Jobs in Japan: Non-compete Clauses, Do They Hold Up?

Non-compete, non-scout, confidentiality and ‘garden leave’ clauses appear in employment contracts worldwide, and Japan is no exception. How valid are these clauses in the Japanese market? What can companies do to protect their trade secrets and confidential information? And should employees be concerned about having such clauses in their employment contracts?

Employee protection is favored

Generally speaking, employees in Japan are very well protected, and both laws and courts tend to lean toward protecting the rights of individuals rather than the company. This stance is also seen when looking at dismissals, Japan is a notoriously hard market to fire people and companies must take clear steps toward dismissal with a verifiable paper trail. This is the opposite of Taiwan, where typically courts will rule in favor of protecting company interests.

As the Japanese constitution gives individuals the right to choose their job and employer freely, it requires a very clear and well-structured case for a company to restrict an employee from working for a competitor once their employment is terminated.

According to a publication on the topic by Nishimura & Asahi (1), the company will need to prove a clear necessity to restrict an employee from joining a competitor to protect the company’s interests. Key points that are considered by a Japanese court will be:

  • Nature, specificity, validity and depth of the proprietary information/trade secrets that the employee has access to.
  • The position and seniority of the employee in question.
  • Regional scope and duration of time of limitation to be imposed.
  • Clear scope on what activities are prohibited, and with which parties such activities are limited.
  • Importantly, the compensation that the company will pay the employee postemployment for bearing the restrictions.

As with many laws and regulations in Japan, the lines are not black and white, and are rather opaque and open to interpretation. Generally, wide and vague non-competes without a clear definition on the scope of activities to be limited tend not to be upheld. Another key point to consider is that non-competes which don’t clearly specify a time period and a compensation structure during also tend to rule in favor of the employee.

The first and second points are also key to consider when deciding whether to try and enforce a non-compete or let the employee leave to a competitor unchallenged. For example, a senior leader in your firm who is leaving to a competitor in the same tender bid or RFP process, and could therefore clearly cause a loss of business, will be much easier to enforce than a more mid-level employee leaving after said tender bid or RFP is submitted or won.

Points for employers on non-compete clauses

Be specific. A broad brush, one size fits all non-compete will fail to hold up more often than it will be upheld. Ensure that the length of ‘garden leave’, and compensation offered during that period are clearly stated in the employment contract as well, because omitting this is one of the leading causes of a non-compete being declared out of line with labor law and/or constitution.

Review and update non-compete clauses as employees move into new, and more senior positions in your company. The scope that was covered when a person was in charge of early stage project development will be significantly different from the scope if they are promoted to lead a competitive project bid.

Keep other clauses designed to protect your business separate from the noncompete. Data protection, confidentiality, non-scout, intellectual property clauses, etc, do not have the same protections from the Japanese constitution and therefore are highly enforceable.

https://www.nishimura.com/sites/default/files/images/80459.pdf

Points for employees looking to leave

Look at how specific your non-compete is, and consider the nature, specificity, depth of competitive information you currently possess, and how much potential damage it could cause your current employer at this given moment in time. Check for specifics on ‘garden leave’ and compensation, as this may affect enforceability. If you’re not sure, take the time to consult with a labor lawyer.

Don’t sign anything new! It’s quite common that once you hand in your resignation, the company wishes to enforce the non-compete. However, they are aware that in most cases, what’s written in your employment contract is too broad, vague and will not stand up in court. Often in these cases the company will bring a new, much more strongly structured non-compete to the table and attempt to have you sign and agree to this. You have no obligation to sign this, and bear in mind that if you do, that new document will be used against you if the case proceeds to legal action. In many cases it is advisable to sign nothing new, as the original non-compete is likely weaker than what the company produces at resignation timing.

Ignore cease and desist letters. Before taking legal action, a company or their legal firm may send you a letter threatening legal action. They may or may not follow through, this is very much case by case, however by responding to such letters you are acknowledging receipt, and depending on your response, may be providing evidence that you are knowingly violating a legal obligation. Bottom line, if they are going to take legal action, it will happen anyway, so don’t give them anything else to build a case against you.

Don’t poke the bear. Generally speaking, it’s hard for your ex-employer to stop you working at the new employer. On the other hand, it’s much easier for them to chase you for poaching employees, customer accounts, or using competitive information against them. Same as your ex-girlfriend can’t really stop you dating her friend, but she can certainly sue you for stealing her belongings on the way out the door!

Bottom line: Talk to a professional

As mentioned above, labor law, like many regulations in Japan, is opaque and open to interpretation. Though in most cases a general non-compete won’t be easily enforceable, there are cases where you can protect your company’s interests and will have a court rule in your favor. Also, in most cases the threats upon exit from a company are more bark than bite, there are cases where due to legitimate business or even personal reasons a company will aggressively look to uphold a non-compete or other protectionist clauses.

Disclaimer: Titan is not a certified legal advisor, and our advice is intended to be used as a guideline, and not to be taken as legal advice. If, as either an employer or employee, you wish to attain quality legal advice on labor issues, Titan can put you in touch with registered Japanese labor law firms through their partner network.

Andrew Statter is Partner and Head of Titan GreenTech, a Tokyo-based  human capital and executive search firm with a focus on renewable energy and clean technology markets. Titan supports global companies with Japan market entry, as well as scale-up and key hiring.

This article originally appeared in the Japan NRG newsletter. NGR Japan is a one-stop platform that delivers both information and analysis on energy and electricity markets in Japan.

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