Shanghai Confirms an Employer’s freedom to Require Confidentiality and Non-competition Agreements

China
In order to explicitly bind an employee to confidentiality, confidentiality agreements must be signed with each employee. It is becoming increasingly common in China to incorporate confidentiality and non-competition provisions into employment contracts with each employee who might have access to the company's business secrets. This practice is confirmed at Articles 15 and 16 of the Measures Regarding Employment Contracts in Shanghai Municipality (effective as of May 1, 2002). Article 17 provides that a penalty may be provided for breach of trade secret confidentiality requirements. Article 49 confirms that part time workers can also be required to keep trade secrets confidential.

The earlier nationally applicable Notice of the Ministry of Labor on Several Issues Relating to the Mobility of Enterprise Staff and Workers (October 1996) specifically permits employers to prohibit employees with access to trade secrets to work for a competitor after leaving the company. Non-competition agreements with employees should be a routine requirement to prevent employees from competing with their employers either while employed or subsequent thereto.

Appropriate content for anti-competition clauses is discussed in Opinions of the State Commission on Science and Technology, on Strengthening Management of Confidential Technical Information When Technical Workers Change Jobs (issued July 1997). Under clause 7 of the Opinions, the maximum period for a non-competition restriction is three years, and then only applicable to key employees. Under clause 9, it is recommended that when technical personnel are hired, and will use know-how which they acquired at their previous employer, the agreement of the earlier employer should be obtained and compensation paid to the previous employer when that know-how turns into a new technical achievement. The Opinions recommend in clause 8 that personnel with access to trade secrets be reminded of their obligation of confidentiality upon leaving the firm, and that the obligation be renewed in writing or verbally. The Opinions further recommend that the employee's new employer be informed of the confidentiality obligations the employee brings with him.

The Zhuhai Enterprise Technology Secrets Protection Regulations permit a non-competition restriction to extend for up to five years, longer than the new Shanghai Measures allow. Compensation is payable for the privilege of compelling an employee to sign a non-competition agreement. Under the Shanghai Municipality Measures anti-competition restrictions are limited to three years, and compensation (no statutory amounts are specified) is required. With an anti-competition clause, the employee would be prohibited from running run his own business or helping others run such a business if it competes with the business of his original employer.

The Guangdong Regulations on Technology Secret Protection require that an anti-competition agreement restrict only matters central to the employer's business, for example the manufacture of a specific product in direct competition with a former employer.

The breach of the duty of confidentiality or non-competition should entail damages, often in the form of pre-stated liquidated damages or other appropriate forms of punishment, as agreed between the parties to the contract. The requirement is more severe under Article 17 of the Shenzhen Measures on the Protection of Technical Secrets in Enterprises in the Special Economic Zone (effective from 1 January 1996) where consideration for an anti-competition agreement must be at least 2/3 of the employee's salary for the previous year, whether or not consideration is stipulated in the anti-competition agreement or employment agreement. Under Article 16 of the same Measures, an anti-competition agreement may restrict employment for up to three years. However under Article 19, the term for non-competition is cancelled if the technical secrets involved become publicly known, if the personnel involved never had actual access to the technical secrets, or if the employer breaches the employment contract by prematurely terminating the employment.

Article 21 of the Shenzhen Measures also requires that the employer confirm technical secrets as secret information and mark documents as such, or if the information cannot be so marked, that it be accompanied by a corporate document confirming the identity of the information as secret, with a copy to personnel with access. Secrets must be categorized as secret or top secret in accordance with their useful life, technical sophistication and value. A system for enacting such categorization is required to be put in place by the employer (under Article 23 of the Shenzhen Measures). The same applies for technical projects which are not organized as employing units (Article 24).

The obligation to maintain confidentiality of trade secrets is different from obligation not to compete. The obligation of confidentiality continues after end of a contract of employment. An employee gives away his interest in using his skills when he agrees not to use his knowledge working in competition with a former employer. The obligation to maintain confidentiality of trade secrets would apply even where there was no non-competition agreement, but non-competition restrictions are only possible with an express agreement. It is advisable to require both kinds of agreements is because on a practical level, employees who know the trade secrets of an employer will have difficulty refraining from using such information in their next job, even if there is no specific intention to violate trade secret confidentiality. Because it is difficult to unlearn information already known, the different restrictions of a non-competition agreement would usually be applied.

Luring technical personnel away from one employer to work with another is treated as an illegal activity under clause 2 of the Various Opinions of the National Science Commission on Strengthening the Management of Technical Secrets in the Course of Job Shifting by Technical Personnel (effective from 2 July 1997).

For further information on this please contact Luke Filei on luke.filei@cms-cmck.com or +86 10 6590 0389 in Beijing or +86 21 6289 6363 in Shanghai.