Mustek Ltd v Van Westhuizen and Another (J2262/14) [2014] ZALCJHB 410 (13 October 2014)

REPUBLIC

OF SOUTH AFRICA

THE LABOUR COURT OF SOUTH AFRICA, JOHANNESBURG

NOT REPORTABLE

CASE NO J 2262/14

In the matter between:

MUSTEK

LTD

APPLICANT

and

KUHN

VAN WESTHUIZEN

1ST RESPONDENT

AXIZ (PTY) LTD T/A

AXIZWORKGROUP

2ND RESPONDENT

Application heard: 7 October 2014

Judgment delivered: 13 October 2014

JUDGMENT

VAN

NIEKERK J

Introduction

[1] This is an urgent application in which the applicant seeks to enforce a restraint agreement entered into between the applicant and the first respondent on 6 March 2014. The applicant seeks, in broad terms, to interdict and restrain the first respondent until 1 September 2015 and anywhere in the Republic of South Africa from being engaged in any entity that is in competition with the business of the applicant and from utilising (whether for his own benefit or that of a third party), and disclosing any of the applicant’s intellectual property, trade secrets or confidential information.

[2] The first respondent does not dispute that he entered into the restraint agreement. He opposes the application primarily on the basis that the second respondent, by whom he is currently employed, does not carry on business in competition with the applicant, and that on the basis of a quantitative and qualitative assessment of the respective interests of the parties, the restraint ought not to be enforced.

Factual background

[3] The applicant’s business entails the assembly, sale, marketing, support and distribution of computer hardware and peripheral and related products and services throughout South Africa. The applicant supplies products to retail dealers, large corporate entities and directly to other entities, including local authorities, and provides related services.

[4] The first respondent was appointed as the branch manager of the applicant's Free State and Northern Cape division on 17 March 2014. On 4 August 2014 the first respondent resigned. He left his employment on 18 August, having advised the applicant that he intended to become employed by the second respondent. Since 1 September 2014 the first applicant has been employed by the second

respondent as its regional manager for the Free State. The applicant contends that the second respondent competes with the applicant in the sales, marketing, support and distribution of computer products and services in South Africa. The second respondent does not have a branch office in the Free State and has never had a physical presence in the region in the form of a branch or regional office. It is not disputed that the first respondent is in the process of establishing a branch in Bloemfontein, and that in the interim, he is dealing with the second respondent’s clients in the Free State, Northern Cape and Lesotho.

[5] When the first respondent was employed in the position of branch manager at the applicant's Free State division he was required to sign agreements of employment and restraint of trade. In terms of the relevant clauses of the restraint agreement, the first respondent agreed amongst other things that during any of the months of the restraint period he would not be interested or engaged, directly or indirectly, in any capacity (including but not limited to adviser, agent, consultant, director, employee, financier, manager, member of a close corporation, member of a voluntary association, partner, proprietor, shareholder or trustee) in any entity directly or indirectly engaged or interested in any competitive activity in the prescribed areas. The first respondent also undertook that he would not in any part of the prescribed areas and for reward or not solicit and accept orders from prescribed customers for the prescribed goods and services, or canvas business in respect of the prescribed goods, or sell or otherwise supply any prescribed goods to any prescribed customers, or render any prescribed services to any prescribed customer or purchase any prescribed goods from any prescribed supplier or accept the rendering of any prescribed services from it, and/or solicit or accept appointment as a distributor, licensee, agent or representative of any prescribed supplier in respect of any prescribed goods or prescribed services.

[6] The restraint period was defined in the agreement as meaning a period of 12 months calculated from the termination date which was defined as the date on which the first respondent's employment by the applicant is terminated for any reason. The prescribed period was defined to mean each magisterial district in the Republic of South Africa and each other country and province and district in which the applicant conducts business. The definition of ‘business’ in the restraint agreement assumes some significance in these proceedings – it is defined to mean ‘the business of marketing and distributing computer and related products and peripherals and other such business as may be conducted from time to time’. ‘Competitive activity’ is defined to mean any activity which is the same or substantially similar to the business of the applicant.

