Poaching of Customers and Employees by Departing Employees: Key Points on the Company's Claims and Evidence

Hello, I'm Noriaki Asato, Representative Attorney at LegalAgent.

After a sales representative leaves, customers the company has dealt with for many years announce one after another that they are ending their contracts, and employees in the same department also hand in their resignations. When faced with this situation, a company naturally wants to stop the outflow of customers and personnel and hold the departing employee responsible.

However, customers are free to choose whom they do business with, and employees are free to change jobs. The mere result that business partners or employees moved to another company does not establish the departing employee's legal liability. Whether the company can bring a claim depends on whether there is a concrete legal basis, such as an agreement on non-competition or non-solicitation, misuse of trade secrets, a breach of the duty of good faith while employed, or improper solicitation that goes beyond the bounds of free competition. To respond effectively, the company needs to identify these legal bases accurately, gather objective evidence early and choose the appropriate means, such as a warning, an injunction or a claim for damages.

Validity of Agreements Restricting Post-Employment Competition and Solicitation

When pursuing a departing employee's liability, the first thing to confirm is what obligations were set out in the employment contract, work rules, written pledges and similar documents. Provisions on non-competition or non-solicitation of customers and employees can serve as a direct basis for liability. However, the fact that a document bears a signature or seal is a separate question from whether all of its restrictive covenants are legally valid.

Article 90 of the Civil Code (Japanese) provides as follows:

A juridical act that is contrary to public policy is void.

An agreement that broadly restricts a person's post-employment activities imposes constraints on that person's freedom to choose an occupation and to engage in business. For that reason, whether such an agreement is valid is judged by balancing the legitimate interests the company seeks to protect against the disadvantages the individual suffers.

Q33 of the handbook published by the National Cybersecurity Office (Japanese) also introduces an approach under which the validity of a non-competition obligation is examined comprehensively, taking into account the company's interests to be protected, the employee's position, geographic limitation, duration, the scope of prohibited conduct and any compensatory measures. Whether the employee had access to trade secrets, and how closely the prohibited business relates to the employee's past duties, are also important factors in assessing whether there is an interest worth protecting.

Even among non-competition clauses, one that uniformly prohibits moving to any competitor for a long period and one that restricts specific approaches to customers the employee personally handled for a certain period differ greatly in the degree of constraint on the individual. Prohibitions on soliciting customers and on soliciting employees also differ in the interests to be protected and the range of third parties affected, so it is essential to scrutinize the validity and scope of application of each clause individually.

Confidentiality obligations and non-competition obligations must also be distinguished. A confidentiality agreement may cover a broader range of information than trade secrets under the Unfair Competition Prevention Act, but the company cannot, merely by invoking a confidentiality obligation, monopolize the general knowledge and skills the individual has acquired. The starting point of the analysis is to identify concretely which information and conduct are prohibited, based on the wording of the agreement and the individual's actual duties.

Use of Trade Secrets and Breaches of Duty While Employed

Even where there is no clear agreement such as a non-competition covenant, if the employee misused the company's trade secrets or acted contrary to the duties of good faith that accompany the employment relationship while still employed, there may be room to pursue liability on a different legal basis.

When Customer Information Qualifies as a Trade Secret

Article 2, paragraph 6 of the Unfair Competition Prevention Act (Japanese) defines a trade secret as follows:

The term "trade secret" as used in this Act means technical or business information useful for business activities, such as manufacturing or marketing methods, that is kept secret and that is not publicly known.

Information that goes beyond publicly available contact details such as a customer's company name or main telephone number, and that systematically accumulates individual transaction terms, contract renewal dates, the requests and intentions of contact persons, and past negotiation histories, may be assessed as having business usefulness and not being publicly known. The question then is whether the company managed that information as a secret and kept it in a state in which employees could objectively recognize that it was secret.

