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
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.