The life blood of many life sciences startups is their assets—employees, ideas, and innovations. A key focus for these companies is how to best protect those assets. In Japan, China, and the United States, there are underlying fundamentals in the employment law approach for startups to be aware of and effectively utilize, such as the use of confidentiality agreements; however, there are also important differences to note when doing business in each of these jurisdictions. Below, we take an illustrative look at these potential myriad of issues for emerging companies to consider.
For life sciences startups entering Japan, there are employment law tools that can help protect company assets, similar to the United States and China. There are a number of protective provisions that employers may choose to utilize, including confidentiality provisions; the right to approve any concurrent employment; prohibition against using or bringing any intellectual property belonging to others; work for hire and assignment of invention provisions; and noncompetes, nonsolicits, and nondisparagements. These can be documented in an employment agreement or in separate agreements as discussed below.
Unlike the United States, there is no concept of at-will employment (an employer's ability to dismiss an employee for any reason or no reason at all, and without notice, as long as the reason is not discriminatory). Employers in Japan may only terminate for cause and the threshold for justifying a termination for cause is very high. Japan’s employment environment is largely employee friendly. Because of the limited ability to dismiss employees, most employee exits are the result of mutually agreed separations between the employer and the employee.
Using fixed-term agreements and including robust probationary provisions are potential solutions. Hiring directors or independent contractors rather than employees are also well-used alternatives to avoid some of these issues with employee terminations.
For startups engaging in cross-border matters, it is important not to use employment contracts from other jurisdictions where they may originally operate as some core employment concepts are different in Japan. In addition to employment-related agreements, work rules carry equal weight with agreements and often specify working hours, overtime, wage calculations, and termination provisions. There are also labor management agreements with unions or employee representatives which also govern the employee relationship. Once the terms of employment have been set, there are restrictions on negative changes in employment terms and conditions, which often require employee consent.
The recording and proper payment for hours worked by employees are closely monitored and employers have an obligation to ensure proper tracking and payment. The proper characterization and payment of overtime premiums are also heavily regulated.
In addition, Japan has stringent data privacy legislation, similar to the European Union’s General Data Protection Regulation, and employers are required to protect the personal information of employees in accordance with the Act on the Protection of Personal Information (APPI), which was significantly amended a few years ago. If an employing entity in Japan needs to transfer any employee personal information outside of the company or Japan, including to affiliates of the employing entity, there are a number of alternative approaches to complying with the APPI.
While China’s employment law regime has developed a great deal in the last 15 years, it is relatively young when compared to the United States and many other jurisdictions. That said, like many countries, China continues to grapple with newer phenomena, such as the gig economy and startup company environment.
At the start of the employment relationship, it is important to set out the core expectations and obligations of employers with respect to protecting intellectual property and how employees engage in business with the fundamentals, such as an employment contract, data export considerations, and a noncompetition agreement. Like Japan, China does not have at-will employment, and terminations for cause are challenging to sustain from an evidentiary perspective. Further, restrictions on negative changes in employment terms and conditions also require employee consent in China and may require employee consultation more broadly.
Expansive data protection laws and potential triggers for China’s new Anti-Espionage Law are important to consider. The data protection regime covers employee data, third-party personal and sensitive personal data, such as patient and clinical testing data, and “important data” or data related to national security, such as data potentially with respect to military hospitals. If a multinational company learns of some non-public and sensitive information that relates to China’s national security, sharing this data outside the China entity and particularly across borders could implicate the new Anti-Espionage Law.
Also worth noting is that, generally, healthcare professionals in China are government officials. There could be anticorruption risks that require robust policies and monitoring of conduct. Control of samples and third-party interactions with the personnel at laboratories, testing centers, and suppliers should also be key considerations.
Another issue for startups is that equity is regulated and requires filing and approval with the State Administration of Foreign Exchange (SAFE). Before a company is listed or if the equity plan is not filed and approved by SAFE, there is no effective and legally enforceable way to grant equity to Chinese nationals or employees of the China entity.
Central to the protection of assets in the United States are the effective use of three key tools:
Invention Assignment Agreements
An invention assignment agreement is a legal contract that gives an employer certain rights to inventions created by an employee or consultant during the employment or consulting relationship. These require detailed disclosure of prior and future inventions; a definition of what future inventions will belong to the employer, including details on “assignment” (legal transfer) of ownership rights; and cooperation in the patent process.
Employees or consultants can be required to sign an invention assignment agreement as a condition of employment or engagement. However, some states limit the extent to which an employer can require an employee to give up rights—for example, California, Delaware, Illinois, Kansas, Minnesota, North Carolina, and Washington have exemptions to the extent the invention did not rely on use of employer’s resources and was created during employee’s personal time.
Confidentiality Agreements
These are legally binding contracts that require parties to retain confidentiality for a defined time. Even if confidentially agreements are executed, care should be taken to protect confidential information, such as by using passwords, setting up need-to-know access, as well as the use of restricted USB drives.
Restrictive Covenant Agreements
Nonsolicits
These are a legal contract an employee or consultant signs agreeing not to solicit employees and/or customers for the benefit of a competing business for a stated period of time after the relationship ends. These may limit solicitation of employees and/or customers. To be enforceable, non-solicits must be reasonable in scope and duration and be tailored to protect legitimate business interests.
Noncompetes
These are legal contracts an employee or consultant signs agreeing not to start a competing business to work for a competitor for a stated period of time after the relationship ends. The Federal Trade Commission has proposed a rule banning noncompetes. Broadly, this rule would ban noncompetes with “workers” or any person “who works, whether paid or unpaid, for an employer”, and applies to explicit and de facto noncompetes. It requires rescission of existing noncompetes with notice to workers—the only exception being in connection with the sale of business—for noncompetes applicable to “substantial owners,” which is defined to mean those owning more than 25% of business.
What Should Employers Do?
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