Protection of trade secrets and guidelines for post-employment non-compete clauses

Trade secret protection, like other forms of IP protection, can never be overemphasised. Considering the nature of IP rights, which are intangible assets stemming from ideas and information, confidentiality is the first priority for IP protection and management before submission of any other IP application. However, in practice, it is difficult to establish evidence of the misappropriation of trade secrets. In practice, the protection of trade secrets often relies on confidentiality agreements and post-employment non-compete clauses. However, the latter often trigger labour rights issues. The key is phrasing a valid and enforceable post-employment non-compete clause.

In late 2016 the Administrative Yuan announced an amendment to the Enforcement Rules of the Labour Standards Act. The amendment provides guidance on the reasonable criteria for restrictions and compensation in connection with post-employment non-compete clauses.

The amendment makes clear that post-employment non-compete clauses are enforceable if they are reasonably limited in scope and duration and designed to protect legitimate business interests. However, there is no clear guidance regarding the reasonable criteria, particularly with respect to the amount of compensation payable to an employee in exchange for his or her agreement to abide by non-compete restrictions.

The Enforcement Rules of the Labour Standards Act provide the following clear guidance:

  • Format – the content of the restrictions and the compensation payable must be written and specified.
  • Restrictions:
    • length – no longer than the lifecycle of the relevant trade secrets, with a maximum duration of two years;
    • area – the actual business area of the former employment;
    • job – clearly defined and similar to the former employment; and
    • new employer – clearly defined, similar to the former employer and with a competitive relationship with the former employer.
  • Compensation payable to the employee:
    • no less than 50% of the monthly salary at the time of resignation;
    • reasonable to live on during the restriction period;
    • other relevant standards regarding reasonability; and
    • payment made in a lump sum or monthly instalments.

However, neither the act nor the enforcement rules include any stipulation on when such clause should be signed. In reality, it is often difficult to reach agreement on non-compete clauses, as employees often ask to end the employment relationship. Moreover, the employee may have already received a new offer of employment from a competitor. Further, it is not known when an employee will leave the company and whether he or she will sign a non-compete clause when he or she initially joins the company. This is because neither the employer nor the employee can foresee the exact scope of restriction or the details that should be defined.

Therefore, to meet the requirements for a non-compete clause, a two-step method should be used. First, when an employee joins a company, both the employer and the employee can agree and sign a post-employment non-compete clause. The details of the content of the clause (eg, the area, scope, counterparties and compensation) can be left blank to be negotiated when the employee requests termination of the employment relationship.

If the parties cannot reach agreement, either party can request a judgment from the court. Of course, litigation takes time and the company can impose restrictions on the employee and pay compensation immediately in order to put the post-employment non-compete clause into practice and leave the issue to a final judgment on issues such as whether the restriction exceeds the reasonable criteria or the amount of the compensation is adequate.

There has been one case litigated in which an employee requested unpaid leave and then, in violation of the original employment contract, went to work for a competitor during the leave. The original employer sent the employee a termination notice and paid compensation immediately according to the post-employment non-compete clause which had been signed previously. The original employer also increased the amount of compensation and reduced the restriction per the original clause when it sent the notice to the employee to initiate termination. The company's actions were taken into consideration by the judge to determine whether the non-compete and compensation clauses were reasonable. As the original employer had already paid the employee compensation and restricted the scope of the non-compete clause, the judge ruled that the original employer could demand that the employee cease working for the competitor and pay a penalty to the original employer.

The key issue is not that an agreement has been reached by both parties, but whether such agreement meets the requirements of the reasonable criteria. After the new guidelines are put into practice, more rulings are expected to explain the new guidelines further. 

This is an Insight article, written by a selected partner as part of IAM's co-published content. Read more on Insight

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