The Importance of Protecting Your Business Secrets – Part IV

Previously, in Protecting the Secret… We left the employer and employee mulling the latest revelation: Restraints of Trade can be enforced, but only if the employer has a legitimate proprietary interest, worthy of legal protection, that will be jeopardized if the employee joins the opposition. Is the employer motivated by vindictiveness, or a genuine desire to protect the valuable confidential information that was given to the employee? Is the employee on the verge of gleefully transferring a few terabytes worth of confidential information to the competitor, or simply looking forward to earning an honest salary in exchange for a hard day’s work? Does the restraint do more than merely restrict competition?

In this epic Battle of the Rights, it is the purest of heart who will in all likelihood emerge victorious. But short of hooking our contestants up to lie-detectors or employing Dynamo the Magician to read their minds, how is our esteemed adjudicator, the judge, to determine who will be crowned Champion of the Rights Contest?

The Restraint of Trade

After confirming that there is, indeed, a valid justification for putting a restraint in place, we can finally turn our attention to the source of all this controversy: the Restraint of Trade Agreement itself. Even if the employee is in possession of critical company information that is deserving of protection, an over-zealous employer can so easily slip up at the end of the final round, allowing the employee to snatch the Victory Cup from under his nose. Because despite all that has been debated, we come full-circle to the final word in our contest: Balance. A skewed, one-sided, unbalanced Restraint of Trade is primed to fail.

Oh – and something else worth noting is that restraints of trade are not governed by our labour law. They’re governed by our law of contract, where sanctity of contract may be king, but public policy is its deity. It is against public policy to enforce a contract that is unreasonable, which includes a restraint that unreasonably restricts a person’s freedom to trade or to work. So, for a restraint of trade to be upheld, the employer’s proprietary interests and the employee’s right to economic activity need to be balanced.

When compiling a balanced Restraint of Trade that doesn’t conflict with the all-important public policy, there are three considerations:

Activities

The courts are unlikely to enforce a blanket restraint that makes it impossible for an employee to work in any industry. The more specific a restraint of trade is and the more narrowly the activities are defined, the more likely it will be enforced. The activities that the employee is restrained from undertaking therefore need to be clearly defined and limited so as to adequately protect the employer’s proprietary interests, without unreasonably restricting the employee from engaging in commercial activity.

For example, prohibiting a salesperson from being employed in any sales position, no matter how unrelated the products and services may be, would be too wide. Prohibiting the salesperson from being employed with a similar company in a similar industry would be marginally better. Further restricting the restraint to involvement with direct competitors who provide exactly the same products and services would be a far safer bet. And limiting the restraint further to a position with a direct competitor matching the position the employee held with the previous employer would restrict the activities even further.

Duration

In order to be reasonable a Restraint of Trade must be limited in its duration. As observed by our courts: “The legitimate object of a restraint is to protect the employer’s goodwill and customer connections (or trade secrets) and the restraint accordingly remains effective for a specified period (which must be reasonable) after the employment relationship has come to an end.”

So how long is reasonable? In one case, the court found a two year duration to be too long. In another, it found that three years was reasonable. And in another, it decided that eight months was more than sufficient. The duration itself is therefore highly variable, depending on the circumstances. When considering the duration of the restraint imposed on a sales director, the court considered the time it would conceivably take before the employee’s influence over the previous employer’s customers would wane.

It is therefore not possible to provide a single, fail-safe duration period. This depends entirely on the unique circumstances of each case. But what is clear is that the restraint should cater for the period of time that the employer reasonably requires protection, and no longer. The shorter the duration, the greater the chance the restraint will be enforced.

Geographical Area

The restraint also needs to identify the area in which the employee is restrained from performing the identified activities. The wider the area, the higher the likelihood that the restraint will be declared invalid. A restraint encompassing the whole planet is therefore a tad over-the-top. The continent of Africa is also unlikely to be upheld in most instances. Southern Africa, or even South Africa, may be marginally better, but may still stand a chance of suffering under a judge’s disapproving glare. Limiting the restraint to a particular province, or to a defined radius is likely to provide the employer with a higher chance of success.

Balance, in a Nutshell

A balanced restraint would therefore identify the activities that the employee is restrained from undertaking in a precise, specific manner. The duration of the restraint would be suitably limited. And the geographical area in which the restraint applies would be appropriate under the circumstances. When facing such a restraint, the employee is cautioned against airily dismissing its enforceability. An employer armed with a fair and balanced restraint makes for a formidable opponent!

The Remedy

If the employer discovers that the ex-employee has breached the restraint, the most effective and widely used remedy is for the employer to apply for an interdict. An interdict is effectively a court order insisting that the employee complies with the restraint and prohibits the employee from acting in breach of the restraint. Invariably the only way for the employee to comply would be to resign. A further risk facing an employee who has breached a restraint, and has failed to inform the new employer of the existence of the restraint, is potentially being dismissed by the new employer, particularly where the previous employer has shown its intention to enforce the restraint. Few new employers relish the idea of being joined as a defendant in a court application, and embroiled in a legal dispute soon after appointing a new staff member!

The Final Verdict

And the winner of our epic battle is: the lawyer!

Because the more skewed and one-sided the restraint, the greater the likelihood that its uncertain fate can only be decided in court. This is exactly the type of scenario that keeps your lawyer in designer suits. To avoid financing your attorney’s fetish for fast cars, make sure that, when drafting your restraint, it is well-intentioned, fair and balanced, with the activities, duration and area of the restraint being reasonably restricted.

In Summary

• A restraint of trade is prima facie valid in our law. Once the employer has established that (a) the restraint of trade exists and (b) it has been breached, the employee bears the onus of proving that the restraint is unreasonable and therefore contrary to public policy.
• A restraint that serves to protect an employer’s proprietary information is not unreasonable.
• The employee’s rights must be balanced. Thus the activities that the employee is restrained from need to be reasonably limited.
• A balanced restraint of trade restricts the restraint to a reasonable and limited duration and geographical area.

When appointing a new employee, a fair and balanced Restraint of Trade can therefore be a useful tool to protect against an ex-employee using confidential company information and causing the company harm after the employment relationship has terminated.

Consider including our template Employee Secrecy Undertaking and Restraint of Trade agreements in your employment process. 

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.