Restraints of trade – latest developments

Whether or not a court will enforce an agreement in restraint of trade is case-specific. The court must balance the importance of ensuring that contracts are enforced when they are freely and willingly entered into against the right of every person to choose his or her trade, occupation or profession without hindrance.

In broad terms, the courts will not enforce a contract in restraint of trade where an employee merely takes up employment with a competitor but it will do so to prevent the transfer of skills and information proprietary to an existing employer.

Two recent Appellate Division cases deal with the enforcement of a restraint of trade agreement with traditional clauses where an employee left his current employer to work for a direct competitor. These are Automotive Tooling Systems v Wilkens (2006) SCA 128 (RSA) and Reddy v Siemens (2006) SCA 164 (RSA).

The Appellate Division appears to have laid down the following set of guidelines to assess the validity and enforceability of restraint of trade provisions:

·        Does the skill, expertise and “know-how” of an employee vest in the employer or the employee?

·        Can the employer show that the employee was in possession of confidential or proprietary information that warranted protection?

·        Do the employee’s relevant skills constitute trade secrets or confidential information of the employer?

·        Can the employer distinguish between information proprietary to it and the general knowledge and skill of its employee?

·        Is the restraint of trade agreement too broad? Unless it is specific enough it may be rejected as being against public policy.

In the Automotive Tooling case, the employee, Wilkens, was allowed to work for employer’s direct competitor, the court holding that:

·        The relevant skills and know-how vested in the employee and accordingly did not constitute trade secrets or confidential information of the employer. In these circumstances, the employee had a right to earn a living using his general stock of skill and know-how.

·        The employer was not able to distinguish between information proprietary to it and the general knowledge and skill of its employee. This should not be allowed to prejudice its own ex-employee when he sought employment with competitors.

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

In the Reddy case, the employee, Reddy, had been employed by Siemens Telecommunications and applied for a job with Ericsson, a competitor in the same market. Although there was no threat that Siemens’s existing customers would move their business to Ericsson because Reddy changed employers, in this case the court enforced the restraint and prevented him from taking up employment with Ericsson for the following reasons:

·        The court found that Reddy possessed 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.

·        Reddy was thus 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.

See this article for more on this topic.

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