June 2013: Japan Litigation Update

by Quinn Emanuel Urquhart & Sullivan, LLP

Amendment to Employment Contract Act Changes Landscape for At-Will Employees. In what may be surprising to those familiar with the U.S. system, at-will contracts in Japan—in which a term of employment is not mentioned—are very favorable to the employee. Under Japanese employment law, an employer can terminate an employee only if it can show good cause (i.e., have objectively “reasonable grounds”) and that the termination is done for socially acceptable reasons (often translated as “appropriate in general societal terms”). Japanese courts have narrowly interpreted the terms “reasonable grounds” and “appropriate in general societal terms.” Indeed, Japanese law makes it so onerous to terminate a contract without a defined employment term that most employees without a fixed term reasonably expect that their employment contracts will continue until their retirement. Accordingly, while fixed-term contracts operate as they do in many countries and are expected to expire at the end of the term, the “open” contract protects the worker.

On April 1, 2013, Japanese contract law was changed to further protect employees. Specifically, under an amendment to the Employment Contract Act, fixed-term contract employees whose contract periods continue more than five years in total may, at their option, convert their contracts to contracts without a definite period. The amendment also contains certain prohibitions on treating workers differently because of a fixed term. For example, employers cannot maintain an “unreasonable difference” in salary between a fixed-term contract employee and an at-will employee. This shift in worker protection for longer-term contracts will affect both workers’ rights and future employment negotiations.

There is a phase-in period. The amended Act does not apply to fixed-term employment contracts that commenced before the date of enforcement, i.e., April 1, 2013. The term of any such contract is not included in the calculation of the initial five-year period. As a result, no employee with a fixed-term employment contract will be able to convert to an “open” contract until April 1, 2018, thereby delaying the impact of the amendment. Still, companies conducting business in Japan should pay special attention to these changes in employment law.

Supreme Court Decision to Approve Online Drug Sales. In Kenko.com Inc. and Wellnet v. Japan, the Supreme Court of Japan affirmed that the government did not have authority to ban online sales of certain over-the-counter drugs.

The Pharmaceutical Affairs Act, which was amended in 2006 and became operative in 2009, classifies over-the-counter drugs into three categories based on the risk of certain side effects. Pursuant to what it believed to be its authority under the Act, the Ministry of Health, Labor and Welfare issued an ordinance prohibiting online sales of certain categories of drugs considered to have high-risk side effect.

Kenko.com and Wellnet, Japanese online drug retailers, filed a lawsuit against the Japanese government, seeking a declaratory judgment that the ordinance goes beyond the scope of the authority conferred by the Act, and is therefore illegal and void. The Tokyo District Court ruled against Kenko.com and Wellnet, upholding the ordinance. The Tokyo High Court (appellate court) repealed the decision, holding that the amended Pharmaceutical Affairs Act was not intended to prohibit online sales. On January 11, 2003, the Supreme Court affirmed the ruling of the Tokyo High Court, holding the Diet did not intend to prohibit online sales of certain kinds of drugs when amending the Act, and therefore the Act does not provide authority for the government to issue such an ordinance. The ordinance was held to be illegal and void. Although some online drug retailers immediately resumed selling the previously-prohibited drugs online after the Supreme Court decision, the Ministry of Health, Labor and Welfare announced that it would study new measures to govern online sales of over-the-counter drugs.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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