In assessing whether information was managed as a secret, the actual state of management, starting with restrictions on access rights, is given weight. Q20 of the same handbook (Japanese) also presents a framework for judging whether information was recognizable as a secret according to the size and business form of the company and the nature of the information. You confirm confidentiality labels and internal rules, as well as how employees were informed and trained. The storage of paper documents and electronic data is also examined. The mere fact that many employees could access the information in their daily work does not necessarily negate secrecy management immediately.

Even a trade secret lawfully disclosed by the company may constitute unfair competition under Article 2, paragraph 1, item 7 of the same Act if it is used or disclosed for the purpose of obtaining a wrongful gain or causing damage to the company. Records of unauthorized copying of data or transmission outside the company are strong objective evidence, but the absence of records showing files were taken out does not necessarily allow you to conclude immediately that there is no problem. Even information used from memory may give rise to liability for misuse if, in light of its content and the way it was managed, it is recognized as a trade secret.

Assessing Solicitation and Preparatory Acts While Employed

Article 3, paragraph 4 of the Labor Contracts Act (Japanese) requires workers and employers to comply with the labor contract and to exercise their rights and perform their obligations in good faith. If a worker breaches the duty of good faith under the labor contract, the company may be able to claim damages for non-performance of an obligation under Article 415 of the Civil Code.

Conduct while employed is considered separately from free competition after departure. If there are problems such as taking out confidential information or soliciting while still employed, a breach of duty during employment may be at issue. If the person also served as a director, the duties as a director during the term of office are examined separately as well.

Tort Liability Where There Is No Agreement

Even where no breach of a non-competition clause or misuse of trade secrets can be established, there remains a path to liability that focuses on the departing employee's method of solicitation. Where the means and manner of solicitation are assessed as exceeding the limits that are socially accepted as free competition, general tort liability may arise.

Article 709 of the Civil Code (Japanese) provides as follows:

A person that has intentionally or negligently infringed the rights or legally protected interests of another person is liable to compensate for damage resulting in consequence.

Economic loss resulting from legitimate competition in the market must be clearly distinguished from infringement of rights and interests by unlawful means.

The Ministry of Health, Labour and Welfare's Employment Guidelines, explanation of non-competition obligations (pages 37–38) (Japanese) introduces the Supreme Court judgment of March 25, 2010 (the Success et al. [Sanka Tech] case). In a case where there was no special agreement restricting post-employment competition, and no circumstances such as use of trade secrets or taking away business by means that damaged the company's credibility were found, the court held that the competitive conduct did not exceed the scope of free competition under socially accepted standards and did not constitute a tort.

In light of this standard, the outward fact that many customers moved immediately after the employee's departure is not enough to conclude that unlawful poaching occurred. The analysis examines the concrete means and manner of solicitation, such as whether the employee damaged the company's social credibility by stating false facts, or deliberately exploited their authority while employed or internal operational disruption.

With respect to poaching of employees as well, the legal assessment differs greatly between a case where individual employees chose to change jobs of their own free will and a case where the departing employee pushed for organized resignations in a way that obstructed the company's business operations. Whether there is unlawful disloyalty beyond ordinary recruitment is judged by comprehensively considering the positions and number of the departing employee and the solicited employees, the timing and method of solicitation, and the degree of disruption to the remaining business unit.

From the Company's Initial Response to Choosing Its Remedies

Having grasped the legal bases, you move on to the practical response. What is first required in the initial response is to separate the impact the company is experiencing from the conduct the departing employee is suspected of, and to gather dates and objective evidence.

Establishing the Timeline and Securing Evidence

First, accurately record the date the employee gave notice and the last day of work. Then arrange the dates and times of access to internal information, contact with customers, contract termination notices and alleged solicitation of colleagues, and build a timeline. For example, the points to examine and the direction of proof change depending on whether a customer's termination had already been decided before the employee left, or whether the departing employee deliberately made contact timed to the contract renewal.

