Restrictive Covenants: A PRC and Hong Kong Perspective K. Lesli Ligorner, Partner, Shanghai Fiona Loughrey, Partner, Hong Kong China Employment Group Simmons & Simmons 10 February 2015 Simmons & Simmons LLP 2011. Simmons & Simmons is an international legal practice carried on by Simmons & Simmons LLP and its affiliated partnerships and other entities.
Introduction - Common forms of post-employment restraints (as in the UK and globally) Non-compete within the same industry / business area Non-dealing with clients Non-solicitation of clients Non-solicitation of employees 1 / L_LIVE_EMEA1:25105491v1
Restrictive covenants basic rules for Hong Kong / other common law jurisdictions Hong Kong legal considerations are very similar to those that apply in the UK Contract terms that are in restraint of trade are void unless Legitimate business interest that requires protection; and Protection is no more than is reasonable to protect that interest Legitimate interests Trade and customer connections Trade secrets and confidential information Maintaining a stable workforce Factors relevant to reasonableness The scope of the restrained competitive activity (industry/business area) The scope of protected clients, customers, suppliers and employees Duration Geographical scope 2 / L_LIVE_EMEA1:25105491v1
Restrictive covenants basic rules for Hong Kong / other common law jurisdictions (cont'd) Balancing act between protecting interests and enforceability Is enforcement or deterrence your goal? Assessed at the date entered into All or nothing unenforceable restrictions will be struck out in their entirety Unless unenforceable restrictions are severable (blue pencil test). 3 / L_LIVE_EMEA1:25105491v1
How long is too long? Garden leave must be factored in when considering the length of restraints In Hong Kong, 12 months often considered too long for a non-compete (WPP v O Donnell 2013 HK CFI) although may be reasonable for a very senior employee (Union Knopf v Sossnowski 2013 HK DC) may be reasonable depending on the confidential information being protected (Dyson Technology v Strutt 2007 UK HC) 6 months has better prospects of enforceability Duration of other restraints (non-solicitation of clients/employees; non dealing)? Cascades? 4 / L_LIVE_EMEA1:25105491v1
Restrictive covenants basic rules (PRC) Post termination non-compete restraints Regulated under the PRC Labor Contract Law and local regulations Maximum 24 months, and the scope and territory must be agreed upon Restraint can only restrict employee s right to work for an employer that produces the same type of products or is engaged in the same type of business, or from establishing a competitive business himself Payments must be made during the restraint period (Supreme Court s recent interpretation vs local regulations for the amounts) Post termination non-solicitation restraints Status is unclear but non-solicitation of customers/clients may be deemed a form of non-compete What happens in practice? 5 / L_LIVE_EMEA1:25105491v1
Confidentiality (PRC) Employee can be liable for damages to the Employer for breach of confidentiality obligations ( 保密义务 ) Damages = Profit from the wrongful exploitation of that confidentiality agreement Anti-Unfair Competition Law protects against unfair exploitation of trade secrets Trade secrets must not be generally known and must be commercially valuable due to their secrecy Client lists are protected trade secrets (2006 Judicial Interpretation of Anti- Unfair Competition Law) Employer must take concrete measures to protect trade secrets (e.g., use of confidentiality agreements, password protections, etc.) 6 / L_LIVE_EMEA1:25105491v1
Compensation (PRC) Monthly payments required, although lump sum permissible Amount of compensation depends on local regulations Usually 30% to 70% of average monthly pay (one-twelfth of annual remuneration including wages, bonuses and other allowances) 7 / L_LIVE_EMEA1:25105491v1
Compensation (PRC) (cont'd) Labour Contract Law Based on the agreement between the employer and employees. Supreme Court s Judicial Interpretation (came into force 1 February 2013) 30% of the average monthly salary for the period of 12 months immediately preceding the termination of employment (or the local minimum wage, whichever is higher), if the employment contract includes non-compete restrictions but does not specify a compensation provision, and the employee fulfils the post-termination non-compete obligations after the termination of employment 8 / L_LIVE_EMEA1:25105491v1
Notice to employee (PRC) Must employer give notice of intention to enforce covenant to employee prior to termination? Local rules may apply (e.g., Shanghai) Content/form of notice Consequences of no notice Termination of the non-compete covenant in the middle of its term 9 / L_LIVE_EMEA1:25105491v1
Remedies in PRC Enforcement of covenants Very limited concept of injunction Order to cease infringing behaviour exists but courts and tribunals extremely reluctant to use on employees As a result, difficult to establish a right to remedy need to prove that the company suffered loss, and value of the loss Few cases reach the stage of needing to seek court order 10 / L_LIVE_EMEA1:25105491v1
