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An Intellectual Property Court's Elaboration on the Non-compete Clause and Non-Disclosure Agreement
In order to protect business secrets and avoid unfair competition from competitors, companies usually sign a non-compete clause and non-disclosure agreement with employees, while the compensation measures involved in a non-compete clause and the content of a non-disclosure agreement, etc. were further elaborated on, in the civil judgment (107-MinYinShangTzu-2) rendered by the Intellectual Property Court (IPC) on January 24, 2019.
This fact of the case is that the plaintiff, the company, used to sign a non-compete clause and non-disclosure agreement with the defendants, the four employees. After the defendants resigned in 2014, they established a company with a competitive relationship with the plaintiff, and obtained orders from the plaintiff's clients. The plaintiff then requested a penalty from the defendants based on the terms of the non-compete clause as agreed, and claimed that the defendants infringed on the plaintiff’s trade secrets of its client list and thereby requested damages.
After the trial in the Taiwan Taipei District Court, the court held that the non-compete clause is invalid, as the non-compete clause did not provide the limitation of the non-compete area and failed to clearly specify what "the plaintiff's business-related industries" and "the plaintiff's business-related work" really are. Therefore, the court held that the non-compete clause exceeded a reasonable range. Further, no compensation measures were given either. Therefore, the non-compete clause shall be considered invalid. As for the infringement of the plaintiff's trade secrets, according to the doctrine of Freedom of Contract, although the secrets as agreed in the non-disclosure agreement do not necessarily comply 100% with the “trade secrets” stipulated in the Trade Secrets Act, the secrets owner still has to take reasonable measures to maintain its secrecy, and the scope of secrets has to be clear and reasonable. As the plaintiff did not prove that its company did take reasonable protective measures on its client list, and did not provide any evidence to prove that the client list is of secrecy and has economic value, this aspect of the request is therefore groundless. Nevertheless, the plaintiff refused to accept the judgment and appealed. After the trial in the IPC, the IPC reversed part of the determination concerning the non-compete clause in the first instance judgment and requested that the four employees shall pay the penalty to the plaintiff.
In respect of the non-compete clause, the IPC held that with the sales of the plaintiff's products at home and abroad, the area, scope and ways with respect to the business strife limitation can be considered as reasonable and appropriate from the perspective of generally accepted views and commercial habits. As for the aspect of compensation measures, although the reasonable compensation for the employees not engaging in business strife activities for the losses incurred by them is stipulated in the newly-amended Article 9-1 of the Labor Standards Act amended on December 16, 2015, according to the interpretative letter issued by the Ministry of Labor in June 2016, Article 9-1 of the Labor Standards Act shall not be retroactive. Therefore, the IPC held that having a compensation payment is not a requisite element for judging that the non-compete clause is legally valid; however, it can be a factor considered by the court for the adequate reduction of a penalty in the event of a violation of the non-compete clause.
With respect to infringing on the trade secret of the client list, the IPC agreed with the legal interpretation of the first stance judgment that the scope of the secrets, as agreed, have to be clear and reasonable. They should not be liberally interpreted only by their literal meaning that any information of the appellant is within the scope of confidentiality or trade secrets. Besides, the appellant has to take reasonable measures to prevent any third persons from knowing the secrets. Notwithstanding the appellant’s providing the evidence such as the company’s SOP for using computers and software, and the photos of the company’s access control system, the aspect of the original judgment is thereby maintained as (x) the access control system is set up by the general enterprises for controlling their personnel’s access, which is difficult to identify any connection with the client list, and (y) furthermore in the company’s SOP for using computers and software, there is no clear and reasonable explanation about any protection mechanism, and the scope of confidentiality or trade secrets of the client list.
Compared with the common civil court's requirement that the non-compete clause has to concretely specify the plaintiff's business-related industries and the plaintiff's business-related work, perhaps the IPC recognized the high difficulty of specifying concrete business-related industries and business-related work during the signing of non-compete clause, and therefore held its legal view on the factor of whether the non-compete clause is reasonable and adequate from the perspective of generally accepted views and business habits. As for the aspect of the non-disclosure agreement, the enterprises have to pay attention to whether the scope of the confidentiality or trade secrets as agreed upon is clear and reasonable, and whether or not other reasonable measures to prevent any third persons from knowing the secrets have been taken. Blunt inclusion of any information in the scope of confidentiality or business secrets may not obtain any remedy in the future litigation.