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[2015] ZALCJHB 430
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Medtronic (Africa) (Pty) Limited v Kleynhans and Another (J2013/15) [2015] ZALCJHB 430; (2016) 37 ILJ 1154 (LC) (15 December 2015)
IN
THE LABOUR COURT OF SOUTH AFRICA
HELD
AT JOHANNESBURG
Reportable
C
ase
no: J 2013/15
In the matter between:
MEDTRONIC (AFRICA) (PTY)
LIMITED
APPLICANT
and
HUGO HENDRICKS
KLEYNHANS
FIRST RESPONDENT
AMAYEZU ABANTU
BIOMEDICAL
SECOND RESPONDENT
Heard:
26 November 2015
Delivered:
15 December 2015
JUDGMENT
WHITCHER
J
Introduction
[1]
This is an application for final relief to enforce certain restraint
of trade and confidentiality undertakings contained in
a contract of
employment concluded between the first respondent (“Kleynhans”)
and the applicant (“Medtronic”).
[2]
Medtronic seeks, however, to enforce the restraint of trade
undertakings to a limited extent: whilst the restraint of trade
undertakings prohibit Kleynhans from taking up employment with a
direct competitor of Medtronic, Medtronic only seeks to interdict
and
restrain Kleynhans from,
inter
alia
,
selling, on behalf of the second respondent (“Amayeza”)
or any other competitor of Medtronic, any products which compete
with
Medtronic’s Spinal Surgery products at certain hospitals or to
certain surgeons. Medtronic also contends that Kleynhans
possesses
its confidential information.
[1]
[3]
Medtronic thus seeks to protect its alleged propriety interests in
its customer connections and confidential information.
[4]
The period of the restraint sought to be enforced is 12 months,
calculated from 30 September 2015
[2]
and enforcement of
the restraint is sought in respect of the Pretoria, Witbank and the
Middleburg Region.
[5]
Kleynhans contends that the restraint of trade provisions are
unreasonable and therefore unenforceable because Medtronic does
not
have any proprietary interests which are being infringed as a result
of his employment with Amayeza and the enforcement will
only limit
his ability to be economically active and productive.
Background
[6]
Medtronic sells medical devices. It has four business groups in South
Africa, including the Restorative Therapies Business Group
which
comprises the Spine and Biologics, Surgical Technologies,
Neuromodulation and Neurovascular Divisions.
[7]
Kleynhans was employed as a sales representative within Medtronic’s
Spine and Biologics Division from 1 September 2010
until 30 September
2015, a period of over 5 years. Kleynhans took up employment in
October 2015 with Amayeza, a direct competitor
of Medtronic in
respect of Spine and Biologics products.
[8]
Medtronic promotes and sells its products to surgeons resident at
particular hospitals, through its sales representatives, such
as
Kleynhans. The sales representatives are assigned specific
geographical areas. Kleynhans initially serviced hospitals
and
doctors in the Johannesburg, West Rand and Klerksdorp territory. In
or around 2012 he moved territories and was assigned specific
hospitals in Pretoria, Witbank and Middleburg.
[9]
The medical devices which are sold are very complicated. The role of
a Medtronic’s sales representative is also to provide
information and expertise on the safe and effective use and operation
of the products, under the direction of the treating surgeons.
Medtronic thus invests a significant amount of time and money in
training their sales representatives.
[10]
Equally, Medtronic spends significant time and money on educating and
training the surgeons on the safe and effective use of
the products
and the benefits of the products.
[11]
Medtronic contended that all this results in the sales
representatives developing very strong relationships with the
surgeons
upon whom they call. These relationships readily result in
the surgeons, where there are competing and interchangeable products
available, electing (and responsibly so) to use the product promoted
by the sales representatives whom they trust and with whom
they have
worked well in the past. Kleynhans, a successful sales
representative, fell in this category.
