INTRODUCTION

In the competitive business environment, employers commonly rely on restraint of trade clauses and confidentiality agreements to protect legitimate interests when employment ends. These mechanisms safeguard proprietary information – such as trade secrets, confidential data, and client relationships, and aim to prevent former employees from engaging in unfair competition. They also serve to retain key personnel. Restraints of trade extend beyond employees to include shareholders, partners, directors, and members of close corporations, who may have access to sensitive business information. This article considers the legal enforceability and ethical implications of such provisions under South African law, with reference to the Gauteng High Court’s judgment in Arteflex (Pty) Ltd v Pieters and Another (2023-024313) [2023] ZAGPPHC 224 (11 April 2023) (“Arteflex case”).

BACKGROUND

The Arteflex case involves an urgent application by Arteflex (Pty) Ltd the (“Applicant”) against its former general manager, Mr. Frans Pieters the (“First Respondent”), and IKONIC INTERIORS CC the (“Second Respondent”) to enforce a restraint of trade against the First Respondent who would work with the Applicant’s main client after joining the Second Respondent. The court found the restraint clause too broad and unenforceable but upheld Arteflex’s right to protect confidential information. Pieters was barred from related hair salon projects for six months.

VALIDITY OF RESTRAINT OF TRADE CLAUSES

The Arteflex judgment underscores the nuanced enforcement of restraint of trade clauses in South African law. While such clauses are not inherently invalid, they must be reasonable and align with public policy. The court affirmed that contractual terms are generally upheld as written, but restraints exceeding what is necessary to protect legitimate business interests may be unenforceable. In the Arteflex case in paragraph 22, the court concurred with the Respondents that the restraint of trade clause, while titled as a ‘non-competition agreement’, factually constituted a non-solicitation clause.

The court further held in paragraph 24 that the non-solicitation clause is overly broad, as it restricted contact with all current and potential customers for two years across all business areas, unfairly limiting the employee’s right to work.

Consequently, the initially sought relief based on this clause was not granted. However, the court, in paragraph 19, affirmed that employers may still act against unlawful use of trade secrets or business connections, even without such a clause.

REQUIREMENTS FOR ENFORCEABILITY

Based on South African legal precedent, the enforceability of restraint of trade clauses hinges on their reasonableness, considering factors such as:

1. The scope of the restraint: This includes the activities prohibited, the geographical area, and the duration. The restraint should be no wider than necessary to protect the employer’s legitimate interests. In the Arteflex case, the clause between the two parties was deemed unreasonable due to its broad scope regarding customers and geographical area.
2. The employer’s legitimate interests: These typically include trade secrets, confidential information, and customer connections. The restraint must be aimed at protecting these specific interests.
3. The employee’s ability to earn a living: The restraint should not unduly restrict the retrained person’s ability to find alternative employment.
4. Public policy: The restraint must not be contrary to the public interest, which includes promoting competition and allowing individuals to exercise their skills and earn a livelihood.

The court held in paragraph 24 of the Arteflex case that even if an employer seeks partial enforcement of a restraint, the clause must first withstand constitutional muster before it can be considered enforceable in any form.

CONFIDENTIALITY

Beyond restraint of trade, employers also rely on the implied duty in employment contracts that prohibits employees from using or disclosing confidential information for personal gain or to the employer’s detriment, even after leaving. This duty is often reinforced by explicit confidentiality clauses. In the Arteflex case, the court upheld the importance of protecting such information, including client data, business strategies, pricing, and other commercially sensitive details, and barred employees from exploiting relationships formed during employment. In addition to restraint of trade clauses, employers often rely on the implied term of every employment contract that an employee will not use or divulge confidential information acquired during their employment for their own benefit or to the detriment of the employer, even after the employee leaves. This is may be reinforced by explicit confidentiality clauses in employment agreements.

The Arteflex case addressed a confidentiality clause preventing misuse of sensitive information and client relationships during and after employment, emphasizing protection of commercially sensitive data.

The court found in paragraph 26 of the Arteflex case that the First Respondent’s specialised knowledge of salon construction constitutes confidential information capable of protection and granted a six-month interdict against The First Respondent based on both his fiduciary duty and a confidentiality clause. The court’s position indicates that a former employee’s common law fiduciary duty does not necessarily end upon termination of employment, particularly concerning actions that constitute unlawful competition using information and connections gained during employment. This reinforces the idea that duties related to confidential information and connections can persist post-employment.

CONSIDERATIONS TO ENFORCE RESTRAINTS OF TRADE AND CONFIDENTIALITY

The enforceability of both restraint of trade and confidentiality agreements carries significant ethical considerations. Some of the ethical considerations include:

1. Fairness to the employee
   There is an ethical imperative to ensure that restraint of trade clauses are not overly oppressive and do not unfairly prevent former employees from using their skills and experience to earn a living. The principle of reasonableness aims to balance the employer’s need for protection with the employee’s right to work.
2. Protection of legitimate business interests
   Employers have an ethical right to protect their genuine proprietary interests, such as trade secrets and established customer relationships, which have been developed through investment and effort.
3. Honouring contractual obligations
   Employees who have willingly concluded employment contracts containing restraint and confidentiality clauses have an ethical obligation to honour those agreements, provided they are legally sound and ethically reasonable.
4. Unfair competition
   The misuse of an employer’s confidential information to gain an unfair competitive advantage is ethically questionable and legally actionable.

CONCLUSION

In South Africa, restraint of trade and confidentiality clauses are enforceable if they protect legitimate business interests, but they must be reasonable and not conflict with public policy. Courts closely examine these clauses to ensure they strike a fair balance between employer and employee rights, guided by ethical considerations.