[7] The applicant contends that during the period of his employment the first respondent acquired knowledge of trade secrets and other confidential information pertaining to the applicant business and that in particular, he acquired intimate knowledge of the entire Free State operations of the applicant including its methodologies, pricing structures, rebate structures, logistical arrangements,

capabilities, stock holdings, management tools, salary and commission structures of employees, and the like. The applicant contends further that the first respondent also acquired intimate knowledge of the specific products, consumables, service and general requirements of the applicant's customers as well as their buying, stock and sales patterns and trends, in addition to the commercial terms on which the applicant does business with particular customers.

Applicable principles

[8] There is no dispute as to the applicable principles. It is well-established that an agreement in restraint of trade is enforceable unless it is unreasonable, and will generally be considered unreasonable, and thus contrary to public policy, if it does not protect some legally recognisable interest of the party in whose favour the restraint is granted but merely seeks to eliminate competition (see Automotive Tooling Systems (Pty) Ltd v Wilkens & others 2007 (2) SA 271 (SCA), Reddy v Siemens Telecommunications (Pty) Ltd 2007 (2) SA 406 (SCA), Den Braven v Pillay & another 2008 (6) SA 229 (D)).

[9] A party seeking to enforce a contract in restraint of trade is required only to invoke the restraint and to prove a breach of its terms. Once a restraint agreement has been invoked and a breach of the agreement proved, the onus is on the respondent to prove on a balance of probabilities that the restraint agreement is unenforceable because it is unreasonable (see Magna Alloys and Research SA (Pty) Ltd v Ellis [1984] ZASCA 116; 1984 (4) SA 874 (A)).

[10] In Basson v Chilwan 1993 (2) SA 742 (A), the court held the determination of the reasonableness or otherwise of a restraint requires, in addition to the existence of an interest deserving of protection, a consideration of the following:

(a) whether that interest is being prejudiced by the other party;

(b) if so, whether the interest weighs up qualitatively and quantitatively against the interest of the latter party that he or she should not be economically inactive and unproductive; and

(c) whether there are any considerations founded in public policy which require that the restraint should either be maintained or rejected (at 767 G-H).

[11] In Reddy (supra) the Court held that in deciding whether or not to enforce a restraint of trade, the following must be considered:

A court must make a value judgment with two principal policy considerations in mind in determining the reasonableness of a restraint. The first is that the public interest requires that parties should comply with their contractual obligations, a notion expressed by the maxim pacta servanda sunt. The second is that all persons should in the interests of society be productive and be permitted to engage in trade and commerce or the professions. Both considerations reflect not only common-law but also constitutional values. Contractual autonomy is part of freedom informing the constitutional value of dignity, and it is by entering into contracts that an individual takes part in economic life. In this sense freedom to contract is an integral part of the fundamental right referred to in s 22.

In applying these two principal considerations, the particular interests must be examined. A restraint would be unenforceable if it prevents a party after termination of his or her employment from partaking in trade or commerce without a corresponding interest of the other party deserving of protection. Such a restraint is not in the public interest. Moreover, a restraint which is reasonable as between the parties may for some other reason be contrary to the public interest. An agreement in restraint of trade is concluded pursuant to 'law of general application' referred to in s 36(1). What is meant by this expression includes the law in the general sense of the legal system applicable to all which, in this case, consists of the corpus of law generally known as 'the law of contract' and which allows for contractual freedom and the conclusion of agreements pursuant thereto. The four questions identified in Basson comprehend the considerations referred to in s 36(1). A fifth question, implied by question (c), which may be expressly added, viz whether the restraint goes further than necessary to protect the interest, corresponds with s 36(1)(e) requiring a consideration of less restrictive measures to achieve the purpose of the limitation. The value judgment required by Basson necessarily requires determining whether the restraint or limitation is 'reasonable and justifiable in an open and democratic society based on human dignity, equality and freedom'.

[12] Proprietary interests that are legitimately capable of protection by a restraint agreement extend both to confidential matters which are useful for the carrying on of the business and which could be used by a competitor, if disclosed, to gain a relative competitive advantage and to relationships with customers, potential customers, suppliers and others that go to make up what is referred to as the ‘trade connection’ of the business. The second kind of proprietary interest capable of protection is that which comprises confidential matter useful for the carrying on of the business, and which could be used by a competitor, if disclosed, to gain a relative comparative advantage. These are referred to as ‘trade secrets’ (see Sibex Engineering Services (Pty) Ltd v Van Wyk 1991 (2) SA 482 (T)).