[12]
Kleynhans contended that because Medtronic spends a vast amount of
time and money educating and training surgeons, it is Medtronic
which
has the relationship, (i.e. that it is therefore Medtronic which has
the customer connection) and that his relationships
with the surgeons
he called upon while at Medtronic are secondary or of no consequence
at all.
[13]
Medtronic replied that this contention disregards the fact that
Medtronic, being a juristic person, can only establish customer
connections through the people it employs, in this case its sales
representatives. While surgeons do attend training sessions organised
by Medtronic, these sessions take place three to four times a year.
It is however the continuous interface between Medtronic’s
sales representatives and surgeons which serve to strengthen
Medtronic’s customer connections with the surgeons. Sales
representatives
are in contact with surgeons on a weekly, and
sometimes, daily basis. The sales representatives attend the
surgeons’ training
sessions which provides further
opportunities for the sales representatives to bolster their
relationship with the surgeons.
[14]
Kleynhans contended that the primary basis for choosing what medical
device to use is the patient’s pathology, and that
medical aid
schemes also influence which products are purchased.
[15]
Medtronic replied that in the spinal surgery field the medical
schemes’ preferred suppliers, of which there are but a
few, are
generally the hospitals (and not the product itself) and the choice
of which product to use is very rarely overridden
by the medical
scheme particularly where the surgeon has requested a specific
product. Moreover, what generally happens is that
the medical aid
will give the medical device company an opportunity to discount the
price to bring it within the medical aid scheme’s
limit.
[16]
Medtronic asserted that its products and those of Amayeza,
particularly the spine products, are interchangeable and it does
not
specifically compete with its competitors on price on these products.
Therefore, whether a surgeon uses Medtronic’s product
is based
primarily on that surgeon’s belief in the product and the
relationship with the sales representative promoting the
product.
[17]
Kleynhans argued that Medtronic’s submission does not take into
account differences in product design. Medtronic however
stated that
changes in product design may only affect the manner in which a
procedure is performed, but it is the function and
purpose that a
particular device fulfils that renders it interchangeable with
another. Where two companies both offer a suitable
premium product or
both offer a suitable low end product, the relationship with the
surgeon will be key.
[18]
Finally, the issue of Kleynhans’ replacement. Medtronic
contended that it is difficult for a new sales representative
to
convince a surgeon to use a product sold by a competitor where that
surgeon has an established relationship with another sales
representative. Consequently the new sales representative needs time,
at least twelve months, to learn the products and build a
relationship of professional trust with the surgeon. During this time
it is necessary to restrain the previous sales representative.
Kleynhans’ challenge to this is that he introduced the new
sales representative to the surgeons during August to September
2015
and that she is a highly competent salesperson. Medtronic, however,
pointed out that this new sales representative was only
employed by
Medtronic in July 2015. Comparatively, Kleynhans has been established
in the field for five years and three years with
his present
surgeons.
Analysis
[19]
In determining the reasonableness or otherwise of the restraint of
trade provision I apply the following test
laid
down in
Basson
v Chilwan and Others.
[3]
[20]
Is there an interest of the one party, which is deserving of
protection at the termination of the agreement? Is such interest
being prejudiced by the other party? 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? 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?
[21]
An
additional ground was enunciated in
Kwik
Kopy (SA) (Pty) Ltd v van Haarlem & Another
,
[4]
namely whether, between the parties, the restraint goes further than
is necessary to protect the interest. In my view, this
is a
reiteration of the third ground set out in
Basson
v Chilwan
.
[22]
Our law regards two kinds of proprietary interests worthy of
protection by way of restraint of trade: trade secrets and trade
connections. I shall consider them in turn.
Trade
Secrets
[23]
Medtronic’s argument in support of protecting its confidential
information is weak. The secrets it suggests Kleynhans
possesses are
knowledge of Medtronic’s business plan and strategy for the
Spine and Biologics Division and knowledge of Medtronic’s
sales
figures.
