Non-Compete Agreements in Japan: When Post-Employment Restrictions Are Enforceable, and How to Draft Them for Employees, Directors and M&A

A post-employment non-compete in Japan is not enforceable just because it appears in a contract or the work rules. Japanese courts weigh the employer's legitimate interest, the person's position, the duration, geographic scope and range of prohibited activities, and whether any compensation was provided.

A restriction that lacks reasonableness and unduly limits the freedom to choose an occupation is void as contrary to public policy. The practical path to an enforceable clause is to narrow it to the information and people that truly need protection, keep the duration and scope to the minimum, and pay for the restriction.

• A sales director resigns and, a month later, starts covering the same customers for a competitor. The pledge signed on joining says "no employment with a competitor for two years after leaving."
• You are unsure whether you can apply the retirement allowance rule "no allowance if the employee joins a competitor" to a former employee who did exactly that.
• Your Japanese subsidiary uses headquarters' English-language non-compete template, unchanged, for Japanese executives and staff.
• You are selling a business or a company, and the buyer wants the seller side to promise not to run the same business again.

The Constitution guarantees workers the freedom to choose their occupation (Constitution Art. 22(1)). An agreement restricting competition after employment is therefore void as contrary to public policy if it is unreasonable in light of its purpose and content (Civil Code Art. 90). Courts consider whether the purpose is to protect the employer's legitimate interests, the employee's position before leaving, the scope of prohibited work, duration and territory, and whether compensation was provided (Tokyo District Court, January 13, 2012).

The position during employment is different. The Ministry of Health, Labour and Welfare (MHLW) explains that employees are understood to owe, as an ancillary duty of the employment contract, a duty not to engage in business competing with the employer while employed. After employment ends, MHLW's view is that a non-compete duty should be recognized only to a limited extent, because of the freedom to choose an occupation.

Based on a study that analyzed more than 50 court decisions, the Ministry of Economy, Trade and Industry (METI) groups the decisive points into six factors: (1) the employer's interest to be protected, (2) the employee's position, (3) geographic limits, (4) duration, (5) the scope of prohibited activities, and (6) compensation.

The protectable interest is not limited to "trade secrets" under the Unfair Competition Prevention Act. It can include proprietary know-how close to a trade secret, and customer relationships the company built through long-term sales efforts. By contrast, courts tend not to accept as legitimate an aim to stop the outflow of contacts or negotiating skills the employee developed through personal ability, the kind of know-how any employee carries to a new job.

What matters is not the title but whether the person actually had access to information worth protecting. A clause that covers all employees, or everyone at a given rank, is unlikely to be found reasonable. In one case, a restriction on an executive officer of a foreign insurer's Japan branch was held void because the officer was not in a position to access information requiring long-term confidentiality (Tokyo District Court, January 13, 2012).

The absence of a territorial limit does not by itself make a clause void; it is assessed together with the company's business footprint and the scope of prohibited activities.

On duration, METI's analysis is that periods of one year or less are often viewed favorably, while some recent decisions have viewed two years negatively. There is no fixed safe period, and courts also consider how quickly the industry changes.

General, abstract bans such as "no employment with any competitor" are unlikely to be found reasonable. Clauses narrowed to specific activities or roles, such as soliciting customers the employee handled, are viewed more favorably.

Compensation carries particular weight; where there is none at all, clauses are often held unenforceable. Even high pay may not count as compensation if the salary did not change when the restriction was imposed.

In a case upholding a restriction, a franchisor of dent-repair techniques sued a former instructor. The court found the techniques and know-how worthy of protection at a level close to trade secrets. It treated the company's independence-support program as compensation and ordered damages and an injunction barring the former instructor from running a business using the same techniques in Japan for two years (Tokyo District Court, November 18, 2008).

In the executive officer case above, a clause barring work for competitors for two years after leaving was held void.

The court found that its purpose was not to protect a legitimate interest, that the scope of work, duration and territory were too broad, and that compensation was insufficient. The appellate court upheld the order to pay the retirement allowance (Tokyo High Court, June 13, 2012).

The Supreme Court held that it was not unreasonable for a company to restrict sales staff from joining competitors for a certain period and to pay those who breached the restriction half of the voluntary-resignation retirement allowance (Supreme Court, August 9, 1977). The reasoning is that a retirement allowance also rewards past service, and a breach of the restriction reduces the value of that service.

The Unfair Competition Prevention Act protects information as a trade secret only if it meets three requirements: it is managed as a secret, it is useful for business, and it is not publicly known (Unfair Competition Prevention Act Art. 2(6)).

Using or disclosing a trade secret disclosed by the company, for example to obtain an improper gain, is an act of unfair competition (Art. 2(1)(vii)). The company can seek an injunction and damages (Arts. 3 and 4), and serious cases can lead to criminal penalties (Art. 21).

Trade secret protection applies by statute, even without a contract, but only if the information was actually managed as a secret.

In a case involving an eyelash-extension salon, the court held valid an agreement signed on joining that barred competition using secret information, limited to two years and to one city. The company still lost: customer records had routinely been shared through staff members' personal smartphones, so the court found they were not managed as secrets (IP High Court, August 7, 2019).

An individual contract that sets working conditions below the standards in the work rules is void to that extent (Labor Contracts Act Art. 12). METI's handbook suggests putting a general provision in the work rules and stating that "where the company concludes an individual non-compete agreement with an employee, that agreement governs."

• Limit coverage to roles and positions that actually handle information worth protecting
• Describe concretely what is being protected (technology, customer data, know-how)
• Limit the prohibited activities, for example similar work at a competitor or soliciting customers the employee handled
• Aim for one year or less as a starting point, and choose a length you can justify
• Pay an allowance or lump sum and state expressly that it is consideration for the non-compete

If you only ask for a pledge at departure, the employee may refuse to sign. In the IP High Court case of August 7, 2019, an exit document to which the employee had added a note saying the employee could not promise to stay away from competitors was held not to create an agreement.

