Hastings International and Comparative Law Review

Volume 22
Article 4
Number 2 Winter 1999

1-1-1999

Noncompete Covenants in Japanese Employment

Contracts: Recent Developments
Miwako Ogawa

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Miwako Ogawa, Noncompete Covenants in Japanese Employment Contracts: Recent Developments, 22 Hastings Int'l & Comp. L. Rev.
341 (1999).
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Noncompete Covenants in Japanese
Employment Contracts: Recent
Developments
B)' iIWAKO OGAWA"

Introduction
Human capital can be an employer's greatest investment. An
employer can train and nurture its employees; it can divulge crucial
business secrets to them. Thus, an employer's worst competitors are
often its former employees who acquired confidential information
and know-how or established valuable customer relationships. These
former employees can then work for a competitor or establish a new
rival business, compete with their former employer and frustrate its
business goals. Noncompete covenants can be an effective tool in
preventing such actions. Without the assurance that this means is
available to protect know-how, goodwill and confidential
information, an employer may be deterred from investing in human
capital and disclosing information to employees
Although noncompetition clauses can advance an employer's

* Member, Class of 1999. LL.M., University of Tokyo 1996; B.A. Stanford

University 1992. The author would like to thank Professor Kazuo Sugeno of the
University of Tokyo whose invaluable guidance and support made this piece possible
and Professor Takashi Araki of the University of Tokyo for helpful suggestions and
comments.
1. This Note is an outgrowth of a comparative analysis of the law of post-
employment restrictive covenants in the United States and Japan in which California,
Texas and New York state laws and Japanese case law were analyzed. See Miwako
Ogawa, Amerika ni okeru Koyo Kankei Shuryogo no Kyogyo Koi no Kisei: Nihonho
eno Shisa wo Motomete [A Study of Post-Employment Restraints on Competition in
the United States: In Search of a Balanced Approad for Japan], 5 Ho;Go HosEI
Kiyo 63 (1996) [hereinafter Comparative Study of Post-Employment Restraints].
This Note summarizes the analysis of Japanese law therein and incorporates more
recent developments in Japanese case law.
2. Harlan M. Blake, Employment Agreements Not to Compete, 73 HARV. L
REv. 625,670 (1960).
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

interests, they are also restraints of trade? Protection of the

employer's legitimate interests ("protectable interests") must not
compromise the rights of employees to occupational freedom or the
basic principle of free competition.
Japanese employers, like their U.S. counterparts, attempt to
deter post-employment competition through noncompete covenants.
Also, like U.S. courts, Japanese courts struggle to reconcile the
protection of an employer's legitimate business interests and the
policy against restraints on trade. In the past, the traditional
Japanese employment system incorporating the practice of long-term
employment (sometimes referred to as "lifetime employment")
discouraged lateral labor mobility and consequently gave rise to few
cases on noncompete covenants.4 In recent years, however, there
have been developments in this area of the law. This phenomenon is
partly due to increased labor mobility that resulted in a noticeable
dilution of "lifetime employment" as the basis for the employment
relationship, as well as increased individualism in employment.'
This Note examines the current law regarding judicial treatment
of noncompete covenants in Japan under the existing Japanese labor
laws and the employment system in general. Part I summarizes the
typical direct and indirect restraints found in Japanese employment
relationships. Part II explores Japanese case law and its evolution in
this area and significant developments in light of the Unfair
Competition Prevention Law. Part III relates the case law to the
Japanese employment system, and finally Part IV examines the
prevailing academic viewpoints and the different approach adopted
by courts to deal with noncompete covenants. It then makes some
suggestions on a proper approach given the changes underway in
Japanese employment relationships.

3. See generally Paul H. Rubin & Peter Shedd, Human Capital and Covenants
Not to Compete, 10 J. LEGAL STUD. 93 (1981).
4. Long-term employment practices contributed to the rarity of cases involving
post-employment competition. See Toshio Yamaguchi, Rodosha no Kyogyo Hishi
Gimu: Tokuni Rodo Keiyaku Shuryogo no Horitsukankeini tsuite [An Employee's
Duty Not to Compete: Particularlyon Legal Relationships After Termination of the
Employment Contract],in RODOHO NO SHOMONDAI 409,409 (1974).
5. See Hidenobu Yasueda & Kenichiro Nishimura, Rodohanrei Kono Ichinen no
Soten: Follow-up [Issues in the Last Year for Employment Law Cases: Follow-up],
NIHON RODo KENKYu ZAssHI, Nov. 1996, at 11, 11.
1999] Noncompete Covenants in Japanese Employment Contracts

I. Typical Noncompetition Clauses

Direct post-employment restraints are found most often in work
rules provisions. Work rules (shugyo kisoklu) govern workplace
conduct, terms and conditions of employment and the rights and
duties of the employer and employees.7 The substantive provisions of
the work rules essentially become the content of each employee's
employment contracte and serve as the basis for the employment
relationship. In addition to items mandated by law," the work rules
can include provisions directly restricting the employee's post-
employment activities or indirectly restricting their freedom to
compete through retirement allowance provisions that act as
disincentives to competition.
Direct noncompete provisions in the work rules tend to be
broadly drafted 0 since they are written either at the outset of the
employment relationship" or are already in existence when a certain
employee is hired. Individual agreements concerning noncompetition
between the employer and the employee are less common."
Indirect restraints typically appear as retirement allowance
provisions in the work rules. These provisions make full or partial
payment of retirement allowances conditional upon the employee

6. Article 89 of the Labor Standards Law mandates that an employer who

continuously employs ten or more employees draw up work rules. See Rodo Kijunho
[Labor Standards Law], Law No. 49 of 1947. art. 89.
7. KAZUO SUGENO, RODOHO [JAPANESE LABOR LAW] 97-108 (4th ed. 1995)
[hereinafter SUGENO]. For an English translation, see KAZUO SUGENO, JAPANESE
LABOR LAW (Leo Kanowitz trans., 1992).
8. Id
9. The law requires that work rules include provisions concerning working time,
rest periods, matters pertaining to wages and their methods for determination and
computation and other specified terms. Rodo Kijunho, art. 89, nos. 1 -10.
10. See, eg., Tokyo Gakushu Kyoryokuka, 581 RODO HANREI 70 (Tokyo Dist.
Ct., Apr. 17, 1990).
11. Yasueda & Nishimura, supra note 5, at 16; see also Tokyo Gakushu
Kyoryokukai, 581 RODO HANREI at 70 (wherein the noncompete provision invoked
in an action for damages against a former employee stated that the employee was not
to compete with the cram school employer for a period of three years after
termination of the employment contract).
12- See eg., Shin Osaka Boeki, 596 RODO HANREi 21 (Osaka Dist. Ct., Oct. 15,
1991). In Shin Osaka Boeki, an operations division manager, at the start of the
employment relationship, entered into a covenant that obligated him not to directly
or indirectly compete with the employer for three years after termination of the
relationship with respect to the manufacturing, handling or sales of goods or products
dealt with by the employer.
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

refraining from competitive activity for a specified period of time

following severance of the employment relationship.13
Thus, noncompete clauses can give rise to several actions by the
employer: an action for damages,14 an action for injunctive relief1" or
an action for restitution on the basis of the retirement allowance
forfeiture provision.16 An employee may bring an action for specific
performance against the employer to compel payment of the
retirement allowance pursuant to the retirement allowance provision
in the work rules.17

II. Japanese Case Law and Statutory Developments

The Labor Standards Law of Japan has no provisions regarding
the validity, applicability or legality of noncompete covenants in
employment." Only the Commercial Code imposes a noncompete
obligation on corporate directors." Hence, in Japan, case law governs
the jurisprudence concerning noncompete covenants, although the
rules are unclear.
While it is settled law that employees owe a good faith duty not
to compete with their employers during the employment
relationship,'0 it is debatable whether such duties continue to exist

13. See, e.g., Chubu Nihon Kokokusha, 569 RODO HANREI 37 (Nagoya High Ct.,
Aug. 31, 1990). The problem with withholding a retirement allowance is that the
retirement allowance is construed as a hybrid of compensation for work already
performed and a reward for meritorious service during the relationship. It would be
unlawful to refuse to provide compensation for work already performed under the
full payment principle of article 24 of the Labor Standards Law. On the other hand,
making full payment of the retirement allowance conditional has been held to be
lawful because the allowance is also construed to be a reward for meritorious service.
See, e.g., Sankosha, 958 RODo KEIzAI HANREI SOKUHO [RoKEIsoKU] 25 (Sup. Ct. 2d
Petty Bench, Aug. 9, 1977) (upholding a clause that provided that only one-half of
the allowance would be paid if retirees worked for a competitor following
resignation).
14. See, e.g., Tokyo Gakushu Kyoryokukai, 581 RODO HANREi 71) (Tokyo Dist.
Ct., Apr. 17, 1990).
15. See, e.g., Shin Osaka Boeki, 569 RODO HANREI at 37.
16. See, e.g., Fukui Shinbunsha, 503 RODO HANREI 83 (Fukui Dist. Ct., June 19,
1987).
17. See, e.g., Chubu Nihon Kokokusha, 569 RODO HANREI 37 (Nagoya High Ct.,
Aug. 31,1990).
18. See also Fumiko Obata, Rodosha no Taishokugo no Kyogyo Hishi Gimu
[Employees' Duty Not to Compete After Retirement], NIHON RODO KE;NKYU ZASSHI,
Jan. 1997, at 25, 25.
19. SHOHO [COMMERCIAL CODE], arts. 41 & 264.
20. See SUGENO, supra note 7, at 71.
1999] Noncompete Covenants in Japanese Employment Contracts

after the relationship terminates absent explicit contractual

arrangements.2! ' However, an employer may provide for protection of
its trade secrets through a noncompete provision in the work rules
and may choose to prevent its employees from leaving and engaging
in competitive activity in that manner.
One court held that a worker's freedom to engage in competitive
activities cannot be restrained without an explicit agreement.
However, another court held that a former employee may be
prohibited from engaging in certain types of competitive acts with an
entity to which he was farmed out (i.e., temporarily transferred by his
contractual employer) even lacking an explicit agreement,
Nonetheless, the Japanese Constitution guarantees a right of
occupational freedom.' Such a right is not extinguished merely
because an employment relationship terminates, and the act of
competing itself does not necessarily implicate any duty of good faith
or loyalty. 6
In an attempt to reconcile the interests of employers in
protecting their business and the basic principle of occupational
freedom, the Japanese courts employ a reasonableness standard to
determine the enforceability of noncompete provisions.' However,
this standard appears to have evolved into a comprehensive
evaluation of the specific facts in a case and has given rise to
inconsistency in enforceability requirements. New attitudes in
Japanese employment manifesting an increasingly mobile, specialized
work force with more individualistic attitudes toward employment
opportunities thus present a challenge that the current jurisprudence
is unprepared to deal with adequately.
This section examines the development of Japanese case law and

