When drafting China employee agreements, I often have to deal with the issue of non-compete provisions. One of the recurring non-compete issues is the geographic scope appropriate for the employee. The general rule for China on this is quite simple: China will enforce a “reasonable” geographic scope.
But what does that even mean?
The analysis is entirely factual. In determining whether the geographic scope of a non-compete provision is reasonable, Chinese courts will consider all facts, including, the employer’s business scope, the employer’s size, the employer’s industry, and the employee’s position. Note that the courts will look at the employer’s actual territory on the date employment is terminated, not the territory in which the employer was contemplating doing business back when its employee signed the employment contract.
In a situation where the employer is part of a bigger enterprise, the only thing that matters is the entity with which the employee has his or her labor contract. The worldwide operations are not considered territories for purposes of your China employee non-competes. This is an important thing for foreign companies to realize because this means that if your China employees are part of your China WFOE (which is what should be the case virtually all the time) and your China WFOE makes or sells its widgets only within China, the reasonable geographic scope of your employee’s non-compete will be confined to only China, regardless of whether your Hong Kong or your New York operations sell widgets all around the world.
But if the employer’s territory includes countries outside China, theoretically, these countries can be added to the territory of the non-compete agreement. However, enforcement of your non-compete provision is another issue your should consider. Suppose your employee leaves your employment to work for a Chinese company with a market in one of these foreign countries; your agreement would in principle be enforceable. However, Chinese courts have historically been very reluctant to enforce contractual provisions dealing with situations not within China and we are not aware of a Chinese court ever having agreed to enforce a non-compete in this sort of situation.
Nonetheless, it can still make sense to make the geographic scope of your employees’ non-compete provisions as expansive as you think appropriate. Even if you make the territory too big or the non-compete agreement is unclear on its geographic scope is, it does not invalidate the entire agreement. It only means the court may reduce the geographic scope if it sides with the plaintiff on the territory issue. However, if your agreement provides for a narrow scope, it would be very difficult for you to argue later that the scope should be broadened.
But, as is so often true in this sort of situation, there is a psychological issue that you should consider when contemplating the geographic range of your non-compete, which makes these provisions equal parts art as science. An example of how this might work would be helpful here. Suppose that 99% of your sales are in Qingdao in the Province of Shandong, and the remaining one percent of your sales are in the rest of Shandong Province and in a few provinces nearby. Now suppose that your non-compete specifies the entire world. A judge looking at that will instantly know that there is no real connection between the geographic scope of your employees’ non-compete provision and where you conduct your business and he or she will no doubt severely reduce the scope of the non-compete, probably limiting it to just the city of Qingdao.
Now suppose instead that your non-compete forbids competing within all of Shandong Province. In that case, the judge would be a lot more likely to “let slide” the geographic scope in the contract because it does at least have some reasonable connection with the scope of your business.
For more on China employee non-competes, check out How To Terminate A China Employee Non-Compete Agreement. Very Carefully.