Non-compete Obligations Should Have Boundaries
August 13, 2025
On July 31, 2025, the Supreme People’s Court issued the “Interpretation (II) of the Supreme People’s Court on Several Issues Concerning the Application of Law in the Trial of Labor Dispute Cases”. Summarizing recent judicial practice, it clarifies the boundaries of the validity of non-compete clauses.
Relevant Legal Provisions
Article 13
Where an employee has neither known nor had access to the employer’s trade secrets or confidential information related to intellectual property, and the employee requests confirmation that the non-compete clause is ineffective, the People’s Court shall support such request according to law.
Where the scope, geographical area, term, or other content stipulated in the non-compete clause is inconsistent with the trade secrets or confidential information related to intellectual property that the employee knew or had access to, and the employee requests confirmation that the portion of the non-compete clause exceeding a reasonable proportion is invalid, the People’s Court shall support such request according to law.
Article 14
Where an employer agrees on an in-service non-compete clause with senior management, senior technical personnel, or other personnel obligated to maintain confidentiality, and the employee requests confirmation that the non-compete clause is invalid on the grounds that an in-service non-compete cannot be agreed upon or that no economic compensation was paid, the People’s Court shall not support such request.
Case A
Mr. He was previously employed in the “Maintenance” department of Company A, responsible for the installation and maintenance of home broadband services during his employment. On January 13, 2022, Mr. He resigned from Company A and joined Company B, holding the position of Maintenance Team Leader.
On January 29, 2022, Company A issued a notice letter to Mr. He, stating that the non-compete geographical area was the Shanghai, the restricted industry was the general telecommunications industry, the restriction period was one year, and the economic compensation was RMB 2,590 per month. On January 30, 2022, Company A transferred RMB 2,590 to Mr. He, with the purpose noted as “February Non-compete Compensation”. On February 11, 2022, Mr. He returned the aforementioned payment to Company A.
The labor arbitration ruled that Mr. He should pay Company A liquidated damages for breaching the non-compete obligation and continue to perform the non-compete obligation. Mr. He disagreed and filed a lawsuit with the People’s Court.
The court held that the information Mr. He had access to did not constitute trade secrets, and Company A failed to provide evidence that Mr. He had access to other potential trade secrets. Therefore, Mr. He was not a suitable subject for non-compete obligations, and the non-compete agreement signed between the parties should be deemed invalid. The court ruled that Mr. He did not bear non-compete obligations after leaving Company A and was not required to pay Company A liquidated damages for breaching the non-compete obligation.
Case B
Mr. Zheng was previously employed by Pharmaceutical Company A (primarily engaged in biopharmaceutical business), serving as Chief Technology Officer (CTO) of the Production Operations Department. During his employment, Mr. Zheng had access to confidential information concerning the production and control details of the chemical components of two drugs from its affiliated company, Pharmaceutical Company B.
On September 29, 2021, Mr. Zheng submitted his resignation and entered into a “Non-compete Agreement” with Pharmaceutical Company A, stipulating a non-compete period of 24 months. After leaving, Mr. Zheng joined Biological Company C, holding the position of Senior Vice President, and informed Pharmaceutical Company A.
In February 2022, Pharmaceutical Company A applied for arbitration with the Labor and Personnel Dispute Arbitration Commission. It argued that since Company C was also a biopharmaceutical company, the two companies were competitors, and Mr. Zheng had violated the non-compete agreement. The company requested that Mr. Zheng pay liquidated damages of RMB 7.1 million, compensate for losses of RMB 1 million, return the economic compensation of RMB 196,185 already paid, and continue performing the “Non-compete Agreement,” among other claims.
The Labor and Personnel Dispute Arbitration Commission terminated the case on the grounds that the statute of limitations has lapsed. Pharmaceutical Company A disagreed and filed a lawsuit with the People’s Court.
The court held that, firstly, Mr. Zheng had only accessed confidential information concerning two specific drugs from Pharmaceutical Company B. Therefore, his non-compete obligation should be limited to those two drugs. Secondly, comparing the products of Biological Company C (which Mr. Zheng joined) with the products of Pharmaceutical Company A and the aforementioned two drugs from Pharmaceutical Company B, although all included cancer treatment products, they were not substitutable based on their indications and medication regimens. Based on this, the court determined that the company Mr. Zheng joined was not an employer operating the same type of products or engaging in the same type of business as Pharmaceutical Company A or its affiliates, thereby constituting a competitive relationship. The court ruled to dismiss all of Pharmaceutical Company A’s claims.
Compliance Recommendations
Through Interpretation II, the court has formalized the requirements for setting and fulfilling non-compete obligations in practice in the form of a judicial interpretation. For employers, it is essential to determine whether to impose non-compete obligations on employees based on the company’s actual circumstances. Slight negligence in the formulation or specific implementation of non-compete clauses may render seemingly comprehensive restrictions a mere piece of paper.
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