21. See Toru Hayakawa, Eigyo Himitsu no Hogo to Yakuin!Jyu yoin no

HishugimulKyogyo Hishi Gimu [Protection of Trade Secrets and the Duty Not to
Compete and Nondisclosure Obligations of Qfficers and Employees], in CMTEKI
ZAISAN NO HOTEKI HOGo 171,192 (1997).
22. See e.g., Nihon Convention Service, 711 RODO HANRE! 30, 47 (Osaka Dist.
Ct., Dec. 25, 1996), rev'd in part on other grounds,affd in part,745 Rouo H-AN REi 42
(Osaka High Ct., May 29,1998).
23. See, e.g., Chubu Kikai Seisakusho, 522 HANREI JIHO 83 (Kanaza~va Dist. Ct.,
Mar. 27,1968).
24. See Chesukomu H-isho Center, 1469 HANREI RHO 93 (Tokyo Dist. Ct., Jan.
28,1993).
25. KENPO [JAPANESE CONSTITUTION], art. 22.
26. Hayakawa, supra note 21, at 193.
27. See, e.g., Foseco Japan Ltd., 624 HANRE JIHO 78 (Nara Dist. Ct., Oct. 23,
1970).
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

judge-made standards, the impact of new statutory provisions in

Japan's Unfair Competition Prevention Law, the incorporation of the
Unfair Competition Prevention Law into those judge-made standards
and the types of relief available to the employer on the basis of direct
and indirect restraints.

A. Case Law Development

1. Traditional"Reasonableness"Standard
The leading case that first introduced the contemporary standard
for noncompete clauses is Foseco Japan Limited, decided in 1970."
This case involved former employees in charge of research and
development and operations divisions who were privy to important
confidential technological information over a ten-year period.2"
During their employment, these employees covenanted not to
disclose any company trade secrets for an indefinite period of time
and not to compete with the company for a two-year period following
the severance of their employment relationship." When the
employees resigned and began competing with their former
employer, the employer sought an injunction based on the
covenants.3'
The court held that without a showing of "reasonableness," the
covenants infringed on the employees' occupational freedom, for if
the employer's aim was to eliminate or restrain competition in the
marketplace, a covenant based on such motives was void for
contravening "public order and good morals" (hereinafter "public
policy").32 According to the court, reasonable circumstances exist
where the employee has objectively proprietary information, rather
than general knowledge, such that the information is a business secret
and a protectable interest of the business justifying a restrictive
covenant. 33 A covenant's "reasonableness" is determined by an
examination of several factors: the restriction's duration, its
geographical limitations, the types of activities subject to the
restriction and the existence of compensation to offset the restriction.
These factors are examined in light of the potentially adverse

28. Id.
29. Id. at 82.
30. Id. at 81-82.
31. Id. at 79-80.
32. Id. at 81.
33. Id. at 81-82.
1999] Noncompete Covenants in Japanese Employment Contracts

consequences on the employer (disclosure of business secrets), the

disadvantage to the employee in being restricted (restrictions on
freedom of lateral movement between jobs) and any resulting social
harm (the threat of monopoly and the effects on consumers in
general). '
The court held that the information in Foseco JapanLimited was
objectively protectable?. Although there was no compensation paid
specifically for the restriction, the court found that the "nondisclosure
payment" to the employees during the employment relationship
supported the reasonableness of the post-employment restriction. '
Furthermore, the court stated, without explanation, that two years
was a reasonably short period
Rather than setting forth a framework for legal analysis, courts
following this approach evaluate and weigh the specific facts to reach
an equitable and fair result.'
2.
BifurcatedApproach. Compensationfor CertainTypes of
Restrictions
A more recent framework is a bifurcated approach, a radical
departure from the more traditional comprehensive approach seen in
previous cases. This approach distinguishes between a noncompete
duty ancillary to the employment relationship and a noncompete duty
that arises out of an agreement not to compete. The 1995 Tokyo
Legal Mind case involved a bar exam preparatory school and
instructors who also had served as officers or auditors of the
company. ' The question was whether to issue injunctions based on
noncompete provisions in the work rules as well as noncompete
agreements entered into individually by the defendants."
The restrictions in Tokyo Legal Mind involved a general bar on
competition effective for two years following severance of the

34. Id. at 82.

35. Id. at 81-82 (determining that the information was a trade secret concerning a
particular manufacturing process).
36. Id. at 83.
37. Id- at 82.
38. See e.g., Kepuna-Torigo, 1543 HANREI JIHO 134 (Tokyo Dist. Ct., Sept. 29,
1994); Tokyo Gakushu Kyoryokukai, 581 RODO HANRE! 70 (Tokyo Dist. Ct., Apr. 17,
1990).
39. See, e.g., Tokyo Legal Mind, 894 HANREi TAthwZU 73 (Tokyo Dist. Ct., Oct.
16,1995).
40. Id.
41. Id.
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

employment relationship and a prohibition on the establishment of a

competitor business during that two-year period. Bloth of these
restrictions were contained in the generally applicable work rules;"
the other noncompete covenants were identical agreements
individually executed by the defendants.43
The court distinguished restrictions by the manner in which they
were created." One type of restriction exists in circumstances where
a duty not to engage in certain types of competitive acts arises
regardless of the existence of an explicit provision (ancillary duty).
This type of restriction may be used merely to confirm the existence
of such a duty not to engage in a violation of the employer's trade
secrets. The other type of restraint arises solely out of an individually
executed agreement.
In the case of an ancillary duty not to engage in certain
competitive acts after the severance of the employment relationship,
the question for the court is whether the restraint's scope is the
minimum necessary or whether it is an appropriate means of
confirming the duty not to disclose trade secrets and whether it
exceeds the limits so required.' If the parameters are excessive, it
violates public policy.46 In making this determination, the court must
consider the employee's status and position, the duration of the
noncompete duty and its geographical scope, activities prohibited and
other circumstances.47 Furthermore, the court must consider whether
the restraint is necessary to protect trade secrets, whether it is more
restrictive than necessary for that purpose and whether compensation
for the restrictions is provided.'
On the other hand, where a post-employment duty not to
compete arises out of an explicit provision in an individually executed
agreement, compensation for the restriction is essential.
Compensation is necessary because the employee curtails his freedom
where otherwise there is no duty to do so." In addition, however, the

42. Id. at 86.

43. Id. at 85-86.
44. Id. at 84.
45. Id.
46. Id. at 88.
47. Id.
48. Id. The court noted that it was not essential that the employer provided
compensation, but it was something to consider. Id. at 89.
49. Id. at 84, 89.
50. Id. at 89.
1999] Noncompete Covenants in Japanese Employment Contracts

parameters of the restriction must be the minimum needed to protect

the employer's interest.
In its holding, the court stated that the work rules noncompete
provision was valid and enforceable to the extent it prohibited
competition entailing a breach of the non-disclosure provision."
Thus, the court narrowly read the general provision together with the
duty not to disclose trade secrets and held that it was reasonable only
to the extent it secured the non-disclosure duty.? The individual
agreement signed by the auditor-instructor was against public policy
because the employer did not show that there was a reasonable
justification for imposing such a duty on an employee in that position
and because the two-year restriction was neither minimal nor
sufficiently compensated." On the other hand, the court held that the
individual agreement executed by the director-instructor was
enforceable because he was privy to trade secrets as an individual in
his position and because the two-year period was not excessive for the
purpose of protecting trade secrets.'
3. Development of the Bifurcated Approach: Compensation
Requiredfor Restrictions Involving Certain Types of Business
Interests
Nihon Convention Service, decided in 1996, introduced another
twist to the framework provided by Tokyo Legal Mind. This case
involved an employer in the business of organizing and administrating
national and international conventions and conferences. The issues
were: (1) the applicability of a work rules provision prohibiting direct
competition with the employer; and (2) the applicability of a work
rules provision denying otherwise payable retirement allowances to
those employees who competed with the employer following
retirement.

51. Id. at 86.

52. Id.
53. Id at 89.
54. Id.
55. Nihon Convention Service, 711 RODO HANREi 30 (Osaka Dist. Ct., Dec. 25,
1996). The seven employees who built client relationships while employed by the
plaintiff over a number of years, departed to establish a new, similar business and
took many other remaining employees with them. The employer maintained that
they were discharged for disciplinary reasons and denied them their retirement
allowances. The plaintiffs then sued to recover those payments. Id. at 31. The
employer also brought an action against the employees for damages on the grounds
that their competitive activity caused detriment to the business. Id.
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

The court held: (1) the work rules provisions for a noncompete
duty apply to the extent that they protect trade secrets; (2) if the
interest protected is not a trade secret, there must be some "counter-
payment" for the restriction; and (3) work rules provisions and
individual noncompete agreements are treated similarly in the
analysis.56
According to the relevant work rules provision, employees must
not engage in direct competition with the employer in the geographic
region where the employer conducted business for a two-year period
following retirement or resignation.' After stating the standard for
determining the validity of such provisions," the court evaluated the
nature of the business interest and found that no trade secrets were
involved because the business of convention services administration
involves customer relationships nurtured by the employees
themselves, not trade secrets provided by the employer? According
to the court, the employer should guard against detriment to its
business from competition by former employees by making payments
to the employees to induce them not to leave. However, "the
employer in this case failed to provide additional payments for
overtime work performed and thus failed to provide such employees
with compensation for the post-employment restraint."'" Where the
employer fails to utilize restrictions coupled with compensatory
payments for restricting competition to protect itself from possible
economic harm by its former employees' competitive activities, the
employer must bear the consequences. 6' Therefore, the court held the
work rules provision was not a ground for damages where the loss of

