IS MY RESTRAINT OF TRADE ENFORCEABLE?

IS MY RESTRAINT OF TRADE ENFORCEABLE?

Published 30 October 2018

As a business owner, one of your many concerns will be ensuring that your proprietary interests are protected. This is especially a concern where it comes to employees who have access to very important proprietary interests, including, among others, trade secrets / confidential information of the business, details of and relationships with customers and suppliers, and who can use such access and information to damage the goodwill of the business. For this reason, and to protect their business’ proprietary interests, many employers enter into restraint of trade agreements with their employees (or include such provisions in their employment agreements). In this blog we briefly examine how the law views restraints of trade and how to ensure that your restraint of trade is reasonable and enforceable.

A restraint of trade is an agreement that limits, usually for the duration of an employee’s employment with the specific employer, and for a set period thereafter, the business activities that such employee may be involved in. It may also be entered where a business is purchased, and the new owner wants to protect the proprietary interests of the business as against the previous owner. It is important to note that there is no automatic right to a restraint of trade and that a restraint will only exist where the parties agree to it – it is a contractual right.

The starting point in assessing any restraint of trade is that, while it results in a clash in the principles of sanctity of contract and the constitutional right to choose a trade, occupation and profession, the courts will presume it to be valid and enforceable. Any person alleging that a restraint is not enforceable must show that it is unreasonable and therefore contrary to the public interest, at the time that the restraint is sought to be enforced.

In determining whether a restraint is in fact unreasonable, the courts will look at reasonableness as between the parties, and reasonableness in terms of the broad interests of the community.

In terms of the conflicting interests of the parties, the court must balance the employer’s interest in protecting his proprietary information against the employee’s right to be economically active. In determining this, the court will firstly consider whether the interest sought to be protected is actually protectable and, if so, it will then consider the duration of the restraint, the geographical area within which the restraint will operate and whether the restrained party is still able to earn a living (among other things). There are no specific thresholds as regards each of the above factors, and each case is rather determined according to its own circumstances.

To ensure that your restraint is enforceable and that your proprietary interests are sufficiently protected, the following must be considered / included:

  • the proprietary interest sought to be protected must be set out clearly and it must be made clear that such interests belong to the party in whose favour the restraint is granted;
  • it must be clear that the purpose of the restraint is to protect a proprietary interest and not to, for example, restrict competition or spite an employee for leaving;
  • the duration of the restraint must be specified and must be reasonable in the circumstances; and
  • the geographical area within which the restraint will operate must be specified and must be reasonable, having regard to the operations of the business.

The above factors must always be considered in the context of the market, the position of the restrained party and his access to proprietary information. Further to this, the restraint must be carefully drafted, such that the intention of the restraint is very clear.

Where the above factors are considered and applied, the presumption that a restraint is valid and enforceable is likely to be upheld, and the business’ interests protected. It is therefore best to always seek appropriate legal advice before preparing or entering a restraint of trade agreement.

THE BOUNDARIES OF PRIVACY IN THE WORKPLACE

THE BOUNDARIES OF PRIVACY IN THE WORKPLACE

The Constitution of South Africa, 1996, enshrines the right to privacy for every individual. The right has been regarded as an extension of every person’s right to dignity and should also be respected in the workplace. However, like every other right in the Bill of Rights, it is subject to justifiable limitations. This article briefly explores the boundaries of the right to privacy in the workplace, in regard to certain specific areas that are most relevant.

Personal information provided to the employer

Employers may, through the normal working relationship, obtain personal information on their employees including, for example, salary and banking information, performance reviews or information on physical or mental health. The use of all such ‘personal information’ will also be subject to the Protection of Personal Information Act 4 of 2013 (“POPI“) (once effective) and must be appropriately dealt with by the employer. The employee may therefore expect such personal information to be protected within the bounds of POPI (and the Constitution).

