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International Quality and Productivity Centre (Pty) Ltd v Tarita and Others (17338/06)  ZAGPHC 85 (30 August 2006)
(WITWATERSRAND LOCAL DIVISION)
In the matter between:
INTERNATIONAL QUALITY AND
PRODUCTIVITY CENTRE (PTY) LTD Applicant
TARITA, IMOGEN First Respondent
OLIVER, PHILIPPA Second Respondent
MOOKI, BRIAN Third Respondent
THUSABATHO TRAINING NETWORK CC Fourth Respondent
In this urgent application, the Applicant seeks to enforce a restraint of trade agreement against the First, Second and Third Respondent, all of whom used to work for the Applicant. They are presently employed by the Fourth Respondent, against whom an interdict is sought against it continuing to employ the three Respondents in breach of their respective restraint agreements. An interdict is also sought to prevent the Fourth Respondent enjoying the products of the unlawful competition generated by its employment of the first three Respondents.
This application was brought in the urgent court on 8 August 2006. It was set down for hearing on 15 August 2006. In the Notice of Motion, the Applicant required the Respondents to file their answering affidavits by 16h00 on Friday 11 August 2006. At 13h54 on 11 August, the Respondents’ attorney sent a telefax in which it was said that it would serve the affidavit “on late Friday afternoon, alternatively over the weekend, alternatively on Monday 14 August 2006.” On 14 August the Respondents’ attorney told the Applicant’s attorney that the affidavit would be served on 15 August 2006 “shortly before court”.
In their answering affidavit, signed on 14 August 2006, the Respondents asked that they be given until 30 August 2006 to file their answering affidavit as it was not possible to do it in the four working days allowed in the Notice of Motion. They went on to say that they did not concede urgency. This was followed by a statement that there was no merit to the application set out in a 278 page founding affidavit. This statement was expanded on by the deponent setting out what was said to be the “essence of the Respondents case”.
4. Following a discussion between the parties on 15 August 2006, they reached an agreement that was made an order of court in terms of which the Respondents were ordered to file their answering affidavit by 16h00 on 18 August 2006. Costs were reserved and the application was postponed to 24 August 2006. On 15 August 2006 an answering affidavit was filed as “a partial affidavit. Our right to deal with the merits of the application remain reserved, including the right to deal with the alleged urgency of the matter”. This “partial answer” dealt with a submission that in terms of the Competition Act 89 of 1989 (the Act), the High Court did not have jurisdiction to hear the application and a submission that the application should be referred to the Competition Tribunal. If this relief was declined, “the Respondents reserved their right to reconsider their position”. The Applicant’s replying affidavit was served on 23 August 2006.
The three issues debated before me on 24 August were those of urgency, the court’s jurisdiction and the right of the Respondents to file an affidavit on the merits should I rule against them on urgency or jurisdiction.
The First Respondent left the Applicant’s employ on 4 September 2005. Her one year restraint expires on Friday 7 September 2006. On the Applicant’s version, it learned of her breach of the restraint on 11 July 2006. The Applicant’s deponent consulted with its attorney on Thursday 17 July 2006. Following correspondence with the Respondents that did not resolve matters, the Applicant sought authority from its overseas holding company to bring this application. It got such authority on 25 July 2006. Seven court days later (i.e. on 8 August 2006) it launched this 278 page application, giving the Respondents seven calendar days within which to file their answering affidavit on 11 July 2006. The Applicant also learned of the other Respondents breach of their restraints on 11 July 2006. Their restraints expire on 28 February 2007 and 31 May 2007 respectively.
In addition to the urgency inherent in all employer employee restraints, urgency as far as the First Respondent is concerned arises from the fact that without shortening the time periods, her restraint would have expired before the application would, in the ordinary course, have been heard by a court. As the continuing breach of the restraint by all the Respondents could cause the Applicant harm, there was, in the case of all the Respondents, a degree of urgency.
What I also took into account is that when initially faced with the need to file an answering affidavit, the Respondents did not contest urgency and in fact undertook on two occasions to file an answering affidavit before 15 August 2006. The issue of urgency only arose when it was mentioned in passing in the first answering affidavit filed on 15 August 2006.
