【Labor Standard Act】The Risk to an Employer in Using a Non-compete Covenant to Restrain an Employee ..
A post-employment non-compete covenant is a common practice adopted by employers to protect their trade secrets. Various cases in the past reveal that, upon discovering a potential breach of confidentiality, an employer tend to, before the rendering of any decision by a court on a pending case, file a motion, on the grounds of an alleged breach of a non-compete covenant, requesting a temporary restraining order (a “TRO”) restraining a leaving employee from working for competitors to the employer during the restraint period. However, a recent decision of Taiwan Hsinchu District Court (Taiwan Hsinchu District Court Civil Judgment 108 Jhong Lao Su No.9; “108 JLS 9”) deserves the attention of employers and employees. In 108 JLS 9, Taiwan Hsinchu District Court (the “Hsinchu Court”) held a former employer liable for restraining a former employee, through a court TRO, from working for a competitor to the employer under an invalid non-compete covenant.
108 JLS 9 involves issues more than just the non-compete covenant. The discussion of this Article will focus on the Hsinchu Court’s finding of fact and reasoning related to the issue of the non-compete covenant in 108 JLS 9. The following presents a summary of the fact in 108 JLS 9:
- The defendant company (the “Defendant”) employed the plaintiff Mr. Hsu (the “Plaintiff”) as an employee of the Defendant in 2007. The Defendant and the Plaintiff entered into an employment contract with a non-compete covenant imposing post-employment non-compete restrictions on the Plaintiff for a restraint period of two years without any compensation.
- After the Plaintiff left the Defendant in 2014, the Defendant, asserting that the Plaintiff allegedly breached the Trade Secret Act and the aforesaid non-compete covenant, motioned to a court requesting a TRO against the Plaintiff. The court granted the requested TRO in April of 2015, prohibiting the Plaintiff from working for a competitor to the Defendant before April 19, 2016.
- The Defendant did not subsequently file a litigation against the Plaintiff for the Plaintiff’s civil liability pertaining to the Plaintiff’s alleged breach of non-compete covenant. Rather, following the end of the aforesaid restraint period, the Defendant motioned to the court to dismiss the aforesaid TRO.
- Plaintiff later sued the Defendant alleging that the aforesaid non-compete covenant is invalid and that the Defendant should be held liable for the loss suffered by the Plaintiff as a result of the aforesaid TRO.
In 108 JLS 9, the Hsinchu Court held the Defendant should compensate the Plaintiff for the loss of wages suffered by the Plaintiff as a result of the aforesaid TRO prohibiting the Plaintiff from working for a competitor to the Defendant. The reasoning of the Hsinchu Court is as follow:
- The employment contract between the Plaintiff and the Defendant is a standard form contract unilaterally set by the Defendant, who is an employer, for new coming employees to sign at the beginning of the employment or during the training period. The Plaintiff signed the said employment contract with the Defendant to get employed by the Defendant. The said employment contract between the Plaintiff and the Defendant was not a result of private autonomy because the Plaintiff and the Defendant were not on an equal footing when they entered into the said employment contract.
- Article 9-1 of the Labor Standard Act, amended on December 16, 2015, provides that “a non-compete covenant between an employer and an employee without meeting all following requirements is impermissible: (1) the employer possesses protectable legitimate business interests; (2) the employee’s position or capacity allows the employee to have access to or use the employer’s trade secret; (3) the restriction imposed by the non-compete covenant shall not exceed a reasonable range in terms of its duration, geographical outreach, the scope of the restricted competing activities, and prohibited prospective employers; and (4) the employer shall provide reasonable compensation to the employee for the employee’s loss resulting from not competing. The reasonable compensation referred to in Subparagraph 4 of the preceding paragraph shall not include the remuneration received by the employee during employment. Any agreement in violation of any of the provisions of Paragraph 1 should be invalid. The restraint period of a post-employment non-compete restriction shall not exceed two years. Any excess period more than two years shall be shortened to two years.” The aforesaid provision did not apply to the said employment contract between the Plaintiff and the Defendant because the aforesaid provision was amended after the Plaintiff and the Defendant had entered into the said employment contract. However, a court may, based on Article 1 of the Civil Code, adopt the jurisprudence enshrined in the aforesaid provision to review and decide whether the said non-compete covenant is apparently unreasonable.
- The Defendant demanded the Plaintiff to observe a duty of confidentiality to protect the Defendant’s trade secret, restraining the Plaintiff from accepting a job position to perform job duties with the Plaintiff’s professional specialty after the Plaintiff left the Defendant. On the other hand, the Defendant did not provide the Plaintiff with any compensation for any loss, including but not limited to the loss of wages suffered by the Plaintiff during the restraint period. The consideration in exchange for the performance of duties between the Plaintiff and the Defendant was apparently unfair and inequitable. The said non-compete covenant should be held invalid on the grounds of unreasonable because the Defendant failed to provide the Plaintiff with any compensation for the restraint imposed on the Plaintiff under the said non-compete covenant. As a leading player in the industry with a large fortune and plenty of in-house legal counsels, the Defendant should have known better that the said non-compete covenant without compensation is invalid.
- Both the Plaintiff and the Defendant knew or would have known that the said non-compete covenant is invalid. Moreover, the Plaintiff had no intent to be bound by the said non-compete covenant. However, the Defendant restrained the Plaintiff, through a court TRO, from working for a competitor to the Defendant under an invalid non-compete covenant. The Hsinchu Court thus held the Defendant liable for the Plaintiff’s loss of wages, which would have been received by the Plaintiff had the Plaintiff accepted the job offer offered by the Defendant’s competitor.
The Hsinchu Court’s aforesaid opinion in 108 JLS 9 is a decision rendered by a district court at the trial level. The case of 108 JLS 9 is currently pending on appeal. It remains unknown whether appellate courts will uphold the Hsinchu Court’s view in 108 JLS 9. However, 108 JLS 9 will likely receive wide attention in the future as this case presents a type of case that has not been seen in the past and also involves a famous leading company in the electronics industry in Taiwan. Particularly, from the perspective of an employer, what claims an employer may assert when, in the future, his employee leaves to work for a competitor? What legal actions an employer may take under such circumstances? The Hsinchu Court’s aforesaid opinion in 108 JLS 9 provides certain insights well worth the attention of an employer to consider the options for the choice of claims and practices to prevent similar incidents from taking place.
【This Article presents the author’s analysis of the Hsinchu Court’s reasoning in 108 JLS 9. However, 108 JLS 9 is pending on appeal. The final outcome of 108 JLS 9 may vary due to different findings of fact by the courts based on evidence presented by the parties or the result of investigation by the courts.】
Reference: Taiwan Hsinchu District Court Civil Judgment 108 Jhong Lao Su No.9
