The enforcability of restraints of trade

Employing a key staff member can feel like risky business. They will get to know your clients, your systems, your “tricks of the trade”. All well and good: you want your staff to be well-liked by your customers, and knowledgeable and effective in their work. But what if, having accepted your training and support to become a true asset to your organisation, your employee leaves and goes to work for your competition? Can you include clauses in your employment contract to prevent this?

A well-known labour law consultancy certainly hoped so when they employed Mr DJ in 2014. His employment contract included extensive confidentiality and restraint of trade clauses, which the Labour Appeal Court adjudicated upon last week.

After about 15 months’ employment, DJ resigned to take up employment with an employer’s organisation who competed with the consultancy to offer similar services to similar clients. His employment contract restrained him in perpetuity from disclosing any client lists, trade secrets of other company information received from the consultancy during his employment. It went on to restrain him from having any interest in any other entity providing similar services to the consultancy, engaging in any similar transactions with any of the consultancy’s clients, or in any way poaching the consultancy’s staff, for a period of 3 years after his resignation, throughout two provinces of South Africa.

The consultancy immediately drew DJ’s attention to the above restraints, and alerted him to their view that he was about to breach his obligations by taking up employment with the employers’ organisation. DJ disagreed that the two organisations were in competition with one another, but nevertheless undertook not to contact any of the consultancy’s clients to attempt to lure their business away.

The consultancy was not satisfied, and launched urgent proceedings  to interdict DJ and the employers’ organisation concerned, from entering into an employment relationship. The consultancy expressed the fear that DJ would take unfair advantage of his knowledge of its clients, pricing and business strategies, and abuse the strong relationships he built up with its clients to lure them away. DJ denied having any special access to the consultancy’s business strategies, saying that he had learned these before starting work for it and that the information was in any event readily available on the internet. He aso denied having any special bond with any of the consultancy’s clients.

The Labour Court was not satisfied that there was special, confidential information in DJ’s possession which could be abused to the detriment of the consultancy. Neither was it satisfied that DJ had been shown to enjoy especially close relationships with the consultancy’s clients. The consultancy had not proven that it had any protectable interest, and to enforce the restraint would be unreasonable as against DJ and only have the effect of stifling competition.

The consultancy approached the Labour Appeal Court with an appeal against this decision. It complained that DJ had entered employment with it as a blank slate, and had only become a valuable asset worthy of being head-hunted by its competitors, as a result of the training and resources it had invested in him. It argued that it was unfair to allow such an employee, who had signed a restraint when accepting employment, to go over to a competitor who would reap the benefits of this investment.

The Appeal Court noted that restraints of trade are enforceable unless they are proven to be unreasonable. Their reasonableness is determined by balancing the need for parties to comply with their contractual promises and the right to freely exercise one’s trade or occupation. A restraint would only be reasonable if it protected an interest worthy of protection, such as confidential information and trade secrets, or customer and trade connections. For information to be confidential it had to be useful, restricted to a small number of people, and have economic value to the employer. Customer or trade connections could be protectable if they were of such a nature that the employee could induce such connections to follow him or her to a new employer. An interest in preventing competition was not in itself protectable.

The employer’s protectable interest had to outweigh the employee’s interest in being economically productive. It stated that an employee cannot be restrained from taking away and using his or her skills, experience and knowledge, even if these were acquired chiefly through the employer’s training of the employee. These skills were not the property of the employer.

The Appeal Court found that DJ had been a relatively junior employee and had lacked access to truly confidential information. The forms he used for his work were freely available on the internet. He had no access to sensitive financial information or business strategies.  DJ’s evidence was that he only handled the simplest of tasks for clients and that he had no ongoing relationships with any clients such that they felt an attachment to him. He had no role in recruiting clients at either organisation.

As no protectable interest had been proven, the Appeal Court noted that it was unnecessary to weigh up the interests of the parties. DJ was entitled to pursue his career unfettered by the clear language of the restraint he had concluded with the consultancy.

Restraints of trade remain contested territory, with the enforceability of restraints coming down to the circumstances of individual cases. In general, they are of most use in the case of absolutely key personnel only, and should not be concluded with employees simply to fetter their career path and keep them from joining the competition.

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