Is Non-Competition Clause Enforceable in Taiwan?
One of the most concerned issues for both employers and employees is whether the non-competition clause provided in the employment contract can be enforced when the employment relationship comes to an end. As an employer would like to protect the business interests and an employee would like to know their rights after an employment contract is terminated, the Taiwanese labor laws have already given clear directions for both parties to comply.
To start off, a non-competition clause which limits an employee's work opportunities after ending employment relationship will be enforceable if certain requirements are met. In short, there are four key requirements provided by Article 9-1 of the Labor Standards Act: (a) employer's proper business interests, (b) employee's access to trade secrets, (c) reasonableness of limitations, and (d) reasonable compensation. Absent one of the requirements will make the non-competition clause void.
Employer's Proper Business Interests
The first requirement is that the employer has proper business interests which require being protected. When the employer can prove that its non-competition clause aims to protect its trade secrets, the first requirement will definitely be satisfied. A recurring question is whether the "proper business interests" requirement can be expanded to include customer data held by the employer. Let me put in this way: the employer would always want to know whether they can enforce the non-competition clause when the employee leaves his job and then poach the employer's customers based on the employer's customer data accumulated over a long period of time. Taiwan High Court concluded yes, and granted the employer's liquidated damages claim. See 109 Taiwan High Court Shan Yi No. 1458 (2020) (noted that the liquidated damages for the non-competition clause was substantially lessened nearly in half because most of the customers did not purchase products from the employees).
Employee's Access to Trade Secrets
The second requirement is the position or job of the employee entitles him to have access to or be able to use the employer's trade secrets. The employer has to bear the burden of proof for this requirement. See 109 Taiwan High Court Chong Lau Shan No. 42 (2020) (reasoned that the employee held an important position for R&D and management for the employer MediaTek Inc. more than 14 years so the employee clearly knew the trade secrets involved).
Reasonableness of Limitations
The period, area, scope of occupational activities and prospective employers regarding the business competition limitation shall not exceed a reasonable range.
- Period: In terms of the period of business competition limitation, it shall not exceed two years. If a non-competition clause limits an employee not to compete more than two years, Article 9-1 of the Labor Standards Act states that the limitation will be automatically shortened to two years. Here, it does not necessarily mean that the employer may use two years as business competition limitation in every case. The court still will consider the reasonableness of the period on a case by case basis for the enforceability of the non-competition clause. In a famous case held by the Supreme Court in 2015, the Supreme Court agreed with TSMC's request, stating that its ex-employee may be prohibited from working for Samsung even though the two years non-competition clause has already expired. However, the grounds for such prohibition were in accordance with the Trade Secrets Act other than the non-competition clause. See 104 Taiwan S.C. Tai Shan No. 1589 (2015).
- Area: Generally, the non-competition area shall be limited to the area of the employer's actual business activities. See Article 7-2 of the Enforcement Rules of the Labor Standards Act. Therefore, the employer shall draft the non-competition clause in a very specific way, narrowing down the area to where the employer actually runs its business. When the non-competition clause fails to specify the area, the employee may argue that non-competition clause covers too broad to be effective. The employer used to argue that limiting the employee not to compete nationally or even globally in the absence of area specification is still reasonable because the employer runs its business globally. However, the court tends to hold that such employer's argument would fail. See 106 S.C. Tai Shan No. 2711 (2017) (rejecting the employer's arguments).
- Scope: The non-competition clause shall concretely specify the scope of occupational activities for the limitation, and shall be identical or similar to the scope of the employee's occupational activities when working for the employer. See Article 7-2 of the Enforcement Rules of the Labor Standards Act. When the employer generally will look to its registry records in front of the Ministry of Economics for arguing the scope of the non-competition clause, the court would still check whether the employee did conduct such occupational activities when working for the employer. In a similar context, the non-competition clause shall specify the prospective employer for the business competition limitation, stating clearly what business activities are identical or similar to and competitive with those of the employer.
The employer shall reasonably compensate the employee who is bound not to engage in business competition activities for the losses incurred. Here, it is very important to note that any remuneration received by the employee during employment will not be considered as the reasonable compensation herein. Article 7-3 the Enforcement Rules of the Labor Standards Act lists some factors for determining whether the compensation is reasonable.
- The amount of compensation per month shall be no less than 50% of one month's average wage of the employee upon resignation.
- The amount of compensation shall be sufficient to support the resigned employee during the period of business competition limitation.
- The amount of compensation shall be equivalent to the loss incurred by the employee in compliance with the period, area, scope of occupational activities and prospective employer of the business competition limitation.
- Moreover, the court may also consider other relevant matter to determine whether the compensation is reasonable.
In addition, the employer must reach an agreement with the employee as to the compensation paid to the employee on a lump sum fee basis upon resignation, or paid on a monthly basis to the employee after resignation.
As you can see, it is very complicated when employer would like to enforce a non-competition clause after the employment relationship is ended. As this article covers almost most of the important points that employers and employees shall pay attention to, you still should consult a lawyer when you are facing this topic.
Hung Ou Yang, Esq., Managing Partner of Brain Trust International Law Firm, specializes in transnational legal disputes, international trade, business and white collar crime, and antitrust. Hung Ou Yang has successfully resolved many high-profile civil, criminal, and transnational disputes, including but not limited to representing Simpolo, Icon, and other Indian tiles companies in an anti-dumping investigation regarding ceramic tiles, advising PharmaEngine to deal with its commercial dispute regarding a merger with a French company, representing Indo Kordsa for its corporate internal investigation which led to exposing a biggest bank fraud case in Taiwan history.