[13] Not every contact between an employee and the employer’s customers constitutes or forms the basis of a protectable interest in the form of customer connection. The need of an employer to protect a trade connection arises where the employee has access to customers and is and in a position to build up a particular relationship with the customer. It is sufficient for the applicant to show that the customer contacts exist and that they can be exploited by the former employee. In Rawlins v Caravan Truck (Pty) Ltd [1992] ZASCA 204; 1993 (1) SA 537 (A) at 541 C-D it was said that the need of an employer to protect its trade connections arises where the employee has access to

customers and is in a position to build up a particular relationship with the customers, and could easily induce the customers to follow him or her to a new business. Once that conclusion has been reached and it is demonstrated that the prospective new employer is a competitor of the applicant, the risk of harm to the applicant if its former employee would take up employment becomes apparent.

[14] Whether confidential information is properly the subject of protection is a factual question. In Experian SA (Pty) Ltd v Haynes and Another (2013) 34 ILJ 529 (GSJ) the court said the following regarding the nature of confidential information:

It is trite that the law enjoins confidential information with protection. Whether information constitutes a trade secret is a factual question. For information to be confidential it must be capable of application in the trade or industry, that is, it must be useful and not be public knowledge and property; known only to a restricted number of people or a close circle; and be of economic value to the person seeking to protect it.

[15] In a matter such as the present, where the beneficiary of a restraint seeks to enforce the terms of a restraint in so far as they related to confidential information, the ex-employer does not have to show that the ex-employee has in fact utilised information confidential to it; it is sufficient to show that the ex-employee could do so. Indeed, the very purpose of a restraint agreement is that the applicant does not wish to have to rely on the bona fides or lack of retained. knowledge on the part of the respondent, of the confidential information. In International Executive Communications t/a IRR v Turnley 1996 (3) SA 1043 (W) at 1056, Cloete J (as he then was) said the following:

But where the employee has had access to protectable information confidential to his previous employer and the reasonable possibility exists, objectively speaking, that he might disclose trade secrets to his new employer, then in the same way that ‘in cases based upon identical contracts, against two similarly placed employees, it would be absurd were the decision to differ because in one the employee admitted he had learnt certain secrets whereas in the other he denied it…, so it would (normally) be absurd where the court’s decision to turn on whether an employee who has been exposed to confidential information admitted remembering anything relevant or whether the Court believed his denial that he had.

Analysis

[16] The first issue to be determined is whether the applicant is indeed a competitor of the first respondent. In this regard, the respondent's rely primarily on the submission that the nature of the business conducted by the applicant and second respondent respectively is significantly different and in particular, that the second respondent is a wholesaler of computer hardware, software, consumables and peripherals and not a retailer. In my view, given the terms of the restraint agreement, the concepts of retailers and wholesalers has introduced by the first respondent or irrelevant. What matters for present purposes is in the second respondent is engaged in competitive activity, being activity that is the same as or substantially similar to the business of the applicant. It is not disputed that the applicant, the second respondent and its holding company Pinnacle are all large distributors of personal computers and complimentary ICT products in South Africa. The applicant and Pinnacle are also assemblers of personal computers. The distributors primarily sell their products to what termed resellers. The resellers generally are either retailers who sell the product the reputed end-users, or value added resellers who are IT service and solution providers. The latter provide integrated IT solutions, that includes the products, to their clients. Occasionally, in respect of

large contracts, the distributors contract directly with governments at various levels, parastatals and large corporations. In other instances, the distributors may prefer to conflict between the end-users, especially in larger transactions. The distributors distribute various brands, sometimes competing in respect of the same brands. However, the products that they distribute all the same, regardless of the branding and source.

[17] In the circumstances, and having regard to the wording of the restraint and the definitions of “business’ and ‘competitive activity’ referred to above, the categorisation of the second respondent's business is wholesale and the assertion that the second respondent is not a competitor of the applicant, is a simplistic assessment and having regard to the undisputed facts referred to above, for the purposes of the restraint agreement, the second respondent's business in my view amongst

competitive activity.

