions? The greater the scope of the competition restriction, the more conducive to protecting the interests of enterprises? This requires specific analysis in conjunction with specific industries. For example, Internet companies often stipulate the scope of competition restrictions very broadly, which can often be recognized by the court. For example, in the aforementioned (2018) Hu 01 Min Zhong No. 1422 Judgment, the Shanghai court held that: “The scope of the competition restriction is too large, and it does not necessarily lead to the invalidation of all agreements on the restriction of competition. It does not mean that Xu Zhenhua does not need to comply with the restriction on competition. Basic obligations.”

In some other areas, such as industries with a high degree of product segmentation, the scope of the enterprise’s competition restriction should not be too wide, otherwise there is a risk of being deemed invalid by the court. In a nutshell, companies should combine their own industry characteristics to expand the scope of competition restrictions as much as possible within a reasonable range to protect their own interests. It is recommended that companies adopt a positive enumeration + general and general agreement method, that is, a clear list of major competing companies and related businesses, and general clauses as protection.

Then, if the agreed scope of the non-competition agreement exceeds the business scope of the employer’s industrial and commercial registration, will it affect the validity of the non-competition agreement? It is generally believed that the agreement is still valid as long as the scope of the non-competition restriction meets the actual business scope of the employer. In the demonstration case (2018) Hu01 Minzhong No. 6132, the Shanghai First Intermediate People’s Court held that: “The business scope of the industrial and commercial registration of Huidun Company does not include sensors, and it cannot be concluded that it cannot actually operate sensors. If Huidun Company For the actual operation of sensors, the agreement with Zhang Feng that the scope of competition restriction includes sensors shall be effective.” Of course, the employer shall bear the burden of proof for the actual operation of the business.

In addition, as far as the geographical scope of the competition restriction is concerned, it should be limited to the area that can form an actual competitive relationship with the employer. For example, for Internet companies, because their geographic location is not obvious, they may not agree on the geographic scope; for enterprises with strong regionality, the geographic scope of the competition restriction should not be too large, otherwise it may be deemed invalid, such as ( 2015) Shen Zhongmin Wu Zhong Zi No. 539 Judgment. As far as the period of non-competition is concerned, Article 24, paragraph 2 of the “Labor Contract Law” stipulates that the maximum period of non-competition is two years, and the exceeding part is invalid, such as (2016) Yue 06 Min Zhong No. 6474 Judgment.

(7) Can the period of application of the competition restriction be extended from the post-employment period to the in-service period?

As mentioned earlier, the non-competition obligations during the employment period are mostly statutory obligations, so can companies also agree on the non-competition obligations during the employment period, that is, extend the application period of the non-competition clauses from the post-employment period to the in-service period? The law does not clearly stipulate this, and this approach can be supported in theory. Some scholars believe that the obligation of restricting competition during employment is part of the obligation of loyalty based on the principle of good faith. Under normal circumstances, it will not affect their right to employment and survival. It clearly stipulates the obligation of restricting competition during the employment period. Nothing wrong.

However, as Article 25 of the “Labor Contract Law” clearly stipulates that employees can only pay liquidated damages in two categories (violation of the service period agreement and violation of the non-competition agreement after resignation) , so the corresponding liquidated damages can be requested in practice. There is uncertainty about whether to get support.

We believe that the legal risk of an enterprise’s agreement on the limitation of competition during the period of employment is relatively small, because the obligation of limitation of competition during the period of employment is itself a legal obligation, and the wages and salaries paid by the company to the workers can be regarded as reasonable consideration for liquidated damages. . Many judicial judgments also support this view, such as (2017) Lu 01 Min Zhong Judgment No. 6461, (2017) Hu 02 Min Zhong Judgment No. 2695, (2018) Jing 03 Min Zhong Judgment No. 955, etc.