56. Id.
57. Id. at 47.
58. The court stated that such provisions are reasonable to tie extent their
purpose is to protect trade secrets, but their applicability is limited to consideration
of the provision's objectives and the reasonableness of its parametcrs in light of its
purpose. It added that such consideration is made in light of the employer's business
interest, particularly whether its purpose is to protect trade secret,-, the degree to
which the employee in question was privy to such information, the specific
parameters of the restriction itself and the existence of any compensation paid to the
employee who was privy to trade secrets during the employment relationship. Id.
59. Id.
60. Id. Although this is the court's stated reasoning, it is perplexing. It is unclear
how overtime payments are related to compensation for a post-employment restraint.
The court seems to have misunderstood or misapplied the notion of compensation
for a restrictive provision.
61. Id.
1999] Noncompete Covenants in Japanese Employment Contracts

customers was concerned. 2

The court also noted that the employer executed individual
noncompete covenants with six of the departed employees. '
However, it held that individual covenants were subject to the same
analysis as work rules provisions, and were not enforceable in this
case.64 Throughout the opinion, the court made no distinction
between work rules provisions and individual agreements.
Regarding the indirect restraint contained in the retirement
allowance provision of the work rules, the court found that its
application was not justified for all but one employee because the
requisite degree of bad faith did not exist.' The court held that
application of the provision was warranted with respect to one
employee who was the driving force behind the establishment of the
competitor and actively solicited remaining employees. The
employer therefore was allowed to withhold the retirement allowance
from that employee due to the egregious nature of that particular
employee's competitive activity."
This case suggests that broadly drafted work rules provisions
may be effective as a ground for damages against a former employee
who was privy to trade secrets during the employment relationship
and misappropriated or disclosed trade secrets in competing with the
employer following his departure. However, where the interests
sought to be protected are not trade secrets, a court will hold such a
provision inapplicable in the absence of any additional compensation.
If subsequent courts follow the approach of Nihon Convention
Service, an employer who seeks to impose a noncompete duty
through work rules must be aware that if the protection of trade
secrets is not the only purpose of the post-employment restriction, it
must be coupled with additional compensation in the form of a bonus

62- Id. The court suggests that the same work rules provision may have been
valid with respect to the company's trade secrets.
63. Id.
64. Id.
65. Id. at 48-49. Here, there was also a technical justification for its
inapplicability. The employer unilaterally amended the work rules to include a
retirement allowance withholding clause in the event of post-employment
competition but failed to comply with the legal procedures for making the new rule
effective. Moreover, the court also reasoned that the employees' conduct was not so
egregious as to negate any meritorious service rendered during the employment
relationship and withhold the retirement allowance in its entirety. Id. at 48.
Nevertheless, it is puzzling that the court did find this new rule, which %vasnot
established at the time, to be applicable to one of the plaintiffs.
66. l1&at 49.
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

or other payment. Nihon Convention Service also suggests that an

individually executed noncompete agreement is no more effective by
virtue of its being an individual agreement.

B. The Impact of the Amendments to the Unfair Competition

PreventionLaw
The Unfair Competition Prevention Law was first promulgated
in 1935 in response to international pressure on Japan to ratify the
Hague Convention, which mandated member States to provide legal
recourse for unfair competition.67 It was amended subsequently in
1990 and again in 1993 when, for the first time, Japan initiated the
amendments without the influence of external pressure."
The Unfair Competition Prevention Law makes available a
statutory injunction against unfair competition (defined as disclosure
or use of the employer's trade secrets in article 2, paragraph 1,
number 7)9 and provides for a cause of action for damages incurred
through unfair competition." Because a tort is not a basis for
injunctive relief under Japanese law,7 this statutory amendment is
significant in that an employer may now seek injunctive relief on the
basis of a contractual provision, if one exists, and also on the basis of
tortious unfair competition. The implication is that an employee to
whom trade secrets were disclosed may not compete in a manner that
entails disclosure of trade secrets, both during and after the
employment relationship, regardless of the existence of an explicit
noncompete agreement.' More relevant here is the result that the

67. SHOEN ONO, FUSBI KYoso BOSHIHo GAIsETsu [INTRODUCTION TO THE

UNFAIR COMPETITION PREVENTION LAW] 26-28 (1994).
68. Id. at 27-28.
69. See Fusei Kyoso Boshi Ho [Unfair Competition Prevention Law], Law No. 47
of 1993, art. 3, para. 1. Article 2, paragraph 1, number 7 states that unfair
competition exists where one who was made privy to trade secrets by the owner, in
order to unfairly gain an advantage, to unfairly compete or to harm the owner,
utilizes or otherwise discloses such information. See also ONO, supra note 67, at 304.
70. See Fusei Kyoso Boshi Ho, art. 4; see also ONO, supra note 67, at 319.
71. See the general provisions on torts, MINPO [CIvIL Code], arts. 709-724. See
also Takashi Araki, Legal Issues of Employee Loyalty in Japan, - CoM. LAB. L.J.
(forthcoming 1999) (manuscript on file with author).
72- See Hayakawa, supra note 21, at 181, 193; see also Hiroshi Ishibashi,
Kaishakan Rodoido to Kyogyo Hishi Gimu: Taishokugo no Rodosha no K)'ogyo
Hishi Gimu wo Chushinni [Lateral Movement of Labor and the Duty Not to
Compete: With a Focus on the Employee's Post-TerminationDuty Not to Compete],
84 NIHON RODOHO GAKKAISHI 105, 110 (1994); Fumiko Obata, Eigyo Himitsu no
Hogo to Koyokankei [Protectionof Trade Secrets and the Employmeat Relationship],
NIHON RODO KENKYU ZAssHI, Nov. 1991, at 38,45.
1999] Noncompete Covenants in Japanese Employment Contracts

employee has a good faith duty not to disclose trade secrets after the
employment relationship terminates.
Consequently, trade secrets are protected by law regardless of
the existence of an explicit provision in either the work rules or an
individual agreement. However, many noncompete covenants
brought before the courts concern business interests that do not
necessarily embody trade secrets per se.3 Therefore, an explicit
provision or agreement takes on added significance when the
protection of non-trade secret business interests are at stake.' The
question, then, is the enforceability of noncompete provisions that
directly concern the act of competing or those concerning the
protection of non-trade secrets, crucial information that the employer
wishes to shield from the public domain even though it is not
technically a trade secret. The courts in Japan have yet to flesh out
these issues.
In any event, courts use the notion of "trade secrets" under the
Unfair Competition Prevention Law to find an affirmative duty not to
compete through the nondisclosure of trade secrets and to examine
the legitimacy of the employer's interest in the determination of
reasonableness. Moreover, one court opined that the Unfair
Competition Prevention Law requirements for an injunction provide
guidance as to what the employer is required to show when seeking
an injunction on the basis of a contractual provision.7 Accordingly,
an employer must demonstrate that it is likely to incur or actually is
incurring harm caused by the competitive activity. Thus, where an
employer fails to show that the employee's competition is causing
harm or that76
there was an actual threat of harm, an injunction is
unavailable.
C. Elements of an Enforceable Covenant

1. Noncompete Clauses and DirectRestraints

A survey of cases reveals the following elements for determining
"reasonableness," although they are far from consistent. First, courts

73. See also Hayakawa, supra note 21, at 194.

74. Yasueda & Nishimura, supra note 5, at 12.
75. See Tokyo Legal Mind, 894 HANREI TAIMUZU 73, 82 (Tokyo Dist. Ct., Apr.
17,1990).
76. See id at 90-91 (denying an injunction where the plaintiff only pleaded that
the defendant started operating a new competing school and hence failed to show
how defendant's new enterprise threatened to violate plaintiffs trade secrets).
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

require the existence of a legitimate business interest to justify post-

employment restrictions.' Restrictions that do not seek to protect a
legitimate business interest are more likely to be found unreasonable.
According to Foseco Japan Limited, protectable interests include not
only specialized knowledge or technological information but also
customer relationships and manufacturing know-how that can be
transferred for value.78 In determining whether there is a legitimate
business interest, the courts examine the employer's efforts at
maintaining the secrecy of the information, the means of protection
and the non-public nature of the information itself."' Thus, the
interests that the employer seeks to protect need not reach the level
of patentable technology; a protectable interest exists where use or
disclosure would have significant adverse effects on the employer's
business.' In more recent cases, courts employed the definition of
"trade secret" under the Unfair Competition Prevention Law in
making this determination.8' However, relief will not necessarily be
granted solely because a legally protectable interest is at stake. Other
factors are also taken into consideration.' 2
The general standard for enforceability of a clause is that the
scope of durational, geographical, occupational and activity restraints
must be reasonable.? However, the courts have not clarified the
extent to which an enforceable restrictive clause must define its
parameters. In some cases, courts validated unlimited restrictive

77. See, e.g., Harada Shoten, 132 HANREI JIHO 16 (Hiroshima High Ct., Aug. 28,
1957). Subsequent cases continue to endorse this view.
78. See Foseco Japan Ltd., 624 HANREIJIHO 78,81 (Nara Dist. Ct, Oct. 23, 1970).
79. For example, the Foseco court took into consideration the Secret Duty
Allowance paid to employees for a duty not to disclose certain information in
addition to treatment of company manuals as corporate trade secrets. Id. at 83.
80. See, e.g., Shin Osaka Boeki, 596 RODO HANREI 21, 24 (Osaka Dist. Ct., Oct.
15,1991).
81. See, e.g., Tokyo Legal Mind, 894 HANREI TAIMUZU 73 (Tokyo Dist. Ct., Oct.
16, 1995); Nishibe Shoji, 1360 RODo HoRTSU GEPPO 48 (Fukuoka D'st. Ct., Apr. 19,
1994). The Unfair Competition Prevention Law defines "trade secret" as production
methods, sales methods and any other technological or operational information
useful to the enterprise that is not publicly known information and is managed as
trade secrets. Fusei Kyoso Boshi Ho [Unfair Competition Prevention Law], Law No.
47 of 1993, art. 2, para. 4.
82. For example, in Nishibe Shoji, the court refused to enforce a restrictive
clause, despite the existence of a "trade secret," upon consideration of other
elements such as the former employee's status during the employment relationship,
the former employee's job contents and the circumstances surrounding the former
employee's retirement. 1360 RODo HORITSU GEPPO at 51-55.
83. See, e.g., Foseco Japan Ltd., 624 HANREI MHO at 82.
1999] Noncompete Covenants in Japanese Employment Contracts

clauses' as well as those 'with only a durational limitation.