9. Taking into account all the facts, I was satisfied that the Applicant was entitled to bring this application by way of urgency. I so ruled and ordered the Respondents to proceed with their point in limine.
The Act prohibits two types of Restrictive Practice. Section 4 prohibits Horizontal Restrictive Practices while Section 5 prohibits Vertical Restrictive Practices.
Section 4 (b) of the Act states that an agreement between firms in a horizontal relationship is prohibited if “it involves any of the following restrictive practices:
directly or indirectly fixing a purchase or selling price or any other trading condition;
"(c) dividing markets by allocating customers, suppliers, territories or specific types of goods or services;
"(d) collusive tendering.”
Section 1 of the Act defines a horizontal relationship as a relationship between competitors. It defines a firm as including a person.
A vertical relationship is a relationship between a firm (person) and its suppliers, its customers or both. Section 5 prohibits such a relationship if “it has the effect of substantially lessening competition in a market, unless a party to the agreement can prove that any technological efficiency or other pro-competition gain resulting from that agreement outweighs that effect.”
Section 65 (2) of the Act provides that where, in a civil action, a party raises an issue concerning prohibited conduct, such court must not consider the issue on its merits and
if the issue is one on which the Competition Tribunal or its Appeal Court has made an order it must apply the determination to the issue or
otherwise the court must refer that issue to the Tribunal to be considered on its merits, if the court is satisfied that –
the issue has not been raised in a frivolous or vexatious manner and
(ii) the resolution of that issue is required to determine the final outcome of the action.”
Each of the three Respondents entered into a separate contract of employment with the Applicant. In their agreements they acknowledged that during the course of their employment each of them would acquire confidential information and trade secrets of the Applicant that could be advantageous to any competitor of the Applicant. Each of them signed a restraint agreement in which they undertook (for the period referred to in their agreement) that on termination of their employment they would, inter alia, not set up in South Africa a business in opposition to that conducted by the Applicant at the date of termination or participate in any such business in any capacity, including that of an employee. Each of the Respondents acknowledged that the restraint was fair and reasonable as to subject matter and duration and “absolutely necessary” in the interests of the Applicant to protect its proprietary interests in the subject matter of the restraints. This is in summary what is set out in each of the separate restraints.
On termination of their employment agreements with the Applicant, the three Respondents took up employment with the Fourth Respondent. The Fourth Respondent competes with the Applicant.
Restraints of trade involving an employer and an employee have been the subject of judicial scrutiny in South African courts for more than a century. Such restraints will be enforced if the court finds that the former employer has a protectable interest in inter alia its trade secrets and, or, confidential information.
At page 8 of the introduction to Competition Law (2002), edited by Martin Brassey, it is said that “Covenants in restraint of trade typically operate to restrain the seller of a business from competing with the purchaser and so undermining the goodwill that is so essential a part of the thing being sold. They are, no less frequently, imposed on employees by employers in order to protect their trade secrets and business know-how during the currency of the contract and for a limited period thereafter. They are the stuff of the overwhelming majority of restraint cases but are seldom of concern to competition lawyers for, while undeniably constituting restraints on competition, they operate within a narrow compass and they are, moreover, normally ancillary to conventional commercial; contracts and a necessary incident of their proper operation. What pricks the interest of the competition lawyer is the clutch of cases, small in number, in which a common-law attack is launched against agreements by which suppliers combine to create a cartel or similar organization that operates at the expense of a fellow supplier or serves to hold a prospective customer or supplier to ransom.”
What pricked the interest of the competition lawyer has now been translated into the Competition Act of 1998 that appears to be based on a jurisprudence developed in North America and the European Union.
Mr Van der Walt, who appeared for the Respondent, submitted that the scope of the Competition Act is broad enough to prohibit an employment agreement that contains a restraint of trade that will operate on termination of the agreement with the consequence that when this issue is raised in a civil action, it must be referred to the Competition Tribunal.