[24]
Kleynhans’ answer denies any knowledge of Medtronic’s
business plans and/or strategy or attending meetings where
such was
attended. He only had access to his own sales figures; and
information contained in sales figures does not include other
financial information such as profit margins.
[25]
Kleynhans’ denials are neither inherently implausible nor are
they expressly contested in the pleadings.
[26]
Consequently I find that Kleynhans likely possesses none of
Medtronic’s confidential information. There is thus
no
protectable interest to be served by a restraint of trade in this
regard. In argument, counsel for Medtronic wisely conceded
that their
case for the enforcement of the restraint rests primarily on
Kleynhans’ ability to exploit customer connections
rather than
disclose trade secrets.
Trade
Connections
[27]
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 a customer so that when he leaves the
employer’s service he could easily induce
the customers to
follow him to a new business. In
Morris
(Herbert) Ltd v Saxelby
[5]
it was said that the relationship must be such that the employee
acquires such personal knowledge of and influence over the customers
of his employer as will enable him (the servant or apprentice), if
competition were allowed, to take advantage of his employer’s
trade connection.
[28]
In
Rawlins
& Another v Caravantruck (Pty) Ltd,
[6]
Nestadt
JA observed
“
Whether
the criteria referred to are satisfied is essentially a question of
fact in each case, and in many, one of degree. Much
will depend on
the duties of the employee; his personality; the frequency and
duration of contact between him and the customers;
where such contact
takes place; what knowledge he gains of their requirements and
business; the general nature of their relationship
(including whether
an attachment is formed between them, the extent to which customers
rely H on the employee and how personal
their association is);
how competitive the rival businesses are; in the case of a salesman,
the type of product being sold; and
whether there is evidence that
customers were lost after the employee left
.”
[7]
[29]
In
Den
Braven SA (Pty) Ltd v Pillay and Another
,
[8]
Wallis J remarked:
“
It
is not in my view necessary for an applicant in this situation to
winnow the wheat of trade connections and customer contact
from the
chaff of other factors that may influence purchasing decisions. It
suffices for the applicant to show that trade connections
through
customer contact exist and can be exploited by the former employee if
employed by a competitor.”
[30]
The onus is on the respondent to prove the unreasonableness of the
restraint.
[9]
The respondent must establish that he did not acquire significant
personal knowledge of or influence over the applicant’s
customers while in the applicant’s employ.
[10]
It is enough if it is shown that contact with the customer has
established a trade connection and that this connection can
be
exploited were the employee to move to a competitor.
[11]
[31]
But just how strong does the connection between employee and customer
have to be before an employer develops a legitimate interest
in
protecting such a trade connection when the employee leaves?
[32]
Mr Rossouw, for Kleynhans, argued that the connection needs to be
irresistibly strong. He submitted that there would
always be
other factors that influence a surgeon’s decision to buy
medical equipment, besides a good relationship with a
salesperson.
These would include factors such as patient pathology and
financial
considerations. As a result, a salesperson’s contact with
a surgeon could never be said, on its own, to be
strong enough to
pull the surgeon away from a particular business.
[33]
I will deal below with the conflicting evidence of how strong a
factor pathology and price are in a surgeon’s buying
decision.
[34]
As for testing whether a protectable customer connection has come
into being, Mr Rossouw submitted that the
dicta
of Nestadt JA in
Rawlins
and Another v Caravantruck (Pty) Ltd
[12]
was apposite:
“
The
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 (
Joubert
General
Principles of the Law of Contract at 149).
Heydon
The
Restraint of Trade Doctrine (1971) at 108, quoting an American case,
says that the ‘customer contact’ doctrine 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’.”
[35]
Mr Rossouw argued that Kleynhans’ contact with surgeons over
the years did not give him the kind of influence over them
where he
can automatically carry any of them with him “
in
his pocket”
when he left
Meditronic.
[36]
The passage in
Rawlins
with the striking image of a customer being carried away in a
departing employee’s pocket does not end there, however.
