Restrictions for core medical personnel joining competitors

By Li Ming, Merits & Tree Law Offices
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Companies in the field of life and medical science, especially pharmaceutical research & development companies and institutions, rely on core personnel (including core technical personnel) for their operation and development. The loss of core personnel is bound to affect the survival and development of companies.

李明, Li Ming, Partner, Merits&Tree Law Offices
Li Ming
Partner
Merits & Tree Law Offices

To protect companies’ trade secrets and prevent the arbitrary flow of core personnel, an important system under PRC law is the non-compete restriction. This article discusses how pharmaceutical companies restrict core personnel from joining competing companies from the perspective of non-compete restriction, and how to hold them accountable after they join competing companies.

According to articles 23 and 24 of the Labour Contract Law, employers can sign non-compete restriction agreements with persons who have confidentiality obligations. Persons who should be subject to non-compete obligation shall be limited to senior managers, senior technicians and other employees who have the obligation to keep confidentiality.

First of all, the non-compete obligation is a contractual obligation that is premised on the existence of a non-compete agreement between the employer and the employee. The non-competition restrictions may be stipulated in a non-compete agreement, or in the non-compete clause of a labour contract or confidentiality agreement. The core personnel is to obtain such confirmation from the employer.

Second, a non-compete obligation is not applicable to all employees, but limited to senior managers, senior technicians and other employees who have the obligation to keep confidentiality.

Proof requirements for employers to pursue the responsibility of core personnel who breach contract

If core medical personnel join a competing company and the legal procedure is initiated, the former employer should prove that:

(1) The employer and the employee have reached a valid non-compete agreement, which needs to cover clauses such as the non-compete restriction term, subjects of non-compete restriction, geographical scope, compensation standards and liquidated damages, etc. The essential clauses are non-compete restriction term and liquidated damages;

(2) The employee actually joined the competing company and violated the agreement. Common evidence includes the employee’s employment announcement in the competing company, social insurance payment records, evidence of the employee attending commercial activities or signing business documents on behalf of the competing company, and the employee posting information about the competing company on social media, etc.;

(3) The employee’s former employer is in competition with the new company he or she joins. In judicial practice, the court’s judgment on whether there is a competition relationship between the two companies is mainly based on whether there are overlaps of business scope of the two companies.

The legal responsibilities of core personnel who violate the non-compete restriction

If the pharmaceutical company can prove that the core personnel has breached the contract, the core personnel can be held accountable for the following:

(1) The core personnel can be required to refund the non-compete compensation employers have paid. Regarding whether the amount of refund of compensation is pre-tax or after-tax, there are always disputes between employers and employees. It is suggested that the refund of non-compete compensation be specified as the pre-tax amount in the agreement;

(2) The core personnel can be required to pay liquidated damages. Regarding the determination of the amount of liquidated damages, the court will generally refer to the agreement, taking into account factors such as the amount of compensation, the performance of the contract, and the degree of the employees’ fault, etc. According to judicial experience, when determining the amount of liquidated damages, the court does not take as prerequisite that the employer can prove the actual loss it suffers. In such cases, it’s difficult for employers to prove the existence of direct losses, and the causal relationship between breach of contract and losses;

(3) The core personnel can be required to leave the competing company and continue to fulfil non-compete obligation. There is a legal basis for employers to ask employees to perform non-compete agreement, but it’s rarely being supported in judicial practice.

If the employer can apply for pre-trial act preservation in a non-compete restriction case, which requires the employee not to work for the competing company before the start of legal proceedings, the employer’s interests can be protected to the greatest extent. But so far, the authors have not retrieved any cases where employers successfully applied for pre-trial act preservation in non-compete restriction cases.

Does the new employer need to bear legal responsibilities?

As mentioned above, the non-compete obligation is a contractual obligation that is based on the principle of privity of contract. The former employer can only pursue the liability of the employee for breach of contract and cannot request the new employer to take responsibility based on the non-compete restriction agreement.

If the new employer uses, or allows employees to use, the trade secrets of the former employer, the former employer can claim that the new employer should bear the tort liability for the infringement of trade secrets. But there are difficulties in providing proof. The former employer needs to prove that the new employer uses its trade secrets, and is at fault.

In summary, although the non-compete restriction system is not comprehensive enough to protect the rights and interests of employers, it is still an important measure for pharmaceutical companies to retain core personnel, and restrict them joining competing companies.

If employees breach the contract, employers can pursue their liability for breach of contract. In many cases, the liquidated damages imposed by the court have amounted to millions, or even more than RMB10 million (US$1.5 million). Meanwhile, employees will naturally weigh the cost of default, and will be more cautious when deciding whether to join a competing company.

Li Ming is a partner at Merits & Tree Law Offices. Legal assistant Sun Yuan also contributed to this article

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Merits & Tree Law Offices
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E-mail: ming.li@meritsandtree.com

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