Proving an employee’s eligibility for non-compete obligations

Non-compete agreements serve as a key legal tool for employers to protect trade secrets. Particularly in tech industries like internet services, it is common practice to subject employees who have access to vital confidential information to post-employment restrictions. These restrictions are intended to preserve the employer’s competitive advantage for a defined period.

The Interpretation (II) of the Supreme People’s Court on Issues Concerning the Application of Law in the Trial of Labour Dispute Cases (judicial interpretation) has ushered in a more substantive judicial review of the validity of non-compete agreements.

This article analyses how employers may discharge their evidential burden to prove that an employee falls within the eligible scope of non-compete obligations, with reference to prevailing legal provisions and case law, as a practical resource for practitioners.

Eligible persons

Article 24 of the Labour Contract Law limits non-compete covenants to senior management, senior technicians and other employees with confidentiality obligations. Employers may not arbitrarily broaden the pool of employees subject to such restrictions.

In judicial practice, disputes often arise over how to define “other employees with confidentiality obligations”. Courts generally assess this by examining an employee’s role, the nature and content of their work, the scope of information accessible and the employer’s industry profile to determine whether the employee actually knew or had actual access to the employer’s trade secrets or other confidential information relating to intellectual property.

Article 13 of the judicial interpretation requires the employer in a non-compete dispute to prove that the employee is a proper subject of the non-compete obligation. In practice, the employer must establish that it possesses trade secrets and the employee knew of them or had access to those trade secrets or other confidential information.

Where the employer fails to demonstrate that the employee falls within the category of employees with confidentiality obligations, the courts may find the non-compete clause non-binding, notwithstanding the parties’ agreement.

Under the Anti-Unfair Competition Law, trade secrets refer to technical information, business information and other commercial information that is unknown to the public, has commercial value and is subject to confidentiality measures taken by its rights holder.

Trade secrets are wide-ranging in practice, covering both technical secrets such as technical materials and R&D plans, and business secrets such as client data and business strategies.

To prove whether an employee actually knew of or accessed such trade secrets, employers should draw on a range of evidence, including confidentiality agreements signed by the employee, records of the employee’s involvement in confidential projects, meetings or business activities, OA system access rights and logs, written confirmations or admissions by the employee, and internal policies on trade secret management and confidentiality.

Evidentiary strategies

In non-compete disputes, whether an employer can effectively discharge its burden of proof depends on the rigour of its day-to-day management practices. Drawing on judicial practice and the authors’ practical experience, employers are advised to improve evidence collection and management in the following respects.

Executing non-compete and confidentiality agreements with employees who may have access to confidential information. On recruitment, employees likely to come into contact with such information should be required to sign non-compete and confidentiality agreements setting out their duties of confidentiality, non-compete obligations and consequences of any breach. To strengthen enforceability and prove the employee signed voluntarily with full knowledge, a handwritten acknowledgment can be added, confirming they have read, understood and accepted the agreement without reservation.

Where employees work on confidential projects, employers should also enter into project-specific confidentiality agreements, clearly defining the scope of confidential information and applicable confidentiality requirements to reinforce proof that the employee knew of and accessed trade secrets.

Implementing information classification and access controls for confidential information. Employers should delineate the scope of trade secrets and introduce appropriate safeguards, including information classification, role-based access permissions and limits on downloading sensitive files.

Access to core trade secrets must be confined to specific positions or designated employees – with system permissions, access logs and approval records preserved to show which staff have in fact accessed the confidential information.

Maintaining a documentary trail of employee awareness of confidentiality policies and access to trade secrets. This requires reinforcing confidentiality policies in routine management and retaining documentary records. Content on trade secret protection can be built into induction sessions, targeted training and regular evaluations, with attendance records, training materials and test results kept on file.

Employees may also be asked to confirm in appraisal reports or work summaries that they observe internal confidentiality rules, and also describe any contact with sensitive information.

Confirming employee’s knowledge of trade secrets and reaffirming non-compete obligations on their departure. The employer should seek evidence of the employee’s acknowledgement, for example by asking in the exit interview for confirmation that the employee accessed or knew confidential information, or by recording in the handover form the sensitive matters involved, the status of material transfer and the continuation of confidentiality obligations, with the employee’s signature.

Where an employee remains bound by non-compete obligations after leaving, the employer is advised to issue a written non-compete obligation notice or equivalent when terminating the employment, clearly setting out the duration, scope and liabilities for breach, and to keep a record of delivery.

Liu Tao is a partner and Zhang Miaoxin is an associate at Anli Partners