About SAFLII
Databases
Search
Terms of Use
RSS Feeds
South Africa: Johannesburg Labour Court, Johannesburg
SAFLII
>>
Databases
>>
South Africa: Johannesburg Labour Court, Johannesburg
>>
2015
>>
[2015] ZALCJHB 405
|
|
Festo (Pty) Ltd v Wesley and Others (J2126/15) [2015] ZALCJHB 405 (20 November 2015)
THE
LABOUR COURT OF SOUTH AFRICA, JOHANNESBURG
JUDGMENT
Not Reportable
case
no: J2126/15
In the matter between:
FESTO (PTY) LTD
Applicant
and
ALLAN,
WESLEY
First Respondent
SINGH, SHIVEN
Second Respondent
SMC PNEUMATICS (SOUTH AFRICA) (PTY)
LTD
Third Respondent
Heard
:
12
November 2015
Delivered
:
20 November 2015
JUDGMENT
RABKIN-NAICKER
J
[1] The applicant company (Festo)
seeks a final interdict to enforce restraint of trade undertakings
against its former employees,
the first and second respondents, who
were both employed by it as sales engineers.
[2] In particular, the applicant seeks
to restrain the first and second respondents from:
2.1. Soliciting, encouraging or
procuring any employee of the applicant, within South Africa, to
terminate his/her employment
with the applicant;
2.2. Dealing with, soliciting,
interfering with or endeavouring to solicit away from the applicant,
within the Gauteng region
in the case of the first respondent and
within the KwaZulu-Natal region in the case of the second respondent,
any person, firm
or company who or which was at date of termination
of his employment, a client of the applicant or potential client of
the applicant;
2.3. Taking up employment,
within the Gauteng region and KwaZulu-Natal region respectively, with
any competitors who offer
a pneumatic range of automation components,
including, but not restricted to the following suppliers of electric
drivers and motors:
the third respondent, Siemens, Tectra (Bosch),
Leze, Delta, Allen Bradley;
2.4. Directly or
indirectly divulging and/or disclosing to the third respondent or any
third party, whether natural
or juristic, or in any way using and/or
exploiting any of the applicant’s confidential information,
trade secrets, know-
how or customer connections, whether orally, in
writing or otherwise, concerning or relating to the applicants, its
business or
its clients.”
[3]
It was submitted by Mr Malan on the basis of the founding papers that
the results of Festo’s investment of significant
time, effort
and financial resources in designing, manufacturing and developing
its products and service offerings has been shared
with its employees
on a regular basis, including its sales engineers (i.e. the
respondents) who also regularly received updates
and training in this
regard together with insight into future product development.
[4] The grounds of the first and
second respondents’ opposition to this application are that
enforcement of the restraints
will not serve to protect any
proprietary interest of Festo but will rather operate to
prevent the first and second respondents
from utilising their skills
and experience, in the public domain, in SMC’s employ. SMC
abides the order of this court.
[5] The background material facts upon
which this application is to be adjudicated are gleaned from the
papers in terms of the approach
set out in
Plascon-Evans Ltd v Van
Riebeek Paints (Pty) Ltd
.
[6] Festo and SMC and provide
industrial automation products and solutions in the pneumatics
market, on a global basis. Pneumatics
is a branch of mechanics which
uses compressed gases, usually air, to produce power and motion in
various forms of technology.
Thus, pneumatic systems utilise the
study of pressurized gas to produce a mechanical motion (i.e.
movement). Pneumatics is also
commonly described as a type of
automation control including automation manufacturing.
[7] Both are international companies
that have been engaged in designing and manufacturing pneumatic
automated products for many
years. They compete with each other on a
global basis. In the international market, the SMC has the greater
market share but locally
Festo is dominant in that it has over 50% of
the market share. Until recently, SMC sold its products through a
distributor, Hyflo
(Pty) Limited. It has now decided to enter the
market in South Africa directly.
[8] Companies within the pneumatics
automation industry manufacture and sell standard automated products
which customers can purchase
directly. They also assist customers in
modifying or adapting their standard products to meet the customer’s
needs as well
as designing and manufacturing in conjunction with the
customer bespoke products to be used in the customer’s
industrial
processes.
