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Restaint of trade clauses and/or agreements: Worth more than the paper they are written on

Restaint of trade clauses and/or agreements: Worth more than the paper they are written on

15th October 2014

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There appears to be a common misconception that Restraint of Trade covenants are unenforceable and not worth the paper they are written on.  This is a misconception because a Restraint of Trade is enforceable provided that it meets the requirements that have been laid down by the Courts, but more specifically provided that the right that you seek to protect is clearly identifiable. 

We recently received an enquiry from a company based in Bela-Bela that sought to restrict an employee from resigning and taking up employment with a competitor and taking with her the client list that she was exposed to as well as the suppliers that the company used.  The first problem that we identified was that there was no clear Restraint of Trade Agreement, the employment contract was not signed by both parties and the Restraint of Trade Agreement was simply a clause to the effect that the employee is restrained from taking up employment with a competitor or practising in the same field and that this restraint applied across the country.  The problem with such a restraint is that not only was it overly broad, but it actually failed to disclose the interest that was sought to be protected.  Furthermore, it went as far as restricting the employee from practising in this field anywhere in the country based on the fact that she worked for a small company based in Bela-Bela.  On the papers, there was no way that such a Restraint of Trade clause would be enforceable based on the fact that there was no interest that they had identified that they sought to protect and furthermore it was simply unreasonable.  Therefore, what one needs to keep in mind, is that in order to be able to enforce the Restraint of Trade covenant, there has to be that clearly identifiable right that is protectable and furthermore it has to be reasonable. 

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That said what follows, is an overview of a recent Labour Court Judgment delivered on 16 September 2014. In the matter between L’Oreal South Africa (Pty) Ltd v Shaun Kilpatrick & Another an urgent application was brought by the employer to enforce a restraint of trade agreement.

This case was brought, as with most restraint disputes, on an urgent basis requesting an urgent interdict and citing the new employer. This is typically the route one would take when enforcing a Restraint of Trade Agreement as it is unlikely that allowing the infringement to occur then claiming damages will adequately cover the losses suffered.  The Court at the outset made it clear that in order for the Applicant to have the relief it sought, it had to establish three things:

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1. A clear right;
2. An injury actually committed or reasonably apprehended; and
3. The absence of any satisfactory remedy.

As stated in the case of Magna Alloys & Research (SA) (Pty) Ltd v Ellis the onus to prove that the Restraint of Trade covenant should be enforced rests with the party who seeks to defeat the application of the Restraint of Trade covenant. The Judge went on to further state that regardless of where the onus lies, it should not affect the approach on how factual disputes in Motion proceedings should be determined and therefore decided that a value judgment based on the facts that have been pleaded, has to be made to decide what the facts actually prove.  This means that as the Applicant has the duty to prove the facts on affidavit, the facts must be clearly stated.  There should not be need for reference to oral evidence based on the fact that:

1. A Restraint of Trade clause should be enforceable by reference to an Agreement that was entered into; and

2. By virtue of approaching the Court with such an application the only mechanism that the Applicant has to prove its case is based on its founding affidavit and the replying affidavit.

Generally a Restraint of Trade dispute will entail a dispute of fact, as the employer is seeking to enforce it whereas the former employee is seeking to not have it enforced.  Therefore, any Applicant seeking to enforce a Restraint of Trade covenant, should be aware that once it approaches the Court to enforce it there is a dispute of fact and this should be adequately dealt with in the papers so as to ensure that the Court has the relevant information before it to make a value judgment.

Briefly, the facts in this are as follows: the First Respondent was employed as a General Manager in one of the divisions of the Applicant in 2010 and a contract of employment was concluded, however, this contract of employment did not include a Restraint of Trade covenant but simply a confidentiality clause.  Two years after the initial employment agreement was entered into, the parties entered into a Restraint of Trade covenant wherein the First Respondent admitted that there was a protectable interest and undertook to refrain from working for a competitor of the Applicant for a period of twelve months from termination of employment.  In return for this as a quid pro quo, the Applicant would pay to the First Respondent 66% of his basic salary on a monthly basis for the duration of the restraint period.

The Court took into account the position and duties of the First Respondent and set out the kind of information that the First Respondent was exposed to by virtue of his position and found that it was clearly of a highly confidential nature.  The First Respondent sought to deny this and contended that he was simply a Sales Manager driving the sales staff and meeting budgetary requirements.  The Judge disagreed with this contention on the basis that, inter alia, the First Respondent was exposed to highly confidential information and that is furthermore entrenched by the fact that the First Respondent himself entered into the Restraint of Trade Agreement some two years after commencing employment with the Applicant.  The Judge said: “The fact is that the First Respondent’s position, at its core, was a position concerned with a day to day operations and management of the business unit, and thus he would be tasked with implementing strategies, rather than being in forefront of creating them.  But the fact that the First Respondent did not develop strategies and technological advances cannot mean that he does not know about them, and knows that such strategies have been developed and are due to be implemented.  This kind of information would be useful to a competitor.” 

The First Respondent went on to further deny that he would have been able to recall all the information that was accessible to him and as such, he could not convey it to a third party.  The Judge disagreed with him on the basis that the information that the First Respondent would have been exposed to, related to the day to day activities in running of the business and as such would have been information that he was required to retain and have easy access to in terms of his recollection and would furthermore be useful to a competitor.  Another contention made by the First Respondent was that the information that he possessed was in the public domain in that the information was known to sales staff and published on the internet.  The Judge in response to this said: “Whilst this may be partly true, it is certainly not all true.  Using this example of the discount structures and on the First Respondent’s own version this is certainly not published on the internet.  The sales representatives who know the discount structures do not update and brief competitors such as the Second Respondent on this. Any competitor would not readily know exactly to what customer the Applicant would sell what product at what price and at what quantity, but the First Respondent would know this, as he managed the sales force and the profit and loss account on a day to day basis for the last four years.  I find it completely unlikely that the First Respondent would not know who the customers of the Applicant are and what exactly they buy and at what price they do so and must reject his contention that he cannot recall such information.  This information, in my view, would be very useful to a competitor such as the Second Respondent.”

