International Law

Flash! Non-Compete Covenant May Require Compensation

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.

Full post as published by Korea Law Blog on February 13, 2008 (boomark / email).