[9] The products manufactured and sold
by Festo and SMC are used by their customers in their industrial
processes. Those products
are therefore an integral part of the
customer’s production or manufacturing process and the
customers are reliant on the
product for the proper functioning of
their operations.
[10] The research and
development of new products and the process of customising and
tailor-making existing products
is carried out at head office level.
In the case of the applicant their head office is in Germany and in
the case of the third
respondent it is in Japan.
[11] In addition to this,
the choice of appropriate products and the use of those products for
large global customers
such as BMW and Volkswagen who are customers
of the applicant and Toyota who is a customer of the third
respondent, are all at
the corporate head offices.
[12] For smaller
customers, the decision as to which product to use is also often
taken at a corporate head office level,
albeit that the corporate
head office is situated locally.
[13] The industry presents
various barriers-to-entry:
13.1 Because of the highly technical
nature of the products being sold, the choice of products on the part
of customers is not based
on or influenced by the relationships which
sales engineers have with their customers. It is the need for the
pneumatic product
itself from a reliable brand or supplier that sells
the product, independent from customer relationship influences.
13.2.The products which are
manufactured by Festo and SMC are used by customers in their
processing or manufacturing processes.
These processes are stable
ongoing processes where the automated product performs a critical
role. Once the process is designed
and working, unless the automated
product fails, it is unlikely that the customer will change the
product being used.
13.3. Customers choose a supplier such
as Festa and SMC based on the products that these suppliers sell.
Information on products
is available
inter alia
, on the
supplier’s website and through advertising.
13.4 For most customers the choice of
a product is dictated by their internal procurement process which
limits their range of suppliers
to those who registered or certified.
13.5 Additional constraints exist by
virtue of the stringent approval procedures, including international
manufacturing standards
which customers must follow to obtain
approval to switch from one pneumatics supplier to another. The
process of obtaining approval
can take between one and two years to
complete, without guarantee of approval. Where a customer already has
a preferred supplier,
the chances of another supplier being listed as
a vendor or preferred supplier are slim.
13.6 Toyota is one of SMC’s
biggest global customers and it designs and manufacturers all the
pneumatic automated products
that are used by Toyota in all of its
factories and vehicles. The design and manufactures is done in Japan
and then rolled out
on a global basis.
[14] Further averments in
the answering papers which fall to be accepted are that despite the
second respondent’s
long involvement with Toyota during his
employment with Festa, he was not able to secure the majority of the
business from Toyota
which has always been enjoyed by SMC. The only
orders which were placed with Festa by Toyota took place when there
were long lead
times for the SMC’s products which were needed
urgently. On all other occasions, where SMC’s product was
available,
Toyota would purchase it from SMC.
[15] On one occasion where
one of SMC’s cylinders failed and there was no stock available
at SMC Toyota placed
an order for the cylinder from Festa. But as
soon as the third respondent’s stock of cylinders arrived in
the country, some
six weeks later, Toyota removed Festa’s
cylinder and replaced it with one of SMC’s cylinders.
[16]
Brand loyalty is key to the supplier-client relationship and is one
of the main influencing factors in suppliers
achieving sales with
customers in the pneumatics market.
[17]
It is the respondents’ case that the relationship which a sales
engineer has with a customer plays a very limited
role in a
customer’s decision to purchase a particular product and on its
own would never cause a customer to switch from
its current product
to that of a competitor’s. It is submitted that this is exactly
why for so many years the applicant did
not conclude restraint of
trade agreements with its employees, as it recognised that the
relationships between employees such as
sales engineers and customers
did not constitute a recognisable proprietary interest in the form of
a customer connection.
[18] It is undisputed SMC
does not require its employees to sign restraint of trade
undertakings. On the first and second
respondent’s submission,
the value of a sales engineer to a supplier is the engineering skill
and experience which he or
she brings to bear to assist clients in
finding engineering solutions through the use of the correct product
or the adaptation
of a product to challenges within the customer’s
processes.