In surveying the law, including ‘American’ law, on the
test for customer connection, Nestadt, JA, directly goes on
to say:
“
In
Morris
(Herbert) Ltd v Saxelby
[1916]
1 AC 688
(HL)
at 709 it was said that the relationship must be such that the
employee acquires 'such personal knowledge of and influence
over the
customers of his employer . . . as would enable him (the servant or
apprentice), if competition were allowed, to take
advantage of his
employer's trade connection . . .' This statement has been applied in
our Courts.”
[37]
It appears to me that the full passage contains two distinct
standards for establishing the right to protect a trade connection.
The first is that an employee has established 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” (emphasis added).
The second standard references the ‘American’
doctrine of
customer contact which depends on an employee being able to
‘
automatically [carry]
the customer with him in his pocket’ (emphasis added).
The phrases “easily induce” and “automatically
carry” set two different standards of establishable influence
over a customer; the latter of a greater magnitude than the
former.
[38]
I think it is safe to say that an employee’s capacity to
“automatically carry” a customer away from an employer
is
not part of our law on restraint of trade. This is clear from
the full passage in
Rawlins
where Nestadt, JA rounds off the survey of the law on customer
connection by referencing
Morris (Herbert) Ltd v Saxelby.
As set out above, this
case provides that a
customer connection is worthy of protection when an employee has
“
'such personal knowledge of and influence over the
customers of his employer . . . as would enable him (the servant or
apprentice),
if competition were allowed, to take advantage of his
employer's trade connection …”. It is this that
has been
taken up into our law, the ability to take advantage and
easily induce a customer, not the ‘American’ requirement
that
a customer is automatically carried away.
[39]
In
casu
, the influence Kleynhans must show he lacks over the
surgeons he served is not a total and hypnotic influence. He
must show
he cannot easily induce at least some of them to follow him
to Amayeza, given the nature of the contact he has had over the past
three years. In this regard, there may well be surgeons who do
not follow him to Amayeza in respect of certain patients with
particular pathologies, belonging to particular medical aids. It is
enough that some may well be induced to switch to Amayeza,
in
circumstances where products are interchangeable and price is
similar, on the strength of their trust in and relationship with
Kleynhans built up during his three years serving them while he was
with Medtronic.
[40]
I agree with
Medtronic that the danger that Kleynhans will exploit customer
connections for the benefit of his new employer is essentially
“unpoliceable”. Where Medtronic has tried to
safeguard itself against the unpoliceable danger of a former employee
utilising its customer connections on behalf of a rival concern by
obtaining a restraint, the risk that the former employee will
do so
is one that Medtronic does not have to run. It is also not
incumbent upon Medtronic to inquire into the
bona
fides
of Kleynhans and demonstrate that he is
mala
fides
before being allowed to enforce its contractually agreed right to
restrain him.
[13]
In those circumstances, all that the Medtronic needs to do is to show
that there is trade connection Kleynhans
could
exploit should he desire to do so. The very purpose of the
restraint agreement is that Medtronic did not wish to have to
rely on
the
bona
fides
or lack thereof on the part of Kleynhans when he left their employ.
[41]
In this vein, in
New
Justfun Group (Pty) Limited v Turner and Others
,
[14]
Van Niekerk J enforced the restraint of trade and held with reference
to customer connections that “it is sufficient for
the
applicant to show that the customer contact exists and that they can
be exploited by the former employee … It remains
ultimately
for the respondent to show that he or she … never acquired any
significant personal knowledge of, or influence
over, the applicant’s
customers.”
[42]
Looked at against the backdrop of the law set out above, Kleynhans’
submission that Medtronic, a juristic person, is
the entity that
truly possesses the customer relations in its own right flies in the
face of common sense. Medtronic’s
connection with its
customers flows from Kleynhans’ continual interface with them.
