Recently, the Supreme Court made a ruling in a case concerning a non-competition agreement between a well-known domestic corporation and its former senior manager.  Also, on October 5, 2015, the Ministry of Labor announced the “Reference Guidelines Concerning Non-Competition Agreements between Employers and Employees”(the “Guidelines”), setting forth the legal factors and standards of reasonableness regarding the utilization of non-competition clauses (the “NCC”), and garnering attention to the issue of non-compeition agreements.

The NCC is an agreement signed by an employer and its employee in order to prevent the employee from entering into the same or similar profession or trade in competition against the employer, within a specified period after the termination of their employment relationship.  In practice, the employer in such NCCs usually requires provisions making the employee liable for damages or penalties in case the employee violates his duties under the NCC.

The primary purpose of a NCC is to prevent the former employee from working for the employer’s competitors, which may lead to unauthorized disclosures of the employer’s technical advantages, trade secrets or other confidential information, including the relationships between the employer and its customers and suppliers, allowing competitors to gain an unfair advantage.  From an employer’s point of view, a NCC is necessary with to respect to an important employee, as a precaution against the employee making unauthorized disclosures of the employer’s technical advantages or trade secrets to competitors.  However, if the conditions in the NCC go beyond what is reasonably necessary for protecting the employer’s rights, the NCC might violate the employee’s employment right under the Constitutionand infringe upon his civil rights and economic interests.  Therefore, a guideline for what constitutes a reasonable NCC is essential for balancing the parties’ interests.

Under the Labor Standards Act, no restrictions are placed on the contents of NCCs.  As a result, based on the principle of freedom of contract, an NCC should be valid unless it is in conflict with mandatory provisions of law, or with public policy or good morals.  Nevertheless, considering that employees are generally in a relatively inferior bargaining position vis-a-vis employers, in practice there have been many cases regarding abuses of NCCs.  Consequently, the Council of Labor Affairs (the predecessor of the Ministry of Labor) in April of 2003 published the “Reference Manual on Signing a Non-compete Clause” , providing seven points for reference: (1) the employer has legal interests which deserve protection; (2) in the course of employement the employee may come in contact with or use trade secrets of the employer; (3) the NCC should be based on good faith; (4) restrictions on time period, geographic area and types of jobs should be reasonable; (5) there should be compensation for the employee; (6) for the employee to be held liable, his breaches of trust or good faith must be obvious; and (7) the liquidated damages should be reasonable.

In court practice, there are 5 points which have been concluded as the standard for evaluating the validity of a NCC: (1) the enterprise or former employer must have interests which need protection by way of a NCC, i.e. the interests in knowledge or trade secrets deserved legal protection; (2) the former employee’s position within the company was sufficiently high to gain knowledge of the employer’s trade secrets; (3) restrictions on the potential future employers of the employee, time period, geopgraphic area and types of jobs should not be beyond a reasonable scope; (4) there should be compensation or subsidy for damages arising from the NCC sustained by the employee; and (5) the employee’s competing act is apparently contrary to his duties or violates good faith.

The Guidelines published by the Ministry of Labor on October 5, 2015, are based on past court judgements and the standards discussed above.  The Guidelines are for the reference of industry, aiming to provide standards for NCCs in order to balance the interests of employers and employees.  Major provisions of the Guidelines include:

  1. 1.An employee can only be required to sign a NCC if the employer has interests in trade secrets or other intellectual property rights requiring legal protection, and if the employee in the course of employment was in contact with or used trade secrets or other advantageous technologies sought to be protected.
  2. The time period of a NCC should be limited to what is necessary for protection, and in any event should not be longer than two years.  Further, restrictions on potential future employers and the types of jobs must be clear and specific, and must be limited to those that are similar or identical to, and are competitive with, the employer’s business.
  3. The employer shall provide reasonable compensation to the employee, which must be at least half of the employee’s average monthly salary immediately preceding the termination of employment. In addition, any payment made during the former employee’s employment cannot replace or be considered as compensation. The NCC is invalid without an agreement on compensation.
  4. An employee need not comply with a NCC if he was terminated without proper grounds or otherwise without the notice required under Article 14 of the Labor Standards Act; or if the employer fails, partially or wholly, to provide the compsensation required under the NCC.

Trade secrets are typically of vital importance in high technology industries. Given the reality that courts sometimes cannot adequately protect trade secrets, the Guideline seem to increase the cost of protecting intellectual property rights.  Even though the Guidelines are for reference only and not a mandatory requirement, it remains to be seen whether the Guidelines will be adopted in practice when courts evaluate whether or not a NCC is reasonable and enforceable.  However, when  a NCC is being negotiated, the contents and spirit of the Guidelines should be taken into account, in order to avoid the possibility that the NCC might be deemed invalid by the courts or the competent authorities.