TIPS^®  Taiwan Intellectual Property Special

Court Ruled in Favor of the Employee for Breach of Covenant Not to Compete

Three officers from DBTEL (the plaintiff) left the plaintiff’s company during October 2001 and May 2002 to work for its competitor, Hon Hai Precision Corp. (Hon Hai). Plaintiff alleged that the three officers (the defendant employees) violated covenant not to compete and asked fordamages in the total amount of US$394,000. Plaintiff also claimed that Hon Hai intentionally seduced employees and should be jointly liable. The Taipei District Court ruled on October 8, denying the plaintiff’s claim.

The plaintiff’s claim is based on the “Agreement on the Ownership of Intellectual Property and Confidentiality,” in which the defendant employees promised to pay damages if they worked in a competing company after termination of the employment. The aforementioned covenant not to compete is one of the provisions in the employment contract to prevent the employees from using or disclosing trade secrets obtained during the employment. The purposes are to maintain the confidential information for the employer, and to prevent the employee from using the technical or business information for competitors after termination of the employment. For protecting the employer, the covenant not to compete should be enforceable if it is reasonable and not in violation of public order and good moral. The reasonableness should be determined based on the following criteria: (1) there are protectable interests of the employer; (2) the employee was in a certain position or at certain level of importance in the employer’s business; (3) the covenant is reasonable in the subject employee, duration, territory, and business scope; (4) there is compensation to the loss of the employee due to the covenant; and (5) the competing behavior of the departing employee is not in good faith.

The Court further ruled that the employer has the burden to prove the competing relationship between it and the employee’s new company. The competing relationship should be determined by the market shares of the two companies, consumers’ intents of purchase, the shares of the two companies in the industrial structure, and channels of distribution. Newspaper reports along should not be sufficient to prove the competing relationship. The employer failed to fulfill the burden of proof, and the employment contract implied that the covenant survived the termination of the employment. The court therefore ruled in this respect that the duration of the covenant is indefinite and it is unreasonable.

For the joint liability of the defendant Hon Hai, the plaintiff merely claimed the fact that the defendant employee worked in Hon Hai would inevitably disclosed the plaintiff’s intellectual properties and trade secrets. However, the plaintiff failed to specify which rights or interests have been damaged. Furthermore, whether the fact that the defendant employees left for a new company would result in inevitable disclosure is questionable. The Court therefore denied the plaintiff’s claims against the defendant employees and Hon Hai.