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08. Restrictive Covenants

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08. Restrictive Covenants

Definition and Types of Restrictive Covenants

Restrictive covenants are not legally defined under Japanese law. However, such covenants are allowed as concomitant obligations under the principle of good faith arising from the employment contract during the term of employment, and even after termination of the employment contract. Generally, restrictive covenants have to be valid to the extent necessary and reasonable, as provided for in the work rules and regulations or the specific employment contract.

Types of Restrictive Covenants

Non-compete clauses

During the term of employment, an employee is prohibited from competing with his/her employer. Non-compete clauses are considered as an employee’s concomitant obligation under the principle of good faith arising from the employment contract. Regarding the validity of non-compete clauses, after termination of the employment contract, the courts have a tendency to judge such clauses very strictly, in accordance with the precedent recently established. Therefore, the scope of the non-compete obligation should be reasonably limited and restricted to those obligations which are actually necessary to protect the company’s interests.

The factors utilised in evaluating the validity of a non-compete clause include, but are not limited to, the following items: (i) job position and responsibility; (ii) scope (e.g., type, region) of the services provided; (iii) confidentiality and importance of the services provided; (iv) duration of the non-compete obligation following the termination; and (v) alternative compensation. Accordingly, non-compete clauses after termination of an employment contract would be considered valid only if the scope of services is reasonably limited, and the confidentiality and importance of the services is deemed to be extremely high. Furthermore, non-compete clauses that are likely to be considered valid by the courts, are those in which the term of the non-compete obligations is within one year, and compensation for such obligations is provided in a reasonable manner.

Non-solicitation of customers

It is possible to compel an employee to refrain from soliciting customers after termination of the employment contract, by providing such a clause in the work rules or the specific agreement. The factors used to consider the validity of clauses regarding the non-solicitation of customers, are basically the same as those for non-competition clauses.

Non-solicitation of employees

It is possible to require an employee to refrain from soliciting former employees after termination of the employment contract, by providing such a clause in the work rules or the specific employment agreement. The factors used to consider the validity of clauses regarding the non-solicitation of former employees, are basically the same as those for non-competition clauses.

Enforcement of Restrictive Covenants – Process and Remedies

Under Japanese law, there are two types of court actions that are possible against a breach of the non-compete clauses and non-solicitation obligations after termination: (i) demanding an injunction and (ii) filing a claim for damages. With regards to an injunction demand, the plaintiff is required to prove that the company’s business profits, in actuality, have already been infringed or are in serious danger of being infringed. With regards to a claim for damages, the plaintiff is required to prove the occurrence of actual damages, as well as a causal connection between the breach and the actual damages caused.

Use and Limitations of Garden Leave

Garden leave is a tool by which an employer can prevent departing employees from performing their regular duties. Typically, the employee will be prevented from attending the workplace, but will still receive full pay. This has the effect of restricting the employee’s access to customers, clients, staff and information, and hampers their ability to work for a competitor. If an employer wishes to put an employee on garden leave there must, in most circumstances, be an express clause in the employment contract permitting the employer to do so. Otherwise, the employer could be violating the employee’s implied right to work and therefore be in breach of contract.

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