Non-Compete Clauses in Korean Employment Agreements and Korean Business Sales Agreements

Non-compete clauses in Korean employment contracts are enforceable in Korea, but there are some limitations and requirements that must be met for them to be regarded as lawful and, thus, enforceable.

A Non-Compete Clause is a type of restrictive covenant that is designed to protect the business of an employer from competition from a particular party. These clauses are, typically, utilized after the completion of the sale of a business or after termination of employment. The following article shall, specifically, address the application of non-compete Clauses to Korean employment agreements. Non-compete clauses, in short, create restrictions of the work of a particular individuals, typically, within a geographic area and typically for a specific period of time.

Restrictions on Korean Non-Competition Clauses in Employment Agreements and Business Transfer and Sales Agreements Governed by Korean Law
The Korean Commercial Act, even without a clause in an agreement, prohibits certain actions post-employment and post-business transfer. Korean Commercial Act, Article 41 provides statutory-imposed restrictions post transfer of a business and Korean Commercial Act Article 17 imposes restrictions on employees during and after employment with a business.

Commercial Act of Korea (상법)

Article 41 (Prohibition of Competition by Transferor of Business)
(1) When a person has transferred his/her business, he/she shall not, for a period of ten years, engage in the same kind of business in the same Special Metropolitan City, Metropolitan City, or Si/Gun, or in any adjacent Special Metropolitan City, Metropolitan City, or Si/Gun, unless the relevant parties have agreed otherwise.
(2) Where a transferor has made an agreement not to engage in the same kind of business, such agreement shall be valid, only in the same Special Metropolitan City, Metropolitan City, Si/Gun and in any adjacent Special Metropolitan City, Metropolitan City, Si/Gun, and only for a period not exceeding 20 years.

Article 17 (Obligations of Commercial Employees)
(1) Without the permission of a business owner, no commercial employee shall effect any transaction in the same type of business as the business owner on his/her own account or for a third party, or serve as a general partner or a director of a company, or an employee of another merchant.(2) Where a commercial employee has made a transaction in contravention of the preceding paragraph, and such transaction has been made on his/her own account, the business owner may regard such transaction as having been done on his/her own account, and if it has been made on the account of a third party, the business owner may request the employee to transfer the profit accrued from such transaction to him/herself.
(3) The provisions of the preceding paragraph shall not affect the termination of a contract by the proprietor against an employee or the proprietor’s claims for damages against a trade employee.
(4) The right provided for in paragraph (2) shall be extinguished two weeks after the business owner becomes aware of such transaction or after one year has elapsed from the date the transaction is effected.

Korean Court Precedence

Korean courts, typically, consider the following in determining the enforceability of a non-compete clause in a Korean employment agreement:

The Korean Supreme Court, further, noted that Korean courts should analyses the following factors in determining if a non-compete covenant is “reasonable”:

employee’s position with the employer before termination of the employment of the employer (courts are more likely to enforce non-compete obligations against senior members of the company);
employer’s specific interest to be protected by the non-competition covenant (courts are more likely to enforce non-compete covenants when the employee was a key figure in the company that could use trade secrets and other internal information to the detriment of the employer);
scope of the restriction (court’s are more likely to enforce restrictions that are limited in time and geographic location);
whether compensation was paid in exchange for the execution of the non-compete covenant (typically this is the most important factor. Compensation may come in, also, non-monetary form.);
situation leading to termination of the employment of the employee (courts are less likely to enforce covenants in situations when termination was not based on cause or employee was pressured to resign); and
public interest served by the enforcement of the non-compete covenant (the typical catch all).

Thus, typically, courts in Korea will deem the non-compete obligations not “reasonable” and either not enforce the agreement or reduce the term or geographic scope of the restrictive covenant if the facts leading to termination show:

fault on the part of the employer (e.g. no termination based on cause/pressured out of employment);
the employee was not a senior or key member of the employer;
the employee did not have access to trade secrets or other important internal data of the company; and
no compensation was paid in exchange for the execution of the non-compete agreement

In a nutshell non-compete clauses in employment contracts are usually enforceable in Korea if certain requirements are met, such as being reasonable in scope and duration, providing sufficient compensation, and having a legitimate business interest. They must be carefully written to guarantee they are enforceable in a Korean court, and there are restrictions on their applicability.

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