Electronic communications and system use

The use of workplace email domains and other information systems resources provided by the employer are central to the day to day activities of many employees. The question arises as to the extent to which the use of such systems may be intercepted or monitored by the employer.

In terms of the Regulation of Interception of Communications and Provision of Communication-Related Information Act 70 of 2002 (“RICA“) – which also applies to the use of workplace email / communications systems – any electronic communication, which includes email, may only be intercepted:

  • by anyone who is a party to the communication;
  • by a third party where they have the prior written consent of at least one of the parties to the communication, or
  • by an employer, where the communication relates to, or occurs in the course of the carrying on of such employer’s business

Therefore, your employer may monitor / intercept your electronic communications, without infringing your right to privacy, where you have provided your written consent for this (for example, in your employment contract or by written agreement to your company’s relevant policy document). In other circumstances, the employer will need a justifiable business reason to intercept the emails / communications – this will require a consideration of the circumstances in any particular case.

The extent to which an employer may intercept communications on a personal device used by the employee, where such communication may affect the business, is not settled.

The use of security cameras / CCTV in the workplace

A number of businesses employ the use of security cameras to ensure the protection of their property or even to, for example, encourage good employee work ethic.

Where such cameras are installed in a ‘public’ work area – an area where it may be expected that your actions could be viewed by others – this is acceptable, however, an employer may not install security cameras in a place where total privacy is expected (for example, a bathroom) without consent.

In any event, and having regard to the trust element that is integral to an employer / employee relationship, employers should notify employees of any security cameras that have / will be installed and the purpose or intended use of the footage retrieved from such cameras.

Conclusion

Given the importance of the right to privacy and the sometimes unclear limitations that can be placed on this right in the workplace, such limitations are best regulated by a formal workplace policy so that all parties are aware of and agree to all reasonable limitations.

WHEN A TRANSACTION MUST BE NOTIFIED TO THE COMPETITION COMMISSION FOR APPROVAL AS A MERGER

WHEN A TRANSACTION MUST BE NOTIFIED TO THE COMPETITION COMMISSION FOR APPROVAL AS A MERGER

The competition authorities have been established in terms of the Competition Act 89 of 1998 (as amended) (the “Competition Act“) to promote and maintain competition in South Africa. This includes the role of assessing proposed mergers for the effects that such mergers may have on competition in any relevant markets. In addition, the competition authorities have been assigned a role in assessing the effect that a particular merger may have on relevant public interest considerations.

Notifiable mergers

All significant mergers must therefore be notified to and assessed by the authorities before they may be implemented. However, the responsibility for ensuring that the competition authorities are aware of all mergers that must be assessed lies with the parties to the merger themselves and a failure to notify the authorities of a notifiable merger may result in the parties being levied with a fine equalling up to 10% of annual turnover of the merging parties and other remedies that may be imposed include retrospective unbundling of a merger transaction.  There are of course other consequences, such as reputational damage that may also have a massive economic impact on the parties involved. It is therefore imperative that the notifiability of a merger to the competition authorities is considered in respect of all transactions and that all notifiable mergers are in fact notified to the competition authorities in the appropriate form.

A transaction constitutes a notifiable merger when all of the below criteria are met:

  • the transaction falls within the jurisdiction of the competition authorities;
  • the transaction meets the definition of a merger as defined in the Competition Act; and
  • the transaction meets the financial thresholds as prescribed by the Minister of Economic Development from time to time.

Jurisdiction

The Competition Act applies (subject to certain exceptions) to all activity within, or having an effect within South Africa. This requirement will be met in respect not only of a transaction that occurs between South African entities, but in any case, where the transaction will have any effect in South Africa.

“Merger” definition

The Competition Act defines a merger as occurring where “one or more firms directly or indirectly acquire or establish direct or indirect control over the whole or part of the business of another firm“.

