CHINA Trends and Developments Contributed by: Linda Liang, Ai Luo, Faluan Pan and Chutian Wang, King & Wood Mallesons
Substantive r eview of competitive relationships In non-compete dispute cases where the employ - ees are within the permissible scope subject to non- compete obligations, the judicial authorities tend to focus on a review of the competitive relationships. The noteworthy points are highlighted below, based on a high-profile case (“Case”). The Case was between a leading Chinese quantita - tive hedge fund company (“Employer”) and its former trading strategist (“Ex-employee”), and caused heated discussion in the industry. The Ex-employee initiated a labour dispute against the Employer, requesting unpaid non-compete compensation for the period in which he alleged to have fulfilled the non-compete covenants. The Employer counterclaimed against the Ex-employee, alleging the Ex-employee’s breach of non-compete covenants, including requesting liqui - dated damages for breaching non-compete obliga - tions in an amount over RMB4 million. In the final judgment, the court found that the non-compete cov - enants had been terminated due to the Employer’s failure to pay non-compete compensation for more than three months, and therefore did not support the Employer’s claim of the Ex-employee’s breach of non- compete covenants. When reviewing competitive relationships, in recent non-compete labour disputes the courts have tended to take substantive review going beyond the business scope in the business licence and taking more factors into consideration, including actual business, audi - ences of product/service, the employee’s job with a new employer, industry practice, etc. In the Case, despite the business scope of the Ex- employee’s new employer (IT development) not over - lapping with that of the Employer (investment man - agement), the first instance court found there is a competitive relationship, taking the following factors into consideration: • the Employer’s reasonable explanation that it has IT development activities in actual operations and that IT development is the core competitive edge of quantitative investment management; • it is also industry practice that different functions are assigned to affiliates of an investment com -
pany, but offer overall support to the investment business (software developed by the new employer is mainly about quantitative trading and its affiliate is a direct competitor to the Employer); and • the job the Ex-employee took with the new employer is the same as that he had with the Employer (quantitative strategy research). Similar logic can also been seen in the No 190 guiding case released by the PRC Supreme Court in 2022, where the court did not limit its examination to the overlap of the registered business scope of the ex- employer and the new employer, but also considered the overlap of their actual business activities, cus - tomers/potential customers and the corresponding market. Obligation to report employment status Another point worth noting is the obligation to report employment status, which is more of a collateral obli - gation to non-compete obligations. It is common for employers to stipulate in non-compete covenants that an employee is obliged to report employment status to the ex-employer during the non-compete period (“Reporting Obligation”). However, there are no laws or regulations directly stipulating a Reporting Obliga - tion; in practice, it is disputable whether failure to fulfil the Reporting Obligation equals a breach of non-com - pete obligations. Moreover, it can be risky if employers stop payment of non-compete compensation based only on an ex-employee’s failure to fulfil the Reporting Obligation. In the Case outlined above, the Reporting Obligation was agreed upon between the Employer and the Ex- employee, but the Ex-employee did not fulfil such obli - gation during the non-compete period. The Employer stopped payment of non-compete compensation from the second month of the non-compete period, and the Ex-employee later notified the Employer of the termination of non-compete covenants due to its failure to pay non-compete compensation for more than three months. There are split opinions on the Case among the labour arbitration commission, the first instance court and the second instance court.
146 CHAMBERS.COM
Powered by FlippingBook