The submission is founded on the proposition that an employment contract creates a horizontal relationship between employer and employee in that the parties thereto become parties to “a relationship between competitors” (see the definition section supra). This somewhat startling proposition flies in the face of one of the fundamental duties of an employee, which is not to compete with his or her employer whilst employed as such.
Mr Van der Walt however approached the matter from another angle, which was based on the unreported decision of the Competition Tribunal handed down on 1 February 2006 in the matter of Nedschroef Jhb (Pty) Ltd v Teamoor Ltd and Others (Case number: 95/1R/Oct/05)
As I understand the facts of the Nedschroef matter, it involved an agreement between parties engaged in the fastener industry, who sought to regulate their future business relationship. When the agreement was concluded Nedschroef and CBC, a party to the agreement, were not competitors in the sense that Nedschroef had not yet commenced business. What was however contemplated when the agreement was concluded was that Nedschroef and CBC would in due course become competitors. The effect of the agreement was to create a restraint on competition in favour of CBC that Nedschroef sought to escape.
In paragraph 41 of its judgment the Tribunal said that Nedschroef contended that the agreement contravened Section 4 (1) (b) (ii) of the Act in that it constituted a market allocation between Nedschroef and CBCbecause it operated to divide the market and because it precluded Nedchroef from participating in certain segments of the market. Following a recital of the subsection and the definition of a horizontal relationship, the Tribunal went on to refer to CBC’s first defence, which was that Nedschroef was not its competitor because it was not a competitor when the agreement was signed. The tribunal said that:
“44. Yet market division does not require that both firms be competitors prior to the act of division. If they are potential competitors this will suffice. Frequently firms will divide a market before they become de fact competitors precisely to avoid that outcome. Anticompetitive outcomes are no less serious as a result of such an outcome than if the firms were pre-existing competitors prior to the market division. Case law supports this approach as well. In the United States the Supreme Court has addressed this issue in the case of Jay Palmer et al v BRG of Georgia, INC et al  USSC 157; 498 U.S. 46, 111 S.CT. 401.
‘The defendants in Topco had never competed in the same market, but had simply agreed to allocate markets. Here, HBJ and BRG had previously competed in the Georgia market; under their allocation agreement. BRG received that market, while HBJ received the remainder of the United States. Each agreed not to compete in each other’s territories. Such agreement are anticompetitive regardless of whether the parties split a market within which both do business or whether they merely reserve one Markey for one and another for the other…’
45. We find that there is no requirement in terms of the Act that firms must have been prior competitors for them to transgress section 4 (1) (b).
Mr Van der Walt then sought to apply the above reasoning to the facts of the present restraint and submitted that when the agreements were signed, each of the Respondents were at least potential competitors of the Applicant, which in turn meant that the restraint contained in each agreement was, in terms of Section 4 (1) (b) (ii) per se prohibited in that it involved “dividing markets by allocating customers, suppliers, territories…”. What followed from this submission was that this court had no jurisdiction to hear the matter and that I was required to refer the application to the Competition Tribunal.
There is nothing to suggest that when the employment agreements were concluded, any of the first three Respondents and the Applicant were competitors. The employer / employee relationship created in terms of the employment contracts did not create a horizontal relationship between the Applicant and any of the three Respondents. If anything it created a vertical relationship that is not governed by Section 5 of the Act. On termination of each contract of employment and in breach of the restraint in their employment contracts, the Respondents took up employment with the Fourth Respondent, who is in a horizontal relationship with the Applicant. As employees of the Fourth Respondent it can never be said that the first three Respondents and the Applicant became involved in a horizontal relationship. As there has never been a horizontal relationship between the parties, the first three Respondents cannot rely on the provisions of Section 4 (1) (b) (ii) of the Act to oust this court’s jurisdiction.
Mr Van der Walt’s reliance on the Nedschroef decision is in any event misplaced. This decision is in turn based on two decision of the United States Supreme Court. The first decision was that of United States v Topco Associates, decided on 29 March 1972. Topco involved a co-operative association’s relationship with 25 small and medium sized regional supermarkets whose members were given exclusive territories for the retail sale of the associations branded products under certain conditions, and restricted to areas, imposed by the association. The court held that these horizontal restraints between competitors at the same level of the market structure to allocate market territories were per se violations of the Sherman Act without regard to their reasonableness.