[18] The first respondent does not dispute that he signed the restraint agreement, incorporating those clauses which correspond with the relief sought in the notice of motion, nor does he dispute that he resigned from the applicant’s employ to take up employment in a similar position with the second respondent. In view of my finding that the applicant and secon respondents are indeed competitors, it follows that in order for the first respondent to escape enforcement of the restraint, it is incumbent on him to establish that the restraint agreement is unreasonable.

Confidential information and customer connections

[19] The applicant contends that it has a protectable interest both in relation to the risk of disclosure of confidential information, and in respect of the applicant’s customer connections and its confidential information.

[20] I deal first with confidential information. The applicant deals at considerable length in the founding affidavit with the nature and extent of confidential information to which the first respondent has been exposed during the course of his employment. The respondents have made much of the brief period for which the first respondent was employed by the applicant. While this is obviously relevant factor, it is not determinative. The court must necessarily assess the nature of any information to which the first respondent had access and the harm that might be caused to the first respondent should that information be disclosed to a competitor. In particular, the applicant described in some detail its computer system known as “Mustek Studio” or “Studio IS”. The system is accessible to all employees of the applicant, subject to restrictions on the level of access which is determined by the level of employment. Does not dispute that as a branch manager, the first respondent had high-level access to information on the system. The applicant avers that this information included intimate knowledge of the specific product, consumable, service and general requirements of the applicant's customers as well as their annual, coldly, monthly and even weekly buying, stock and sales patterns and trends. the first respondent does not deny that he had access to the system. Easy response to the

applicant's details of the months is general and borders of the vague. It is not disputed that during the course of July 2014 the first respondent accessed a report on turnover and commission that enabled him to see all information for customers of the applicant, including the credit limits, compliments, sales persons responsible, past month turnover, commissions and or transaction details including selling price, product line, invoices and payment terms. In these reports were accessible for the applicant entire business and would not limited to the Free State branch. Further, during the same month, the first respondent accessed the summary of orders report. This report, limited for the first respondent to his branches, shows orders placed by all sales persons for the customers for a chosen period. The report includes customers, invoices, links to gross profit, profit percentage as per transaction by invoice and by credit. This is highly confidential information that is not in the public domain in which could be used to on the applicant and diverted to custom. In addition, the first respondent Ray and what referred to as ‘dashboard indicators’ and that updated continuously the most important information of revenue, gross profit for sales representatives, customers and representatives

involved in transactions, invoices and invoice amount, gross profit and a gross profit percentage as per transaction. It is not disputed that the first respondent could have accessed the studio IS at any time until he left the applicant on 18 August 2040

[21] It cannot be seriously disputed that this information in the hands of the competitors such as the second respondent could be used to undercut the applicant's pricing products and services to customers and to identify profitable accounts, the applicant's preferred suppliers, the most profitable product lines and the most successful employees of the applicant, the applicant's loss leading products services and its marketing and business strategies. The first respondent claims to play down the applicant's concerns by contending that he has not disclosed and is not in a position to disclose any confidential information of the applicant that he has never had the time to require knowledge of the needs, requirements, buying, stock and sales, patterns and trends of the applicant's customers and that he did not download or copy any information or reports from the Studio IS system, this response is wholly insufficient and unconvincing, particularly in the light of the uncontradicted confidence in the founding affidavit in this regard.

[22] I am satisfied that the applicant has demonstrated that the first respondent had access to information of a confidential nature despite the limited term of his employment and that really is a risk of harm to the applicant if the first respondent takes up employment with a competitor such as the second respondent.

[23] Turning next to the issue of customer connection, the applicant relies primarily on the risk of damage to its customer connection, on the basis not only that the first respondent enjoyed good working relationships with the applicant’s customers during the course of his employment, but also on the basis of relationships with customers developed prior to the first respondent employment by the applicant. The first respondent effectively concedes the fact of his influence over the applicant's customers and his ability to influence them. In his answering affidavit, the first respondent says in as many words that none of the applicant's customers were new to him and that he had dealt with them while employed by his previous employers, Welcomp and Tarsus. He states further that the applicant poached many customers from Tarsus which word what he describes as ‘my customers’. It is not disputed that the first respondent was subject to a restraint agreement concluded in favour of his previous employer, but that when he left the employ of Tarsus, the issue of any restraint was resolved by mutual agreement. The terms of the answering affidavit appear to suggest that the first respondent considers that he has a form of personal proprietary interest in the customers to which he refers - what he fails to appreciate is that the customers concerned are customers of his employer and that it is his employer who has a proprietary interest in the end returning the custom. This no doubt is precisely why the applicant sought to restrain the first respondent.

