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Non-Compete Agreements in Korea


The US Fair Trade Commission (FTC) recently proposed a ban on non-compete agreements with "workers". Under the proposed rule, entering into a non-compete agreement with a worker would be prohibited as an unfair method of competition under Section 5 of the FTC Act. If finalized as is, the ban would equally apply to de facto non-compete agreements with workers, e.g., a non-disclosure agreement between an employer and a worker that is written so broadly that it effectively precludes the worker from working in the same field after the conclusion of the employment or engagement, as applicable, or a contractual term that requires the worker to pay the employer for training costs not reasonably related to the costs the employer incurred for the training if the worker's employment or engagement, as applicable, terminates within a specified time period. The proposed rule will also apply retroactively. Existing non-compete agreements with workers must be rescinded and the employer must notify the worker of the rescission. It remains to be seen as to whether such a significant change to the existing non-compete practice with workers would be adopted as proposed by the FTC.

In view of these potential changes in the US, we thought it would be a good time to review the Korean practice on non-compete agreements with employees ("Employee NCAs"). In general, the number of Employee NCA cases disputed in Korea is growing. Korean courts have a reasonably balanced approach that tries to take into account the individual rights of employees to freely choose their employment and the employers' rights to protect their trade secrets and confidential information.

The Korean courts have often upheld Employee NCAs with reasonable terms, usually for a duration between six months and one year, but up to two years, depending on the factors outlined below. Where the Employee NCAs impose excessive burdens on the employees, the courts tend to shorten the non-compete period or sometimes modify or remove some of the terms, but may even nullify the entire Employee NCA where the terms are not amenable to a reasonable modification. The following factors are considered in determining the validity of an Employee NCA:

  • The nature of the employer's interest
  • The employee's position, status, and length of employment
  • The duration and scope of jobs restricted
  • Compensation paid to the employee specifically in consideration of the non-compete obligation
  • Reason for termination of employment agreement
  • Other factors, such as prevailing market practice in the relevant industry.

A court recently held that an Employee NCA for an auto part company was enforceable against its former employees who started working for a direct competitor. This case provides a good example of how the factors were reviewed by the Court. In particular, the Court found the length of the Employee NCA (three-year) was too long and reduced the term to two years (still fairly long period of time) because most of the above factors favored the employer's interests based on the following:

  • The nature of the employer's interest: The Court looked at the employer's highly competitive power in the global market and concluded that the marketing and business strategies the employer possessed were worth protecting, whether or not they constituted trade secrets. The employees worked in marketing departments covering foreign jurisdictions. The Court found that it takes considerable time and efforts to learn how to comply with varying regulations and meet diverse consumer demands in the region. Therefore, the information the employer possessed was not generally known in the field and was highly valuable. Therefore, the employer had a great interest in guarding the information through the Employee NCA.
  • The employee's position, status, and length of employment: Both of the employees' careers were heavily focused on marketing in foreign regions. They worked for the employer for more than 10 years, mostly in global marketing departments, and held executive positions in the later years. Their positions and lengths of employment indicated that the defendants were well aware of the employer's strategies and other valuable information in relation to marketing to the relevant market.
  • The duration and scope of jobs restricted: The Employee NCA prevented the employees from seeking employment in the same field for three years, regardless of the region. The Court held that the Employee NCA was not overly broad in terms of region because the employer is one of the global leaders in the relevant market. As for the length of the Employee NCA, the Court stated that the valid term should have been two years instead of three years. Given the fast-changing nature of market conditions, the marketing and business strategies the employees knew would be less applicable after two years, diminishing the employer's need for protection.
  • Compensation paid to the employee specifically in consideration of the non-compete obligation: The employees were paid compensation amounting to a substantial portion of their yearly salaries in exchange for non-compete obligations. Factoring in the amount of fees paid to the employees, the Court concluded that it was more appropriate for an Employee NCA for two years rather than three years.
  • Reason for termination: Contrary to employees' arguments, there was no evidence that they were involuntarily terminated by the employer.
  • Other factors: There were no factors that indicated enforcing the Employee NCA would be against public interest.

This court case illustrates how Korean courts may reasonably modify the terms of an Employee NCA in an effort to strike a balance between the conflicting interests of an employer and an employee to uphold the effectiveness of an Employee NCA. This court case, however, does not necessarily mean that Korean courts generally respect a two-year non-compete period in Employee NCAs, and the permitted temporal length of Employee NCAs would be determined based on an overall assessment of the facts and circumstances pertaining to the factors described above. In fact, the prevailing Korean market practice, as well as past court precedents, generally lean towards an employee non-compete period of up to (and often less than) one year, absent compelling employer-favorable factors and interests which support a two-year non-compete period such as in the court case illustrated above.

As seen in the above and in many other cases, the courts in Korea have applied a reasonable balancing test in assessing whether an Employee NCA should be enforced. With the importance of trade secrets and other intangible assets growing, along with companies' attempts to protect their business information, litigation in this practice area has been increasing. In light of the above practices in Korea, it would be advisable to monitor the status of the US FTC proposal and, if appropriate, consider using Korean law as the governing law of the Employee NCAs for employees in Korea.