When hearing from customers or employees, confirm who made what approach and when. Clearly separate in the record facts directly seen or heard, hearsay from third parties, and the person's own speculation or impressions. Where messages or emails from the departing employee remain, preserve the data with the cooperation of the person concerned, including the context of the surrounding exchanges and the dates and times sent and received.

For business computers, company email and customer management systems managed by the company, preserve access logs, download histories, and logs of saving to external storage or deleting data. Cutting off the departing employee's access rights to internal systems and preserving logs and data as evidence without allowing them to be erased should be carried out carefully, with the departments involved confirming the procedure with each other. Because even business devices may contain private data, limit the investigation to the necessary scope in light of the purpose of the investigation and internal rules, and refrain from any action that would amount to unauthorized access to an individual's personal accounts.

Where misuse of trade secrets is suspected, identify the content of the information at issue and collect materials showing how it was managed as a secret at the time the conduct in question took place. Gather the actual confidentiality labels, folder access permission settings, written pledges, records of security training and the like. Bear in mind that the fact that management was strengthened after the information leaked cannot by itself prove the past state of management.

Where disloyal conduct while employed is at issue, do not judge solely on the fact that it occurred during the employment period; confirm the individual's authority, the business opportunities the company had, and the connection with any facilities or information used for private purposes. With respect to post-employment sales activities as well, distinguish on the basis of evidence between legitimate business based on the individual's own experience and personal relationships and misuse of information the company should protect.

The Subject and Recipient of a Warning

When sending a warning letter to the departing employee, clearly identify the content of the obligation alleged to have been breached and the specific conduct at issue. Also indicate concretely the information concerned and the measures the company is seeking. Excessive demands, such as a blanket prohibition on joining competitors or contacting existing customers without sufficient evidence, should be avoided. Seek realistic measures suited to the case, such as stopping use of confidential information, responding regarding what information is held, and returning or destroying data. Even when requesting deletion of data, consider preservation procedures in advance so that evidence necessary for proof in litigation or other proceedings is not lost.

Whether a claim can be made against the new employer that hired the departing employee is judged separately from the departing employee's own liability. The outward fact of having hired the departing employee is not enough to establish legal liability; concrete circumstances supporting the new employer's own unlawfulness are required, such as its awareness of or involvement in the acquisition or use of the company's trade secrets, or its involvement in unlawful poaching.

Requirements for Injunctions and Damages

Against misuse of trade secrets and the like, a person whose business interests have been or are likely to be infringed may, under Article 3 of the Unfair Competition Prevention Act, be able to demand that the conduct be stopped or prevented. Where a valid agreement exists, the company seeks to stop the prohibited conduct in accordance with the terms of that agreement. However, where the claim is based on tort under Article 709 of the Civil Code, the fact that tort liability is recognized does not automatically mean that all business or solicitation can be enjoined.

Where sales activities need to be stopped urgently, a petition to the court for a provisional disposition comes into consideration, but the company must make a concrete prima facie showing of the right to be preserved and of the necessity of preservation that cannot await a final judgment in the main action. Whether the company can clearly specify which conduct toward which customers is to be prohibited, or the use of which information is to be enjoined, greatly influences the outcome.

In a claim for damages, the central issues are proof of a proximate causal relationship between the breach of duty or act of unfair competition and the damage, and proof of the amount of damage. A decrease in sales is not necessarily recognized as legal damage as is; the factors considered include the likelihood that the business would have continued absent the departing employee's conduct, the company's profit margin, and whether contracts ended for reasons on the customer's own side. Depending on the case, you also check whether the presumption of the amount of damage provided in the Unfair Competition Prevention Act can be applied.

Whether an injunction or damages is the realistic choice depends on the nature of the case. Depending on whether it is urgent to stop ongoing misuse of information or customer outflow, or whether the goal is monetary compensation for damage that has already occurred, you choose the evidence to gather and the legal procedures to follow.