(8) The employer’s unilateral right to rescind the non-competition agreement

In the non-competition system, the right of termination of the employer and the employee is not equal. Article 39 Paragraph 1 of the “Labor Dispute Interpretation (1)” stipulates: “If the employer requests the cancellation of the non-competition agreement within the non-competition period, the people’s court shall support it.” That is, the employer is given relative freedom. The right to terminate (while the worker only enjoys the passive right to terminate, as mentioned above, he must meet three months of not receiving compensation and fulfill the obligation of restricting competition during this period) .

This is consistent with the purpose of the non-competition system, that is, focusing on protecting the interests of one side of the enterprise; if workers are allowed to freely release, then the protection function of the non-competition restriction itself will no longer exist. However, according to the second paragraph of Article 39 of the above-mentioned judicial interpretation: “When the laborer requests the employer to pay the laborer’s three-month non-competition economic compensation when the non-competition agreement is lifted, the people’s court shall support it.” That is to say, if the enterprise terminates the non-competition contract, it shall pay three months’ compensation.

(9) The issue of the validity of the agreement in the case of labor dispatch

In the provisions of the “Labor Contract Law” on the restriction of competition, the expressions used by the enterprise side are all “employing units.” Normally, the non-competition agreement is signed between the worker and the employer; but in the case of labor dispatch, the employer and the employer are separated, and the labor and the employer sign the non-competition agreement, whether the agreement is valid ?

From the perspective of legislative purposes and freedom of contract, it is clear that the competition agreement between the worker and the employer should be considered equally effective. This is also supported by judicial practice. For example, in the typical case of (2016) Hu 0115 Min Chu No. 81171, the Shanghai court held that the signing of a non-competition agreement between the employer and the employer is in line with the legislative purpose of the non-competition system; , The law does not prohibit employers and dispatched workers from agreeing on competition restrictions. The court finally determined that the non-competition agreement was valid.

(10) Issues concerning the validity of agreements for employees in foreign-related situations

Article 43 of the Law on the Application of Laws on Foreign-Related Civil Relations stipulates: “Labor contracts shall be governed by the law of the place of work of the worker; if it is difficult to determine the place of work of the worker, the law of the principal place of business of the employer shall be applied. For labor dispatch, the law of the place of dispatch of the labor service shall be applicable. “

Therefore, the nationality of the worker does not affect the validity of the non-competition agreement, and the corresponding labor disputes should be governed by Chinese laws. Local courts hold the above opinions, such as (2018) Hu 01 Min Zhong Judgment No. 685 and (2019) Zhejiang 02 Min Zhong Judgment No. 4811.

2. Judgment of Violation of Non-competition Obligations

(1) Recognition of Competitive Relationship

The determination of the competition relationship refers to the comparison of the business scope of the former employee’s new unit with the original unit. If there is an overlap, it is determined that there is a competition relationship. In judicial practice, whether the business scope of the two industrial and commercial registrations emphasizes cooperation is an important reference for the existence of a competition relationship.

If the business scope of the industrial and commercial registration overlaps obviously, the court may directly determine that there is a competition relationship, thereby benefiting the employer. For example, in the (2010) Shanghai Second Zhong Min San (Min) Zhong Zi No. 363 Judgment, the Shanghai court clearly stated: “The most direct way to judge the competitive relationship between the two (yes) is to use the business scope on the business license as Standards for measuring competitive relations.”

In addition to the business scope of industrial and commercial registration, the court will also conduct comprehensive judgments based on product characteristics, business nature, customer targets, market differences, and the subjective intentions of the parties. If an employer wants to prove the existence of a competitive relationship, it needs to provide sufficient evidence. The evidence that can be collected includes: the business registration of the competing company, business brochures, website information, official account information, etc.

For example, in the (2020) Zhejiang 04 Minzhong Judgment No. 2195, the Jiaxing Intermediate People’s Court pointed out: “The determination of the scope of non-competition restrictions should be subject to a substantive review, rather than based on the business scope registered in the business license as the final basis.” In this case, the Jiaxing court, based on relevant evidence, held that although the business scope of Hongyuan Consulting Company (the original company) was “education consulting”, the scope of competition restriction should not be limited to “education consulting”, but should include “education and training”. “Therefore, Liu’s (laborer’s) main project constitutes a competitive relationship with the original company.

