Arrow Altech Distribution (Pty) Ltd v Byrne & others (2008) 29 ILJ 1391 (D)

Principle:

An ex-employee under a restraint of trade agreement may use recollected knowledge of former customers in his own interests. And whilst s/he may also have some social contact with these customers of the old employer, at some point this may become excessive and the old employer would be entitled to restrain the employee from further conduct of this nature.

Facts:

The applicant was in the business of importing and distributing electronic components and wireless modules, which were then used by customers in units designed by themselves. The first and second respondents were employed by the applicant as field application engineer and field sales engineer respectively. The third and fourth respondents were close corporations of which the first and second respondents were members. On entering employment the first and second respondents signed restraint of trade clauses in their contracts of employment in which they undertook not to disclose the employer's trade secrets (as defined in the agreement) or to take up employment with or become interested in any concern that competed with the employer for a period of 12 months after leaving their employment. When the respondents left their employ the applicant applied to the High Court for a final interdict, alternatively an interim interdict, restraining them from breaching the restraint clauses. The relief sought included an interdict preventing them from being employed by the third and fourth respondents, and restraining the third and fourth respondents from competing with the applicant.

The court noted that the relief sought was in substance for a final interdict. Although many facts were in dispute the rule applied that an application for final relief was generally decided on the respondent's version, even where the onus of proof was on such respondent.

After setting out the legal approach to the enforcement of restraints of trade and the terms of the restraint agreements, the court considered whether the applicant had any proprietary or protectable interest. The interest the applicant sought to protect related firstly to its trade secrets and confidential information and secondly to its customer connections. After a review of the relevant case law and applicable principles, the court found one of the difficulties to be the very wide definition in the agreements of the alleged trade secrets and confidential information. The applicant dealt in its papers with the various categories of trade secrets and alleged that they existed without any specific elaboration. The respondents denied any such secrets or that there was any special manufacturing and/or operating know - how, processes or techniques, and replied that the applicant's business was no different to any other business which bought from manufacturers and resold to customers. Similarly, they denied that the applicant designed any products, or owned any patents, and pointed out that technical information came from the manufacturers who made it publicly available on their web sites. They denied having any influence over fellow employees or over customers. The court found that on this issue it had to accept the respondents' version.

On the issue of customer connections the court had reference to decided case law and expressed the view that the legal protection afforded to this type of confidential information was limited. While prohibiting an employee from taking his employer's customer list, or deliberately committing it to memory, the law recognized that some knowledge of former customers would inevitably remain in the employee's memory, and that the employee was free to use and disclose such recollected knowledge in his own or a competing employer's interests.

The court accepted that the first respondent had direct access to customer information, and both respondents admitted to having social contact with customer representatives, although they denied having built up b interpersonal relationships with the decision makers in the customers' employ. To prove the extent of the respondents' customer connections and contacts the applicant provided details of requisitions that they had made with the employer's consent for the reimbursement of expenditure incurred in making gifts to and entertaining customers' employees. These included DVDs, alcohol, gift baskets, tickets for sports events and tickets to an A1 Grand Prix event. The court expressed extreme criticism of such practices which, in its view, seemed prima facie to constitute a breach of the Corruption Act 94 of 1992, and voiced its distress at the brazen and shameless manner in which this was put before the court to seek its assistance in enforcing a customer connection based on such disreputable sources. Considerations of public policy militated against giving protection to such practices. The court was not a criminal court and it would be incorrect to stigmatize the conduct as criminal. The papers would, however, be referred to the Director of Public Prosecutions for investigation.

In conclusion, the court found that on the respondents' version the applicant had not made out a case for the protection of trade secrets and confidential information. It was only in this context that the involvement of the first and second respondents with the third and fourth respondents became relevant. In the absence of their liability it was difficult to see how the third and fourth respondents could be restrained from competing with the applicant. On the issue of using gifts or bribes to woo or maintain customers, the maxim that a party must approach a court with clean hands seemed apt in the circumstances. There was accordingly no substantial interest that deserved protection after termination of the contracts of employment. The court declined to entertain a submission that the contracts be found to be partially enforceable. The application was dismissed with costs.

