Non-compete clauses in employment agreements

Once mainly found in the high tech industry, non-compete clauses are now routinely added by Taiwanese employers in a variety of industries. While employers should consider adding non-compete clauses as part of their general intellectual property protection strategy, both employers and employees should be aware that many non-compete clauses in Taiwan are drafted too broadly and may be void or only partially enforceable.

As a matter of Taiwanese law, the CEO (usually known as a “General Manager”) of a company and members of its board of directors are prohibited from engaging in business activities that would compete with their company’s own business while they are employed by or on the board of that company.

Although Article 15 of the ROC Constitution guarantees the right to work, Taiwan’s Council of Labor Affairs and the courts have held that the freedom of contract and Article 23 of the Constitution permit employers and employees to agree to limit the employee’s right to work with non-compete clauses. This limitation is however subject to the following principles:

  1. The employer must have an interest that is protected by the non-compete clause. If an employer does not have business secrets that it needs to protect, or if the alleged business secrets do not merit the degree of protection afforded by a non-compete clause, the employer may not bind the employee with a non-compete clause.
  2. There must be a likelihood that the employer’s secrets will be disclosed because the employee changes jobs. If the employee is in a relatively junior position where she does routine work and can be replaced without undue difficulty, her employment by a competitor will not cause disclosure of business secrets and her right to seek new employment may not be restricted with a non-compete clause.
  3. The scope of the non-compete restrictions must be reasonable. This standard applies to the length of the non-compete restriction, the work to which it applies, the employers for whom the employee cannot work, and the applicable region. For example, an agreement in which the employee agrees not to work for another employer in the semiconductor in any capacity worldwide would be deemed unreasonable and therefore unenforceable. But if the same agreement provided that the employee should not accept employment with a competitor in Taiwan for two years following the end of the current employment relationship, the courts would tend to find the agreement enforceable. This reasonableness requirement along with the following consideration requirement are the most commonly fatal terms in non-compete agreements.
  4. The employee must receive consideration for his loss caused by agreeing to the non-compete clause. This should be in the form of a higher salary, stock option, or other forms of compensation specifically tied to the non-compete clause. It would be obviously unfair to require the employee to restrict his right to work without receiving something in exchange.
  5. Breaches of non-compete clauses must be substantive. When an employee breaches the non-compete clause in an employment contract, the breach must be malicious and in bad faith. Examples of substantive and enforceable breach would include leading an entire team of employees to a competitor or establishing a new competing firm using proprietary business processes, technology, or financial information. In theory, substantive breach should have bearing only on the determination of damages to be awarded rather than effective of the contract. In practice however, the courts have made the extent of the breach a factor in determining whether the non-compete clause is effective.

Both employers and employees should be aware that the courts have exercised considerable latitude in interpreting these principles in the contexts of different industries and individual corporate cultures. In some cases, the courts have used these guidelines to carve more reasonable non-compete terms out of employment contracts that the court has determined are excessively broad.
As Taiwan shifts to a more innovation-based economy, employment contracts that seek to protect intellectual property rights with non-compete agreements have taken on increased importance. Neither employers nor employees should lightly enter into such agreements, and if they do, the courts will be concerned that both parties have fully understood and discussed the need for the agreement and its specific terms in good faith.

Employment law is rapidly evolving in Taiwan, both human resource professionals and prospective employees should be especially cautious about mechanically applying standardized non-compete language that may not in fact be enforceable.