In this regard, we note that the concept of “control” is broad for purposes of establishing a merger and does not only extend to cases of over 50% shareholding / voting rights / the right to appoint or veto the appointment of over 50% of the directors of an entity but extends to minority rights that grant a party the right to materially influence the policy of a firm in a manner comparable to a person who exercises majority control (this may include, for example, a minority right to veto material strategic decisions).

It is therefore not always a straightforward matter to determine whether control is established and it is best to seek legal advice in this regard. We note, for example, that in 2016 the Competition Tribunal found that a merger had occurred between Life Healthcare Group (“Life Healthcare“) and Joint Medical Holdings (“JMH“) where, despite Life Healthcare’s minority stake of 49% in JMH, it was found to have, in practice, exercised strategic influence over JMH. The parties were fined a penalty of R10 million for failing to notify this merger.

It is also worth noting that the definition of a merger refers to the acquisition of the whole or part of a business. A merger does therefore not only occur where there is a sale of business as a going concern / a sale of shares, but may also occur where, for example, an asset constituting a part of a business is sold. A merger may also occur where a joint venture is formed.

Financial thresholds

The final criteria that must be met is that a merger must meet the relevant financial thresholds. Mergers are categorised into small, intermediate and large mergers – all intermediate and large mergers must be notified to the competition authorities. The current merger thresholds for an intermediate merger are that the combined assets / turnover of the merging parties must meet or exceed R600 million and the assets / turnover of the target firm must meet or exceed R100 million. The current thresholds for a large merger are that the combined assets / turnover of the merging parties must meet or exceed R6.6 billion and the assets / turnover of the target firm must meet or exceed R190 million. Where the thresholds for either an intermediate or large merger are met, the merger meets the financial threshold criterion.

Conclusion

Any transaction that meets all three of the above criteria must be notified to the competition authorities. As discussed above, whether a merger is notifiable is not always straightforward and it is best to seek expert legal advice in this regard.

COMPETITION COMISSION INVITES COMMENTS ON DRAFT GUIDELINES FOR INFORMATION EXCHANGE BETWEEN COMPETITORS

COMPETITION COMISSION INVITES COMMENTS ON DRAFT GUIDELINES FOR INFORMATION EXCHANGE BETWEEN COMPETITORS

The exchange of information between competitors treads a thin line between enhancing efficiencies and potentially causing harm to competition. While the potential benefits of an information exchange system include the improvement of investment decisions, improved product positioning, lower research costs, benchmarking best practices and a more precise knowledge of market demand, such systems could also facilitate collusive / co-ordinated behaviour among competitors, to the detriment of consumers.

Recognising the difficulty in determining which side of the line an exchange of information falls, the Competition Commission (the “Commission“) intends to set out, based on its experience and international best practice, the general approach that it will follow in determining whether an exchange of information contravenes the Competition Act 89 of 1998 (the “Competition Act“).

The Commission has published and called for written comment on its Draft Guidelines on the Exchange of Information between Competitors (the “Draft Guidelines“) from any interested person. We set out the basic principles as set out in the Draft Guidelines below.

Legal basis for assessing information exchanges

Section 4 of the Competition Act regulates practices amongst competitors, with competitors including all firms that are in the same line of business (whether these firms actually or may only potentially compete with one another).

The section prohibits any agreements (including contracts, arrangements or understandings, whether legally enforceable or not) between competitors:

  • that have the effect of substantially preventing, or lessening, competition in any market (without sufficient technological, efficiency or other pro-competitive justifications); or

 

  • that involve cartel practices, including price-fixing, market allocation or bid rigging (which automatically fall foul of the Competition Act and for which no justifications may be advanced).

Where an exchange of information has the effect of substantially preventing or lessening competition in any market (without sufficient pro-competitive justifications for such exchange), or where it facilitates price-fixing, market allocation or bid rigging, such an information exchange system will therefore contravene the Competition Act.

