Preventing Indirect solicitation: An Employer’s protection through a restraint of trade

Introduction

Upon termination of the employment relationship, employers run the risk of having their business interests, which have been shared with employees during the course of employment, exploited for personal gain. To mitigate this risk, an employer can include a restraint of trade clause into the employment contract or conclude a restraint of trade agreement, restricting an employee from entering into employment with a competitor of the employer, or establishing a business in competition with the employer, for a specified period in a specified geographical area.

A restraint enables an employer to protect the proprietary information of its business, such as trade secrets, confidential information, trade connections, customers and clients, as well as the goodwill of the business.

A restraint of trade is commonly interpreted to prohibit the employee from committing acts which would be in breach of the restraint, however, the restraint does not only enforce an omission on the part of the employee. The recent judgment in Adviceworx (Pty) and Another v Roux and Others [2024] (LC) highlights a former employees’ obligation to take an active approach in ensuring that they are not in breach of the restraint.

Facts of the case

The applicant approached the Labour Court to interdict the respondents from breaching the restraint agreement concluded between the parties. The first to tenth respondents had left the employ of the applicant and had all become employed by direct competitors of the applicants. The applicants claimed that, as former employees, the respondents used their access to confidential information, to gain access to its client data base. Consequently, various clients of the applicant terminated their mandates with the company to acquire the services of the respondents.

As a Financial Services Provider, the applicant had spent 10 years building its business, which depends profoundly on its client base. Due to the nature of the financial services sector, the applicant relies heavily on the restraint agreement to ensure that its business is not compromised by competitors. Through the exodus of the respondents, the applicants were at risk of suffering grave financial loss as the former employees sought employment with a direct competitor.

Court Ruling

Interestingly, the respondents argued that they did not solicit the clients, but it was the clients who of their own accord and for their own reasons decided to follow them. Acting Judge Snyman held that this argument is untenable, and if ascribed to, would render most restraints of trade, completely valueless. A restraint has the effect of preventing outgoing employees from directly competing against the employer by restraining the employee from inter alia, engaging in certain work, competing in a certain area and period, and soliciting clients. Solicitation of clients in a restraint agreement is not limited to the employee refraining from taking clients from the employer’s practice, but includes indirect solicitation.

In casu, Acting Judge Snyman held:

“Simply described, all that an employee would have to do to defeat a restraint is to say it was not me, but it was the client, and it will be virtually impossible to prove the contrary, especially considering that the client obviously would support the employee. In fact, this kind of situation is still regarded as client solicitation, in the form of ‘indirect solicitation.’”

It was held that in order to not to breach the restraint, the respondents could not make contact with any of the applicant’s clients and had a reciprocal duty to turn any client who approaches them away, and inform those clients that they cannot be assisted because of the restraint of trade.

This case effectively highlights the fact that a restraint not only prevents the action of the employee but also the benefit which the employee stands to gain.

Consequently, the court granted the interdict and upheld the restraint of trade. The respondents were ordered to pay the applicants’ costs, jointly and severally, including the costs of two counsel.

Conclusion

In summary, this case dispels the misconception that restraints of trade do not extend to passively accepting former clients. Naturally, this will depend on the restraint itself, and each case will be continued to be judged on its merits but this precedent-setting case constitutes a massive departure from how restraints have been judged in the past.