Employment history of the first and
second respondents
[19] The first respondent
was originally employed by the applicant as a didactic sales engineer
on 1 March 2013. He
was not asked to sign a restraint of trade
agreement when he was employed. In paragraphs 13.2 to 13.3 of the
founding affidavit,
Festo sets out in some detail the first
respondent’s employment responsibilities and alleged access to
confidential information
whilst deployed as a didactic sales
engineer. It is common cause, however, that the first respondent has
not been employed in this
capacity for over a year. The first
respondent, avers that he will not be employed in SMC’s
didactic division.
[20] On 19 June 2014 the
first respondent was asked to and did sign a letter of appointment
which included a restraint
of trade. On 1 August 2014 the first
respondent was appointed as a sales engineer in the applicant’s
industrial automation
division. He was employed to service the West
Rand region but his geographic area was limited to “Area 108”
being the
area between Midrand and Krugersdorp.
[21] The first
respondent’s day-to-day duties and functions at Festa in this
capacity, predominantly consisted
of increasing sales to existing
customers. They included,
inter alia
-
21.1. Making use of the available
equipment for demonstrations and customers’ expo’s with a
view to winning sales and
a market share;
21.2. Conducting presentations to
customers as part of a team selling exercise with systems engineers,
other sales engineers or
individually;
21.3. Documenting and tracking
activities with respect to target customers and strategic customers;
21.4. Keeping accurate reports of time
spent at customers through the applicant’s CRM system;
21.5. Keeping the information on the
CRM system up to date at all times and replicated with the server
twice a week as required;
21.6. Carrying out the relevant
research and development for special applications that may be
required by customers from time to
time;
21.7. Helping with the design of
customer control solutions;
21.8. Attending monthly sales
meetings;
21.9. Attending internal training and;
training meetings and handling calls from customers with regards to
technical and sales queries.
[22] On 29 September 2015,
after having been employed as a sales engineer by Festa for a
period of 13 months,
the first respondent tendered his resignation
and took up employment with the third respondent in November 2015.
[23] The second respondent
commenced employment at Festa in 2006 as a junior sales engineer in
Durban. As junior sales
engineer his duties included
inter alia:
working with senior sales engineers to grow the applicant’s
customer base and turnover in the Durban South region and assisting
with the management of the portfolio of customers in the Durban South
region.
[24] On 1 July 2010, the
second respondent was appointed as a sales engineer in the KZN
region. His new contract of
employment contained a provision about
confidential information but did not restrain his employment at a
competitor. The second
respondent’s day-to-day duties were the
same as those of the first respondent.
[25] On 19 June 2014 the
second respondent was asked to and did sign a letter of appointment
which included a restraint
of trade.
[26] On 30 September 2015
the second respondent tendered his resignation to the applicant and
commenced employment at
the third respondent in November 2015.
[27] In its replying
papers Festo underlined that in so far as local customers are
concerned, sales engineers such as
the first and second respondents
have a significant influence over decision making in the procurement
of pneumatic automated products.
This is why the first and second
respondent were so successful and earned substantial commissions
whilst employed by the company.
Further because both Festo and SMC
are reliable brands and reliable suppliers, customer relationships
play such an important role
among these two direct competitors.
[28] It is further averred
on behalf of Festo that while a sales engineer uses his engineering
skills and experience
to provide services to a customer client, their
role is not limited to this. A sales engineer also uses information
proprietary
to his or her employer such as sales and marketing
strategies, costings and prices as well as his or her customer
relationship
and knowing a customer’s specific needs and
requirements in order to render such services to the customer.
[29] It is also emphasised by Festo
that it is not claiming that it is the proprietor of any generic
product training that is available
in the public domain. It has
however invested a substantial amount of time in training the first
and second respondents in order
to equip them with product
information to render services to customers and by doing so build
customer relationships. It is further
concerned with protection of
internal product training on new developments and future products not
in the public domain.
[30] The first and second respondent
were also privy to information shared at the Festo 2020 strategy
session. At this a sales overview
was presented which included major
activities planned for 2015-2016; sales project priorities, sales
targets and expected business
development regarding headcounts and
infrastructure. The applicant annexes copies of the presentation
outlines to its papers.
