RESTRAINT OF TRADE AGREEMENTS ATTRACT RENEWED FOCUS

Wednesday, February 14, 2007
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By Jason Smit

Two recent Appellate Division cases dealing with the enforcement of agreements in restraint of trade have introduced new debate into a field of law which continues to evolve.

The cases in question are Automotive Tooling Systems v Wilkens (2006) SCA 128 (RSA) and Reddy v Siemens (2006) SCA 164 (RSA). Both dealt with the enforcement of a restraint of trade agreement where an employee left his current employer to work for a competitor.

Intriguingly, in the former, the restraint was upheld, while in the latter the enforcement restraint was refused and held to be unlawful.

A close look at the judgments suggests that the Appellate Division may have introduced a new set of guidelines against which restraint of trade agreements are to be interpreted.

In Automotive Tooling, two of the appellant’s employees, having entered into employment contracts with traditional clauses preventing them from working for a competitor, resigned and went to work for a direct competitor of the appellant.

In assessing the validity and enforceability of the contracts’ restraint of trade provisions, the court focused on the skill, expertise and "know how" of the employees and considered whether or not that skill, expertise and "know how" vested in the employer or the employees.

The court ruled it was clear that the relevant skills and know how vested in the employees and accordingly did not constitute trade secrets or confidential information of the employer. The court relied upon the rights of the employees to earn a living using their general stock of skill and know how.

Accordingly, the court required the employer to show that the employees were in possession of confidential or proprietary information that warranted protection.

Indeed, the court went so far as to state that the employer’s inability to distinguish between information proprietary to it and the general knowledge and skill of its employees should not be allowed to prejudice its own ex-employees when they sought employment with competitors.

Although the employees held specialised skills, the court found that the restraint of trade agreements were not enforceable and that the skill sets which the employer sought to protect were in fact part of the employees’ general stock of skill and knowledge. Preventing them from exploiting such skill sets would accordingly be contrary to public policy.

The employees were consequently permitted to work for employee’s competitor.

In the Reddy case, the appellant, formerly employed by Siemens Telecommunications, applied for a job with Ericsson.

He would not deal with the same customers as he did when employed by Siemens, although, in general terms, Siemens and Ericsson were competitors in the same market. The threat of Siemens’s existing customers taking their business to Ericsson as a result of Reddy’s change of employers was not present.

In this case, too, the court studied the appellant’s knowledge and skills.

However, in the Reddy case, the employee was held to possess information that was confidential and proprietary to his ex-employer. He had attended numerous training courses, as a result of which his skills and know-how related specifically to his ex-employer’s products and systems.

Once again the court balanced the importance of ensuring that contracts are enforced when they are freely and willingly entered into against the right of every citizen freely to choose his or her trade, occupation or profession.

It weighed up the interests of the employer and the employee, after which it made a value-judgement as to whether or not the restraint was enforceable, at the end of which it was satisfied that the contract’s restraint of trade clauses did not, in contrast to the Automotive Tooling matter, preclude the employee from using his skills and abilities. Rather, the clause in question sought to restrict the employee’s choice of new employer.

The employee was thereby restrained from taking up employment with Ericsson.

The court concluded that he was indeed in possession of trade secrets and confidential information, which, if disclosed to his new employer, could be used to the disadvantage of his old employer. The mere risk of disclosure of the relevant information justified its decision to prevent the employee’s employment with Ericsson.

The employee was required to honour the agreement he had entered into freely and voluntarily with his previous employer and, accordingly, could not work for Ericsson.

In assessing the two judgments together, a new approach to the analysis and interpretation of restraint of trade agreements is potentially evident; that it is not the mere acceptance of employment with a competitor that a restraint should seek to prevent but, rather, the transfer of skills and information proprietary to an existing employer.

Although, therefore, restraints of trade agreements remain enforceable, the courts appear to be beginning to insist that they are crafted in a far narrower and more specific manner than in the past, failing which they will be rejected and held to be against public policy.