General principles of assessment

Importantly, the guidelines only concern the exchange of information between competitors. Also, information in this context refers to “commercially sensitive information”, being trade, business or industrial information which has a particular economic value to a firm and its business strategy and is generally not available or known by others.

Information exchange systems between competitors are evaluated on the following general bases (among others).

  • The nature of the information sought to be exchanged: considerations will include whether the information is based on past, current or future conduct or outcomes, the level of aggregation of information, the frequency of sharing and the age of information;
  • The purpose for which the information is being exchanged; and
  • The market characteristics and dynamics: considerations include whether products are homogenous, the level of concentration in the market, the transparency of information in the market, the symmetry and stability of the market shares of competing firms and barriers to entry.

It is important to note that the Guidelines are just that – they are not binding on the competition authorities and will not be applied mechanically – there is no set formula / combination of the above factors that will ensure that an information exchange system is compliant with competition law and assessment will be multi-factorial and on a case-by-case basis.

Forums for information exchange

The Commission also set out an (open) list of platforms over which information exchange may occur and practical considerations and platform-specific guidelines to ensure competition law compliant exchanges over such platforms.

These platforms include, among others, trade / industry associations and regulators / policy makers, public announcements (which may constitute market signalling), joint ventures, cross-directorships / shareholdings, market studies and benchmarking and cartels.

Information exchange and your business

Whatever the final guidelines, given the inherent difficulties in determining whether an information exchange system between competitors will fall foul of the Competition Act, and the significant penalties and reputational harm that such conduct (even if unintentional) may incur, obtaining legal advice before embarking on any such practice may prove invaluable to your business.

The full draft guidelines can be found here.

Please note that the closing date for the submission of comments is 14 September 2017.

The dos and don’ts of recording conversations

The dos and don’ts of recording conversations

There are several reasons why a business may want to record its interactions / conversations with customers: improving customer service; ensuring that employees always treat customers in the best possible way; ensuring easy customer follow-up and resolution of disputes; demonstrating accountability to customers; and aiding reliable note-taking.

Several businesses may not, however, realise these benefits as they are unsure of the legality and legal parameters of recording conversations. To clear up grey areas and enable you to grow and improve your business using all tools available, we have set out the basics of recording conversations in South Africa.

Am I (or is my business) allowed to record conversations with customers?

While, in terms of the Regulation of Interception of Communications and Provision of Communication-Related Information Act 70 of 2002 (“RICA“), the general rule is that no person may record a conversation without consent, the Act does set out certain exceptions to this rule. The exceptions include (and you can therefore record a conversation) where:

  • you are a party to the conversation (“single-party consent”);
  • you have the prior written consent of at least one of the parties to the conversation; or
  • the conversation relates to, or occurs in the course of, the carrying on of your business (“the business exception”).

It is important to note that the business exception is subject to further requirements in terms of RICA.

As a side note, certain businesses (specifically those in the financial services and intermediary industry) are legally required to record certain conversations with customers and to maintain such recordings for a statutory minimum period. This is however beyond the scope of this article.

Consent to record

As stated above, consent of at least one party to the communication is required when recording a conversation. This rule does not apply where the recorder is also a party to the conversation.

However, where a third party is recording the conversation, the third party must obtain informed consent from one of the parties to the conversation in order to legally record the conversation.

Guidelines for recording conversations

  • When recording conversations under the business exception, it is required that you make all reasonable efforts, in advance, to inform all parties that you will be recording conversations. It is good business practice to ensure and be certain that all customers are aware when conversations are recorded.
  • Use reliable technology to record and store recordings of conversations – you want to make sure that your customers’ (and your business’s) information is protected! In this regard, ensure that any recordings and storage thereof comply with all relevant laws (including, for example, the Protection of Personal Information Act 4 of 2013)
  • Maintain an effective storage system so that you can make the most use of your recorded conversations in developing your business

The article is serves only as a basic introduction to the topic of recording conversations and legal advice should be sought in relation to specific circumstances.