Temu Parent Sues to Keep Its Secrets --- China's PDD enforces culture with noncompete agreements

"For Chinese tech workers, jobs at e-commerce behemoth PDD Holdings are highly sought after. The pay at the company, a challenger to Alibaba and parent to Temu, is relatively generous and a position there lifts any resume. The trouble, for some workers, comes after they leave.

That is because of noncompete agreements, a tool lawyers say is increasingly being used against rank-and-file workers in China, even as their use wanes in the U.S. Former employees and court data suggest that PDD has enforced such agreements with particular determination to thwart potential rivals.

PDD's competitive zeal helped propel its meteoric rise -- the Nasdaq-listed company has a $154 billion market cap and was briefly China's most valuable e-commerce company last year. Its Temu app is the world's most downloaded shopping app. It closely guards its corporate secrets, keeping its workers in silos to prevent information leaks. Some employees say they don't know the real names of even longtime colleagues.

Some former PDD employees, including low- and midlevel workers, say PDD has gone after them to mete out hefty noncompete penalties.

One former PDD midlevel manager signed a noncompete agreement before he left the company in 2021. His next venture was a small business selling a weight-loss supplement online that brought in around $2,800 a month. Last year PDD, which had sales of $34.9 billion in 2023, sued him. The court ordered him to pay more than $1 million in compensation for competing in the same space as his former employer.

"I was a proper member of the middle class before joining PDD," he said. "Now, even if I pooled all my savings, I can't possibly pay off what I owe."

The U.S. has in recent years moved away from noncompete clauses in job contracts. The Federal Trade Commission is leading the effort to ban such clauses, citing concerns about their potential to stifle competition and hurt workers.

In China, the trend is in the opposite direction. While China's Labor Contract Law says noncompete restrictions should apply only to senior executives and others with confidentiality obligations, it is increasingly common for tech companies to require lower-level workers to sign the agreements, lawyers say.

Some 20 mostly lower-level former PDD employees have voiced grievances on Chinese social media after the company hit them with noncompete penalties.

PDD said it uses noncompete agreements in a "limited and responsible manner" and strictly adheres to the law and best industry practices. Former employees taken to court for alleged noncompete violations in the six months to February accounted for less than 2% of workers who left the company during the period, PDD said.

PDD, which had 13,000 workers at the end of 2022, said only a small percentage of departing employees were bound by noncompete agreements, which it said are based on the relevance of their jobs to the company's commercial secrets rather than seniority or years of work experience.

By some measures, PDD is especially active in enforcing such agreements in court. In the past five years, 110 employment-related lawsuits involving PDD's main business entities were filed in China, according to the Chinese corporate-registry database Tianyancha. That compares with 125 lawsuits involving business entities of Alibaba, which had a head count more than 18 times that of PDD in 2022.

Of the PDD-related lawsuits, 15% were over noncompete agreements, compared with 5% for Alibaba. Noncompete grievances are also dealt with outside the justice system, in legally binding arbitration.

One Temu employee, who previously worked for Temu's Chinese sibling app Pinduoduo, said PDD assigned a human-resources representative to monitor the activities and career movements of each midlevel manager who left the company. The employee said PDD sometimes hired external agencies to track where former employees went or what businesses they started.

Some former employees say PDD has cited their real-time locations and social-security payment records as evidence that they have taken jobs at competitors. PDD denied using such methods and said the company "doesn't engage in any illegal or unethical surveillance practices."

Noncompete agreements in China run for up to two years, and the law requires companies to pay compensation to former workers during the period they can't work for rivals.

Often workers feel they have no choice but to sign noncompete agreements or risk retribution such as losing their jobs, said Huang Sha, a New York-based Chinese human-rights lawyer specializing in labor disputes.

Two PDD noncompete agreements reviewed by The Wall Street Journal listed as PDD competitors more than 30 tech companies, including businesses they had stakes in or that owned stakes in them. The agreements said that rivals weren't limited to the companies named. They also barred former workers from starting ventures that overlap with PDD's businesses.

The scope of companies whom PDD considers rivals is "seriously affecting employees' job prospects," said You Yunting, a senior partner of the DeBund Law Office in Shanghai.

PDD said that as the company has expanded, its list of competitors has evolved.

Employees say they are discouraged from socializing at work, and cross-department collaboration is strictly controlled." [1]

1. Temu Parent Sues to Keep Its Secrets --- China's PDD enforces culture with noncompete agreements. Shen, Lu; Huang, Raffaele.  Wall Street Journal, Eastern edition; New York, N.Y.. 02 Apr 2024: B.6.