February 2024
Aaron Chen and Julian Lai
1. Background
Non-compete clauses often protect a former company’s trade secrets by preventing employees from jumping ship to competitive businesses after leaving their positions, eliminating the potential risk of employees leaking a former company’s trade secrets. This encourages companies to invest more proactively in research and development, fostering increased industry investment and innovation[1]. Additionally, non-competes help reduce turnover rate and incentivize employers to invest more in training, enhancing product or service quality.
However, non-compete clauses also come with significant drawbacks.
Restricting employees’ post-employment job options hampers labor mobility, stifles competitive businesses’ ability to attract top talent, and could result in reduced employee salaries. Consequently, this impedes competitive businesses from entering and thriving in the market.
According to explanations from the Federal Trade Commission (hereinafter, “FTC”)[2], when employees are restricted by non-compete clauses from moving to positions with higher productivity and higher salaries, it not only affects the salaries of employees bound by such agreements, but also deprives other employees in the labor market of opportunities for those job vacancies. This leads to a decrease in overall job mobility in the labor market, ultimately resulting in a decline in overall market salaries. According to the FTC’s estimates, if legislation is enacted to prohibit non-compete clauses, the total labor income in the United States will increase by nearly US$300 billion annually. Furthermore, the FTC states that numerous empirical studies show that non-compete clauses hinder competitive businesses from recruiting talent in the market, leading to a decrease in entrepreneurship rates, lower product or service quality, and increased prices. The FTC points out, for example, that if legislation is enacted to prohibit non-compete clauses in the healthcare industry, it will result in an annual decrease of US$150 billion in prices paid by consumers.
2. The proposed amendment by the FTC
In light of the above, on January 5, 2023, the FTC proposed the amendment affirming that entering into non-compete clauses would constitute unfair competition and violate Section 5 of the Federal Trade Commission Act. The proposed amendment aims to add a new subchapter J, consisting of part 910, to chapter I in title 16 of the Code of Federal Regulations, comprehensively prohibiting employers from entering into non-compete clauses with employees, except in special circumstances such as merger transactions (Section 3, Part 910).
According to the proposed amendment, it is an unfair method of competition for an employer to enter into or attempt to enter into a non-compete clause with employees; maintain with employees a non-compete clause; or represent to employees that the employees is subject to a non-compete clause where the employer has no good faith basis to believe that the employees is subject to an enforceable non-compete clause (Section 2(a), Part 910). Furthermore, because employers are not permitted to continue maintaining non-compete clauses with employees, employers must rescind non-compete clauses previously signed with employees within a specified period and provide notice to employees or former employees (if contact information is available) in writing or in digital format, informing them that previously signed non-compete clauses are invalid and unenforceable (Section 2(b), Part 910)[3].
Since the proposed amendment has sparked widespread discussion and opposition from enterprises, the FTC has yet to promulgate the final version of the proposed amendment. It is expected to be finalized in April 2024[4]. However, in the years leading up to the proposed amendment, the FTC has initiated prosecutions against several companies for unfair competition due to their signing of non-compete clauses and has reached settlements with them on conditions such as ceasing to sign non-compete clauses in the future, terminating the signed non-compete clauses, and notifying affected employees.
3. Reference and impact on Taiwan laws
Regarding the regulation of non-compete clauses, Taiwan only amended Paragraph 1 in Article 9-1 of the Labor Standards Act (hereinafter, “LSA”) on December 16, 2015. It stipulates the requirements for employers and employees to agree on non-compete clauses, including: (1) the employer has legitimate interests that need protection; (2) the employee’s position or duties involve access to or use of the employer’s trade secrets; (3) the duration, scope of activities, geographical area, and prospective employers regarding the non-compete limitations do not exceed reasonable limits; (4) the employer provides reasonable compensation to employees for losses incurred due to non-compete clause. Additionally, Article 7-2 of the Implementing Regulations of the LSA actively provides the details concerning the “reasonable limit” stipulated in Item 3, Paragraph 1, Article 9-1 of the LSA above. For example, it is stipulated that the duration of the non-compete period shall not exceed the life cycle of the business secrets or technical information the employer seeks to protect, and shall not exceed a maximum of two years.
In Conclusion, Taiwan’s oversight of non-compete clauses remains at the stage of individualized consideration, balancing the protection of labor rights and the safeguarding of business proprietary information. Additionally, It has yet to address the potential adverse effects of non-compete clauses on the overall labor market, which may result in unfair competition.
Taiwan Fair Trade Commission has not issued any explanation or determined that a company’s behavior of intentionally signing invalid non-compete clauses with employees violates Article 25 of the Fair Trade Act[5]. However, the FTC’s recent focus on non-compete clauses and the above groundbreaking proposed amendment will likely significantly impact the businesses, worthy of Taiwan Fair Trade Commission’s attention to its subsequent development.
[1] For related details, please refer to the firm’s cover article in October 2021 titled How Can Enterprises Enhance the Protection of Intangible Assets via Employment Agreements (Taiwan) (last visited on February 29, 2024)
[2] See Chair Lina M. Khan, Statement of Chair Lina M. Khan Joined by Commissioner Rebecca Kelly Slaughter and Commissioner Alvaro M. Bedoya Regarding the Notice of Proposed Rulemaking to Restrict Employers’ Use of Noncompete Clauses Commission File No. P201200 at: https://www.ftc.gov/system/files/ftc_gov/pdf/statement-of-chair-lina-m-khan-joined-by-commrs-slaughter-and-bedoya-on-noncompete-nprm.pdf (last visited on February 29, 2024)
[3] See FTC, Non-Compete Clause Rulemaking at: https://www.ftc.gov/legal-library/browse/federal-register-notices/non-compete-clause-rulemaking (last visited on February 29, 2024)
[4] See Cheryl Winokur Munk, One of Wall Street’s favorite ways to control workers is under attack at: https://www.cnbc.com/2024/02/08/one-of-wall-streets-favorite-employee-control-tactics-is-under-attack.html (last visited on February 29, 2024)
[5] However, Taiwan Fair Trade Commission has also introduced this issue, indicating that the authority is also closely monitoring this matter. See Wen-Hung Lin, New Policies under Section 5 of the Federal Trade Commission Act, Fair Trade Commission Newsletter Issue 215 at: https://www.ftc.gov.tw/upload/1120315-1.pdf (last visited on February 29, 2024).
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