A simple yet fatal restraint of trade pitfall for employers

13 May 2024

Restraint of trade agreements safeguard businesses by legally preventing employees from joining competitors, thus protecting businesses’ proprietary information and maintaining their competitive advantage.

In an urgent application seeking to enforce a restraint of trade agreement, recently before the Labour Court of South Africa, Johannesburg, an insurance brokerage firm made the fatal error of failing to present sufficient evidence that a former employee of the firm had joined a competitor.

Generally, if an application to enforce a restraint of trade fails, it is due to the agreement being unreasonable – such as having overly broad geographical limits or an excessive duration—or the employee not being privy to the employer’s inner workings. Rarely is it due to a failure to prove that an employee has joined a competitor.

The applicant provides short-term motor vehicle insurance products through relationships with motor vehicle dealerships. The first respondent, whose new employer was the second respondent, was employed by the applicant for nearly five years, during which he gained exposure to the applicant’s inner workings, representing a significant risk to the applicant’s business, relationships, and revenue.

The applicant averred that the second respondent, another insurance brokerage, was its rival. However, the respondents claimed that the applicant had not clearly demonstrated how and where the second respondent competes with them. They did not detail the products that were sold, the sales methods used, or the list of motor dealerships both were vying for referrals from.

The judge found that there is no evidence that the second respondent works with or has agreements with motor dealerships. To compound the issue, the applicant failed to provide lists of dealerships with which it works or has agreements. As a result, the court was unaware of where the second respondent operates, what products it sells, how it sells them, and who its clients are. Consequently, the applicant failed to establish that the first respondent breached the restraint of trade agreement, and the application was dismissed.

This case serves as a timely reminder to employers: before trying to enforce a restraint of trade agreement, they must prove their former employee is actually working for a competitor. Without such evidence, their case is likely to fall flat.

Article sourced from Adams & Adams.

See also:

• Restraint of trade agreements and business transfers
• The consequences of an inadequate restraint of trade
• Close but no cigar – The importance of restraint of trade clauses
• Sharing is not caring – It’s in your NDA

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)