(2) Recognition of Competitive Behavior

For the existence of laborer’s competitive behavior, the employer must at least bear the initial burden of proof. Once an employer discovers that a worker is competing for business, it shall collect all kinds of evidence in a timely manner and take timely preserving measures for the relevant evidence. Evidence that may be obtained from public channels includes: business information of the former employee’s new company, relevant recruitment and job search information, the equity investment of the former employee’s close relatives, the former employee’s WeChat Moments and Weibo, etc. Enterprises can also request the arbitration agency to obtain non-public evidence, such as wage payment records, social security payment records, personal tax payment records, etc.

In the typical case (2011) Huyi Zhongmin San (Min) Final Zi No. 1294, 3M provided evidence to the court that Lang had invested in Sopu through his wife. The Shanghai No. 1 Intermediate People’s Court held that: “Although there is no evidence to show that Lang directly established a labor relationship with Sopu, during the duration of the marriage relationship, it is difficult to recognize the external behavior of one spouse based on the common interests as the personal behavior of one party.”

In this case, the court affirmed the existence of business competition based on the equity investment of the close relatives of the former employee. In practice, the new unit may collude with the targets of competition restriction, making it difficult for the original unit to obtain relevant evidence through conventional channels. For example, objects of non-competition restrictions may conceal the facts of competition by signing false labor contracts, paying social security on their behalf, and cash-settled wages. Where necessary, the original unit shall adopt certain investigative methods to obtain evidence to prove the existence of competition. For example, in the (2019) Zhejiang 02 Minzhong Judgment No. 2491, Yu signed a labor contract with Haorun Company (a non-competing company) after leaving his job. It pays wages and pays taxes on its behalf.

However, Borg Warner (the original company) through investigation and evidence collection, provides a fertile ride Yumou company (competing companies) free nature tourism conference department manager Zhang vehicles to work together, to participate in fertile organized by the company (fellow officers All are the facts of Fengwo’s executives and employees) . These two key pieces of evidence became the key for BorgWarner to prove Yu’s breach of contract and win the lawsuit.

(3) Competitive cooperation that violates competition restrictions and infringes on trade secrets

What needs to be clarified is that the violation of competition restrictions by workers does not require infringement of trade secrets. The former corresponds to breach of contract, and the latter corresponds to infringement. For example, in the judgment (2016) Zhejiang 02 Min Zhong 3026, the court of first instance found that Hou did not violate the competition restriction. The Ningbo Intermediate People’s Court of the second instance corrected this and proposed an action against Article 23 and Article 24 of the Labor Contract Law. Interpretation of the Article: “The obligation of confidentiality requires employees to keep secrets, based on the inability to “speak”; and the restriction on competition requires employees not to have a competitive relationship with their own unit producing or operating similar products or engaging in similar businesses. Other employers work, or start production or operate similar products, or engage in similar businesses on their own, and they are based on the inability to’do.’ It can be seen that competition restriction is a legal concept with definite meaning, and violation of competition restriction does not violate confidentiality Obligation is a condition for entry into force.” This argument can be described as vivid and accurate.

3. Forms of liability for breach of contract for non-competition restrictions

(1) The employer may request the worker to return the compensation for non-competition

For employers, it is very necessary to clearly stipulate the terms of the return of compensation in the non-competition agreement, that is, it is clearly stipulated that if the laborer violates the obligation of non-competition, he must return the non-competition compensation. If there is no clear agreement, there is a risk that the corresponding request will not be supported by the court. For example, in the (2017) Shanghai Minshen No. 1219 ruling, the Shanghai Higher People’s Court held that: “Wailian Company requires Xie to return RMB 50,000 for competition restriction compensation, which has neither contractual basis nor legal basis” and therefore rejected it. The re-examination application of Wailian Company.

