Flash! Non-Compete Covenant May Require Compensation

by Brendon Carr

In late January the Seoul District Court issued a judgment holding for the first time that “reasonable compensation” must be made to employees subject to a non-compete covenant if the employees have not had access to “trade secrets” of the employer.

This is a new and dramatic holding—previously Korean courts had as a general rule not required any compensation for non-compete covenants of 12 months, and sometimes enforced longer covenants under certain circumstances. For example, there is one Supreme Court precedent in which a three-year non-compete had been upheld without compensation to the employee.

The recent case concerned teachers at a private “cram school” in Seoul who left employment and took jobs at a nearby school. They had signed a non-compete agreement forbidding them from taking a position with another cram school within five kilometers (because they could then recruit former students who live in the area) for a period of 12 months from termination.

The court held that where employees do not perform any specialized duties involving trade secrets of the employer, non-compete covenants without compensation for the limitation on the Constitutionally-guaranteed freedom of occupation cannot be enforced as a matter of public policy. But there was no guidance offered by the court concerning the level of compensation deemed “reasonable”, which the court stated shall be required to make an enforceable covenant in cases where no trade secrets were involved.

The District Court ruling is not binding on parties other than those in the case concerned, although the precedent, if not reversed or revised on appeal, may be persuasive to other courts. A Court of Appeals or Supreme Court ruling would be binding, and we would expect to see such a ruling within a year or so if appealed. Right now, then, the state of the law may be described as uncertain because of this ruling.

What this probably means is that for rank-and-file employees without any special responsibilities, a non-compete would need to be compensated. But for senior managers or technical staff, to whom the employer may grant access to formulas, pricing, and customer lists—all of which may be trade secrets under Korean law, if the company takes efforts to protect such information and control access within the company—it is our opinion based on the recent court precedent that their non-compete covenants need not be compensated.

But because of the uncertainty over whether this precedent will be affirmed on appeals, or perhaps extended in the course of appeals, employers should pay closer attention to their use of non-compete agreements and whether such agreements protect genuine trade secrets or merely serve to vex former employees.

6 Responses to This Entry

1. Thomas Chow on February 14, 2008 @ 12:07 pm

   That is a big deal here.  The idea that reasonable compensation is required for rank and file employees means that protection is really high.  In California, compensation for non-competition clauses is standard stuff.  But that is California, where workers rights are protected heavily.  I would say that this exceeds the protection of most states in the U.S., which is a scary thought.

   One thing you did not mention was what compensation was actually required amountwise.  If the court gave any indication, that would be good to know.

2. Brendon Carr on February 14, 2008 @ 2:19 pm

   Yes, it is a notable development. Compensation for non-compete clauses is not unknown in many jurisdictions, including the People’s Republic of California, but it’s new to Korea. Personally, I think it will survive challenges on appeal and become part of the landscape of employment law. Generally the law here in fiercely pro-employee, so that would be in keeping with the general tenor of things.

   Only multinationals and the odd chaebol are really subject to the full effect of the law, because smaller employers are avoidance-driven and the authorities only enforce sporadically—a phenomenon to which you allude on your fine China Esquire blog as you discuss monitoring suppliers’ labor practices. Smaller employers generally treat their employes abominably and do so without much fear of the law.

   The laws are written mainly in response to the horribly oppressive practices of the smaller domestic employers; large employers, and foreign companies, are mostly pretty good.

   But be a large company (of the sort that uses non-competes) and be ready to feel that ton of bricks coming your way if you’re out of compliance. Worse yet, be a small foreign-invested company that stays away from lawyers because of worries about cost, and get blindsided by developments like this.

3. Thomas Chow on February 15, 2008 @ 4:08 am

   I agree.  My clients always complain about the costs of having to follow employment law, but if they were to get hit by a lawsuit (which has happened), it is far more painful.  I used to do a lot more employment litigation for some rather large American companies, so I know just how costly a lot of it gets. 

   I think the toughest thing about non-competes is just keeping up with all of the various jurisdictions’ laws.  (I think we can agree that non-competes are pretty universal)  Unless you have a proactive attorney who notifies you about developments, it’s easy to get left in the dust.

   Thank you for the compliment.  I just began building my blog and hope to grow its readership (and get myself on all of the blogrolls of important Asia-centric law blogs).

4. Drambuie_man on February 16, 2008 @ 11:22 pm

   Given a case last year where the Court ruled that a company had to take active measures to protect information they wish to claim is a “trade secret” could make a whole lot of people eligible for a bit of cash.

   However, I wonder how this will effect Korean employment contracts. An easy argument could be made that their salary is already part of the “non-compete” compensation. So I wonder what exactly what documentation was involved in this case.

5. Tim Gardner on May 04, 2008 @ 6:27 am

   What if job candidates are asked to sign the agreements prior to employment?  In the Korean context would the offer of a job suffice as compensation or does the ruling suggest there woudl need to be compensation on top of the job offer?

6. Brendon Carr on May 04, 2008 @ 9:00 am

   That’s the $64,000 (and then some) question. Korean court precedents are rarely fully explanatory of any issue, so your guess is as good as mine. There isn’t a precedent available which states conclusively that salary constitutes full compensation, while there are other cases denying the claim.

   But in my personal opinion, no—in the cram school case, it seems like the covenants were signed at the time of commencement (i.e. prior to employment).

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