Extract from the judgment:

[4]   In Reddy v Siemens 2007 (2) SA 486 (SCA) 493 et seq; (2007) 28 ILJ 317 (SCA) Malan AJA set out the present position of the law including the application of the Constitution. This case and the cases quoted by the court may be summarized in the following manner. Part of what is set out is a verbatim quote from the various cases and part is a summary thereof.

1. Covenants in restraint of trade are valid. Like all other contractual stipulations, however, they are unenforceable when, and to the extent that, their enforcement would be contrary to public policy. It is against public policy to enforce a covenant which is unreasonable, one which unreasonably restricts the covenantor's freedom to trade or to work.
2. Insofar as it has that effect, the covenant will not therefore be enforced. Whether it is indeed unreasonable must be determined with reference to the circumstances of the case.
3. Such circumstances are not limited to those that existed when the parties entered into the covenant. Account must also be taken of what has happened since then and, in particular, of the situation prevailing at the time enforcement is sought.
4. Where the onus lies in a particular case is a consequence of the substantive law on the issue.
5. What that calls for is a value judgment, rather than a determination of what facts have been proved, and the incidence of the onus accordingly plays no role.
6. A court must make a value judgment with two principal policy considerations in mind in determining the reasonableness of a restraint.


1. The first is that the public interest requires that parties should comply with their contractual obligations, a notion expressed by the maxim pacta servanda sunt.
2. The second is that all persons should in the interests of society be productive and be permitted to engage in trade and commerce or the professions. Both considerations reflect not only common - law but also constitutional values.  Contractual autonomy is part of freedom informing the constitutional value of dignity, and it is by entering into contracts that an individual takes part in economic life. In this sense, freedom to contract is an integral part of the fundamental right referred to in s 22.


7. In applying these two principal considerations, the particular interests must be examined. A restraint would be unenforceable if it prevents a party after termination of his or her employment from partaking in trade or commerce without a corresponding interest of the other party deserving of protection. Such a restraint is not in the public interest. Moreover, a restraint which is reasonable as between the parties may for some other reason be contrary to the public interest.
8. Five questions that should be asked when considering the reasonableness of a restraint:


1. Does the one party have an interest that deserves protection after termination of the agreement?
2. If so, is that interest threatened by the other party?
3. In that case, does such interest weigh qualitatively and quantitatively against the interest of the other party not to be economically inactive and unproductive?
4. Is there an aspect of public policy having nothing to do with the relationship between the parties that requires that the restraint be maintained or rejected? Where the interest of the party sought to be restrained weighs more than the interest to be protected, the restraint is unreasonable and consequently unenforceable. The enquiry which is undertaken at the time of enforcement covers a wide field and includes the nature, extent and duration of the restraint and factors peculiar to the parties and their respective bargaining powers and interests.

Whether the restraint goes further than necessary to protect the interest?.

[13]   The principal point of departure is whether the applicant has in respect of first and second respondents any proprietary or protectable interest worthy of protection. As is often the case the proprietary interest the applicant seeks to protect relates to its trade secrets and confidential information and secondly its customer connections.

[14]   I accept that confidential information is that which is not in the public domain or public knowledge, see Saltman Engineering Co Ltd v Campbell Engineering Co Ltd [1963]   3 All ER 413 at 415 and Atlas Organic Fertilizers (Pty) Ltd v Pikkewyn Ghwano (Pty) Ltd 1981 (2) SA 173 (T) at 194.

[15]   I am of the view that information received by an employee (or anyone else bound by a fiduciary duty) about business opportunities available to an employer (or to anyone else to whom a fiduciary duty is owed), even if such information could be obtained from a source other than the employer or employee (or from the parties to the fiduciary relationship) is in certain circumstances protected: Jones v East Rand Extension Gold Mining Co Ltd 1903 TH 325. Among such business opportunities may be included those which arise through knowledge of the identity of the supplier of a particular commodity wanted by a potential buyer, even if such knowledge may be available from other sources too. 

[18]   First there is information which, because of its trivial character or its easy accessibility from public sources of information, cannot be regarded by reasonable persons or by the law as confidential at all. The servant is at liberty to impart it during his service or afterwards to anyone he pleases, even his master's competitor.

