Restraints of trade
Almost every modern commercially active entity has one or more characteristics that distinguish it from piers and competitors.
Almost every modern commercially active entity has one or more characteristics that distinguish it from piers and competitors. These characteristics vary from almost insignificant to being such that it clearly distinguishes the entity’s products and/or services and endows the entity with a distinct competitive advantage. The law acknowledges that some distinguishing characteristics are so important that it is deserving of legal protection. Some of the legal mechanisms devised to protect proprietary interests include laws against passing off, copyrights, trademarks, confidentiality agreements and restraints of trade.
Restraint of trade agreements concluded between entities and individuals rendering services to these entities are aimed at restricting the activities of the individual after termination of his or her involvement with the entity. This type of agreement can be embodied in a document drafted with the sole purpose of addressing this particular issue or it can form part of another contract such as a contract of employment.
Restraints of trade have received much consideration in our courts for many years and continue to be a constant issue brought before court for determination. Irrespective of the consistent approach adopted by our courts, there still seems to remain a constant font of litigation.
The true object, effect and enforceability of restraints of trade will be impossible to debate fully in a discussion of this nature. In broad general terms it can be noted that a restraint of trade is only enforceable by means of a court order. An entity wishing to enforce a restraint will therefore have to approach the High Court or Labour Court for an order interdicting the individual in question to from certain activities for a specified time, often within a certain geographical area.
One of the most important aspects of a restraint of trade to be borne in mind is that it is not a mechanism to prevent competition. A restraint of trade has to be aimed at protecting unique interests and will always be unreasonable and unenforceable if aimed at avoiding competition only.
Generally our courts are reluctant to unduly restrict an individuals’ participation in economic traffic. At the core of the determination whether a restraint is enforceable is the question whether the party wishing to enforce the restraint can prove that it has a protectable interest that will be infringed on if the individual is allowed to conduct his business unchecked.
What then will be regarded as a protectable interest? The party seeking to enforce a restraint of trade will have to show some proprietary interests sufficiently unique to the business and worthy of protection. The interest may take the form of trade secrets, confidential information, goodwill or trade connections. Something commonly available, known or accessible in the industry will not be regarded as a protectable interest due to lacking uniqueness. For an employer to succeed in showing that trade secrets and confidential information are interests justifying protection, it should show that the information, knowledge, technology or method is something which is unique and peculiar to it and that it is not public property or public knowledge.
A protectable interest has to be of a nature which would trump the employee’s right to continue to work in his or her chosen field. Conversely, an employee who uses his own expertise, knowledge, skill and experience, not gained as result of his employment with the employer wishing to restrain him, is not likely to be restrained.
Trade connections seem to be regarded as a protectable interest. Where business relationships between an individual and clients cemented to the extent that the individual can be said to have these clients “in his pocket”, a restraint of trade is likely to be enforced. Remember the individual was employed and paid to establish the relationships on behalf of the employer. These trade connections belong to the employer.
A restraint will generally be enforceable if it is aimed at protecting an employer’s confidential information or trade secrets that an ex-employee may have gained access to or obtained knowledge of during his employment.
All criteria are tested against the measures of reasonability and public policy. As such a restraint will not be enforced if the period of operation is unreasonably long or the geographical area in which the individual is prohibited to function is too wide. As with almost any legal question, that which will be seen as reasonable will depend on the facts of the particular case. Normally restraints will not exceed two years but one year seems to be the norm.
By Willem Jacobs