Precedent set for proving ex-employee covert competition

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A recent non-compete dispute heard before Shanghai Baoshan District People’s Court will have significant reference value for employers seeking to prove ex-employees covertly competed against them through indirect employment arrangements.

The defendant in this case worked for company A, the plaintiff, which was mainly engaged in the development of electric vehicle drive systems. When the employee left company A, the two parties agreed on a 12-month non-compete period.

The following month, the employee joined software company B and provided company A with a document from company B certifying that he was working there. Company A paid non-compete compensation to the employee as agreed.

Company A subsequently learned that company B was engaged in the provision of IT personnel outsourcing services, and it was highly likely the employee was actually working for company C, in the same line of business as company A.

As the defendant’s official employer, company B was responsible for signing his employment contract, paying his salary and making his social security contributions. Being a software company, company B was not a competitor to company A, so it was difficult to provide direct evidence of the employee breaching the non-compete agreement.

But based on preliminary evidence provided by company A, the court approved its application for an investigation, obtaining information such as the defendant’s parking space rental and hotel accommodation invoices. An in-depth investigation subsequently found the following evidence confirming the defendant worked for company C:

  1. The employee was renting a monthly parking space in a parking lot where company C was located, and which it owned. Video records showed the employee at the parking lot on multiple occasions during the dispute period;
  2. An invoice relating to the employee was obtained from a hotel showing he stayed there and invoiced company C; and
  3. The employee did not admit to these facts but failed to provide a reasonable explanation. During the dispute he made contradictory statements as to his place of work. His actions were hard to justify and his arguments were implausible.

Finding this circumstantial evidence could form a chain of evidence meeting the high standard of proof of probability required in civil actions, the court supported company A’s allegations.

In practice, the signing of non-compete agreements is one of the more common precautions taken to protect trade secrets. Competition by ex-employees can take various forms, not only including direct employment and investment in an organisation in the same industry but also covert forms such as labour dispatch, nominee shareholding, nominal employment by another entity and working through a personnel agency.

Since it is often difficult for enterprises to obtain direct evidence of covert competition, it can be hard for them to defend their rights.

But this case – with the court issuing an investigation order after company A provided preliminary evidence – shows that when a court assesses such cases, it may take into account the employer’s difficulty in collecting evidence and allocate the burden of proof more reasonably. The court’s approach enables a rethink of ways to identify and prove covert competition by former employees.


Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Howard Wu (Shanghai) at howard.wu@bakermckenzie.com

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