The applicable legal principles
[31]
The law as it applies to restraints of trade was most usefully
summarised by Mbha J in
Experian
South Africa (Pty) Ltd v Haynes and Another
[1]
as follows:
“
Legal
principles applicable to agreements in restraint of trade
[12]
The
locus classicus
on this subject is
Magna
Alloys and Research (SA) (Pty) Ltd v Ellis
[1984] ZASCA 116
;
1984 (4) SA 874
(A) at
897F – 898E, where Rabie CJ summarised the legal position,
inter alia
, as follows:
[12.1]
There is nothing in our common law which states that a restraint of
trade agreement is invalid or unenforceable.
[12.2]
It is a principle of our law that agreements which are contrary to
the public interest are unenforceable. Accordingly, an
agreement in
restraint of trade is unenforceable if the circumstances of the
particular case are such, in the court's view, as
to render
enforcement of the restraint prejudicial to the public interest.
[12.3]
It is in the public interest that agreements entered into freely
should be honoured and that everyone should, as far as possible,
be
able to operate freely in the commercial and professional world.
[12.4]
In our law the enforceability of a restraint should be determined by
asking whether enforcement will prejudice the public
interest.
[12.5]
When someone alleges that he is not bound by a restraint to which he
had assented in a contract, he bears the onus of proving
that
enforcement of the restraint is contrary to the public interest….
[14]
The position in our law is, therefore, that a party seeking to
enforce a contract in restraint of trade is required only to
invoke
the restraint agreement and prove a breach thereof. Thereupon, a
party who seeks to avoid the restraint bears the onus to
demonstrate,
on a balance of probabilities, that the restraint agreement is
unenforceable because it is unreasonable.
[15]
The test set out in
Basson v Chilwan and Others supra
at 767G
– H for determining the reasonableness or otherwise of the
restraint of trade provision, is the following:
[15.1]
Is there an interest of the one party which is deserving of
protection at the determination of the agreement?
[15.2]Is
such interest being prejudiced by the other party?
[15.3]
If so, does such interest so weigh up qualitatively and
quantitatively against the interest of the latter party that the
latter should not be economically inactive and unproductive?
[15.4]
Is there another facet of public policy having nothing to do with the
relationship between the parties, but which requires
that the
restraint should either be maintained or rejected?
[16]
In
Kwik Kopy (SA) (Pty) Ltd v Van Haarlem and
Another
1999 (1) SA 472
(W) ([1998]
2 All SA 362)
at 484E
Wunsh J added a further enquiry, namely whether the restraint goes
further than is necessary to protect the interest.”
[32]
The question for this court to determine is whether on the facts of
this matter, Festo has a protectable interest which is
sufficiently
deserving of protection and whether any of the other enquiries laid
down in
Basson v Chilwa
n
would lead the court to find the restraints unreasonable.
Is
there a protectable interest?
[33]
It is well established that the proprietary interests that can be
protected by a restraint agreement are of two kinds. The
first
consists of the relationships with customers, potential customers,
suppliers and others that go to make up what is referred
to as the
'trade connections' of the business, being an important aspect of its
incorporeal property known as goodwill. The second
kind consists of
all confidential matter which is useful for the carrying on of the
business and which could therefore be used
by a competitor, if
disclosed to him, to gain a relative competitive advantage. Such
confidential material is sometimes referred
to as 'trade secrets'.
[2]
[34]
In
Rawlins
and Another v Caravantruck (Pty) Ltd
[3]
Nestadt JA stated that —
'(t)he
need of an employer to protect his trade connections arises where the
employee has access to customers and is in a position
to build up a
particular relationship with the customers so that when he leaves the
employer's service he could easily induce the
customers to follow him
to a new business'.
[35]
Whether information constitutes a trade secret is a factual
question. For information to be confidential it must be
capable of
application in the relevant industry. It must thus 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.
[4]
[36] It is submitted by
the respondents that the information which the applicant alleges
constitutes confidential information
which was given to the first and
second respondents is the following -
36.1. The unique products and service
offerings which the applicant has specifically selected and
configured to address each client’s
unique requirements;
36.2. The applicant’s business
plans, marketing strategies, new product strategies, customer lists,
price lists, profit margins,
discount structures and costings.
[37] First and second
respondent underscore that the products are generic and homogenous
amongst competitors in the
industry. Each competitor goes through the
process of consulting with its clients, modifying and tailor making.
