Litigation is a whole lotta fun, particularly if you are looking at it from a good distance away. Game co. Tencent is getting in on the merriment in Shenzhen (h/t Chinatechnews):

Chinese instant messaging and online game company Tencent has confirmed to local media that the company has formally sued 15 former employees who are suspected of violating non-compete obligations in the work contracts.

The lawsuit will be heard for the first time on December 26, 2008 at Futian People’s Court in Shenzhen and the focus of the two sides’ dispute lies in the non-compete term in the contracts signed between Tencent and these employees.

As usual, I do not know all the details here. However, one wonders (I am mentally scratching my head here, and it hurts) why this sort of labor case is being heard by a civil court. Although there are situations where courts will hear labor disputes, primary jurisdiction is with the labor arbitration commissions, which are local, special-purpose bodies. I know that in Beijing, if you go to court and try to enforce a non-compete like this, the judge is going to kick your ass out and tell you to go to labor arbitration. 

Anyway, moving on to the specifics of the non-compete:

Tencent says that the lawsuit aims to safeguard the legitimate rights of company while the relevant employees say Tencent does not pay a non-compete compensation, so the agreement is invalid.

According to the explanation of lawyers quoted in local media reports on this issue, non-compete agreement are divided into two situations. For senior managing staff who have high salaries, they are obliged to observe the non-compete agreement and the company does not necessarily pay a compensation. For lower-level staff, from a legal perspective the company should pay compensation to make the non-compete agreements valid. However, different cases require their own dedicated detailed analysis because each case can be different.

Uh huh. Well, it’s certainly true that each case is different, and local practice does vary somewhat with labor issues. However, let’s take a look at what the Labor Contract Law (the new one) says on this:

Article 23. An Employer and a worker may include in their employment contract provisions on confidentiality matters relating to maintaining the confidentiality of the trade secrets of the Employer and to intellectual property.

If a worker has a confidentiality obligation, the Employer may agree with the worker on competition restriction provisions in the employment contract or confidentiality agreement, and stipulate that the Employer shall pay financial compensation to the worker on a monthly basis during the term of the competition restriction after the termination or ending of the employment contract. If the worker breaches the competition restriction provisions, he shall pay liquidated damages to the Employer as stipulated.

Article 24. The personnel subject to competition restrictions shall be limited to the Employer’s senior management, senior technicians and other personnel with a confidentiality obligation. The scope, territory and term of the competition restrictions shall be agreed upon by the Employer and the worker, and such agreement shall not violate laws and regulations.

The term, counted from the termination or ending of the employment contract, for which a person as mentioned in the preceding paragraph is subject to competition restrictions in terms of his working for a competing Employer that produces the same type of products or is engaged in the same type of business as his current Employer, or in terms of his establishing his own business to produce the same type of products or engage in the same type of business, shall not exceed two years.

From my understanding, whether the employee is senior management or not is only relevant with respect to establishing why a non-compete was needed in the first place. You are not really supposed to have the guy cleaning the floors at night sign a non-compete, but with other staff, it’s OK if they are high up in the company or are exposed to confidential info.

However, I am unaware of any distinction between non-competes with senior management that do not require compensation and those with junior staff that do require payment. If you have a valid non-compete, you gotta pay. End of story.

Unless there is either some weird local practice involved here or some other fact that was not publicized, this case looks bad for Tencent. If they did not pay their employees for the non-compete, they are in trouble.

On the other hand, they still might have some arguments based on confidentiality or misappropriation of trade secrets. That’s a related, but distinct, legal theory.