Moreover, some courts neither explain nor justify their rationale for
the reasonableness of certain durational limitations. For example,
courts have held that two years can be reasonable because it is a
"relatively short period of time."''
Furthermore, the cases vary in the weight they attach to
compensation for post-employment restrictions. For example, in
Nihon Keihosochi, the court reasoned that a bonus paid to the former
employee for a post-employment restriction could be returned to the
employer in exchange for recapturing the freedom to compete;
therefore, the restrictive clause was valid!' Another court did not
view a payment for nondisclosure of trade secrets during employment
as compensation per se but still recognized that it supported the
clause's validity.! The absence of compensation for a work rules
noncompete provision can be inconsequential," as can the absence of
compensation for an individual agreement not to compete.
Although lacking any binding precedential authority, Tokyo Legal
Mind may be indicative of the courts more recent posture. It remains
to be seen whether other courts will follow the proposition that
compensation is an essential element for the validity of a
contractually-created, post-employment restriction.
Finally, courts consider the public interest and the disadvantage
borne by the employee. The court is sympathetic to the employee's
inability to freely utilize his knowledge and the potential detriment to
his livelihood, although no court has invalidated a clause solely on
these grounds. Similarly, no court has justified validity on public
interest alone.
Besides the foregoing factors, the courts also consider case-

84. See, e.g., Nihon Keihosochi, 520 HANREK JIHO 61 (Tokyo Dist. Ct., Dec. 25,
1967). The court in this case construed a bonus as compensation and stated that, if
the former employee were to return the payment, he could regain his freedom to
compete; hence, the court validated the restrictive provision. Id. at 63.
85. See e.g., Tokyo Gakushu Kyoryokukai, 581 RODO HANRi 70 (Tokyo Dist.
Ct., Apr. 17,1990).
86. See, eg., Tokyo Legal Mind, 894 HANREi JIHO 73; Foseco Japan Ltd., 624
HANPI HO 78, 82 (Nara Dist. Ct., Oct. 23,1970).
87. See Nihon Keihosochi, 520 HANREi JIO at 63 (stating that to avoid being an
impermissible restraint on freedom of occupation, the clause should be interpreted to
permit the employee to return the payment to regain his freedom).
8S. See, e.g., Foseco Japan Ltd., 624 HANREIJIHO 78.
89. See, e.g., Tokyo Gakushu Kyoryokukai, 581 RODO HANRE1 70.
90. See, e.g., Shin Osaka Boeki, 596 RODO HANREI 21 (Osaka Dist. Ct., Oct. 15,
1991).
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

specific facts that, in their view, may make enforcing a clause

inequitable (or "socially inappropriate"). In Nishibe Shoji, the court
found that the employee did not fully comprehend the significance of
restrictive provisions in the agreement, and in light of those facts, the
court deemed the covenant would be valid only if there was evidence
of bad faith by the employee.9 The court held that this covenant was
unenforceable because no such evidence existed." Bad faith alone
can be grounds for enforcing a restrictive clause,' but in such cases,
inherent reasonableness in restraining an employee from engaging in
bad faith conduct was more likely the impetus for finding
enforceability, rather than legal reasoning.94 Hence, Japanese courts
examine the fairness in enforcing a covenant on a case-by-case basis,
and this approach to restrictive covenants results in a lack of
uniformity in the requirements.
2. IndirectRestraints
Retirement allowance provisions threaten forfeiture of all or part
of an employee's retirement allowance if the employee competes
after severance of the employment relationship. The courts tend to
construe such provisions narrowly and limit their application to
situations with certain factual circumstances. The courts' narrow
construction of such clauses is manifest in the leading case decided by
the Japanese Supreme Court, the Sankosha case." Subsequent cases
consistently follow the approach adopted in Sankosha.96
Drafted by the employer, retirement allowance provisions in the
work rules state that employees are entitled to a retirement allowance
calculated by multiplying the worker's basic wage at the time of

91. See Nishibe Shoji, 1360 RODo HoRiTsu GEPPO 48, 53-54 (Fukuoka Dist. Ct.,
Apr. 19, 1994).
92. Id. This case is criticized for focusing on the existence of bad faith rather
than determining the reasonableness of the covenant according to staTndards set forth
by prior cases and commentary. See Hiroshi Ishibashi, Kyogyohishi Tokuyaku no
Goriteki Gentei Kaishaku [Reasonable Narrow Construction cf Noncompete
Covenants], 136 RODO HoRrrsu GEPPO 6, 10-11 (1995).
93. See, e.g., Tokyo Gakushu Kyoryokukai, 581 RODO HANREC 70 (awarding
damages on the basis of a restrictive work rules provision against a former employee
who solicited employees of the employer and engaged in competitiva activities that
would harm the employer).
94. See also Michio Tsuchida, Rodoshijo no Ryudoka wo Megun Horitsu Mondai
(jo) [Legal ProblemsAssociated with Mobilization of the Labor Market (pt. 1)], 1040
JuRisuTro 53,57 (1994).
95. See Sankosha, 958 RoKEISOKu25 (Sup. Ct. 2d Petty Bench, Aug. 9,1977).
96. See, e.g., Nishibe Shoji, 1360 RODo HoRiTsu GEPPO 48.
1999] Noncompete Covenants in Japanese Employment Contracts

retirement by a coefficient that increases with the length of

continuous service.' Many clauses also divide the payments into two
types: allowances paid when the employee retires at retirement age
(the traditional case) and allowances paid when the employee resigns
for reasons not attributable to the employer)3 Resigning to join
another competitor, to establish a competing business or engage in
any competitive conduct falls into the latter category. Not
surprisingly, payment amounts in the latter case are significantly less
than those under the former category." In some cases, full payment
of the retirement allowance is conditional on noncompetition,
sometimes for a number of years, following resignation."

97. See generally SUGENO, supra note 7, at 173. The amount of retirement
allowance is calculated on the basis of the monthly wage times a variable that
increases with length of service. For example, an employee who has been in
continuous service for up to ten years will have a variable of 0.6 month's basic wage
for each year of service; if he has been in continuous service for eleven to fifteen
years, that variable will be 0.8 month's basic wage per such year and increases such
that those with more than twenty-five years of continuous service may have a
variable of 1.2 month's wages for every year. See KAZUO SUGENO, KoYo SHA1AI NO
Ho [THE JAPANEsE EMPLOYMENT SYSTEM AND THE LAW] 137 (revised ed. 1997).
Generally, an employee who is a male college graduate, thirty-two years of age in a
managerial or technical position with ten years of continuous service with an
employer having more than five hundred employees can expect to receive 255
million yen in retirement allowances if the retirement is for reasons attributable to
the employer. Taishokukin Nenkin ni kansun Jittai Chosa (9/1996) [Survey on
Retirement Allowances and Pensions (September 1996)], 796 CHINGIN JITSuMU 4, 8
(1997) [hereinafter Report on Retirement Allowance Survey].
9S. See generally SUGENO, supra note 7, at 175.
99. For example, the work rules provision in Nihon Convention Service provided
that one who retires for personal reasons (i.e., reasons not attributable to the
employer) and has three to five years of service receives thirty percent of the
allowance to be paid in the event of a retirement for reasons attributable to the
company; one who has five to ten years of service receives fifty percent; one who has
ten to fifteen years receives seventy-five percent. See Nihon Convention Service, 711
RODO HANREI 30 (Osaka Dist. Ct., Dec. 25, 1996). See generally Report on
Retirement Allowance Survey, supra note 97, at 4-8. According to statistics in this
report, the disparity in retirement allowances to be paid is such that if a male college
graduate, thirty-two years of age in a managerial or technical position, with ten years
of continuous service with an employer having more than five hundred employees
can expect to receive 2.55 million yen if he retired for reasons attributable to the
employer, whereas that amount would be 1.59 million yen if he retired for p.rsonal
reasons not attributable to the employer. Id. at S. An employee in a managerial or
technical position that is fifty-five years of age with thirty-three years of continuous
service would be entitled to 25.96 million yen if he retired for reasons attributable to
the employer, whereas that figure would be 23.63 million yen if he retired for
personal reasons. Id.
100. For example, the provision in question in Chubu Nihon Kokokusha, 569
RODO HANREI 37 (Nagoya High Ct., Aug. 31, 1990), made full payment of the
retirement allowance conditional on noncompetition for a period of six months; the
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

Withholding any part of the retirement allowance implicates

article 24 of the Labor Standards Law, which guarantees full payment
for services rendered."0 ' The retirement allowance is deemed a hybrid
of deferred compensation and a reward for meritorious service. ' As
deferred compensation, it may not be withheld in light of the full
payment principle for wages;"'O however, as a reward for meritorious
service, the employer has discretion in its pay out."°
The courts' compromise has been to recognize application of
such clauses only under certain factual circumstances. For example, a
work rules provision making payment of the retirement allowance
conditional upon the employee not competing for a six-month period
only applies where the competitive activity was conducted in bad faith
and in a manner so egregious that withholding payment would be
reasonable." Where the retirement allowance clause gives the
employer discretion to reduce the amount otherwise receivable if the
employee engages in any "inconvenient" activities,"6 a court may find
such a provision extremely subjective. Particularly because the
provision would be invoked after the payable amount was calculated,
a court may only apply the clause where circumstances justify its
application." Thus, by narrowly interpreting the terms, a court may
give former employees who were partially denied their retirement
payments relief if the employer is unable to show such bad faith."'°

provision in Fukui Shinbunsha, 503 RODO HANREI 83 (Fukui Dist. Ct., June 19, 1987),
made full payment of the retirement allowance conditional on noncompetition
without a durational specification.
101. See Rodo Kijunho [Labor Standards Law], Law No. 49 of 1947, art. 24. This
issue is confronted in many cases where the employee competed with the former
employer upon termination of the employment relationship. See, e.g., Sankosha, 958
RoKEIsoKu 25 (Sup. Ct. 2d Petty Bench, Aug. 9, 1977); see also Chubu Nihon
Kokokusha, 569 RODO HANREI 37 (Nagoya High Ct., Aug. 31, 1990); Fukui
Shinbunsha, 503 RODO HANREI 83 (Fukui Dist. Ct., June 19, 1987).
102. See, e.g., Chubu Nihon Kokokusha, 569 RODO HANREI 37,45. For retirement
allowances generally, see SUGENO, supra note 7, at 175-76.
103. Rodo Kijunho [Labor Standards Law], art. 24.
104. See SUGENO, supra note 7, at 175.
105. See, e.g., Chubu Nihon Kokokusha, 569 RODO HANREi 37 (holding that
starting a business that competes with the employer within the six-month period is
not sufficient to warrant a finding of "extreme bad faith" as required by this rule).
106. The retirement allowance provision in Benisu, 687 RODO HAREI 69 (Tokyo
Dist. Ct., Sept. 29, 1995), stated: "If, after retirement, [an employee] engages in
activities which harm this company, or which are inconvenient or improper, the
retirement allowance payment percentages may be reduced after terraination of the
employment relationship." Id. (translation by author).
107. See, e.g., id. at 73.
108. Id. at 74.
1999] Noncompete Covenants in Japanese Employment Contracts

3. Summary of the Court'sPaternalisticPosture

The goals of Japanese courts with regard to noncompetition
covenants is to reach the fairest outcome by weighing certain factors
to justify what the court believes to be the equitable result, even if
this entails a passive analysis of the legal issues. Thus, in determining
the validity of a covenant or the applicability of a work rules
provision, the courts often resort to narrowly construing the clause
and apply it only in specific circumstancesY Because a court cannot
void a work rules provision, it merely prohibits application in a
particular case. The case law for retirement allowances provisions in
the work rules is the most common manifestation of this approach."'
Finally, the Japanese courts are protective of employees in the
employment relationship and take a conservative stance on individual
noncompetition agreements. They may even inquire into the business
or managerial judgment of employers when deciding the
enforceability of a noncompete clause."'

