The New Development on Regulation over the Non-Compete Clause

Author: Marine Yang, translated into English by Colbert Hung

Taiwan has suffered talent deficit along with incessant leakage of trade secrets in our proud high-tech industry, the application and legal interpretation of the “non-compete clause” therefore play a decisive role in the industry’s future development. This year (2015), the most important court case is the Taiwan Semiconductor Manufacturing Co., Ltd. (TSMC) v. Mr. Liang, Mong-Song. The Supreme Court in the case held that in order to protect the core technology of the important industry, Liang cannot work for Samsung until the end of the year even though the non-compete clause which TSMC sought to enforce had already expired. The Supreme Court, by extending the non-compete clause past its contractual term, showed its intention to protect vital technologies in key industries.

Photo Courtesy Tim Pierce CC BY 2.0

In an earlier case, MediaTek Inc., (MTK) applied for provisional injunction to prevent three leaving engineers to work for a competitor, Digital Infrastructure Ltd., before the expiration of non-compete clause of two years. According to media coverage, the three engineers claimed that they have only accessed the technological content that are within their personal working specialities and their role at Digital Infrastructure is different from their capacity at MTK. The engineers argued, being restricted from joining companies in relevant industries would make it difficult for them to earn a living. However, the Supreme Court held that since the three engineers had accessed the core technology of the IC chips at MTK and there is a possibility of leakage, the court granted the provisional injunction to prevent the three from working for Digital Infrastructure for the time being. The substantive litigation over the non-compete clause is still ongoing at the first instance court.

It can be observed from the above precedents that enterprises often use non-compete clauses as the protection of its own rights and interests, and a major defence mechanism against malicious competition by competitors. The courts, meanwhile, play the role of safeguarding the core technology of enterprises in key industries, and interpret to expand the non-compete clause like what they did in TSMC case.

It is worth noticing that the Legislative Yuan has already passed the Labor Standards Act amendment and incorporate previous non-compete clause directives into statutory legislation, prescribing that the non-compete clause after an employee’s resignation should follow four principles:

1. The employer has justifiable business interests which should be protected (such as trade secrets);
2. The employee, in his/her previous position, has access to trade secrets of the employer;
3. The period, region, working scope, and employers that are off-limits in the non-compete clause cannot go beyond reasonable scope. (the longest non-compete period cannot exceed 2 years);
4. The employer shall pay reasonable compensation to the employee for undertaking the non-compete clause and the compensation should be additional to the regular payments received by the employee during his employment.

Any non-compete clause in the future will be deemed null and void if it is not in accordance with the above-stated principles.

The most crucial part of the amendment is that it directly stipulates a reasonable compensation and that the employer must pay compensation for the employee’s non-competition. Some courts had previously held that whether or not there is reasonable compensation does not necessarily affect the validity of the non-compete clause, but the controversy is now settled and if an employer refuses to give reasonable compensation, there will be no more argument that the clause is void. Furthermore, the amendment to the Labor Standards Act prescribed that the compensation cannot take the form of the payment the employee received during his employment, which means that bonuses, year-end bonuses and salaries cannot be counted as reasonable compensation. The significance of the amendment is beyond doubts and the court will be restricted by the four principles in the future and cannot interpret differently in different cases. Enterprises and employers should review and revise their non-compete clause and negotiate with employees in order to avoid the clause being deemed null and void.

Extensive Readings:

• 聯發科聲請禁止 3 名前員工跳槽敵營洩密案，最高法院裁定獲准
• 競業禁止期限 最長二年