what we think

By Maarten Roos

China regularly issues updates to some of its main laws. The latest update to the PRC Criminal Law (effective 1 March 2024) includes new provisions to tackle employees have set up a parallel, competing business; and employees who disadvantage their employer when dealing with “friendly” customers or suppliers.

Our law firm is currently representing several different European and North American clients in disputes with former managers. In most of these cases, the manager set up a separate, competing business – while still being employed by our client’s subsidiary in China. Clearly unethical, but unfortunately not uncommon in the current Chinese business environment.

This phenomenon is not unique to China, but the distinctions in language, culture and business practices between China and the West may make it more common. When we are retained for these kinds of projects, the first step is usually to confirm and collect evidence of the violation; and then to terminate him (or her, or them). Often there are two components to a possible dispute:

• The termination itself. With sufficient proof, we should be able to terminate without paying severance or economic compensation. However, evidence of the unfair competition is not always easy to obtain (and often needs to be collected after the termination), and so the preferred option is to pressure the employee(s) to resign.

• Besides termination, clients can have additional priorities that we will need to pursue through negotiations, such as to collect some level of compensation, and/or to obtain hard (and legally enforceable) commitments to not compete in the future.

In these negotiations, the keys to success are attitude, evidence and leverage.

Starting with the attitude, invariably we will take the violating employees by surprise, giving them no time to prepare (and prepare stories) and putting them under a lot of pressure to confess and settle immediately. More evidence for these sessions will yield better results. The biggest leverage that we have in these situations is the threat to report the case to the local Public Security Bureau (PSB) for criminal enforcement, i.e. the risk of jail-time.

Amended PRC Criminal Law

The latest amendment to the PRC Criminal Law should help. Article 165 directly makes it a crime for

• a company’s director, supervisor or senior manager to take advantage of his/her position to operate a competing business, if this causes serious losses to the interests of the company.

Moreover, even if the employee does not operate the competing business itself, we may still be able to pursue criminal liability in the case of a clear conflict of interest, i.e.

• if the employee organized his employer to purchase goods or services from an entity managed by his relatives or friends at a price obviously higher than the market price; or organize it to sell goods or services to such an entity at a price obviously lower than the market price (Article 166).

Even before this latest amendment to the PRC Criminal Law, we would often use the threat of a criminal complaint to press for a favorable settlement. This latest development further strengthens our position. Moreover, it should also make it easier to actually convince the PSB to accept our case, if no settlement is reached and actual filing is required / desirable. The more tools the law gives us, the better our chances to get a positive outcome for our clients!

If you are facing a similar situation, or suspect employees of going behind your back to hurt your business, please contact Maarten at [email protected]!

This was originally published on LinkedIn as an edition of Maarten's China Law Focus Newsletter. Subscribe here to get regular updates.