Elizabeth Pai and Jack Hsieh
I. Introduction
In practice, businesses all wish to enhance the protection of their trade secrets through specific clauses in the employment contract (refer to our firm’s October 1, 2021 article on “How Can Enterprises Enhance the Protection of Intangible Assets via Employment Agreements (Taiwan)”). In addition to confidentiality clauses in the contract, more restrictions are imposed via the “post-employment non-compete clause” for employees who have access to critical confidential information to avert the risk of leaking trade secrets. Given the fact that employees’ rights to work may be affected by such clauses, to balance the protection of both trade secretes and employees’ right to work, the Labor Standards Act (“LSA”) has added Article 9-1 on December 16, 2015, expressly stipulating the relevant elements of the non-compete clause in the employment contract:
1. The employer has legitimate business interests to be protected;
2. Some positions or obligations held by the employees provide them access to the employer’s trade
3. The non-competing period, region, occupational activities, and targeted employers shall not go beyond a reasonable scope.
4. The employer shall reasonably compensate any potential loss due to the non-compete commitment
Moreover, Article 7-1 of the Enforcement Rules of the LSA stipulates that: “non-compete agreement shall be made in writing, detail the contents in Article 9-1, Paragraph 1, Item 3, and Item 4 of the LSA (i.e. the scope of non-compete restriction and the reasonable compensation for such restriction), and signed by the employee and employer.” However, an in-depth discussion still needs to be made about what “reasonable” delineates.
II. Content of a Reasonable Scope
Article 7-2 of the Enforcement Rules of the LSA stipulates that “agreement made in accordance with Article 9-1, Paragraph 1, Item 3 of the LSA shall comply with the following requirements:
1. The period of non-compete shall not exceed the life cycle of the trade secrets or technical information the employer intends to protect. Such period shall not be longer than 2 years.
2. The restricted regions shall be limited to the regional scope of the original employer’s actual business activities.
3. The scope of restricted occupational activities shall be expressed clearly and identical or similar to the original occupational activities.
4. The targeted employers under restriction shall be expressed clearly and limited to those of identical or similar operational activities and have a competitive relationship with the original employer.
Although the above regulations clarify “reasonable scope” to a certain extent, in practice, the reasonable scope is still being determined on a case by case basis.
For the post-employment non-compete clause signed before the enactment of Article 9-1 of the LSA, Article 247-1 of the Civil Code and the principle as being outlined in the current Article 9-1 of the LSA are used as the basis for determining whether such clause is unfair (hence invalid). The following is an excerpt of the relevant judicial practice judgments since mid-December of 2015 (the effective date of Article 9-1 of the LSA):
(1) The Supreme Court 109–Tai-Shang-Zi 1616 Civil Adjudication (this case is being returned to High Court for retrial)
Non-compete clause: “Party A agrees that within 2 years of contract termination, he/she shall not engage in business projects or operations, or take positions in a for-profit institution, similar to Party B; and not engage in any activities of competitive nature against Part B in any countries or areas without Party B’s written consent.”
The Court held that the clause isn’t fair as its scope is worldwide and there’s no compensation (Note: the agreement was signed before the enactment of Article 9-1 of the LSA), remanding it to the High Court.
(2) The Taiwan High Court 109– Lao-Shang-Zi 52 Civil Adjudication (currently in appeal)
Non-compete clause: “within the 18 months from the termination of employment, you shall not engage in any of the following: take an employment position from, or provide services to, abovementioned competitors…… ‘competitors’ shall mean ‘any semi-conductor wafer manufacturing businesses currently or in the future.'”
In this case, the Court held that while the non-compete clause has no specific areas, due to the fact that the semi-conductor businesses compete in a globalized market and the clause has specified the relevant service providers, it’s fair to say such provision has effectively specify the scope of regions. Therefore, such clause is necessary and appropriate. (Note: the agreement was signed before the enactment of Article 9-1 of the LSA)
(3) Taiwan High Court Kaohsiung Branch 109– Lao-Shang-Zi 37 Civil Adjudication
Non-compete clause: “Within 2 years from the termination of employment, without the prior written consent from the company, any direct or indirect engagement (including but not limited to self-employment, employment, or as an agent or consultant) in domestic or international businesses to which the company may potentially has competitive relationship or conflict of interest (including but not limited to R&D, manufacture, or sales) is prohibited.”
The Court held that the clause overextended the scope of the company’s actual operational activities, as “domestic or international” effectively means worldwide. Moreover, it further restricts its scope to direct or indirect business engagement, including even businesses with potential conflict of interest. Thus, such abstract and vaguely expressed scope on occupational activities and employers renders such clause ineffective.
