Enforcing Non-Compete and Protecting Business Secrets in China

In today’s competitive global market, safeguarding intellectual property and proprietary information is more critical than ever for maintaining a competitive edge and ensuring business success. The risks of intellectual property theft and corporate espionage are still on the rise, particularly for companies operating in rapidly growing markets with complex regulatory environments, such as China.

For businesses entering or expanding within the country, understanding how to effectively enforce non-compete agreements and protect trade secrets is essential to mitigating these risks and securing long-term success.

Enforcing Non-Compete Agreements

Key considerations when enforcing non-compete agreements include the following:

• Whether an employment relationship has been established between the new employer and the former employee, as claimed by the previous employer. In practice, two key indicators are the employee’s social security registration status and their physical presence at the new workplace. The core question often centers on whether the former employee frequently appears at the competitor’s premises during working hours and whether this can be substantiated through legally admissible evidence.

  
  

• Whether a competitive relationship exists between the former employer and the new employer. This is usually outlined in the non-compete agreement signed in advance. If the agreement lacks specific language defining the competitive relationship, the former employer may need to gather additional evidence to substantiate the claim.

  
  

• Whether the penalties stipulated in the non-compete agreement for breach are reasonable. The enforceability of such clauses often hinges on whether the amount is proportionate and justifiable under the circumstances.

China’s evolving legal landscape offers increasingly better protection for business with well-drafted non-compete agreements. However, in practice, former employers often face challenges in enforcing these agreements due to the difficulty of proving violations. This often leads to a deadlock in courts and labor dispute arbitrations. Effective enforcement often requires strategic planning, localized legal expertise, usually supported by strong investigation efforts, including field investigation and other approaches.

Case Study

In 2023, a Shanghai tech company suspected a former product manager of breaching a non-compete clause after noticing similar features in a competitor’s new app. Though the manager denied involvement and provided social security indicating employment with a newly established firm that appeared unrelated, the company uncovered that this firm was a proxy entity. With this, the company decided to launch a non-compete investigation.

Digital forensics conducted by Grapevine Asia revealed email correspondence and code similarities that linked the former manager to the competitor. Subsequently, our firm also found the former manager appeared at the rival’s office building three days a week over a two-week period. Lastly, a field investigation, conducted by Grapevine Asia under the supervision of a public notary, was then carried out to formally document his movements.

Armed with solid proof, the company filed a lawsuit. The court upheld the non-compete, citing valid compensation and clear contractual terms, and awarded a few million RMB in damages. This case underscores the critical role of timely, lawful investigation in gathering evidence to successfully enforce non-compete agreements in China.

Protecting Trade Secrets

Trade secrets theft often occurs simultaneously with non-compete violation cases, and is usually harder to prove.

Trade secrets may include technical information, operation methods, and other confidential commercial data, that bring economic benefits and are protected by confidentiality measures. In cases of theft or unauthorized disclosure, companies in China can safeguard their legitimate rights and interests mainly through the following four channels:

Channel	Legal framework
Labor dispute arbitration	Labor Law, Article 22 and Article 102: Trade secrets-related obligations can be included in labor contract, and employees shall be liable for compensation for violating and causing economic loss to employer. Labor Contract Law, Article 23: Trade secrets and intellectual property-related obligations can be included in labor contract.
Civil litigation	Civil Code, Book III (Contracts, e.g., violating an NDA) and Book VII (Tort Liability, e.g., stealing a trade secret); Anti-Unfair Competition Law (AUCL); Judicial Interpretations by the Supreme People’s Court, which provides detailed guidance on applying Civil Code and AUCL.
Administrative complaint	Anti-Unfair Competition Law (AUCL)
Criminal litigation	Criminal Law, Article 219

Conclusion

As China continues to strengthen its legal framework around employment and intellectual property, businesses now have greater opportunities to protect their interests. By drafting enforceable non-compete clauses and acting quickly against violations, companies can not only safeguard their proprietary information and talent but also operate and expand with greater confidence in China’s fast-evolving and highly competitive market.

Grapevine Asia Partners is a boutique risk consultancy established by a team of skilled corporate-intelligence research analysts and anti-fraud experts, who collectively have decades of experience in Asia, particularly in Greater China and Southeast Asia. Our firm actively monitors policy changes and regulatory investigations involving multinational companies. Aside from collecting, interpreting, and analyzing up-to-date information from credible sources, Grapevine Asia also supports clients in liaising with law enforcement and regulatory agencies to facilitate case resolution. We have extensive experience in dealing with law enforcement, particularly on matters involving embezzlement, private sector bribery, non-compete violation and trade secrets theft, and intellectual property infringement.