Restraints of Trade

1. Principles of Restraint of Trade in South Africa

Individuals should be free to sell their skills and to practice their trade in the market to make a living. This is a fundamental constitutional right. They are also free to conclude legally binding contracts, such as a restraint of trade, of their own free will. And having freely concluded a contract, they are expected to keep their promises. It follows that if a person freely signs a restraint of trade and then wants the court to set it aside – he is effectively asking the court to condone his breach of promise.

 

2. What does the court consider in restraint of trade cases?

• Does the employer have a protectable interest?
• Could the employee potentially prejudice the protectable interest?
• Is the restraint reasonable?
• Is the restraint against public policy?

 

2.1 Does the employer have a protectable interest?

A protectable interest is a “trade secret” – something unique which the business has created to help it to compete in the market. By definition, the “secret” is not freely known or available in the public. And because it’s unique – it has a value which the business has an interest in protecting.  It could be product formulas, recipes, production methods, and designs. Or it could be confidential information – such as customer lists, price structures, operating procedures, etc.

 

Related:

TRADE SECRETS: What must a business owner do to protect them?

 

2.2 Could the employee potentially prejudice the protectable interest?

The business does not have to show that actual harm has already been done. The court will enforce the restraint if the employer can show that there is serious potential for harm if the ex-employee is allowed to trade freely in the market. The facts of the case will determine whether the potential exists or not.

 

2.3 Is the restraint of trade reasonable?

If there is a protectable interest and the employee could potentially prejudice it – the court will consider whether the duration and the geographic area of the restraint are reasonable. The shorter the restraint period is and the smaller the area it applies to – the more reasonable the restraint is likely to be.  For example, a restraint which is for two years and covers the whole of the country could be unreasonable – but one which is for six months and covers the province in which the employer’s business mainly operates could be reasonable.

The same principle applies to the scope of activities which the restraint covers.  For example, if the employee is a computer programmer – it would be unreasonable to impose a restraint which stops him from working in the IT industry as a whole. But one which prevents him from working in the employer’s specific business niche – such as computer game design, could be reasonable.

 

2.4 Is the restraint against public policy?

If all these criteria for a restraint exist and its purpose is to protect the employer’s legitimate business interests – it will probably be enforceable. If they’re not, and the real purpose is simply to stop the employee from practising his trade, the court will be less inclined to enforce it – because it would be against public policy.

 

3. Recent court decisions

 

3.1 Johnsson Workwear (Pty) Ltd v Williamson and Another (August 2013)

In Johnsson Workwear (Pty) Ltd v Williamson and Another  (August 2013), the court did not enforce a restraint that prevented an employee from being employed or from having any interest in any competing business throughout South Africa for 12 months from termination. This was because the employee had acquired his knowledge of the textile industry from his twenty-plus years of working in the industry before he started his job with the employer; he gained no special skills from his work with the employer; there was nothing confidential and unique about the employer’s clothing manufacturing processes; his new job did not involve manufacturing, and a nation-wide restraint was unreasonable. The court also accepted the principle that the employee had the onus to prove that the restraint was unreasonable.

 

3.2 Digicor Fleet Management (Pty) Ltd

In Digicor Fleet Management (Pty) Ltd, the High Court did not enforce a restraint which prevented an ex-employee from working for a competitor for two years. This was because the employee did not acquire any confidential information while she was employed at Digicor – and she left the company with no more knowledge than she had when she first started working for them.  Other factors were that her new work did not involve fleet management work which Digicore specialises in and she had no strong connections with any of their clients. The employee contacted a Digicor client to solicit business for her new employer. This was unsuccessful because she did not have a strong enough connection to influence the client to make the switch. The court found that the restraint on soliciting a former employer’s business could be enforceable if the employee “…had the client in his or her pocket”. The employee’s mere knowledge of the client was not enough to threaten the employer’s protectable interest.

 

3.3 Nashua (Cape Town) vs Wesley Dempster (December 2008)

In Nashua (Cape Town) vs Wesley Dempster (December 2008), the court did not enforce a restraint against a junior sales representative when he left to join a competitor. Its reasons were that the new employer operated outside Nashua’s franchise area; the employee signed a non-disclosure agreement with his new employer in which he undertook not to disclose any confidential Nashua information to his new employer or to target any of Nashua’s clients; he was a junior employee and who did not hold an influential position; he did not have much knowledge about Nashua’s business; and, lastly he received no benefit in return for signing the restraint undertaking.  The court also took account of the fact that the company had not consistently enforced its restraints of trade in the past.

 

4. Conclusions

The courts have to strike a balance between the employer’s right to protect its unique business interests on the one hand – and the employee’s right to work and to sell his or her skills in a competitive market on the other. An employee who wants to be released from a contract in restraint of trade must be able to persuade the court that his or her right to work outweighs the potential prejudice his ex-employer could potentially suffer if the employee leaves and competes with the ex-employer in the open market.   Only then will a court relieve an employee of the need to keep his or her promise.