The same court held void a work-rule provision that banned competition without limit, regardless of position. It is safer to sign agreements on joining or on promotion, with an explanation.

While in office, a director who wishes to carry out a transaction within the company's line of business must disclose the material facts and obtain approval from the shareholders' meeting, or from the board in a company with a board of directors (Companies Act Arts. 356(1)(i) and 365(1)). If a director competes without approval, the profit obtained by the director or a third party is presumed to be the company's loss (Art. 423(2)).

The Companies Act does not restrict competition by former directors after they leave office. If you want a post-departure restriction, it must be agreed, for example in the appointment agreement.

Expect its validity to be judged on the same factors as for employees; the Tokyo High Court decision of June 13, 2012 framed the test in terms common to employers and principals under a mandate.

Note also that an "executive officer" (shikkō yakuin) is not a statutory officer under the Companies Act and may be treated as an employee depending on the facts (Tokyo District Court, January 13, 2012). Choose a director-type or employee-type clause to match the actual relationship.

Article 21 restricts competition by a company that has transferred a business as follows.

Article 21 applies to a company that transfers a business. To bind a selling shareholder in a share deal, or a founder who will leave after closing, the non-compete must be set out in the share purchase agreement or a related agreement.

Even in a business transfer, the statutory territory (municipality-based) rarely fits the deal, so parties usually define the business, territory and duration in the contract. Non-competes for the target's employees remain employment matters, judged under the framework above.

For employees working in Japan, Japanese courts apply the same framework even at the Japanese branch or subsidiary of a foreign company. The clause in the Tokyo District Court case of January 13, 2012 was written in English and was held void under the same test.

For employment contracts, even if a foreign law is chosen as the governing law, the employee can invoke the mandatory rules of Japanese law where Japan is the place of work (Act on General Rules for Application of Laws Art. 12). Rather than using a headquarters template as is, redesign the coverage, duration and compensation for Japan.

If a former employee breaches a reasonable non-compete, the company can seek an injunction against the competing activity and damages. If trade secrets were misused, claims for an injunction and damages under the Unfair Competition Prevention Act should also be considered (Arts. 3 and 4). Where time matters, the company may apply for a provisional disposition (an interim court order) before filing a full lawsuit.

In damages claims, proving a causal link between the breach and the loss is often the hardest part. METI's materials describe a case in which a breach was found but the claim failed because no loss caused by the breach was proven. In practice, proceed in this order.

1. 1

   Secure evidence

   Secure evidence first.

2. 2

   Send a warning

   Send a written warning, for example by content-certified mail.

3. 3

   Decide what to prioritize

   Decide which to prioritize: an injunction, damages, or the treatment of the retirement allowance.

4. 4

   Provisional disposition or lawsuit

   Where time matters, the company may apply for a provisional disposition before filing a full lawsuit. If trade secrets were misused, claims for an injunction and damages under the Unfair Competition Prevention Act should also be considered (Unfair Competition Prevention Act Arts. 3 and 4).

• List every non-compete provision in your work rules, joining and exit pledges, and director agreements
• Check that coverage is not blanket, and is limited to people with access to information worth protecting
• Review whether the duration, territory and prohibited activities match the interest you need to protect
• Check whether compensation (allowance or lump sum) is provided and its purpose is stated in writing
• Audit how confidential information is actually managed, including designation, access controls and rules on personal devices
• Check that retirement allowance reduction or forfeiture clauses are consistent with the non-compete itself
• If you use a headquarters template in English, review it against the Japanese standard

We recommend consulting early in situations such as these:

• A former employee has joined a competitor, and you suspect poaching of customers or staff, or the taking of information.
• You want to confirm that a clause will hold before reducing or withholding a retirement allowance.
• You are drafting or revising non-compete pledges or work-rule provisions.
• A director is leaving, a founder is exiting, or you are negotiating non-compete terms in an M&A deal.
• You have received a warning letter from a former employer alleging a non-compete breach.

Our firm advises on designing non-compete provisions and handling related disputes from both the M&A/corporate and employment perspectives, in Japanese and English. Please contact us through our inquiry page.

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There is no statutory limit and no fixed period that is always valid. METI's analysis is that one year or less is often viewed favorably, while some recent decisions have viewed two years negatively. Duration is assessed together with the protectable interest, compensation and other factors.

No. Even a signed pledge is void as contrary to public policy if its content is unreasonable. Courts weigh the legitimacy of the purpose, the person's position, the scope of prohibited activities, duration, territory and compensation. Clauses that ban competition without limit, regardless of position, are especially likely to be held void.

The Supreme Court found it not unreasonable to pay half of the voluntary-resignation allowance to employees who joined a competitor in breach of a restriction (Supreme Court, August 9, 1977). However, where the underlying non-compete was void, a clause denying the allowance has also been held void (Tokyo District Court, January 13, 2012). Withholding the full amount requires particularly careful review.

In most cases, confidentiality agreements and proper management of confidential information are the foundation of protection. Some situations, however, cannot be covered by confidentiality alone, for example when it is hard to tell whether know-how is being used. For that limited group of people, combining a narrowly drawn non-compete is reasonable.

Unless otherwise agreed, a company that transferred a business may not carry on the same business in the same and adjoining municipalities for 20 years from the transfer date (Companies Act Art. 21(1)). A special agreement is effective only within 30 years, and operating for the purpose of unfair competition is prohibited at any time (Art. 21(2) and (3)). In a share deal, the non-compete must be agreed by contract.