Courts have recently shown a willingness to award significant damages in high profile non-compete cases, including upholding liquidated damages clauses that impose high level penalties for breach. For example, the Shanghai No. 1 People’s Court reportedly ordered an R&D employee to pay RMB19.4 million to his former employer for breaching his post-termination non-compete obligations. Other courts upheld liquidated damages of approximately 10 times the amount of the non-compete compensation received by the employees from their prior employers.
In the Shanghai case, the employee was hired to engage in online gaming R&D operations and had access to material information of the company. He received restricted stock options from the company to sign a confidentiality and non-compete agreement. Under the agreement, the employee agreed to not work in the same or similar industry as his employer for a set post-termination period upon separating from the company. In addition to the stock options, the employer agreed to pay the employee additional non-compete compensation for the post-termination non-compete period.
While still employed with the company, the employee established a tech company. After separating from the company, but still during the post-termination non-compete period, the employee established two more tech companies. In the final ruling, the appellate court ordered the employee to pay RMB19.4 million in damages, which was significantly higher than the 3.72 million in damages that was originally awarded by the first instance court. The appellate court took into consideration the restricted stock benefit that was provided to the employee when making the decision on the damages amount.
In another set of cases, a Chinese search engine company reportedly brought a series of suits against former employees who joined a map search engine company (or the subsidiary of that map search engine company) during their post-termination non-compete term. In each of the cases, the final court ruling ordered the former employees to refund the non-compete compensation received from their prior employer and to pay additional liquidated damages of approximately 10 times the amount of the non-compete compensation received from their prior employer in accordance with the contractually stipulated liquidated damages amount.
Business Law Digest is compiled with the assistance of Baker McKenzie. Readers should not act on this information without seeking professional legal advice. You can contact Baker McKenzie by e-mailing Danian Zhang (Shanghai) at [email protected]