Restraint of Trade – protecting a Company’s Trade Secrets

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What is Restraint of Trade

Contractual agreements that contain a restraint of trade has been a practice that seeks to protect employers against employees who would take up new employment with companies and are likely to divulge their trade secrets.  The principle behind “restraint of trade” is the protection of a company’s trade secrets, trade connections, customers, confidential information and any other interests that the company may deem to be the basis its trade. The agreement itself would then restrict a party’s right to carry on trade and profession freely.

Restraint of Trade contract

What does the Constitution Say

It is enshrined in chapter 2 of our Constitution that every person has the right to choose their trade, occupation or profession freely. Law may regulate the practice of trade, occupation. (Section 22 of the Bill of Rights). It is commonly known that the Constitution is the supreme law and forms the corner stone of all laws. Limitations of the Rights contained thereof, would only be valid if it is reasonable and justifiable in an open and democratic society, based on humanity, dignity, equality and freedom, taking into consideration all factors that are listed in Section 36 of the Bill of Rights.

The balance between the common law restraint of trade and section 22 of the Bill of Rights has been argued and weighed in our South African Courts for a number of years.

Is a Restraint of Trade Clause Reasonable?

Restraints of trade clauses or agreements are considered unreasonable and unenforceable if it is in conflict against public policy as emphasized in Magna Alloys and Research SA (Pty) Ltd vs Ellis.

In Advtech Resourcing (Pty) Ltd t /a Communicate Personal Group V Kuhn, the court held that the fact that the parties agreed that the restraint of trade was reasonable as envisaged in the agreement is not itself decisive. The reasonableness of the agreement or clause is for the court to decide. Therefore, on face value, the agreement may seem to be valid and reasonable based on the fact that the contract met the standard requirements for a valid contract in terms of contract law, but its reasonableness will be subject to debate.

What about Skills and Experience gained during employment?

The question of whether skills and experience acquired by an employee should be regarded as a companies’ “secrets” has been decided in our courts that the employer has no proprietary hold on the employee, his knowledge or skills and experience acquired and thus a restraint of trade on such basis would be declared unreasonable. It is evident that a restraint of trade agreement for the above purpose will be against public policy and section 22 of the Bill of Rights will be upheld.

The notion that skills and experience acquired by an employee during his employment will not be subject to restraint was also emphasized in Labournet (Pty) Ltd v Jankielsohn and Another.

When will a Restraint of Trade Clause be Reasonable and Enforceable?

What will be deemed as confidential information, which requires protection will be based on whether such information constitutes a trade secret. In Experian SA (Pty) Ltd v Haynes and another it was found that confidential information would be regarded as trade secret if such information is not public knowledge and property and such information is only known by a restricted number of people and has an economic value to the person who seeks protection. The restraint of trade that is based on confidential information may be enforceable if it is proven that the confidential information obtained by the employee during the course of his or her employment is not public knowledge.

What will the Courts consider when determining whether or not a Restraint of Trade Clause is Enforceable? 

  1. The period of the restraint
  2. The geographical area in which the restraint applies
  3. Whether a restraint of payment was made to the employee
  4. Whether the employee could still engage in a trade or profession and earn a living
  5. The proprietary interest of the employer

The onus of proof, lies with the party that wants to declare the restraint of trade unenforceable or the party, that has a clear right and interest that needs to be protected, which the employee would have obtained such information by virtue of the position he held within the company. In our most recent case of Aqcuatan (Pty) Ltd v Heinrich Jansen van Vuuren Engineered Linings and PSV Industrial (Pty) Ltd, the applicant had the onus of proof to show that the restraint was reasonable and therefore should be enforceable.

While such contracts are in common practice and concluded by an employee and employer, the reasonableness thereof will be subject to scrutiny by the courts. Our courts do not have a particular approach to such matters and solely determine the reasonableness based on the facts and merits thereof.

REFERENCES

ACTS:

  1. The Constitution of the Republic of South Africa, Act 108 of 1996

CASES:

  1. Magna Alloys & Research (S.A.) (Pty) Ltd. v Ellis (109/84) [1984] ZASCA 116; [1984] 2 All SA 583 (A) ; 1984 (4) SA 874 (A) (27 September 1984)
  2. Labournet (Pty) Ltd v Jankielsohn and Another (JA48/2016) [2017] ZALAC 7; [2017] 5 BLLR 466 (LAC); (2017) 38 ILJ 1302 (LAC) (10 January 2017)
  3. Experian South Africa (Pty) Ltd v Haynes and Another (48711/2011) [2012] ZAGPJHC 105; 2013 (1) SA 135 (GSJ); (2013) 34 ILJ 529 (GSJ) (18 May 2012)
  4. Aquatan (Pty) Ltd v Janse Van Vuuren and Another (J838/2017) [2017] ZALCJHB 141 (4 May 2017)
  5. Advtech Resourcing (Pty) Ltd t /a Communicate Personal Group V Kuhn & another [2007] JOL 20680

WEBSITES:

https://www.globalworkplaceinsider.com/2016/02/enforcing-employee-restraints-of-trade-after-termination-of-employment/

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