If the non-competition agreement clearly stipulates that the laborer must return the non-competition compensation for violation of the obligation of non-competition, the court will generally support it. It is worth mentioning that the court often does not support it in full, but will deduct the compensation for the period during which the laborer has fulfilled the competition restriction. For example, in the (2019) Shanghai 01 Minzhong Judgment No. 1070, the Shanghai court found that Jiang had terminated the labor relationship with Dassault on January 27, 2018, and entered Z company on January 29, 2018, and ruled that Jiang should Refund Dassault’s non-compete compensation payments after January 29, 2018. That is, the court even deducted the two-day difference between the employee’s resignation and the entry of employment. In the (2015) Yongdong Minchuzi No. 476 Judgment, Zhu resigned from Zhaosheng Company on July 30, 2014 and established Shuaili Company on August 21, 2014. Zhaosheng Company requested the return of The compensation for competition restriction paid was 18,732 yuan, and the amount supported by the Ningbo court was 15,502 yuan. The calculation is available, and the difference is the compensation for non-competition for the period from July 30 to August 21. It can be seen that the courts often directly use the time when the laborer enters the new company or establishes the new company as the starting time for the violation of the non-competition obligation.

(2) The employer may request the employee to pay liquidated damages for non-competition

Liquidated damages are the core method for enterprises to pursue the liability of employees for breach of their obligation of restricting competition. Common liquidated damages agreement methods include: agreed specific amount, agreed amount calculation method (such as several times of salary, several times of competition restriction compensation) , agreed liquidated damages are actual losses (it is not recommended for enterprises to adopt this method, because the actual It is more difficult to prove the loss) and so on. From the perspective of business logic, too low liquidated damages cannot provide sufficient deterrence, and it is difficult to exert the effect of competition restrictions (especially for important executives) .

In judicial practice, a small number of cases have fully supported the company’s request for workers to pay liquidated damages, such as (2019) Jing 01 Min Zhong No. 8352, (2020) Zhejiang 02 Min Zhong No. 1524, etc. However, in most cases, due to comprehensive considerations, even if the court supports the enterprise’s liquidated damages claim, it will significantly reduce the amount of liquidated damages. Whether the discretionary reduction is not related to the agreed method of liquidated damages does not seem to matter much. The consideration factors of the court’s discretion to reduce liquidated damages include: the amount of compensation planned or actually paid by the enterprise, the actual loss of the enterprise, the actual gains from the laborer’s competitive behavior, the laborer’s subjective fault, and the laborer’s economic affordability, etc.

For example, the Shanghai court summarized the meaning of the typical case (2016) Hu 0115 Min Chu No. 73153 as: “If the parties claim that the agreed amount of liquidated damages is too high or too low, the court can combine the laborer’s degree of subjective malice and actual breach of contract. Facts, the amount of compensation for labor competition restrictions, the benefits of the laborer’s breach of contract (the new unit’s wage standard), and the loss of the employer caused by the laborer’s breach of contract are comprehensively judged.”

The judgment of the case finally adjusted the liquidated damages from the agreed 500,000 yuan and the 180,000 yuan in the arbitration award to 270,000 yuan. In (2018) Guangdong 01 Min Zhong 9370 Judgment, although the Guangzhou Intermediate People’s Court found that Zhou had violated the obligation of non-competition, after comprehensive consideration, the liquidated damages were reduced from the agreed amount of more than 860,000 yuan (5 of the previous year’s salary). Times) significantly reduced to 50,000 yuan.

In fact, even if a lower standard of liquidated damages is agreed upon, the judge will often reduce it as appropriate. In (2016) Zhejiang No. 02 Min Zhong 1259, the liquidated damages agreed by both parties were 21,000 yuan (the employee’s monthly salary is 3500 yuan, that is, the liquidated damages are equivalent to the employee’s half-year salary) , and the court lowered it to 4950 yuan ( equivalent to the employee’s salary for half a year) . More than one month’s salary for the employee) . It can be seen that the amount of liquidated damages should not be too low, otherwise it will not help the realization of the purpose of non-competition restrictions (not having sufficient deterrence) , nor will it help protect the interests of corporate litigation (there is still the possibility of substantial reduction) .