[19]   Second, there is information which the servant must treat as confidential, either because he is expressly told it is confidential, or because from its character it obviously is so, but which once learned necessarily remains in the servant's head and becomes part of his own skill and knowledge applied in the course of his master's business. So long as the employment continues, he cannot otherwise use or disclose such information without infidelity and therefore breach of contract. 

[20]   But when he is no longer in the same service, the law allows him to use his full skill and knowledge for his own benefit in competition with his former master.

[21]   If an employer wants to protect information of this kind, he can do so by an express stipulation restraining the servant from competing with him (within reasonable limits of time and space) after the termination of his employment. In those circumstances it seems to me to be almost impossible, in justice to the servant, to restrain him when he leaves his master's employment from using not disclosing information which he could not help acquiring. It seems to me that to try to restrain him by injunction from using knowledge, which in that way has become his own, is to try to do something which the court really has no power to do, or rather it has no power to enforce the injunction if one could be granted.

[22]   First, after the employment terminates, the servant may, in the absence of special stipulation, canvass the customers of the late employer, and further he may send a circular to every customer. On the other hand, it has been held that while the servant is in the employment of the master he is not justified in making a list of the master's customers, and he can be restrained, from making such a list, or if he has made one, he will be ordered to give it up. But the defendant was not restrained from sending out circulars to customers whose names he could remember.

[23]   Another thing to be borne in mind is that although a servant is not entitled to make use of information which he has obtained in confidence in his master's service he is entitled to make use of the knowledge and skill which he acquired while in that service, including knowledge and skill directly obtained from the master in teaching him his business. It follows that the servant may, while in the employment of the master, be as agreeable, attentive and skilful as it is in his power to be to others with the ultimate view of obtaining the benefit of the customers' friendly feelings when he calls upon them if and when he sets up business for himself. That is, of course, where there is no valid restrictive clause preventing him doing so.

[24]   Third, however, there are specific trade secrets so confidential that, even though they may necessarily have been learned by heart and even though the servant may have left the service, they cannot lawfully be used for anyone's benefit but the master's.

...

Customer connections

[41]   In Rawlins v Caravantruck (Pty) Ltd 1993 (1) SA 537 (A) at 541-2 A Nestadt JA dealt with the need of an employer to protect his trade connections. A summary or synopsis of his comments would amount to the following:

1. The need to protect trade connections arises where the employee has access to customers and is in a position to build up a particular relationship with the customers so that when he leaves the employer's service he could easily induce the customers to follow him to a new business.
2. The customer contact doctrine depends on the notion that the employee, by contact with the customer, gets the customer so bly attached to him that when the employee quits and joins a rival he automatically carries the customer with him in his pocket.
3. The relationship must be such that the employee acquires such personal knowledge of and influence over the customers of his employer as would enable him (the servant or apprentice), if competition were allowed, to take advantage of his employer's trade connection. Whether the criteria referred to are satisfied is essentially a question of fact in each case, and in many, one of degree.
4. Much will depend on the duties of the employee; his personality; the frequency and duration of contact between him and the customers; where such contact takes place; what knowledge he gains of their requirements and business; the general nature of their relationship (including whether an attachment is formed between them, the extent to which customers rely on the employee and how personal their association is); how competitive the rival businesses are; in the case of a salesman, the type of product being sold; and whether there is evidence that customers were lost after the employee left.

[42]   I accept also that as recognized in Meter Systems Holdings Ltd v Venter & another 1993 (1) SA 409 (W) at 429 et seq by Stegmann J customer lists drawn up by a trader, and kept confidential for the purposes of H his own business, contain confidential information, the property of the trader: Pelunsky & Co v Teron 1913 WLD 34; Robb v Green [1895] 2 QB 315 (CA).

[43]   I am of the view that the legal protection afforded to this type of confidential information is limited to a certain extent. It seems clear I that the law, whilst prohibiting an employee from taking his employer's customer list, or deliberately committing its contents to memory, nevertheless recognizes that, on termination of an employee's employment, some knowledge of his former employer's customers will inevitably remain in the employee's memory. This leaves the employee free to use and disclose such recollected knowledge, in his own interests, or in the interests of anyone else, including a new employer who competes with the old one: Freight Bureau (Pty) Ltd v Kruger & another 1979 (4) SA 337 (W) at 341E-F; Roberts v Elwells Engineers Ltd [1972] 2 All ER 890 (CA) at 894f-h.