restraints are still a valuable tool for employers
1 March 2007

We dealt with restraint of trade agreements as one of the current issues at our 2006 Juta's Labour Law. A recent Supreme Court of Appeal case considers the following important question. Can employers still use restraint of trade agreements to protect confidential information and trade secrets from being leaked to a competitor in the light of our Constitution which guarantees every citizen the right to choose his or her trade, occupation or profession freely? The answer is ''yes''. Judgment was given on 30 November 2006 in the matter of Reddy v Siemens Telecommunications (Pty) Ltd. The effect of the judgment is that a Mr Reddy - a former employee of Siemens, was interdicted from joining Ericsson (a competitor or Siemens) for a period of one year because of the terms of the restraint of trade agreement that he had signed with Siemens.

Reddy had been employed by Siemens as a systems engineer since 1998. He resigned in January 2006 to take up a position with Ericsson from 1 March 2006. However, when he joined Siemens he had signed a restraint agreement in which he agreed not to be employed by a competitor for a period of one year after termination of his employment and not to disclose trade secrets and confidential information belonging to Siemens. Reddy had received extensive training while employed by Siemens including a three week training course in Vienna shortly before his resignation. He had current knowledge of Siemens' processes, methodologies and systems architecture.

However, Reddy argued that he would have no involvement with Siemens' main customers (Vodacom and Cell C) when employed with Ericsson as he was going to work in Kenya servicing Ceitel and Safricom and he would service MTN in South Africa, all of whom were Ericsson and not Siemens customers. Because he would be working on Ericsson products he claimed that his training on Siemens products would be of no use.

Siemens was nevertheless concerned that Reddy would disclose confidential information to Ericsson and sought to enforce its rights under the restraint by interdicting him from being employed by Ericsson. After Siemens was successful in the High Court, Reddy (backed by Ericsson) appealed to the Supreme Court of Appeal (the SCA). The SCA's judgment is the one discussed in this report and is the unanimous decision of all five judges.

In its judgment the SCA said that it was not necessary for Siemens to show that Reddy would use the trade secrets and confidential information in his new employment - it was enough to show that he could do so. It confirmed that the law in South Africa on restraint of trade agreements has, since an important 1984 case, been that such agreements are valid and enforceable unless they are unreasonable and thus contrary to public policy. This has meant that anyone who challenges the enforceability of such an agreement bears the onus of proving that it is unreasonable. But all agreements - including restraints - are subject to constitutional rights and courts thus have to consider fundamental constitutional values when applying and developing our law. The critical issue was therefore whether the law regarding restraints should change in the light of the fact that we now have a constitution and a Bill of Rights. Reddy argued that it was in conflict with his fundamental right to choose his trade, occupation or profession freely to give him the onus of proving that the restraint was unreasonable. Rather, he argued, Siemens should be required to show that the restraint was reasonable before it was enforced.

The SCA confirmed that rights may be limited because of the existence of other rights - the respective interests of the parties must be balanced. In this case there were two policy considerations that had to be taken into account. First was the public interest that parties should comply with their contractual obligations. Second was that all people should in the interests of society be productive and be permitted to engage in trade, commerce or professions. A restraint of trade agreement would be unenforceable if it prevented someone from partaking in trade or commerce without there being a corresponding interest on the part of the former employer deserving of protection. In this case the court was satisfied that Reddy had confidential information and that there was a risk of disclosure to a competitor. His loyalty would be to his new employer and the opportunity to disclose such information, whether deliberately or not, would exist. This was exactly the risk that the restraint in favour of Siemens was designed to protect. Siemens should not have to rely on Reddy's good faith not to make disclosures of confidential information to Ericsson. It should be entitled to rely on the agreement that it had secured for the very purpose of protecting its position. Therefore the restraint was neither unreasonable nor contrary to public policy and should be enforced. "Public policy requires contracts to be enforced. This is consistent with the constitutional values of dignity and autonomy" said the court. Reddy's appeal was therefore dismissed with costs.

Although Reddy applied to the Constitutional Court for leave to have the matter heard by it, the Constitutional Court has recently refused the petition. This means that the SCA decision stands. Restraint of trade agreements remain valid and enforceable and it is up to employees who want to get out of them to prove that they are unreasonable - good news for employers

www.jutalaw.co.za, NewsLetter FEB/MAR 2007