D. Relief Available to the Employer

1. DirectRestraints
Under the 1993 Unfair Competition Prevention Law, the
employer may seek equitable as well as monetary relief from a former
employee who misappropriates or improperly discloses trade secrets,
regardless of the existence of a restrictive clause.1 Regarding actions
based on provisions that directly restrict competitive activities,

109. See e.g., Nishibe Shoji, 1360 RODo HoRrrsu GEPPO 48 (Fukuoka Dist. Ct.,
Apr. 19, 1994); Shin Osaka Boeki, 596 RODO HANREI 21 (Osaka Dist. Ct., Oct. 15,
1991); Chubu Nihon Kokokusha, 569 RODO HANREI 37 (Nagoya High Ct., Aug. 31,
1990).
110. The courts continue to utilize the framework used in the leading cases and
limit the application of retirement allowance provisions to cases where there is some
egregious, bad faith conduct on the part of the employee. See Benisu, 6S7 RODO
HANREI 69. Limited application of a clause resulting from a narrow construction of
its terms is also an approach taken for noncompete (direct anti-competitive) clauses.
See, e.g., Tokyo Legal Mind, 894 HANREI TAvIUZU 73, 86 (Tokyo Dist. Ct., Oct. 16,
1995).
111. See, e.g., Nishibe Shoji, 1360 RODo HoRrrsu GEPPo 48 (refusing to enforce
the covenant because the employer did not have that great of a need to impose a
noncompete on this particular employee).
112. Under the Unfair Competition Prevention Law, an employer may seek an
injunction or monetary damages against an employee who was privy to trade secrets
as defined in article 2, para. 4. See Fusei Kyoso Boshi Ho [Unfair Competition
Prevention Law], Law No. 47 of 1993, arts. 3 & 4.
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

injunctive relief is available if the explicit restriction is reasonable. As

discussed above, the court often denies application of a restrictive
clause, rather than deeming it void,13 and to make it reasonable under
the circumstances, limits the application of the restriction to most
closely reflect the parties' intent."'
To obtain an injunction, the employer must show a threat of
harm to the employer's business, the threat that such harm will
continue and the illegality of the competitive act.' 5 An employer
must show such harm, or threat of harm, with specificity." 6 In
addition, damages for breach of contract (i.e., breach of an explicit
covenant not to compete) are also available in the amount of lost
profits caused by the activity in breach."7
2. Indirect Restraints
When faced with an action brought by the employee to compel
payment of a withheld retirement allowance, or an action brought by
the employer for restitution for the amount paid, the courts question
whether there was bad faith by the employee."' The court examines
the nature of the former employee's competitive activity and the
intent behind the acts before determining the provision's
enforceability in that particular case." 9 Thus, where the employer
shows that the employee engaged in egregious bad faith conduct,
relief has been granted based on an indirect restraint, in the form of
restitution.

113. See, e.g., Tokyo Legal Mind, 894 I-ANREI TAIMUZU 73 (Tokyo Dist. Ct., Oct.
16, 1995) (denying application of restrictive provisions to one of the defendants in
light of the defendant's job content); Nishibe Shoji, 1360 RODo HoRrTSU GEPPO 48
(denying application of noncompete agreement to defendant former employee on the
ground that other circumstances prevented enforcement of the contract terms,
despite the protection of trade secrets as the valid purpose of the agreement).
114. For example, in Shin Osaka Boeki, 596 RODO HANREI 21 (Osaka Dist. Ct.,
Oct. 15, 1991), the court construed the covenant as restricting only a 3pecific type of
activity (i.e, prohibiting handling of only specified goods), and enforced it based on
those terms. Id. at 25. See also Nishibe Shoji, 1360 RODo HORMTSU GEPeo 48
(limiting covenant's scope to encompass only situations involving extreme bad faith).
115. ONO, supra note 67, at 305.
116. See Tokyo Legal Mind, 894 HANREI TAIMUZU at 82, 90-91.
117. See, e.g., Toyko Gakushu Kyoryokukai, 581 RODO HANREI 70 (Tokyo Dist.
Ct., Apr. 17, 1990) (concluding an award for damages in the amount of lost profits
caused by the employee's departure and activities is justified).
118. See, e.g., Benisu, 687 RODO HANREi 69 (Tokyo Dist. Ct., Sept. 29, 1995);
Chubu Nihon Kokokusha, 569 RODO HANREi 37 (Nagoya High Ct., Aug. 31, 1990).
119. See, e.g., Fukui Shinbunsha, 503 RODO HANREI 83 (Fukui Dist. Ct., June 19,
1987).
1999] Noncompete Covenants in Japanese Employment Contracts

Im. Case Law in Light of the Japanese Employment Model

The Japanese judicial treatment of post-employment restraints
presumes the traditional long-term employment relationship and a
collective notion of human resources. The Japanese employment
scheme and surrounding jurisprudence bolster each other to support
long-term employment, and this result is reflected in the law on
noncompetes. In stark contrast is at-will employment in the United
States; some U.S. state law reflects a more individual-based approach
to noncompete clauses.'
In Japan, an employer's right to dismiss its employees is severely
restricted and faces scrutiny when exercised." Employers therefore
invest heavily in human capital, rotating employees among jobs and
training them in skills and knowledge that are valuable to that
particular employer. Because certain skills are traditionally more
valuable within a company than in the external labor market, and due
to the seniority system in which wages increase with seniority,
employees who are nurtured in this environment tend to refrain from
voluntary departure. In turn, the employer tends to adopt a
paternalistic attitude toward its employees. Thus, as a natural
consequence, issues arising out of lateral mobility traditionally have
been rare. Moreover, this model entails collective labor management
such that similarly situated employees who are alike in age and wage
are treated equally and as a collective unit rather than as individuals.
In determining the terms and conditions of employment as well,
employees are treated as a group, and individual agreements are
uncommon. Presumption of this model may lead to disregarding the
significance of individually executed agreements vis-4-vis work rules
provisions.
Moreover, kaikoken ranyo hori, the judicially-created doctrine of
the abuse of the employer's right to dismiss, may have affected the
judicial attitude towards noncompete covenants. This doctrine
severely restricts the employer's exercise of its right to discharge
employees by imposing certain requirements that must be met before

120. For example, Texas law on noncompete covenants in employment

incorporates consideration principles by framing consideration for a noncompete as
something which gives rise to a need to prevent the employee from competing. See
TEx. Bus. & CoM. CODE ANN. § 15.50-15.52 (Vernon Supp. 1995); see also DeSantis
v. Wackenhut, 793 S.W.2d 670 (Sup. Ct. Tex. 1990), reh'govcrned, cert. denied, 493
U.S. 1048 (1991) (consideration for a covenant not to compete may include sp cial
training or knowledge provided by the employee).
121. See generally SUGENO, supra note 7, at 398-400.
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

a discharge can be valid."n At the same time, however, the employer

is given wide latitude in unifying work rules to manage employees
collectively and to enable flexibility, the employer may unilaterally
modify those terms and conditions of work as the environmental and
business conditions change."z To support this flexibility, courts
"reasonably construe," or narrowly construe, noncompete
provisions. 4 Moreover, courts are inclined to give such provisions
legal effect only to the extent that it is reasonable to do so.
Lastly, investment in human resources and the nature of the
recruiting process may influence the court's traditional reluctance to
uniformly mandate a quid pro quo for a post-employment restriction.
Traditional Japanese employment begins with the hiring of recruits
straight out of school to be molded into "corporate citizens." Thus,
much of the training, skills and contacts that become part of the
typical employee's value to the employer is due to the very training,
skills and contacts that the employer provides. From this perspective,
it is not surprising that the Japanese courts have not viewed
compensation for a noncompetition provision as essential; it may be
sufficient to enjoin or award damages for injury caused by
competitive activity only in cases where the activity can be said to
have involved bad faith.

122. The doctrine of kaikoken ranyo hori dictates that the dismissal of an
employee requires a reasonable justification in order to be upheld. See generally id.
123. According to case law, an employer may unilaterally impose even
disadvantageous changes in the work rules, which comprise the terms and conditions
of employment, as long as such modifications are reasonable. See generally SUGENO,
supra note 7, at 93-108. To effectively modify work rules and for the modification to
be upheld in court, any modification must be reasonable, and its reasonableness will
take into account the degree of disadvantage to the employees, the necessity of the
modification, any improvements in overall terms and conditions of work, negotiation
procedures with the union or employee representative and response of other
employees. See id. at 105-06.
124. For example, the court in Toyko Gakushu Kyoryokukai limite l application of
the work rules provision restricting competitive activity for three years to prohibiting
only bad faith acts, and on that basis, held the provision applicable upon the facts
presented. 581 RODO HANREI 70 (Tokyo Dist. Ct., Apr. 17, 1990); see also Tokyo
Legal Mind, 894 HANREI TAIMUZU 73 (Tokyo Dist. Ct., Oct. 16, 1995). This type of
interpretive tool is most common for retirement allowance proviions. See, e.g.,
Chubu Nihon Kokokusha, 596 RODO HANREI 37 (Nagoya High Ct., Aug. 31, 1990);
Sankosha, 958 ROKEISOKU 25 (Sup. Ct. 2d Petty Bench, Aug. 9,1977).
1999] Noncompete Covenants in Japanese Employment Contracts

IV. Academic Perspectives and Shortcomings of the Japanese

Framework
Both Japanese legal scholars and courts share the aversion to
post-employment restrictions. This may be due to the fact that the
notions of freedom of contract that prevail under civil and
commercial law do not necessarily apply to noncompetition clauses in
the employment context because such agreements generally are not
arms length bargains made on the basis of equal bargaining power.'n
As a result of unequal bargaining power, employees may feel
compelled to accept or consent to restrictive terms without
objection.' 6 Thus, there is a general consensus that noncompetition
agreements in the employment context cannot always be deemed an
employee's waiver of his right to compete.'
The majority of scholars and the case law agree that an explicit
clause or agreement is necessary as a basis for a post-employment
restriction on competition.' Furthermore, most scholars agree that
intentional trade secrets misappropriation is actionable under the
Unfair Competition Prevention Law, even without an explicit non-
disclosure agreement for trade secrets.c' However, views vary as to
the proper framework for determining the validity or enforceability
of restraints, and moreover, to date, the courts have not adopted
scholars' views.

