The standard for acknowledging the validity of non-compete agreement and cases

 

The standard for acknowledging the validity of non-compete agreement and cases


Labor Dispute, Labor Law Attorney, Non-Compete Agreement | Dowoo Hwasan Attorneys & Counselors, Labor and Employment Team in South Korea | English-speaking Attorneys in South Korea

 


Today, we will examine whether a non-compete agreement applies as is to an employee who made the agreement even after the person’s involuntary dismissal due to COVID-19.

 

Involuntary dismissals have increased due to causes of advised resignation and corporate restructuring as the long-term economic downturn continues in the aftermath of COVID-19. As such, employees may become involved in the violation of a non-compete agreement in transferring to another company or establishing a business of one’s own. Non-compete agreements may limit the freedom of workers to choose an occupation. Thus, it has been a controversial issue whether a non-compete agreement that restricts the freedom of employment at a competitor and freedom of entrepreneurship such as establishing or operating a competing business can be applied the same in cases where employees are involuntarily dismissed such as in the case of layoffs or advised resignation.

 

A non-compete agreement, a frequent provision in labor contracts in South Korea, prohibits an employee from joining a competitor or establishing/operating a competing business of one’s own.

 

What is the standard for allowing a claim for the prohibition on a job transfer and when is it recognized as valid in South Korea?

- When parties have a non-compete agreement and the details and term thereof are acknowledged as reasonable and therefore valid

- Even without a non-compete agreement between parties, it is acknowledged that the trade secret of the former employer cannot be protected unless the employee is prohibited from working on a business that is related to the trade secret at the employee’s new employer.

 


Standard and Considerations for Determining Validity of Non-Compete Agreement in South Korea

-The employer’s interests that are worth protecting → Generally in line with trade secrets

- The employee’s position before the resignation

- Period, region, and target occupation of the non-compete restriction

- Whether or not a consideration (compensation) is provided to the employee → However, the non-compete clause cannot be immediately considered invalid only because there is no corresponding compensation.

- Circumstances surrounding the employee’s resignation

- Public interest and other circumstances


​Cases that validated/invalidated non-compete agreements in South Korea


· Cases where non-compete agreement is validated

Circumstances where there is no evidence to acknowledge causes attributable to the employer in the process of the employee’s resignation, etc.

→ Non-compete agreement validated (Seoul Eastern District Court 2014. 3. 26, Decision 2013GAHAP102341, Seoul High Court 2015. 1. 15, Decision 2014NA2012674)

· Cases where non-compete agreement is invalidated

Cases where there are circumstances that show the employee did not receive any consideration/compensation whatsoever in relation to non-compete restriction and rather left the employment due to the employer’s advice for resignation

→ Non-compete agreement invalidated (Seoul Central District Court 2019. 1. 19. Decision 2017GADAN5177171)





Supreme Court Cases on Non-Compete Agreement in South Korea

Supreme Court 2010. 3. 11. Decision 2009DA82244

The Supreme Court case (see Supreme Court 2010. 3. 11. Decision 2009DA82244) has held “Despite the presence of non-compete agreement between the employer and the employee, when the agreement excessively restricts the employee’s constitutional freedom to choose an occupation and right to work or free competition, it shall be deemed null and void as a legal act that is contrary to good morals and other social order. In addition, in determining the validity of the non-compete clause as such, the employer's interests worthy of protection, the employee's pre-resignation status, the period, region and target occupation of non-compete restrictions, the presence or absence of compensation for the employee, the details of the employee’s resignation, the public interest, and other circumstances, etc., should be comprehensively considered.”

▶ In short, the Supreme Court comprehensively considers various circumstances to determine the validity of a non-compete agreement with a special emphasis on “the details of the employee’s resignation” as one of the important factors to consider.

 


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