[24] It ought necessary to be borne in mind that they predictable interest in the form of a customer connection is often constituted by relationships and reputation. As Wallis AJ (as he then was) remarked in Den Braven (supra),

[8]… In any business dependent for its profits on the sale of its products, the sales function is of fundamental importance and the salesperson’s ability to damage the business of the employer may be very considerable or even fatal… It must also be borne in mind that what is referred to in the cases is a customer connection is often constituted by intangibles such as the relationship on personal issues between salesperson purchaser; the reputation of the salesperson for dealing with complaints and problems and his or her all-round willingness to ‘go the extra mile in order to secure a sale. ’

[25] In short: the first respondent concedes that he has had access to the applicant's confidential information and there is a potent risk of harm to the applicant should that information be disclosed to a competitor. Further, the applicant has built up a trade connection with its customers in the Free State and Northern Cape, and it is entitled to protect itself against any prejudice to those connections occasion by the first respondent’s activities on behalf of the second respondent.

[26] In so far as the balancing of the parties’ respective interests is concerned, the restraint does not prohibit the first respondent employment in the computer industry – it extends only to competition with the applicant in that industry. The applicant has managerial experience, which can be utilized in circumstances which do not amount to a breach of the restraint. Further, the applicant entered into the restraint voluntarily, and in circumstances where he was appreciative of the nature of the contract that he signed and its consequences. The first respondent had signed a similar agreement with his previous employer, and appreciated the need to negotiate a resolution of the issue when commencing employment with the applicant.

[27] For the above reasons, in my view, the application stands to succeed.

Costs

[28] The identity of the first respondent’s employer assumed some significance in relation to costs. The second respondent filed a notice of intention to oppose and the answering affidavit, though deposed to by the first respondent is filed on his behalf and on behalf of the second respondent. The first respondent avers that his employer is Pinnacle Technology Shared Management Services (Pty) Ltd and that he has been seconded to the second respondent. Although Pinnacle is reflected on the title page of the first respondent’s contract as his employer, clause 1 of the contract states that the first respondent to be employed at AxizWorkgroup. The contract is signed by and on behalf of Axiz (Pty) Ltd, by a duly authorised director. In these circumstances, the second respondent is the employer of the first respondent if not solely, then certainly as a co-employer.

[29] There is no reason why in the present instance, costs should not follow the result. This is not one of those cases where an order for costs would serve to convey to individual employees that the doors of this court may be closed to them on account of any apprehension of an adverse order for costs. Indeed, this court has more often than not in matters brought in terms of s 77 (3) held that ordinarily, costs should follow the result.

For the above reasons, I make the following order:

1. The first respondent is interdicted and restrained until 1 September 2015 and anywhere in the Republic of South Africa from:

a. being interested or engaged, directly or indirectly, in any capacity (including but not limited to adviser, agent, consultant, director, employee, financier, manager, member of a close corporation, member of a voluntary association, partner, proprietor, shareholder, or trustee) in any entity, including the second respondent, that is directly or indirectly engaged in competition with the business of the applicant;

b. soliciting and/or accepting orders from customers of the applicant, and selling or otherwise supplying goods or rendering services to any customers of the applicant; and

c. purchasing goods from suppliers or accepting the rendering of services or soliciting or accepting appointment as a distributor, licensee, agent or representative of any supplier of the applicant.

2. The first respondent is interdicted and restrained, for his own benefit or the benefit of any third party, from utilising or directly or indirectly disclosing or making available or deriving profit from any of the applicant's intellectual property, trade secrets or confidential information.

3. The first and second respondents are to pay the costs of this application, jointly and severally, the one paying the other to be absolved.

ANDRÉ

VAN NIEKERK

JUDGE

OF THE LABOUR COURT

APPEARANCES

For the applicant: Adv. I Miltz SC, instructed by J Sweidan Attorneys

For the first and second respondents: Adv. AL Cook, instructed by MJ Hood & Associates.