In determining whether the Applicant had a protectable interest the Court had regard to the principles set out in Basson v Chilwan & Others 1993 (3) SA 742 (A) at 767G-H which stated that there are four questions that should be asked when considering the reasonableness of the enforcement of a restraint. 

1. Does the one party have an interest that deserves protection after termination of the agreement;

2. If so, is that interest threatened by the other party?;

3. In that case, does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?

4. Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected?

The First Respondent in this case sought to rely on the Restraint of Trade covenant in that the Applicant had a protectable interest and the First Respondent was exposed to confidential information.  As such, the Court engaged in an enquiry as to what a protectable interest was.  The Court said that a protectable interest could be found in two general categories, the first being trade connections and the second being confidential information.  The Court then went on to list categories of what would constitute confidential information.  As such, having dealt with the kind of information that the First Respondent was exposed to, the Court held that this information would clearly be considered to be confidential in that the Applicant would not want it to be disseminated to competitors.  To add to this, the Court said that the fact that the First Respondent entered into the Restraint of Trade covenant some two years after it had joined the employment of the Applicant showed that it was aware that there was a protectable interest and it admitted to same in signing the covenant.  Furthermore, the First Respondent conceded that the industry was fiercely competitive and as such, on the probabilities that the information that a Business Unit Manager of one competitor would have about the business activities of his employer, would always be useful to another competitor in such an industry.  The Court went on to state that even if some of the information is out in the public domain, which was one of the First Respondent’s principal defences, the fact remains that it did take substantial time, effort and resources to create, compile and reduce it to a usable form, and that the distribution of most of such information was done on a confidential basis.  An example of this would be the Applicant’s pricelist and discount structures.  While it may be so that this information is provided to customers and even accepting that the customers may share this information with other suppliers, the fact remains that this information is given to customers not to disseminate it to the market place, but to keep for themselves.  Therefore this information despite being so available does remain confidential.  As such, the Court found that the information the First Respondent had access to and used on a day-to-day basis was confidential. 

The Court went on to state that it is also impossible to isolate the information from the First Respondent upon him leaving, as it is the kind of information used by him on a daily basis in discharging his duties and would therefore remain known to him.  This information would have value to the Second Respondent as a competitor.  The Court therefore concluded the Applicant had a protectable interest in the form of confidential information that the First Respondent had access to whilst employed at the Applicant and that this protectable interest had been infringed by the First Respondent’s employment with the Second Respondent.  As such the clear right of a protectable interest had been established as had the infringement of that right.

In weighing off of the interests of the First Respondent and the public interest, the Court said that the employment of the First Respondent with the Second Respondent was an infringement of the protectable interest of the Applicant and that this employment clearly placed such interest at risk.  Furthermore, the First Respondent has an interest to pursue the occupation he wants and knows and it would seem in a promoted position at the Second Respondent.  Therefore, the Court had to weigh the quantitative and qualitative interests of the respective parties.  In concluding that in the weighing off of these interests, the exercise favoured the Applicant, the Court first considered the First Respondent’s conduct in refusing to have disclosed where he was going to take up employment despite being consistently requested to do so.  Furthermore the Court considered that the First Respondent concluded the restraint long after he became employed and when there would have been no obligation on him to do so in which he confirmed the nature of the interests the Applicant was seeking to protect.  Finally the Court considered that the First Respondent was properly warned beforehand not to take up employment with a competitor in breach of the restraint before it even left the employ of the Applicant yet persisted to do so nonetheless.  The Court said that the First Respondent failed to take the Court into his confidence in setting out what his skills were and therefore what he could and could not do.  The Court also concluded that there was simply no issue of public interest that should have intervened in this instance as there was nothing unlawful in the interest itself and the parties contracted willingly when they entered into the Restraint of Trade agreement. 

In considering the practical application of a restraint of trade agreement the Court said, “The first question is thus whether the Applicant has demonstrated the existence of a clear right.  In the context of this matter, this means whether the Applicant has a protectable interest.  As I have set out above, I accept that the Applicant had a legitimate and proper Restraint of Trade Agreement acceptable to be enforced.  I equally accept that the Applicant has a proper protectable interest in the form of confidential information and that the employment of the First Respondent with the Second Respondent infringes with such protectable interest.  The weighing off of interests favoured the Applicant and there is no intervening issue of public interest.  In my view, the Applicant has therefore properly demonstrated the clear right to the relief sought, and an existence of an injury committed and reasonably apprehended.”  The Court then considered the issue of whether there was an alternative remedy in this case.  The Court said that the only other alternative remedy that would have been available to the Applicant would be for it to wait and see that the harm was committed first and then launch a claim for damages.  However, such a remedy would not sufficiently protect the interests of the Applicant as the loss could have been prevented through the enforcement of the agreement.  As such the Court granted the interdict against the First Respondent.

This is a very well reasoned judgment that clearly shows that Restraint of Trade covenants are not only valid but that they are also enforceable.  The trick lies in ensuring that you are able to adequately show the interest that you seek to protect and that on the papers the Court will be able to reach a conclusion that your interest may be infringed and is thus deserving of protection.

Written by Manisha Maganbhai-Mooloo  and Khanyisile Khanyile, Adams & Adams

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