No other person in Medtronic, nor
the corporation as an official
entity, rivals Kleynhans insofar as the quantity and quality of
interaction with surgeons is concerned.
Colloquially speaking,
Kleynhans was Medtronic’s point man in dealing with surgeons in
the Pretoria, Witbank, Middleburg
corridor and he made out no case to
the contrary.
[43]
I accept Medtronic’s assertions that its products are
interchangeable with those of its competitors. It is common
cause that Amayeza competes with Medtronic in spinal products.
Such competition would, logically, not exist if their products
were
not substantially interchangeable.
[44]
Medtronic, in my view, was correctly dismissive of Kleynhans’
untenable attempt to elevate patentable differences to
difference in
the function of a product or the effective remedy it provides to a
patient.
[45]
Could price then be the determining factor in a sale? Medtronic
says a medical aid seldom overrides a surgeon’s
recommendation
while Kleynhans states that medical aid preference plays a
significant role. I cannot see how it can plausibly be
denied that
the two companies’ products are, broadly, similarly priced,
albeit in bands ranging from low-end to premium products.
Even
if their advertised prices are different, Kleynhans specifically did
not dispute Medtronic’s claim that medical aids
offered
suppliers the opportunity to discount their wares to meet a rival’s
price in individual cases.
[46]
I am satisfied that where products are interchangeable and price is
negotiable, a patient’s pathology would not necessarily
play a
determinative role in a surgeon’s selection of spinal product.
In these circumstances, a relationship between
salesperson and
surgeon could play a role in swinging the deal one way or the
other. As stated above, a prior connection
to a customer
does not have to come into play in all buying decisions, only some,
for a protectable interest to manifest.
[47]
As Wallis, J remarked in
Den Braven,
it is not necessary for Medtronic to ‘winnow the wheat of trade
connections and customer contact from the chaff of other
factors that
may influence purchasing decisions’. It appears from
Kleynhans’ affidavit that he indeed concedes
that customer
connection could play a role in a choice of medical product, it is
only, for him, not the primary consideration.
[48]
In my view, it suffices for Medtronic to show that trade connections
through Kleynhans’ extensive contact with surgeons
exists and
that, given the interchangeability of spinal products and flexibility
in price, these connections could easily be exploited
by Kleynhans if
employed by a competitor.
[15]
[49]
I therefore find that Medtronic possesses a protectable interest over
its customer connections in this case.
[50]
In addressing whether Kleynhans is prejudicing Medtronic’s
trade connections, Kleynhans bears the onus to show that his
continued involvement in Amayeza will not infringe these. He
has not done so.
[51]
It is common cause that the products sold by Amayeza and Medtronic
are competitive and thus interchangeable products. It is
Kleynhans’
intention to sell Amayeza’s products in direct competition with
Medtronic in the same area in which he was
employed by Medtronic to
the same surgeons at the same hospitals. Medtronic has simply
to show that it has an objectively
reasonable apprehension of harm,
which I find that it does.
[52]
The next question in terms of
Basson v
Chilwan
is whether Medtronic’s
interest so weighs up qualitatively and quantitatively against the
interest of Kleynhans that the latter
should not be economically
inactive and unproductive?
[53]
Bearing the onus in this regard, Kleynhans adduced no evidence to
show that enforcement of the restraint is disproportionate
having
regard to any of his countervailing interests. Kleynhans resigned
from Medtronic of his own accord. Medtronic does
not seek to
prohibit Kleynhans from taking up employment with Amayeza or even
selling spinal products to surgeons in the rest of
South Africa,
outside the Pretoria, Witbank and Middleburg area. In the
circumstances, Kleynhans remains free to earn a living
by using his
skills and expertise in the industry. The restraint itself will
not last forever. It is in place for 12
months, a period which
does not appear excessive given the steps Medtronic needs to take to
protect its legitimate interests: that
is, permit a replacement
salesperson establish the same relationships with surgeons upon which
its sales strategy partly relies.