A. The PrevailingAcademic Theories: Disparitywith the Courts

Scholars disagree about which factors are essential for a post-
employment restraint to be "reasonable." One approach is to impose
requirements for validity,"'' that is: 1) such restraints must be based on

125. See also Akira Yonekura, Horitsukoi (22): Kojo Ryozoku lhan no Horitsukol
[Legal Acts: Legal Acts That ContravenePublic Policy], 65 HOGAKu KYoSHITSLT 38,
49 (1986).
126. Ishibashi, supra note 72, at 114-15.
127. Id.
128. See; e.g., Hisada Seisakusho, 165 RODO HANREi 61 (Tokyo Dist. Ct., Nov. 1,
1972); Chubu Kikai Seisakusho, 522 HANREI JIHO 83 (Kanazawa Dist. Ct., Mar. 27,
1968); JuN ARIZUMI, RODO KInuN Ho [LABOR STANDARDS LAv] 122 (1963);
Kiyosm GoTo, TENSHOKU NO JIYU TO KIGYOHIMITSU NO BOEI [FREEDOM TO
CHANGE JOBS AND PROTECTION OF ENTERPRISE SECRETS] 32 (1974); Tsuchida, supra
note 94, at 57; Yamaguchi, supra note 4, at 431.
129. See ONO, supra note 67, at 304-06, 319-21; see also Hayakawa, supra note 21,
at 181; Ishibashi, supra note 72, at 110; Obata, supra note 72, at 45.
130. See Tsuchida, supra note 94.
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

an explicit provision; 2) the employee must have been in a position

which enabled him to be privy to business information; 3) the purpose
of the restraint must be to protect legitimate business interests; 4) the
restraint must not be unfairly oppressive on occupational activity; 5)
the restraint must be reasonable with respect to duration and
geographical scope; and 6) there must be compensation.1" Another
approach requires, in addition to explicit provisions and
compensation, durational, geographical and occupational restrictions
that are in proportion to the various other factors 3 2
In contrast, the courts lack consistency in their incorporation of
these various elements. They disregard the commentators' assertions
that certain requirements be met for a restriction to be valid."' For
example, case law suggests that the position of the employee, the
reasonableness of parameters and quid pro quo compensation are
part of a totality of circumstances analysis, rather than independent
requirements."
Among the requirements that scholars advocate, that of
compensation has generated the most debate. Thce concept of
compensation, or daisho sochi, is similar to the notion of
consideration under U.S. law, where, for example, some state courts
have required consideration for a noncompete covenant to be
enforceable.135 However, the notions of consideration and daisho
sochi are not identical. Although neither academics nor the Japanese
courts have clearly defined daisho sochi,3 6 it seems to refer to a

131. See id. at 57.

132. See Susumu Noda, Rodoryokuido to Kyogyo Hishi Gimu [Workforce
Mobility andthe Duty Not to Compete], 160 KIKAN RODOHo 49,57 (1991).
133. For example, the courts do not give consideration to the compensation issue
as advocated by commentators. See also Hayakawa, supra note 21, at 197.
134. However, Legal Mind introduces a bifurcated approach whereby certain
requirements are imposed under certain situations. See 894 HANIEI TAIMUZU 73
(1995).
135. See, e.g., Zellner v. Conrad, 589 N.Y.S.2d 903 (1992) (recognizing
consideration for a covenant not to compete where restrictions on freedom to
terminate were provided in the context of employment-at-will).
136. There are various definitions of "compensation." For example, one view
states that compensation is that which is meant to provide security fo the employee's
livelihood while his occupational freedom is restricted. See Ichio Morioka, No-Hou
no Boei [Protectionof Know-How], 5 NIHON KOGYO SHOYUKEN Ho GAKKAI NENPO
31, 52-53 (1982). One court's decision implies that "compensation" is something
which may be returned to the employer for the former employee to recover his
freedom to compete. See Nihon Keihosochi, 522 HANREI JIHo 61, 63 (Tokyo Dist.
Ct., Dec. 25, 1967) (ordering the compensation paid to the former employee to be
returned to the employer).
1999] Noncompete Covenants in Japanese Employment Contracts

monetary payment made in exchange for the future restraints on

freedom of competition,' but it is not necessarily a bargained-for
exchange or an inducement to a contract. The daisho sochi debate
focuses on whether it is a threshold requirement or that it is merely a
factor in a comprehensive evaluation.
The prevailing view argues that compensation is a threshold
requirement. ' One rationale is that the Unfair Competition
Prevention Law and its amendments do not require compensation for
an employer to have a cause of action against a former employee
regarding the misappropriation of trade secrets; therefore, it is
unnecessary to extend this "uncompensated" duty not to compete to
cover areas not within the Law's scope as long as trade secrets are
involved." Other commentators argue that when it is necessary to
restrict the use of an employee's specialized knowledge or skills to
protect the employer's interests, the infringement on the employee's
freedom requires payment of some form of compensation in
exchange."' However, neither view explains what suffices as
"compensation.''.
A minority view asserts that the legal effect of the
noncompetition clause dictates whether compensation is essential.'"
Because an injunction directly bars the employee's competitive
activity, compensation for the restriction on freedom is required!"
On the other hand, if the noncompete duty only arises when the
employee acquires benefits through a retirement allowance provision,

137. For example, a special bonus payment made to the employee at the time of
his retirement for a post-employment restraint is "compensation." Sce, e.g., Nihon
Keihosochi, 522 HANREI JIHO 61.
138. See e.g., Noda, supra note 135; Fumiko Obata, Taishokushita Rodosha no
Kyogyo Kisei [Restrictions on Separated Employees], 1065 JURISUTO 119, 121 (1995).
Tsuchida, supra note 94; Michio Tsuchida, Rodosha no Tcnshoku.Hkikinuki i.o
meguru Shomondai [Legal Issues Involving Employces' Changing of Jobs and
Recruitment], 1990 Jnu TO SEIGi 31,35.
139. Tsuchida, supra note 94, at 57-58.
140. Yamaguchi, supra note 4, at 42S.
141. One view asserts that if the employer provides the employee with "sufficient"
compensation for the restraint, it is reasonable to hold the covenant valid even if its
scope is broad. Morioka, No-Hou no Boei, supra note 136, at 53.
142. Tsuchida, Rodosha no Tenshok-u-Hikinuki wo inguru Shonmondai,supra note
138, at 35. However, the author revised his view on this issue in Tsuchida, supra note
94, in which the author argued that compensation for a post-employment restraint
should be an essential element.
143. Tsuchida, Rodosha no Tenshok-u-Hikinuki wo ineguru Shontondai,supra note
138, at 35.
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

compensation is not always necessary to offset the loss of freedom."

Therefore, compensation is essential only where the employer seeks
to enjoin the employee's future activity. 141 Furthermore, one
commentator argues that whether compensation is required should be
evaluated based on the degree of the restriction. 146 According to this
view, as long as the employee's freedom is only partially restricted
(e.g., preserves the employee's freedom to switch employers in the
same industry), compensation should be merely a factor to take into
consideration in the balance and totality of circumstances analysis. 147
These views focus on the nature and extent of the restraint on
competition.
There is a more basic question: if occupational freedom is such a
fundamental right and any restrictions thereon implicate public
policy, how can an infringement on that right become legal merely by
supplying some compensation? 1" Is the contention that
compensation is necessary actually a concession that compensation is
insufficient
149
to overcome the illegal nature of a post-employment
restraint?
In contrast to this scholarly debate, the Tokyo District Court
held that compensation is not always required to impose a duty that is
ancillary to the employment relationship. A duty not to disclose or
compete in a way that would entail a disclosure of trade secrets exists
with or without an explicit provision.15 The Tokyo District Court also
held that if a duty not to compete is created by an agreement,
adequate compensation must be supplied. 5 Subsequently, the Osaka
District Court held that compensation was necessary where the
provision sought to protect non-trade secret business interests. ' As
evidenced by these decisions, the courts have declined to follow the
scholars' suggestions. This may be due to skepticism about whether
uniform criteria can properly deal with the legal effect of an
employee's breach (disciplinary actions, discharge, claims for

144. See id.

145. See id.
146. See Ishibashi, supra note 72, at 120.
147. Id.
148. Hayakawa, supra note 21, at 199.
149. Id.
150. See Tokyo Legal Mind, 894 HANREI TAIMUZU 73 (Tokyo Dist. Ct., Oct. 16,
1995).
151. Id.
152. See Nihon Convention Service, 711 RODO HANREI 30 (Osaka Dist. Ct., Dec.
25,1996).
1999] Noncompete Covenants in Japanese Employment Contracts

damages or injunction) to determine the legality of post-employment

restrictions, as scholars proposed.'
B. A Perspective on the CurrentJurisprudence

1. The Basisfor Restricting CompetitiveActivity

If there is either an agreement or a provision setting forth non-
competition duties, it warrants consideration first as a legal basis for
restricting competition before any totality of circumstances analysis
can take place.
The Japanese employment contract is not an instrument that sets
forth rights and duties of the employee; rather, it is merely a contract
establishing the employee's status as such."'r This employment
contract embodies rights and obligations of the employer and
employee that are molded as their relationship evolves over time.
Hence, any ancillary duties that may arise with respect to an
employment relationship are insufficient as a basis for restricting
legitimate competition after termination of the employment
relationship. If an explicit provision exists, therefore, it deserves first
consideration as a basis to restrain an employee's competition before
a totality of circumstances analysis can be engaged.
Furthermore, in light of the Unfair Competition Prevention Law,
an explicit provision deserves analysis first as the basis for a duty not
to compete, however limited in scope. Under the Unfair Competition
Prevention Law, an employer may seek injunctive relief for
misappropriation of trade secrets even without an explicit agreement
or provision.' 5 However, an employer often has business information
that, although not a "trade secret" per se, still deserves to be
protected."' In such cases, an explicit work rules provision or
153. See Araki, supra note 71.
154. In addition to the work rules and collective agreement (if one exists) which
may furnish more details regarding the contents of the employment contract, an
appropriate part of the employment relationship cannot avoid embodying subsequent
agreements between workers and their employer and the employers directions and
orders to constitute job content; thus, the employment contract possess a flexible
quality. See SUGENO, supra note 7, at 67.
155. See supra notes 67-76 and accompanying text.
156. "Even in the best of good faith, a former 'creative'... employee working for
a competitor, or in business for himself in the same or related field, can hardly
prevent his knowledge of his former employer's confidential methods or data from
showing up in his work." Blake, supra note 2, at 669-70. Thus, noncompete clauses
are often the most effective means for protecting an employer's business interests,
even if those interests do not necessarily involve "trade secrets." See also Michael
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

individual agreement is essential, particularly because competition

itself is not actionable unless a contractual agreement provides
otherwise (for instance, a contractual agreement not to solicit the
employer's clients or remaining employees). If the Unfair
Competition Prevention Law provides a minimum level of protection
for "trade secrets," with respect to any level of protection that the
employer wants for other business interests such as customer
relationships, or if the employer simply wants to prevent a certain
employee from engaging in otherwise legitimate competition, an
explicit contractual provision with that former employee is necessary.
An agreement or provision setting forth any non-competition
duties therefore warrants first consideration because any contractual
agreement restraining the employee's freedom should reflect the
parties' agreement, at least in theory. However, any such agreement
warrants judicial scrutiny due to the risks of disparity in bargaining
power." Only after determining the enforceability of such an
agreement should the court proceed to an examination of whether
there was unfair competition, bad faith or tortious conduct in the
totality of the circumstances.
2. LegitimateInterests of the Employer and the Scope of
Protection
Japanese case law currently provides insufficient guidance
regarding what constitutes a "protectable interest." Is it confined to
the definition of "trade secret" under the Unfair Competition
Prevention Law, or is it broader? If it is broader, as it appears,' what
factors warrant a finding of a protectable interest? In thds regard, the
court must enumerate the factors that are crucial in the analysis. Such
factors should include investment or efforts at research and
development of the particular information, methodology or business.

