1. Introduction – Validity of Non-Compete Obligations After Resignation
Under Japanese law, resignees do not naturally assume non-compete obligations to their (former) employer and in order to impose such obligations on them, it is necessary to execute a separate agreement or stipulate such obligations in the rules of employment. However, as non-compete obligations would restrict resignees’ freedom of occupational choice and business operation, past judicial precedents held that non-compete obligations are valid only when they are reasonable in light of, among other things, (i) the content and degree of benefit of the employer that should be protected by restricting competitive acts, (ii) the position of the resignee before the resignation, (iii) the scope (content, period, geographical range) of the restriction on competitive acts, and (iv) whether there are compensatory measures and, if there are, the content thereof.
Recently, the Intellectual Property High Court rendered a judgment holding that, for determining the validity of non-compete obligations, the confidential information of the employer that should be protected by restricting employees’ competitive acts needs to satisfy the “secrecy management” requirement, which is one of the requirements to be categorized as a “trade secret” under the Unfair Competition Prevention Act. As this judgment seems to serve as a useful reference, an outline of the case is described below.
2. Judgment of the Intellectual Property High Court, Third Division, on August 7, 2019
(1) Outline of the case
In this case, the appellee, a former employee of the appellant (a company operating eyelash extension salons), was employed, after leaving the appellant, by another eyelash extension salon located in Kokubunji-shi, the same city in which the appellant operated its salons. The appellant claimed that this fact constituted a violation of the agreement on non-compete obligations between the appellant and the appellee and sought an injunction barring the appellee from conducting competitive acts in the said city for two years based on the said agreement.
The rules of employment of the appellant had a provision stating that, “Employees must comply with their non-compete obligations and may not work for any competitor company after leaving the Company.” In addition, upon joining the appellant, the appellee signed a written pledge stating, among other things, that (i) the appellee, for a period of two years after leaving the appellant, would not engage in any competitive acts in Kokubunji-shi using confidential information obtained by appellee while working for the appellant, and that (ii) confidential information means important information managed by the appellant as secret that comes to the knowledge of the appellee while working for the appellant.
(2) Judgment rendered by the Intellectual Property High Court
The Intellectual Property High Court first held that the above-described provision of the rules of employment was invalid because it imposed an unlimited restriction on the appellee’s work and therefore was unreasonable. Also, with respect to the agreement on non-compete obligations under the written pledge between the appellant and the appellee, the court held that it was an agreement to the effect that for two years following the resignation, the appellee would not operate another eyelash extension salon nor engage in eyelash extension services in any other eyelash extension salon in the same city where the appellant was operating using “confidential information” that the appellee had come to know while serving the appellant (the “Agreement”). The court then held that, as it is appropriate to construe the “[information] managed [by the appellant] as secret” under the Agreement to be synonymous with information that is “managed as secret” in the definition of “trade secret” (Article 2, paragraph 6) in the Unfair Competition Prevention Act, then accordingly “confidential information” under the Agreement needed to be information that satisfied the “secrecy management” requirement[1] which is one of the requirements to be categorized as a “trade secret” under the Unfair Competition Prevention Act.
The Intellectual Property High Court then found the fact that the appellant’s customer records obtained by the appellee after leaving the appellant had been routinely shared among the appellant’s employees using a messaging application on their private smartphones; determined that such records did not satisfy the “secrecy management” requirement based mainly on how they were actually managed, and so it was not the case that the appellee had “used ‘confidential information’ that came to the appellee’s knowledge while working for the appellant”; ruled that there was no violation of the agreement on non-competition obligations; and dismissed the appellant’s claim for injunction.
(3) Gist of the ruling of the Intellectual Property High Court and its influence on business operations
In determining the validity of the agreement on non-compete obligations, past court decisions had a general tendency to not particularly focus on whether the benefit of the employer that should have been protected by restricting competitive acts was categorized as a “trade secret” under the Unfair Competition Prevention Act.
The above judgment held that the confidential information that should have been protected by the Agreement needs to satisfy the “secrecy management” requirement under the Unfair Competition Prevention Act because the written pledge signed by the appellee contains the same language as the definition of “trade secret” under the Unfair Competition Prevention Act (“confidential information means important business information managed… as secret”). Therefore, we cannot immediately generalize this judgment; however, it can be viewed that the court made a value judgment that information considered not to satisfy the “secrecy management” requirement under the Unfair Competition Prevention Act has less necessity to be protected by non-compete obligations.
Therefore, in the future, from the viewpoint of executing enforceable non-compete obligations, companies should secure “secrecy management” under the Unfair Competition Prevention Act with respect to information that they do not want to be used by their former employees. Also, in order to prohibit such competitive conduct using information that does not satisfy the “secrecy management” requirement, it would be necessary to find effective ways of stipulating written pledges or rules of employment, etc.
End
[1] According to the “Management Guidelines for Trade Secrets” issued by the Ministry of Economy, Trade and Industry (revised as of January 28, 2015), for the “secrecy management” requirement to be satisfied, “it is not enough for only the trade secret owner corporations to be aware of the relevant information as secrets. That is, it is necessary to indicate clearly to the employees the intention of the trade secret owner corporations to manage their secrets (the intention to manage specific information as secrets) by means of rational and economically feasible secrecy management measures according to specific circumstances, thereby allowing the employees to easily discern the said intention to manage the secrets (in other words, recognition of the intention is ensured).”
