In Japan, post-employment non-compete agreements are permitted only to a limited extent. This reflects the need to strike a balance between the constitutional right to freely choose one’s occupation and the protection of an employer’s legitimate business interests. In principle, the enforceability of such agreements is judged based on the reasonableness of the restriction, considering the following factors:
– Existence of a legitimate business interest
– Scope of restriction (including the type of work, geographical scope and duration)
– Existence of compensatory measures
This column explains how Japanese courts assess the validity of post-employment non-compete obligations and what employers should be mindful of when drafting and implementing them.
1. Form of Non-Compete Agreement
Non-compete obligations are typically documented through one or more of the following:
– Rules of employment
– Letter of pledge submitted at the time of joining the company
– Letter of pledge submitted at the time of retirement
Generally, a letter of pledge submitted at the time of retirement carries more weight, as the employee likely has specific post-retirement plans and agrees to the restriction with full awareness. In contrast, the other two, in particular, obligations under the rules of employment, which are unilaterally prepared by employer and may be applied to all covered employees equally without regard to the nature of their job and access to confidential information, are more likely to be thoroughly scrutinized by the courts.
Accordingly, if an employer wishes to impose a binding non-compete obligation, it is advisable to obtain a written pledge at the time of retirement. However, since employees may refuse to sign such a pledge upon leaving, it is also recommended to include non-compete provisions in both the rules of employment and the pledge signed at the time of hiring, as a fallback measure.
2. Factors to determine the validity of post-employment non-compete agreements
In principle, the enforceability of post-employment non-compete agreements is judged based on the reasonableness of the restriction, considering the following factors:
– Existence of a legitimate business interest
– Scope of restriction (including the type of work, geographical scope and duration)
– Existence of compensatory measures
We will explain about each of these factors in more detail.
(1) Legitimate Business Interest
A key requirement for a valid non-compete clause is the existence of a legitimate business interest. This typically includes the need to protect valuable confidential information—such as trade secrets, client information, or proprietary know-how—and to prevent its leakage to competitors.
The restriction must be necessary to achieve this objective. If there is no such confidential information at risk, the employer cannot, in principle, justify imposing the restriction.
Generally speaking, being a senior employee or employees who have access to confidential information is factors which may support the validity of post-retirement non-compete obligation.
(2) Scope of Restriction
(i) Type of Work
It is difficult to generalize what kinds of post-employment activities may be restricted. Each case is judged individually, but the restriction must be narrowly tailored to the employer’s legitimate interest. Broad or overly restrictive clauses may be deemed invalid, as they infringe upon the employee’s constitutional right to choose their occupation.
(ii) Geographical Scope
The permissible geographical scope of a non-compete obligation is also decided case by case. However, If the employer operates only in a particular region, restricting competition only within that region is usually considered reasonable. On the other hand, if the employer’s business spans multiple regions, a broader restriction may be allowed.
(iii) Duration of the Restriction
The permissible duration of a non-compete obligation is also assessed on a case-by-case basis. However, as a general guideline, restrictions exceeding one year can be subject to stricter judicial scrutiny. The longer the restriction, the more compelling the employer’s justification must be.
(3) Compensatory Measures
The presence of financial compensation for the non-compete period is one factor in determining validity. If the employer provides additional payments after retirement in exchange for the restriction, this supports the enforceability of the obligation. Even if no separate compensation is provided, a higher salary during employment—compared to employees not subject to such a restriction—may also be considered a form of indirect compensation.
It should be noted, however, that the absence of compensation does not automatically invalidate the non-compete clause. Courts consider all relevant circumstances in a comprehensive and holistic manner.
3. Court Cases
(1) Tokyo District Court Decision, April 24, 2007 (Validity Upheld)
The court upheld the validity of a post-employment non-compete clause contained in a letter of pledge signed at the time of retirement. The case concerned a former store and area manager of a major electronics retail chain who, after retiring, took up employment with a competitor in the same industry. The clause prohibited employment with competing companies for one year after retirement and applied to employees at the rank of “floor-head” or above. The purpose of the clause was to protect the employer’s proprietary know-how.
With respect to the compensatory measure, the court noted that employees at the “floor-head” rank or higher received higher salaries than other employees, which could be considered a form of compensation. While the court stated that it was unclear whether such salary differences alone were sufficient as a compensatory measure, it held that this issue could be considered when determining damages and did not render the clause invalid. The court concluded that the restriction was enforceable and that the former employee had breached the agreement.
(2) Tokyo District Court Decision, November 18, 2008 (Validity Upheld)
The court upheld the validity of a non-compete clause set forth in the employer’s Rules of Employment, as well as in letters of pledge signed during employment and upon retirement. The court found that the employer had invested significant time and resources in training the employee to acquire specialized technical knowledge and skill, which constituted a legitimate business interest warranting protection through a non-compete obligation. After retirement, the employee established a competing business using the confidential techniques learned during employment.
Although the clause did not specify any time or geographic limitations, the court found that the employer’s offer to support the employee’s transition into operating a franchise business was a sufficient compensatory measure. The court thus upheld the validity of the post-employment restriction.
(3) Tokyo District Court Decision, March 13, 2012 (Validity Denied)
The court invalidated a non-compete clause set forth in the Rules of Employment that prohibited employees from working for competitors or engaging in competitive business utilizing “confidential information” for a period of three years after retirement.
The court found the clause unenforceable for two key reasons:
(i) The employees in question (sales representatives) were not in positions granting them access to the employer’s confidential information; and
(ii) No compensatory measures were provided to the employees in exchange for the restriction.
Disclaimer: This column intends to provide a high-level summary of the subject matter, and it does not aim to provide exhaustive information. Also, this column is for informational purposes only and does not constitute legal advice. For specific issues, we recommend consulting an expert. If you have any query, please contact us via inquiry form in this homepage.