The intellectual
property relating to any adaptations vests in the
customer concerned, not in the applicant.
[38] In as far as second
type of confidential information referred to above, the first
respondent avers that:
38.1. He was not aware of actual
specifics of the national business plans or the strategies setting
out how the applicant was to
achieve these goals;
38.2. The applicant had no specific
regional plan for the West Rand region where he was deployed;
38.3. He was never privy to the
development of marketing strategies: his knowledge was limited to
being informed about them once
the products were being rolled out;
38.4. He was only told about new
products once they had been developed and made available. He had no
input into developing new product
strategies;
38.5. He only had access to the area
108 customers on the CRM system;
38.6. As to price, he only dealt once
with a price issue as price is fixed by the applicant’s head
office;
38.7. Any deviation from the discount
structure agreed with a customer (which was in any event inserted
into the SFA system price
list for that customer) would have to be
approved by the applicant’s management;
38.8. He did not have access to the
applicant’s profit margins;
38.9. As to costings, there were over
32 000 products and to obtain access to the costings thereof, the
first respondent would have
had to obtain access to the SAP system.
[39] The second respondent
deals with the second category of alleged confidential information in
some detail as well,
averring that:
39.1. As a junior sales engineer, he
had no access to confidential information or trade secrets;
39.2. He had no access to a business
plan and only knew of marketing strategies when they were rolled out
and everyone was informed
about them;
39.3. As regards price lists, he had
access to this through the SAP system, but he only checked the price
lists for his customers;
39.4. He did not have access to profit
margins and no ability to negotiate discount structures with clients;
39.5 He only had access to the CRM
system for his customers in the Durban South region.
[40] The respondents
submit that while they accept that certain of the information
referred to by Festo may constitute
confidential information for
Festo, they challenge what purpose the restraints would serve taking
account of :
40.1 The limited access that
first and second respondents had as to customer base (Area 108 and
Durban South Region, respectively);
40.2 The way in which the market
has historically been divided up;
40.3 The overwhelming influence
of brand loyalties; and
40.4 In the case of the second
respondent, his intended deployment in the heartland of the third
respondent’s existing
niche business with Toyota.
[41] In view of the above,
Mr Whitcutt submitted that in this regard no purpose would be served
by enforcing the restraints
to protect confidential information.
[42]
Indeed it appears on the papers that Festo has placed most emphasis
on customer connections, as a component of
its proprietary interest,
in its effort to enforce the restraint. Mr Whitcutt for the
respondents referred the court to
Aranda
Textile Mills v Hurn & Another
[5]
to submit that the proprietary interests sought to be protected must
be properly described as belonging to the employer. As explained
by
Kroon J:
“
A
man’s skills and abilities are a part of himself and he cannot
ordinarily be precluded from making use of them by a contract
in
restraint of trade. An employer who has been to the trouble and
expense of training a workman in an established field of work,
and
who has thereby provided the workman with knowledge and skills in the
public domain, which the workman might not otherwise
have gained, has
an obvious interest in retaining the services of the workmen. In the
eye of the law, however, such an interest
is not in the nature of
property in the hands of the employer. It affords the employer no
proprietary interest in the workmen,
his know-how or skills. Such
know-how and skills in the public domain become attributes of the
workman himself, do not belong in
any way to the employer and the use
thereof cannot be subjected to restriction by way of a restraint of
trade provision. Such a
restriction, impinging as it would on the
workman’s ability to compete freely and fairly in the market
place, is unreasonable
and contrary to public policy.”
[43]
It was stated in
Rawlins
v Caravantruck
[6]
that establishing customer connections depends on the notion that:-
'the
employee, by contact with the customer, gets the customer so strongly
attached to him that when the employee quits and joins
a rival he
automatically carries the customer with him in his pocket'.
[44]
Based on the papers before me, and applying the
Plascon Evans
principle, I note that the first respondent was employed as a sales
engineer for 13 months and all of the customers with whom he
interacted were situated in Area 108 being the area between Midrand
and Krugersdord.
[45]
The second respondent was employed in the Durban South region for 9
years and did forge good relationships with the customers
with whom
he dealt. He has however been earmarked by SMC to exclusively service
Toyota and thus his relationships with his former
customers will not
endure in his new position.
