Restraint of Trade Agreements: A Tale as Old as Time, Until Covid-19.
Over the years the Courts have issued a plethora of restraint of trade judgments succinctly benchmarking the requirements for the enforceability of a restraint of trade agreement. In general, the Courts take account of whether the employer has an interest that deserves protection, whether such an interest is threatened by the recent departure of the employee, whether such an interest weighs quantitatively and qualitatively against the interest of the employee not to be economically inactive or unproductive, public policy and whether a less restrictive measure could be used to achieve the same purpose of the restraint i.e., reasonableness. All of these factors must be determined as a whole taking into account the particular facts.
This essentially entails an enquiry into the nature of the activity that is prevented, the duration of the restraint, the area of operation of the restraint and a balancing of the interests taken at the time of enforcement and a consideration of the nature, extent and duration of the restraint and factors peculiar to the parties and their respective bargaining powers and interests.
In the recent case of Oomph Out of Home Media (Pty) Limited v Brien and another (2021) JOL 49492 (GJ) the High Court was required to determine the enforceability of a restraint of trade agreement during the unprecedented Covid-19 pandemic.
Mr Rory Brien (“the employee”) was employed by Oomph Out of Home Media (Pty) Limited (“the employer”) during March 2015, which conducts specialised media and advertising solutions in various countries. The employee subsequently became both a director and shareholder of the employer and was subject to both a restraint of trade agreement and a shareholders agreement.
In accordance with the restraint of trade agreement, the employee was, inter alia, prohibited from either joining a competitor of the employer or enticing customers of the employer for a period of eighteen months after the termination of his employment. The shareholders’ agreement in turn placed additional fiduciary obligations on the employee and expressly prohibited the disclosure of the employer’s confidential information and trade secrets.
During February 2020 the employee resigned as an employee and director of the employer, allegedly as a direct result of a breakdown of his relationship with one of the directors of the employer. Furthermore, the employee was also aggrieved by the fact that he had not been paid his full salary and was consequently owed an amount of some R1.2 million by the employer. The employee however remained a shareholder of the employer.
Subsequent to his resignation the employee joined Provantage (Pty) Limited, a direct competitor of the employer. This was despite a further written undertaking by the employee not to engage in conduct that may be harmful to the business of the employer. It also appears that the employee thereafter contacted customers of the employer, which allegedly led to the retraction of a proposed joint venture between customers and the employer.
During the hearing of the matter, the employee did not seek to deny his employment with the employer’s competitor but instead sought to challenge the validity and enforceability of the restraint of trade agreement. In this regard, the employee alleged that the restraint of trade was unreasonable and prevented him from earning a living. The employee also alleged that the employer failed to act consistently in the enforcement of restraint of trade agreements.
The High Court, in determining the enforceability of the restraint of trade agreement, found that the employee was both aware of the employer’s confidential client information and acted in breach of the restraint of trade agreement.
In determining the reasonableness of the restraint the Court made reference to the seminal case of Magna Alloys and Research SA (Pty) Ltd v Ellis 1984 4 SA 874 (A). In this regard, the Court placed great emphasis on the circumstances prevailing at the time when the employer sought to enforce the restraint of trade and particularly in the context of the Covid-19 pandemic.
In summary, the Court, without mention of the proprietary interest of the employer, found that in view of the devastating effect of Covid-19 on the economy which has led to the closure of businesses and retrenchments, it would be unreasonable and contrary to public policy to enforce the restraint of trade agreement. In this regard, the Court held, inter alia, as follows:-
“… For him to be forced out of a career of choice to start working in a different field at a time when many businesses are closing down, retrenchments and lay-offs being commonplace and individual doing everything possible to survive and cope with the health and economic devasting effects of the covid 19 pandemic, is plainly unreasonable and contrary to public policy and constitutional values”.
The Court furthermore awarded costs against the employer for “its lack of sight and reasonableness”.
This judgment has an adverse effect on an employer’s right to protect both its proprietary interest and confidential information during the Covid-19 pandemic and negates the very purpose of a restraint of trade agreement. The enforceability of a restraint of trade agreement entails a value judgment being exercised in order to conclude whether or not the restraint could be enforced and accordingly all factors must be considered. The Covid-19 pandemic is no exception to this and ought not to have been a determinative factor, to the exclusion of the employer’s rights.
This judgment is deeply concerning and could lead to the exploitation of proprietary interest and information, confidential information, trade secrets, client connections and goodwill by opportunistic competitors.