[54]
Kleynhans has not shown why he must target and deal with Medtronic’s
customers rather than finding his own.
[55]
There are no other public policy issues that militate against
enforcing the restraint. Absent oppressive behaviour by Medtronic
in
obtaining Kleynhans’ consent to the restraint of trade
agreement, which was not shown, the importance of parties being
held
to their agreements favours the restraint being enforced.
[56]
In conclusion, I find that the restraint sought is reasonable.
Medtronic is, therefore, entitled to the final relief sought.
Medtronic seeks costs, including the costs of two counsel. The issue
of costs is difficult. On the one hand, Kleynhans is an individual,
the applicant is a major corporation and there is no evidence to
suggest Kleynhans defended these proceedings out of ill-will or
malice. On the other hand, prior to litigation, Medtronic proposed a
compromise similar to the relief sought in this application.
Kleynhans rejected the proposal. Therefore in the circumstances, the
applicant deserves costs, but not the costs of two counsel.
Order
1.
The first respondent is interdicted and restrained from selling, on
behalf of
the second respondent or any other competitor of the
applicant, any products which compete with the applicant’s
Spinal and
Surgery products, that is the products listed in the
notice of motion, at the hospitals listed in the notice of motion or
to the
surgeons listed in the notice of motion. The period of
restraint is twelve (12) months, calculated from 30 September 2015.
The
enforcement shall apply in respect of the Pretoria, Witbank and
the Middelburg Region.
2.
The first respondent is ordered to pay the costs, which includes the
costs of
one counsel.
________________________
Benita
Whitcher
Judge of the Labour Court
APPEARANCES:
For
the applicant: C Whitcutt SC and Claire de Witt instructed by Fasken
Martineau (incorporated in South Africa as Bell Dewar Inc)
For
the first respondent: P Rossouw SC instructed by Pieter Ferreira
Attorneys
[1]
A complete
list of products, hospitals and surgeons was provided. A
confidential information affidavit was also provided.
[2]
In October
2015, the
parties
agreed to an interim restraining order, pending the outcome of this
application.
[3]
Basson v
Chilwan and Others
[1993] ZASCA 61
;
1993 (3) SA 742
(A) at 767C-H;
[4]
1999 (1) SA
472
(W) at 484E.
[5]
[1916] 1 AC
688
(HL) at 709
[6]
Rawlins
& Another v Caravantruck (Pty) Ltd
[1992] ZASCA 204
;
1993 (1) SA 537
(A) at 541C/D-I
[7]
at 541D-I
[8]
2008 (6) SA
229
(D) at 240H
[9]
Basson v
Chilwan,
supra;
Reddy
v Siemens Telecommunications (Pty) Ltd
2007
(2) SA 406 (SCA).
[10]
Rawlins
,
supra, at 542F-543A
[11]
Den
Braven SA (Pty) Limited v Pillay and another
[2008] All SA 518
(D), at [17] - [18] at 240H-241A.
[12]
[1992] ZASCA 204
;
1993 (1)
SA 537
(A) at 541D-F
[13]
IIR
South Africa BV (Incorporated in the Netherlands) ta Institute for
International Research v Tarita & Others
2004 (4) SA
156
(W), at 166H0167C;
International
Executive Communications Ltd ta Institute for International Research
v Turnley & Another
1996 (3) SA 1043
(W) at 1055E-1057B;
BHT
Water Treatment (Pty) Ltd v Leslie & Another
1993 (1) SA 47
(W) at 57H-58D;
Turner
Morris (Pty) Ltd v Riddell
1996
(4) SA 397
(ECD) at 409I-410C;
New
Justfun Group (Pty) Limited v Turner and Others
(unreported
judgment of Van Niekerk J, Labour Court, Johannesburg, case no.
J786/14)
[14]
Unreported
judgment of Van Niekerk J, Labour Court, Johannesburg, case no.
J786/14
[15]
Den
Braven
(supra)