(4) Taiwan Taipei District Court 108–Lao-Su-Zi 111 Civil Adjudication
Non-compete clause: “Within 1 year from the termination of this contract, you shall not engage in, agree to, accept, solicit, or support any businesses of similar nature to our company’s businesses or intended future businesses. Moreover, you shall not directly or indirectly inquire or propose any related suggestions or offers.”
The Court held that the above clause does not expressly specify a reasonable geographic restriction. Even if such restriction is interpreted as the entire Taiwan region, whether it is necessary is still questionable. Therefore, since this clause lacks predictability for the employees and imposes improper restrictions on employees’ rights and freedom to work in the future, it’s beyond a reasonable scope and shall be ineffective.
(5) Taiwan’s Hsinchu District Court 108-Lao-Su-Zi 55 Civil Adjudication
Non-compete clause: “The scope of Party A (the company)’s technical service region is Taiwan and the Mainland area. Party B shall not, within 2 years from the termination of employment, without Party A’s consent, engage in any work of similar nature or category to Party A within the above regional scope.”
The Court held that while the clause is restricted to Taiwan and the Mainland area (i.e. the employer’s technical service region), considering the employee’s education and working experience, he should still have the ability to work outside the industry. Thus, the clause is within a reasonable scope.
(6) Taiwan’s Taichung District Court 108-Lao-Su-Zi 148 Civil Adjudication
Non-compete clause: “Within 2 years from the termination of employment…… you shall not engage or take positions in any businesses or entity of competitive nature in Taiwan (later amended the restricted area to Taiwan and Hong Kong).”
The Court held that since the restricted employment area is limited to Taiwan and Hong Kong (i.e. the scope of business activities in which employee had actually worked), the clause is not beyond a reasonable scope.
(7) Taiwan Taoyuan District Court 105-Lao-Su-Zi 1 Civil Adjudication
Non-compete clause: “Within 2 years from the termination of employment, regardless of the reason for the termination, Party B (the employee) shall not, without Party A’s written consent, hold any relevant positions in Elite Material Co., Ltd., Formosa Laboratories, Inc., ISOLA, Hontai, Advanced Material, Shengyi Technology Co.,Ltd., Hong Ren, and Tai Zhen; or any other businesses manufacturing a same type of product (including but not limited to plastic film, soft/hard copper foil substrate, and printed circuit board foundry under Party A’s product line), or conducting operations of competitive nature (e.g. competing in or for the same market or client), to Party A’s business. The scope of such competitive business shall be determined by the coverage of Party A’s business operation and shall not be limited to the Mainland and Taiwan region.”
The Court held that due to the rapid expansion of the employer’s business, the employee could not foresee the scope of such expansion. Therefore, the clause is unfair since it restricts the employee from working within the scope of the company’s business operation. (Note: the agreement was signed before the enactment of Article 9-1 of the LSA)
III. Conclusion
Based on the above cases, the following conclusions can be drawn:
1. In judicial practice, the “reasonable scope” is determined on a case-by-case basis. Factors considered in determining what constitutes a reasonable scope include whether the restricted region is specific and explicit; the ability to work of the employee concerned; the competitive nature of a market; whether the future scope of the employer’s business operation is foreseeable for the employee; and the aptness of compensation in comparison to the restrictions.
2. According to the above cases, the violations of reasonable scope requirements will render post-employment non-compete clauses wholly invalid in accordance with Article 247-1 of the Civil Code and/or Article 9-1, Paragraph 3 of the LSA. However, in practice, the Resolution No. 7 of the Civil Proposal of the 107 Legal Symposium of the Taiwan High Court and its lower courts once held that, for the purpose of ensuring employer’s interest and promoting economic development, invalid a post-employment non-compete clause in whole will be unnecessary if the clause contains a reasonably appropriate scope and does not endanger the employee’s right to work (in other words, such non-compete clause will be partly enforceable). However, it remains to be seen whether this resolution will be generally adopted in practices.
In addition to assessing whether its scope of restrictions is reasonable, a non-compete clause shall also be examined by certain factors such as “whether the employer has any proper trade secrets worthy of protection”, “whether an employee’s position provides he/she access to such secrets”, and “the reasonable compensation for such restriction”. Therefore, it is recommended to refer to the abovementioned factors to address any detail properly when drafting non-compete clauses.
(The authors’ opinions do not represent the position of this law firm.)