Enforceability of non-compete agreements in Japan
A non-compete agreement in an employment context usually refers to an agreement that prohibits an employee from working for another company doing similar (therefore competing) business during or for a specified time after their employment. Most companies require their employees to abide by such non-compete covenants during their employment to protect their confidential information and legitimate business interests.
However, if a company forces this clause after employees leave the company, such employees may have a hard time finding other work because they cannot utilize their work experience in the preceding career. As this indirectly restricts the freedom to choose occupations, tension arises in protecting the company’s business interests or employee’s freedom.
Some jurisdictions entirely ban post-employment non-compete agreements, but Japanese courts generally enforce such agreements under certain conditions. We discuss below general guidance on what conditions a non-compete agreement is enforceable in Japan.
Whether a signed non-compete agreement is necessary
As a non-compete after employment term is much more restrictive for employees than one during employment, a conservative view requires an explicit agreement to enforce a non-compete clause post employment. While a non-compete covenant in the work rules is enforceable, it might not be enforceable against an employee having left the company. In addition, if you try to impose a non-compete on all employees regardless of their positions and duties, it is not likely enforceable in Japanese courts. Thus, companies should obtain a letter consenting to a non-compete clause when an employee leaves the company, or at least reiterate in an exit letter the non-compete clause agreed when an employee was hired.
Elements considered in the enforceability of non-compete
Courts generally adopt a balancing approach to assess whether a particular non-compete agreement is enforceable in a given circumstance. They consider a variety of factors, such as the nature of the information to protect, the position and responsibility of the employee during their employment, the scope, duration, and geographical coverage of the non-compete obligation, and compensation provided in exchange for the non-compete. If a non-compete is considered too broad and restrictive, courts nullify the clause for a breach of public policy.
As a non-compete may be a significant burden for a leaving employee, courts take a relatively strict approach in this assessment. In American Life Insurance Co. (Tokyo. Dist. Ct., Jan. 13, 2012), a non-compete obligation against a senior executive officer in bancassurance sales was considered void when the company refused to pay his retirement allowance, asserting his violation of non-compete obligation. He signed up for two years of non-compete obligation after his departure and then shortly assumed a job as executive vice president of a competing life insurer. The court took a close look at the actual competing status of the two companies in the market and the history of negotiating the non-competing obligation. It pointed out that the scope of the obligation was not limited to bancassurance sales and thus too broad to protect the know-how he gained during his employment. He was employed as vice president by the new employer and not directly engaged in bancassurance sales.
Information to be protected
Information to be protected does not have to be trade secrets. This includes broader know-how and proprietary technical or business information. However, general knowledge or skills that employees may acquire through their work experience will not likely meet this element. Similarly, business contacts per se, in the absence of other nonpublic information that make such contacts highly valuable, might not enjoy protection under the non-compete obligations.
Position of employee
Employees subject to non-compete obligations should be in positions with access to highly valuable information in their work capacities. Senior executives, engineers in product development, and senior sales managers could be subject to non-compete agreements, depending on their actual access to confidential information. On the other hand, sales or administrative representatives with relatively low seniority are not likely to be bound by a non-compete.
Scope
What is competing and restricted should be carefully considered. For example, prohibiting any job in a company engaging in a competing business is riskier than doing so only in a business unit that essentially does similar things to their previous job. As courts look into the actual threat and impact on business, even similar sales positions could not be restricted by a non-compete if your competitor’s targeted customers are widely different.
Duration
Although subject to other factors, we often see one to two years as standard in our market practice. This does not mean, however, that two years of a non-compete is always enforceable. As mentioned above, this requires broad consideration of various factors.
Compensation
Compensation in this context refers to a particular payment given to an employee in exchange for accepting non-compete as a burden to forfeit their freedom to take jobs. However, the retirement allowance accrued as part of the salary is not likely to be adequate compensation to justify a non-compete agreement. We cannot definitively show what is adequate but can say that courts put significant weight on this element.
Conclusion
If you wish to implement a non-compete agreement with your employee, take a step back and think about whether you can protect your interests in less restrictive way, such as confidentiality agreements or a non-solicitation clause. A non-compete agreement prohibits the former employee from taking a job and is thus much more stringent than banning poaching your customers or disclosing your confidential information. If these alternatives are not sufficient, your company should pursue a non-compete agreement. In constructing these agreements, be mindful of setting a proper scope and duration and offering adequate compensation when asking your employees to sacrifice some of their freedoms.
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