Therefore, it is recommended that the enterprise set the standard of liquidated damages to be more than three times the total amount of compensation for competition restriction that the enterprise plans to pay to employees. After all, a higher standard can provide a higher benchmark for judges to reduce liquidated damages.

(3) Employers can request workers to compensate for losses

Regarding the issue of whether liquidated damages and compensation losses can be claimed at the same time, and how to apply when liquidated damages and liability for damages limited to actual losses coexist (the nature of liquidated damages should be understood as punitive or compensatory) , theoretically There are disputes, and there are also differences in judicial practice. We believe that it is the most beneficial practice for employers to include both liquidated damages and damages in the contract text of the non-competition agreement. Because if the judge tends to support the view that the two can be agreed at the same time and the nature of the liquidated damages is punitive, this agreement can provide the necessary basis for the judge to support the employer’s claim; even if the judge believes that the two cannot be agreed at the same time, And the nature of the liquidated damages is compensatory, so this agreement will not have consequences that are detrimental to the employer in the litigation.

It is recommended that the employer make the following agreement on compensation for losses: If the liquidated damages are not enough to make up for the actual loss suffered by the employer, the worker should also compensate the enterprise for the direct or indirect economic losses suffered by it. And it is recommended to list in the agreement the expenses paid to stop the breach of contract, including litigation fees, arbitration fees, attorney fees, investigation fees, notarization fees, appraisal fees, etc.

(4) The employer may request the employee to continue to perform the obligation of restricting competition

Where an employee breaches the contract and engages in business competition, the employer may not only claim the above-mentioned liability for breach of contract, but also at the same time claim that the employee continue to perform the obligation of restricting competition. According to Article 40 of the “Labor Dispute Interpretation (1)”: “After an employee violates the agreement on the restriction of competition and pays liquidated damages to the employer, and the employer requires the employee to continue to perform the obligation of the restriction of competition in accordance with the agreement, the people’s court shall grant Support.” That is, workers cannot evade the obligation to perform non-competition restrictions at the cost of paying liquidated damages. Of course, in judicial practice, even if the court is willing to support the company’s claim that employees continue to perform their non-competition obligations, it is often impossible to achieve due to the limitation of time.

From the enterprise discovering that the laborer is carrying out the competition, the negotiation fails, and then the labor arbitration, the first trial and the second trial have often exceeded the time limit for the competition restriction, thus losing the basis for continued performance. For example, in the case of (2018) Hu 0115 Min Chu No. 81176, the first instance was judged on January 15, 2019, and Li was ordered to continue to perform his non-competition obligations until March 30, 2019. Li then appealed, and the second instance was held in 2019. In the September judgment, although the original judgment was supported, the continued performance of one of the litigation claims was no longer practically enforceable.

It is worth mentioning that after the court ordered the worker to continue to perform the non-competition obligation, if the worker violates the non-competition obligation again, can the company again claim liquidated damages? Judicial practice supports this. In (2015) Shanghai Yizhong Min San Min Zhong Zi No. 523, the Shanghai court found that Zhong once again violated the confidentiality and non-competition contract signed by the two parties and should pay a penalty of 100,000 yuan again (a total of 200,000 yuan for the two breaches) Yuan) .

Fourth, the conclusion

Although the legal provisions on the restriction of competition are relatively simple, the various situations involved in the practice are more complicated. There are many risk points in the non-competition agreement. A little carelessness may cause serious damage to its binding force and cause unnecessary losses to the enterprise. It is hoped that enterprises can pay attention to the risk control of the non-competition agreement, set up a reasonable risk prevention mechanism, and safeguard their legitimate rights and interests and market competitiveness.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/how-do-companies-control-the-litigation-risk-of-a-non-competition-agreement/
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