Best practices in PRC Include liquidated damages provisions in non-compete agreement Specify in agreement that dispute be heard in court rather than tribunal Claims against the new employer Trade secret infringement claim 11 / L_LIVE_EMEA1:25105491v1
Injunctive Relief (of sorts) (Pudong District Court Case (2014) No. 21090) Non-compete covenant stated that in the event of breach, one of the remedies would be to require the employee to continue to perform his obligation and to stop the damage. Labour arbitration commission ruled in favour of Employer Employer applied to the District Court for enforcement Court issued a mandatory enforcement order that the Employee terminate employment with the new employer On appeal, the District Court issued a judgment for the Employer that the Employee should continue to perform his non-compete obligation (However, the judgment did not expressly specify whether the Employee should terminate his employment with the new employer.) 12 / L_LIVE_EMEA1:25105491v1
Liquidated Damages (Xuhui District Court Case (2013) No. 421) Non-compete covenant had a liquidated damages provision of RMB 150,000 Very high amount relative to employee s salary (RMB 8,000 / month) and compensation for non-compete (30% of monthly salary for 12 months) Court held that since the actual loss to the employer was difficult to calculate, damages should be paid in accordance with the liquidated damages provision (Note that in other cases, courts have lowered the agreed liquidated damages based on the principle of equality and fairness.) 13 / L_LIVE_EMEA1:25105491v1
Practical tips (PRC) Keep robust working rules governing restraints during employment Consultation process (mandatory) Employee s acknowledgement of receipt and certification of compliance (recommended) Reach agreements on post termination restrictions Written agreement (part of employment contract or separate agreement) Signing at the time of hiring recommended, with contract renewals being an opportunity to update any covenants 14 / L_LIVE_EMEA1:25105491v1
Drafting restrictive covenants Non-compete Duration should be linked to the shelf-life of the confidential information to be protected Limit to industry / business area in which the person was engaged Non-solicit/deal: clients, customers, suppliers Non-solicit/poach: employees Not unusual to list (inclusively) competitors to which covenant applies and have ability to update the list Duration should be the period which it would take to reestablish the relationship Limit to clients (etc.) with which the person had contact during previous [x] months Limit to senior employees / employees that would cause damage to the business if they left Limit to employees with whom that person had relevant contact (e.g., direct reports) during the previous [x] months 15 / L_LIVE_EMEA1:25105491v1
Drafting restrictive covenants (cont d) What are the precise interests to be protected specific to the business (and this individual or level of employee)? Consistency amongst employees vs appropriate restrictions for individuals at certain levels in the business Rules of construction Review / update periodically 16 / L_LIVE_EMEA1:25105491v1
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Contact us Fiona Loughrey Partner, Head of China Employment Group Fiona has been a partner in the Firm, and head of its China employment group, since 1999. T +852 2583 8361 E fiona.loughrey@simmonssimmons.com Fiona advises on all aspects of the employment relationship, including hiring strategies; negotiation of employment terms and contract drafting; protection of confidential information, and enforcement of, and issues relating to, business protection restrictions; dispute resolution and litigation, including applying for and defending applications for injunctions; privacy and data protection; the employment aspects of mergers and acquisitions and restructurings, share option/stock purchase schemes; and audits of human resources procedures. Fiona also has particular experience in dealing with the defence of equal opportunities and discrimination claims. 18 / L_LIVE_EMEA1:25105491v1
Contact us K. Lesli Ligorner Partner, Shanghai T +86 21 6171 9328 E lesli.ligorner@simmonssimmons.com Lesli Ligorner joined Simmons & Simmons in early 2012 and has worked in the PRC since 2006. She is an employment partner based in Shanghai who is a market-leading employment specialist in the PRC, and is admitted to the bars of New York and New Jersey. She has unsurpassed knowledge and breadth of experience in helping highprofile multinational clients navigate the PRC regulatory environment. Lesli s experience cuts through many industries. She trains employees on workplace anti-harassment and diversity policies, codes of conduct, anti-corruption compliance and best practices for human resources and compliance professionals. She counsels companies globally on compliance matters with respect to FCPA and UK Bribery Act. She conducts and supervises investigations into anti-corruption and employment-related misconduct. She regularly speaks and publishes articles on employment and anti-corruption-related topics. Lesli is also a founding member of the Asia Turnaround & Transformation Association. 19 / L_LIVE_EMEA1:25105491v1
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