Hutter, Drafting Enforceable Employee Noncompetition Agreements to Protect

ConfidentialBusiness Information:A Lawyer's PracticalApproach to the Case Law,
45 ALB. L. REv. 311, 316 (1981). See generally 1 ROGER MILGRIM, MILGRIM ON
TRADE SECRETS § 3.02 (1979).
157. See also Michio Tsuchida, Rodosha no Kyogyo Hishi Gimu to Songaibaisho
Sekinin no Umu. Tokyo Gakushu Kyoryokukai Jiken [Employecs' Duty Not to
Compete and Liability for Damages: The Tokyo Gakushu Kyoryokukai Case], 995
JuiusuTo 114, 116 (1992).
158. For example, Shin Osaka Boeki validated a restrictive covonant by finding
that enjoining a former operations manager from dealings with respect to certain
goods was justified by a legitimate business interest. 596 RODO HANREi 21 (Osaka
Dist. Ct., Oct. 15,1991).
1999] Noncompete Covenants in Japanese Employment Contracts

Furthermore, the courts give little guidance regarding why

certain parameters of a restraint are "reasonable."" In this regard,
U.S. opinions explaining the means-ends fit between the interest
protected and the parameters of the restraint are instructive.' For
example, a one-year prohibition on competition in a particular
specialty within a specified geographical region may be reasonable
where the subject information has a life span of one year.' The
Japanese courts must emulate this reasoning and explain the
correlation between the specific parameters of the restraints and the
business interests sought to be protected.

3. TailoredApproaches to the Different Types of Restraints

Restrictive provisions in work rules should be treated differently
from individual agreements, and the latter should be given more
deference. One of the reasons for this different treatment is that the
inherent nature of "reasonable" restraints on competition requires
that these restraints be tailored to the specific circumstances at hand.
Parameters such as the duration and geographical scope should
depend upon the employer's protectable interest and the skills and
the knowledge of the particular employee. Accordingly, an individual
covenant that is situation-specific, particularly given the
circumstances at the time of the employee's departure, deserves more
deference than generally applicable provisions that are, by their
inherent nature, broad and vague.'" Therefore, in reviewing

159. Courts merely stated, for example, that a period of two years was a relatively
short period of time for a post-employment restraint. See, e.g., Tokyo Legal Mind,
894 HANREI TAIMUZU 73, 87 (Tokyo Dist. Ct., Oct. 16,1995).
160. Among the cases in the analysis in Comparative Study of Post-Employment
Restraints, supra note 1, see, e.g., Coolidge Co. Inc v. fMokrnski, 472 F. Supp. 459
(S.D.N.Y. 1979) (applying New York law).
161. See Coolidge Co. Inc., 472 F. Supp. 459 (denying enforcement of a restrictive
covenant that prohibited competition for two years in a specified region wvith resp2ct
to a business similar to that of the employer on the grounds that two years was
unreasonable because the information at stake was amended biannually and the
scope of activities prohibited was broader than the work activities that actually
involved business secrets).
162. As the workforce becomes more individualized, situation-specific clauses for
specific employees may become increasingly useful. This tendency is seen in a much
more individualistic labor market, that of the United States, where a trend toward
drafting anti-competition covenants to be as specifically tailored to the individual's
situation as possible can be noted. See generally Peter Wlhitmore, Empirical Study:
A Statistical Analysis of Noncompetition Clauses in Employment Contracts, 15 J.
Cosu. L. 483, 499-500 (1990). That individualized covenants are more reliable
because they are drafted with the specific fact situations in mind applies equally in
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

restrictive clauses, the Japanese courts should approach provisions

drafted for general collective purposes differently from those drafted
for specific situations, and individual agreements that are carefully
drafted should be given more deference than work rules provisions.
With this background, the court's opinion in Nihon Convention
Service 63 that noncompete clauses in individual agreements were to
be afforded similar treatment as provisions in the work rules is
unfortunate.
A second reason for this distinction, the fact that an individual
agreement was executed, should be given some degree of weight in a
comprehensive analysis. Since the employer may unilaterally modify
work rules, 64 any provisions, including a noncompete provision or an
indirect restraint, may be introduced or revised, even if it is a
modification that the employees would not otherwise consent to, with
the sole limitation that the modification must be substantively and
procedurally reasonable. 65 As discussed above, work rules provisions
could be a basis for relief if trade secrets were involved, as held in
Nihon Convention Service.6 In addition, the misapp:ropriation of
trade secrets or unfair competition is actionable whether an explicit
provision prohibiting such activity exists; therefore, a work rules
provision would be a mere confirmation of this particular duty. Any
restriction above and beyond the duty not to misappropriate trade
secrets or engage in unfair competition must arise out of an
affirmative agreement."' Thus, individual agreements that set forth
these additional duties have an inherent significance. Those which set
forth the substantive agreement of the parties should be given more
deference, but safeguards are necessary to ensure that such an
arrangement results from a voluntary agreement free from

Japanese employment contexts. At the same time, however, individual covenants

can be unreliablesince there is a bargaining power disparity betwee'i the employer
and employee, and under such circumstances, a covenant should nol necessarily be
deemed an accurate reflection of the parties' agreement.
163. See Nihon Convention Service, 711 RODO HANREI 30, 47 (Osaka Dist. Ct.,
Dec. 25, 1996) (stating that individual agreements are to be given the same analysis
and treatment as a collective work rules provision).
164. The employer may unilaterally modify the terms and conditions of work as
set forth in the work rules, as long as such a modification is reasonabe. See generally
SUGENO, supranote 7, at 99-106.
165. A work rules provision may be unilaterally modified if substantively
reasonable and if the employer seeks the opinion of the union or employee
representative. See Shuhoku Basu, 22 MINSHU 3459 (Sup. Ct., Dec. 25, 1968).
166. 711 RODO HANREI at 47.
167. Yamaguchi, supra note 4, at 431.
1999] Noncompete Covenants in Japanese Employment Contracts

overreaching bargaining power or coercion.

A third reason for this distinction is that recent trends in
Japanese employment support giving individual covenants more
deference vis-a-vis collective work rules provisions. The traditional
employment system presumed collective employment management
and provided the employer -withsignificant flexibility in modifying the
terms and conditions of work." However, the diffusion of
individualism is expected to continue.' Lateral movement, mid-
career recruiting and headhunting are on the rise,' and individual
employment relations will become increasingly more significant."
With changing attitudes and increasing individualism in the
workforce, employers should opt to execute individual covenants with
valuable key employees to clarify and delineate that employee's
noncompete duties. Courts, in turn, must recognize the importance
of distinguishing between individual covenants and generally
applicable provisions and give greater weight to the former. From
this perspective, the enforceability of the individual covenants in
Nihon Convention Service should have been further examined.'
Moreover, noncompete clauses are most often litigated in the
context of smaller companies where customer relationships and
goodwill are at stake.'n Work rules provisions are ineffective in such
situations under Nihon Convention Service. According to that court,
an employer can restrict a former employee from competing on the

168. Examples of this flexibility in personnel management are, for example, the
doctrine concerning the binding effect of disadvantageous unilateral modifications in
the work rules.
169. See generally Kazuo Sugeno et al., Zadankaik White Collar no Aratshii
Jinjikanriwo Motomete [Discussion:In Search of a Net. Personnel Managementfor
White Collar Employees], 1066 JulusuTo 148, 150 (1995). Further evidence of a
more individualized employment system is the increase in merit-based wage schemes
rather than one which places emphasis on seniority alone, and is reflected in other
areas of the employment relationship as well. See generally Hirokuni Tabata, From
Collectivism to Individualism A ParadigmShift in Japanese Labor Las-, Theoly 1995
Soc. SCe. JAPAN (visited Feb. 5, 1999) <http:-IIww.iss.u-
tokyo.ac.jpfNewsletter/SSJ3/tabata.html>.
170. More employees will seek individual career development and further their
skills in the external labor market by moving laterally between firms. See Sugeno et
al., supranote 169.
171. See &.
172. The court merely stated that individual covenants executed with the
employees providing a noncompete duty after termination of the employnent
contract were subject to the same analysis as work rules provisions. Nihon
Convention Service, 711 RODO HANREI30,47 (Osaka Dist. Ct., Dec. 25,1996).
173. See Yasueda & Nishimura, supra note 5, at 13.
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

basis of a work rules provision as long as trade secrets are concerned,

whereas the employer must provide additional means of
compensating the employee for a noncompete obligation when
business interests regarding non-trade secrets, such as customer
relationships, are involved.174 With non-trade secrets, providing
compensation through the work rules for any potential :estraints that
the employer wishes to invoke has practical difficulties. The amount
of compensation may vary for each employee according to the value
of that employee's noncompetition obligation, and an employer must
be free to negotiate the amount or set the amount as appropriate.
Because the reasonableness of a post-employment restraint hinges on
the specific circumstances of a particular employee, the court facing
such a work rules provision will necessarily pare down its scope to suit
situational demands. This will lead to the undesireable result that the
court will become the vehicle for interpretation of noncompetition
provisions in the work rules, and the court's judgment may replace
the intent of the parties themselves. Not only does this result force
the courts to be interpreters and ultimately drafters of reasonable
noncompetition obligations, but it also gives rise to uncertainty and
unpredictability in what constitutes the rights and duties under a
particular employment relationship. For these reasons, individual
agreements should be favored over general work rules provisions.
4. Compensation
Compensation for a post-employment restraint in an individual
agreement is not essential. The courts currently ignore the nature of
the restraint and bargaining power, if any, of the departing employee
when considering this element. However, the need for compensation
should depend on the bargaining power of the employee (evaluated
in terms of the employee's position, the method of recruitment, job
content and so forth) and the type of restraint imposed--whether the
restriction prohibits use of trade secrets, solicitation of customers or
clients, passive or active solicitation or direct competition generally.
Under the Unfair Competition Prevention Law, which provides
for liability for misappropriating trade secrets, the existence of a non-
disclosure agreement for trade secrets has less practical relevance to
liability. Thus, if the restriction prohibits the employee from
disclosing trade secrets otherwise protectable under the Unfair
Competition Prevention Law, no compensation should be required.

