Reporting obligations in non-compete disputes

By Xie Yang, Zhilin Law Firm
non-compete disputes

In recent years, the number of non-compete disputes has been on the rise as employers actively use non-compete agreements to safeguard their intellectual property and competitive edge. According to the principle that “the claimant bears the burden of proof”, the former employer is responsible for providing evidence for the departing employee’s violation of the non-compete agreement, i.e. evidence like the departing employee engaging in self-employment in the same kind of business as the former employer, or working for a competitor.

Non-compete disputes pose significant challenges for former employers in terms of gathering evidence, as they face limited methods and the risk of infringing on individuals’ privacy and other legal rights during the evidence collection process and, under general evidence rules, departing employees are not required to prove their compliance with the non-compete obligations.

To address these issues, former employers must consider the direction and clues for evidence gathering, and explore ways to increase the burden of proof on departing employees in future legal proceedings.

One effective approach has been to include reporting obligations in non-compete agreements to stipulate that departing employees must report their subsequent employment to the former employer, which helps mitigate the above-mentioned challenges and has demonstrated favourable outcomes in practice.

The valid agreement

Xie Yang, Zhilin Law Firm
Xie Yang
Senior partner
Zhilin Law Firm

An employer can be hard pressed to independently ascertain the subsequent employment status of a departing employee. To address this, employers include an obligation in non-compete agreements for employees to regularly report their employment status.

This provision enables employers to determine whether the employee has violated the non-compete obligations based on their job situation. Although the Labour Contract Law does not specifically require employees to report their employment information after leaving a job, the reporting obligation clause becomes a valid agreement and must be adhered to by the involved parties, as long as they genuinely declare externally that the clause complies with the law, and they have agreed to abide by it. This clause effectively places a certain burden of proof on employees.

Non-compete compensation

In many non-compete agreements, companies stipulate that they have the right not to pay non-compete compensation if a departing employee refuses to comply with or improperly fulfils the obligation of reporting their subsequent employment.

While such clauses were previously considered invalid by the courts as legal obligations, recent judicial precedents indicate a shifting stance.

For instance, in Li Yunpeng v Chengdu Zhimingda Electronics, the court acknowledged the non-competition agreement and resignation agreement as genuine expressions of both parties’ intent, mutually agreed on and not in violation of laws and regulations, making them legally valid.

In this case, the employee, Li, reported his employment, service and investments for August and September 2017, but failed to provide any further reports. Consequently, the company was not obligated to pay Li the third month’s non-compete compensation.

However, the obligation to report employment is not mandated by the Labour Contract Law and is distinct from the non-compete obligation. It functions as a supplementary obligation within the non-compete agreement.

Therefore, employers are recommended to explicitly include provisions to temporarily withhold non-compete compensation in the event of refusal to fulfil the reporting obligation.

Furthermore, the agreed scope and criteria for reporting should be reasonable and moderate. If overly broad and unreasonable, it could burden departing employees and pose difficulties in fulfilling the obligation.

In such cases, the employer’s justification for withholding non-compete compensation due to the employee’s failure to report may be insufficient, and the departing employee may claim early termination of the non-compete agreement based on the employer’s non-payment of non-compete compensation.

Investigation direction

Based on the departing employee’s report, the former employer can conduct an in-depth investigation and analysis of their employment situation. Factors such as their professional background, salary level and the scope of their new employers’ businesses are taken into consideration to determine if the departing employee is suspicious, if the report is accurate, or if there’s a possibility of providing false information.

The former employer gains insights to decide whether launching an investigation and collecting evidence is necessary and worthwhile, and it also helps establish the primary direction for the investigation.

Employee’s court appearance

In cases where departing employees provide false employment information, they might be exposed during the investigation by their former employer. Article 64 of the Several Provisions on Evidence in Civil Litigation empowers the court to request the parties to appear in person and answer questions related to the case.

Article 66 of the provisions states that if a party refuses to appear, sign a statement or answer questions without a valid reason, the court will consider the case’s circumstances and assess the credibility of the facts.

If no other evidence supports the facts in question, the court shall make a finding unfavourable to the party. In non-compete litigation, departing employees are increasingly commonly asked to appear in court and face questioning by experienced judges. In such situations, employees providing false employment information will likely struggle to defend their actions effectively.

Adjusting compensation

In non-compete dispute cases, departing employees often argue that the non-compete compensation is unreasonably high and seek the court’s intervention to reduce it. The court considers several factors when deciding whether to approve the reduction, and one crucial aspect is the degree of subjective malice exhibited by the defaulter.

Intentionally providing false employment information is likely to be deemed a significant act of malice, resulting in the court refraining from reducing the compensation or limiting the extent of the reduction.

If employers effectively utilise the reporting obligation clause, it could help improve the traditional imbalance where the former employer faces disadvantages in non-compete disputes.

Xie Yang is a senior partner at Zhilin Law Firm

Zhilin Law Firm logoZhilin Law Firm
Rooms 2001-2007, 20th Floor, Tower C

Global Trade Center, 36 North Third Ring Road East

Dongcheng District, Beijing 100013, China

Tel: +86 186 1130 1382

Fax: +86 10 8400 4936