Contributed By Yoon & Yang LLC (Seoul - HQ)
The Korean Commercial Act imposes a non-competition obligation upon directors, whereas employees are not subject to the same restriction. Nevertheless, employees’ non-competition obligation can be partially recognised through interpretations of court precedents.
The Korean Supreme Court has held that, where an employment contract has a non-competition clause, such clause is valid, so long as it is reasonable. However, if the non-competition clause excessively restricts (i) employees’ constitutionally protected rights (eg freedom in choosing jobs or providing labour) or (ii) free competition, then such non-competition clause is invalid for going against Article 103 of the Civil Act.
The Korean Supreme Court further held that, in order to determine whether a non-competition clause is valid, there must be a comprehensive consideration of various factors. Among other things, the court considers (i) whether the employer has an interest that necessitates protection, (ii) the resigning employee’s position and rank, (iii) the reasons for the employee’s resignation, (iv) territorial scope, period, and the types of jobs restricted through the non-competition clause, (v) whether the employee received compensation in exchange for signing the non-competition clause, and (iv) public interest furthered by the non-competition clause.
In practice, the most common issues that arise relating to non-competition clauses are the ones involving territorial scope and period. A non-competition clause may be invalidated for restricting an employee’s freedom of job selection if (i) the period of restriction is unnecessarily long, (ii) the territorial scope of restriction is excessively broad covering territories that need not be restricted to protect the employer’s interests, and (iii) the non-competition clause restricts employees from working in unnecessarily broad categories of jobs that are unrelated to protecting the employer’s trade secrets.
If an employee breaches a non-compete agreement, then an employer may request the court for an injunction or a preliminary injunction to suspend the relevant employee from continuing the competitive acts in breach of the non-compete agreement. Moreover, employers may seek civil damages against relevant employees if the employer has suffered damages from the employee’s breach.
Korean labour laws do not forbid or restrict non-solicitation clauses that prohibit former employees from soliciting other employees who remain employed with the former employer. Therefore, employers may include such non-solicitation provisions within their employment contracts, and require their employees to pay liquidated damages pursuant to Article 398 of the Civil Act for a breach of such an agreement. In addition to liquidated damages, employers may seek civil damages for breach of contract if the employer suffers ascertainable damages from the employee’s breach.
Non-solicitation clauses can also trigger issues regarding trade secret infringements under the Trade Secret Act. The Korean Supreme Court has held that, where a person who acquired technological information which qualifies as a trade secret moves to another company and attempts to disclose and use such trade secret at such other company, then such act constitutes violation of the confidentiality obligation under Article 2.3(D) of the Trade Secret Act. Further, the company that recruits such person is in violation of Article 2.3(A) for unlawfully acquiring a trade secret.
In such a case where a former employee and/or another company misappropriates trade secrets, a person (including employers) may request the court for a prohibition or preventive order against any person (including employees) who infringes or is likely to infringe trade secrets, if the business interest of the employer who possesses the trade secrets suffers damages or is likely to suffer damages due to such infringement (see Article 10(1) of the Trade Secret Act). Further, Article 11 of the Trade Secret Act provides that a person who damages the business interest of another person who possesses trade secrets through an intentional or negligent infringement of trade secrets is liable for compensation for such damages.
It is difficult to deem a former employee’s solicitation of their former employer’s customers as an infringement of trade secrets within the meaning of the Trade Secret Act.
However, the Korean labour laws do not forbid or otherwise restrict an employer from requiring its employees to sign an employment contract that includes a non-solicitation clause which prohibits those employees from soliciting the employer’s customers upon termination of the employment relationship. Further, as mentioned above, employers may require employees to pay liquidated damages, under Article 398 of the Civil Act, for breach of such non-solicitation clause. In addition to liquidated damages, employers may seek civil damages for breach of contract if the employer suffers ascertainable damages from the employee’s breach.