174. See Nihon Convention Service, 711 RODO HANREI at 47.

1999] Noncompete Covenants in Japanese Employment Contracts

On the other hand, where non-trade secrets are targeted (such as

a non-solicitation clause for goodwill), an employer should not be
allowed to prohibit an employee from legitimately competing unless
there is an agreement providing otherwise. Particularly in smaller
enterprises, an employee who seeks to depart and take clients with
him may have the opportunity and leverage to extract some exchange
for a restriction on doing business with those clients after his
departure. Therefore, both the existence of compensation and the
process by which an agreement was reached should be important
factors to consider in determining the enforceability of a restrictive
covenant for such interests. A court should be more suspect of
overreaching restrictions obtained without bargaining or negotiations,
or through unconscionable means.
It would be difficult to require an examination of any negotiation
or bargaining process in light of the employee's bargaining power, as
such discussions are less likely to occur in the context of traditional
Japanese collective human resources management.' Here, it is
important to note that many of the cases concerning restrictive
provisions arise in client-relationship intensive, small business entities
settings where employees with client contact leave or are recruited
away from the employer. In addition, individualism in employment
is the trend.'i With these environmental changes, more deference to
individually executed agreements concerning compensatory measures
should be given such that not only monetary payments, but also other
non-pecuniary benefits, can constitute compensation for the
restriction. The courts, too, must be cautious not to exercise
excessive paternalism and allow greater consideration for freedom of
contract where circumstances call for that approach, as not all
employees warrant such protection."

175. This difficulty presumes a long-term employment relationship. Therefore,

where a mid-career recruit, head-hunted recruit or managerial executive hiring is
concerned, the weight given to freedom of contract should be greater, i.e., it would be
more appropriate to examine whether the employee was given adequate opportunity
to bargain for a "fair" exchange for the restrictions to be imposed upon him.
176. See Yasueda & Nishimura, supra note 5, at 13.
177. See Sugeno et al., supra note 169, at 162.
178. A comparative study reveals that courts in the United States and Japan
display paternalism towards the employee as the weaker party to noncompetition
covenants and scrutinize such agreements carefully. Although this approach may b2
the safer one for the purpose of guarding against oppressive contracts resulting from
significant disparities in bargaining power, not all employees are deserving of this
paternalism. See Comparative Study of Post-Employment Restraints, supra note 1;
see also Maureen B. Callahan, Comment, Post-Employment Restrictions: A
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

Japanese case law is ambiguous concerning the definition of

compensation or daisho sochi. The courts seem to adhere to the
notion that it is some kind of monetary payment,' although the
court in Nihon Convention Service confused the issue when it
referred to overtime payments in the course of ils discussion
concerning the lack of compensatory measures.O° This concept
requires further clarification.
5. Rigidity of the Courts
As seen in the case law, the Japanese courts must find a
restrictive covenant valid or unenforceable (for an individual
covenant), or inapplicable or case-specifically applicable (for a work
rules provision). These limitations are a straightjacket when trying to
reconcile the competing interests of the employer and employee. For
example, where the confidential information at issue has a life span of
one year and there is a restrictive provision of three years, the
equitable solution would be to reform the restriction's duration to
one year, as justice warrants under the facts of the case, rather than
striking the clause in its entirety or enforcing it as written (or, the
court may find that the clause is applicable only in certain
circumstances). New statutory authority may be requhed to allow
courts the flexibility to rewrite such provisions to be reasonable under
the specific circumstances of each case and not to be limited to an "all
or nothing" validity. Furthermore, even with such statutory
authority, courts in the future would still be called upon to provide
guidance and certainty regarding the parameters are considered
"reasonable."

6. The Problem of IndirectRestraints

Japanese courts continue to adhere to the reasoning that because
Reassessment,52 U. CHI. L. REv. 703 (1985).
179. See, e.g., Nihon Convention Service, 711 RODo HANREI 30 (Osaka Dist. Ct.,
Dec. 25, 1996). This notion is consistent with Nihon Keihosochi, 520 HANREI JIHO 61
(Tokyo Dist. Ct., Dec. 25,1967), where the court suggested that compensation can be
a bonus payment.
180. Nihon Convention Service, 711 RODO HANREI at 47 (stating that "since
despite the fact that the employees worked overtime on a regular basis, the
[employer] did not provide any overtime payments and only paid them a certain fixed
amount, it cannot be said that there was sufficient compensation paid [for the post-
employment restriction].") (translation by author). However, it is difficult to see how
overtime payments (which should have been paid regardless) relate to compensation
for a post-employment restriction on competition. The court does not explain the
connection, if any, in further detail.
1999] Noncompete Covenants in Japanese Employment Contracts

the retirement allowance is a hybrid of deferred compensation and

reward for meritorious service, provisions that make its payment
conditional on non-competition are applicable only in cases where
there is extreme bad faith.c1 However, the courts have not clarified
the meaning of "extreme bad faith""t or whether conduct reaching
the level of an intentional tort would be required. Moreover, by
requiring extreme bad faith for applying a provision, the court inserts
its own terms into the provision.
The reasonableness of a provision making retirement allowance
payments conditional on performance of a duty of noncompetition
cannot be based on the rationale that the retirement allowance is a
hybrid of deferred compensation and reward for meritorious service.
Such an analysis ignores the issue of the clause as a basis for a valid
post-employment restriction. Employers should not utilize deferred
compensation as a tool to restrict post-employment activity because
an employee is already entitled to the compensation for services
rendered. On this point, further analysis by the courts is desireable.

Conclusion
Recent developments in Japanese case law enable us to glean
some tactics for drafting post-employment restrictions in Japan. A
provision in the work rules should set forth specific parameters, but
only to the extent necessary to protect particular, cognizable business
interests, so that employees will be on notice as to what types of post-
employment activities will result in a breach. However, because
reasonableness is situation-specific, modifications and revisions of
work rules may become necessary for a provision to maintain its
reasonableness. An employer may modify the work rules provisions
in accordance with the needs of its business, but only so long as the
modifications are reasonable. Courts may pare down the force of a
work rules provision so that it applies only in specific circumstances,
particularly if it is sweeping in breadth. Moreover, a court may read a
general noncompete provision in the work rules jointly with a

181. See, e.g., Benisu, 6S7 RODO HANREI 69 (Tokyo Dist. Ct., Sept. 29, 1995);
Chubu Nthon Kokokusha, 569 RODO HANREi 37 (Nagoya High Ct., Aug. 31,1990).
182. For example, the courts have not clarified whether the requirement of
"extreme bad faith" would exclude application of such provisions to situations where
there is only some bad faith. See Koichiro Yamaguchi, Kyogyohishigimu ni ihanshita
Mono ni taisuru Taishokukin Fushik-yukitei no Koryoku."Chubu Nihon Kokokusha
Jiken [The Legal Effect of a Retirement Allowance ForfeitureProvision: The Chubu
Nihon Kokokusha Case], 991 JuiusuTo 134, 136 (1991).
 Hastings Int'l & Comp. L. Rev. [Vol. 22:341

confidentiality or non-disclosure provision in the work rules, and

construe the noncompete clause to apply only with regard to
competitive activities that entail disclosure of information the
employee is obligated not to reveal under the non-disclosure clause.'
The courts permit a maximum duration of two years for noncompete
restrictions. However, such generally applicable provisions may be
insufficient to protect non-trade secrets.
Furthermore, due to the inherent nature of general work rules
provisions, merely having such work rules provisions may be
insufficient. Employers should execute individual agreements with
particular employees whom they wish to prevent from competing and
who are privy to specific information key to the operation of the
business or to maintenance of customer relationships. Individually
executed covenants should be narrowly tailored to specific
circumstances and not be overreaching in scope. Moreover, adequate
compensation in the form of a quid pro quo bonus or allowance
should be provided to ensure that the employee is compensated for
the disadvantage of not having unbridled occupational freedom. Such
compensatory means are crucial where business interests such as
customer relationships or restricting a key employee from directly
competing are at stake. If an employee refuses to execute such an
agreement, the employer's power to discharge the employee for that
reason may be abridged by the judicial doctrine of the abuse of the
right to dismiss. However, flexibility in personnel deployment
remains the employer's prerogative to employ the individual in a
different capacity, particularly if the employer acts quickly before
significant disclosures are made to a particular individual.
However, an employer should avoid relying upon a retirement
allowance provision to impose a duty not to compete. As the case law
indicates, a retirement allowance provision which makes a payment
conditional on performance of a duty of noncompetition is only
applicable, and hence valid as to a specific employee, when there is
sufficient evidence of egregious bad faith. In the event of legitimate
competitive activity by the former employee, the employer will be
unable to invoke the provision and withhold payments lawfully.
Therefore, such provisions should be utilized only as a means to
discourage employees from engaging in bad faith behavior,
particularly given the court's adherence to the notion of the hybrid

183. See, e.g., Tokyo Legal Mind, 894 HANREI TAIMuZU 73, 86 (Tokyo Dist. Ct.,
Oct. 16, 1995).
1999] Noncompete Covenants in Japanese Employment Contracts

nature of retirement allowances. In the end, an employee should not

be penalized for engaging in legitimate competitive acts through the
withholding of what is, at least in part, deferred compensation, the
full payment of which is guaranteed under the Labor Standards Law.
Finally, in an action against a former employee for harm caused
by competitive activity, the cause of action should be unfair
competition under the Unfair Competition Prevention Law, as well as
a claim for damages or an action for an injunction on the basis of an
individual agreement or work rules provision prescribing a duty not
to compete (on the theory of a failure to perform a contractual
obligation). This will guarantee that if a claim of unfair competition
under the Law fails, the contractual claim may still remain.
Amid the changes underway in Japanese employment, the case
law doctrines regarding noncompetition agreements and provisions
will most likely continue to evolve. With an increasingly individual
basis for employment relations in Japan, more specific and
individually-tailored post-employment restrictions wll come before
the courts. The courts must serve the interests of both the employer
and the employee in a manner that will give legal effect to properly
executed and negotiated and carefully drafted restraints designed to
protect legitimate business interests, while denying enforcement of
provisions that can be demonstrated to be a result of coercion or
overreaching bargaining power.