[46]
Inasmuch as the second respondent did form relationships with Festo’s
customers in the Durban South region, the respondents
rely on the
following:
46.1. Decisions about which products
to buy or use are taken at head office level (globally in the case of
international customers
and locally in the case of South African
customers), many levels up the corporate ladder from the position of
sales engineer;
46.2. Products are tailor-made for
specific customers. Once the lengthy process of developing the
product has been completed and
the product is working within the
customer’s business, it is unlikely that a customer would
change the product being used;
46.3. Many customers can only buy
products from suppliers who are registered and certified, a process
which can take up to two years
to complete;
46.4. Customer relationships are based
on brand loyalty and not on the relationships between individuals
employed by suppliers or
customers;
46.5. Restraint of trade agreements
are not customary in this industry in recognition of the above;
[47] As to the prejudice
to be suffered by Festo should the restraints not be upheld I must
take into account that it
is common cause that six of its former
employees have already left its employment and joined SMC before
restraints were introduced
by Festo. Although these employees may not
have been privy to the most recent strategic plans of Festo, all six
former employees,
(three of whom were managers and one of whom was
also a sales engineer) were from the time of taking up appointment
free to disclose
Festo’s information to SMC and to mobilise
their customer connections in order to lure customers over to SMC.
[48] Significantly,
despite these employees having left several months ago and despite
their free reign there is no
evidence before me of any of the
applicant’s customers moving across to the third respondent.
[49] It is further
cogently submitted by Mr Whitcutt that as far as the second
respondent is concerned, because he will
only be servicing Toyota in
relation to existing (and historically entrenched) SMC business
activities, there can be no infringement
of proprietary interests and
to enforce the restraint in these circumstances would be
disproportionate.
[50] In view of the above,
I accept that the first and second respondent’s interests in
remaining economically
productive outweigh any of Festo’s
interests in its customer connections and confidential information.
This is more particularly
in view of the following:
50.1 Both the first and second
respondent’s employment at the applicant was limited to
well-defined geographic areas within
the province in which they were
employed;
50.2 Their restraint of trade
agreements restrict any employment with a competitor to the entire
province, a geographic restriction
which is unreasonably broad. And
as has been submitted on their behalf: On what reasonable basis can
information be protectable
from disclosure to a national organisation
when it emanates from KwaZulu-Natal, when the self-same information
can freely be disclosed
to the same entity by the same ex-employee
from Gauteng?
[51] It is my view, given
all the above circumstances, that the restraints were primarily
directed at protecting Festo
from the footprint of a new competitor
on the national scene, one looking to employ the skills of South
African personnel. Indeed
Mr Malan on behalf of Festo submitted that
the impending employment of the first and second respondents will
advance the business
of its competitor i.e. by using Festo’s
proprietary information as a “springboard” to enter the
South African
market directly, in a situation in which Festo had
dominated that market for the past 42 years.
[52] On the evidence
before me, taking into account the work previously performed by the
first and second respondents
and the work to be performed by them, as
well as the issue of geographical scope of the restraints, I find
that the enforcement
of same would not be in line with public policy
and in the public interest.
[53] I therefore make the
following order:
Order:
1.
The application is dismissed with costs, including the costs of two
counsel.
__________________
H. Rabkin-Naicker
Judge of the Labour
Court of South Africa
Appearances
:
Applicant:
Adv LM Malan
Instructed
by:
Bowman Gilfillan
Respondents:
Adv C
Whitcutt SC with Adv J Nicholson
Instructed
by:
Fasken Martineau
[1]
2013 (1) SA
135 (GSJ)
[2]
Sibex
Engineering Services (Pty) Ltd v Van Wyk and Another
1991
(2) SA 482
(T) at 502D – F.
[3]
[1992] ZASCA 204
;
1993 (1) SA
537
(A) at 541C – D
[4]
Townsend
Productions (Pty) Ltd v Leech and Others
2001
(4) SA 33
(C);
Mossgas
(Pty) Ltd v Sasol Technology (Pty) Ltd
[1999] 3 All SA 321
(W) at 333f).
[5]
[6]
1993(1) SA
537 (AD) at 541 C-H