In Jay Palmer v BRG of Georgia Inc, decided on 26 November 1990, the court held that an agreement between two providers of bar review courses that contained mutual covenants not to compete in the other provider’s market violated the Sherman Act. In paragraph 20 of this judgment I have set out the court’s findings.
In all three of these decisions the court was dealing with companies at the same level of the market structure with a capacity to compete with each other. All three cases had to do with market division. Topco had to do with defendants who had not competed in the same market. Jay Palmer had to do with parties who had competed in the same market. What was decided in Nedschroef was that an agreement between parties at the same level of the market structure to divide a market before the parties become de facto competitors was prohibited for the reasons set out in paragraph 44 of the judgment. The Tribunal described the parties to such an agreement as “potential competitors”. Here, the word “potential” was used as a noun (i.e. the latent quality or ability that may be developed and lead to future success). The word was not being used as an adjective (i.e. having the capacity to develop into something in the future) – see the Concise Oxford Dictionary.
Because the first three Respondents have never competed with the Applicant at any level of the market structure, they cannot be said to be “potential competitors” in the sense in which these words are used in Nedschroef. That any one, or more, of them may have had the potential to develop into a competitor when they signed their employment agreement containing the restraint is irrelevant. What must also be borne in mind is that having terminated their employment, the three Respondents are employees and not competitors. As to the meaning to be given to the words “potential competitor” it is helpful to bear in mind the European Union’s Guideline on the difference between an actual and a potential competitor. In footnote 9 at page 33 of the European OJC Series (reprinted from Westlaw 01.2001 C3/2 Celex 301Y0106 (01)) the following is said: “A firm is treated as a potential competitor if there is evidence that, absent the agreement, this firm could and would be likely to undertake the necessary additional investments or other necessary switching costs so that it could enter the relevant market in response to a small and permanent increase in relative prices. This assessment has to be based on realistic grounds, the mere theoretical possibility to enter a market is not sufficient. …” In this application all that has ever existed is a theoretical possibility that does not suffice.
What further undermines Mr Van der Walt’s submission is that assuming the parties to be in a horizontal relationship, then on a proper construction of Section 4 (1) (b) (ii) of the Act, it can never be said that an otherwise enforceable restraint of trade that excludes the three Respondents from unlawfully competing with the Applicant amounts to “dividing the market by allocating customers, suppliers (or) territories.” By definition, an exclusion for the period of a restraint cannot amount to either a division or an allocation of customers, suppliers or territories.
Based on the above considerations, I find that the somewhat strained meaning sought to be given to the words “competitor” or “potential competitor” do not assist the three Respondents. Part of their problem appears to arise from the fact that it appears to me, from a very brief acquaintance with the Act that it was not intended to change the common law of employer / employee restraints, which are more than adequately protected by the ongoing development of our common law on such restraints. In the circumstances, this is not a statute to which the law of unintended consequences can or should be invoked to give a benefit to persons for whom the Act was not primarily intended (see Bekker & Another v Jiko 2003 (1) SA 113 (SCA) at page 123D to F.)
Turning to Section 65 (2) of the Act the Competition Tribunal has not determined the issue raised in this application. I am only required to refer the issue to the Tribunal if I am satisfied that the issue has not been raised in a frivolous manner (see paragraph 10.5 hereof). In my judgment, the Respondents case, based on the provisions of the Act is hopeless. “There is authority for the proposition, which I endorse, that one who conducts a hopeless case acts frivolously” – see S v Cooper 1977 (3) SA 475 (T) at page 476D to G, cited with approval by Conradie JA in Platinum Holdings (Pty) Ltd & 2 Others v Victoria & Albert Waterfront (Pty) Ltd & Another (SCA), unreported judgment in case number 03/428 handed down on 28 May 2004. In the circumstances there is nothing to refer to the Competition Tribunal, and in the result, the point in limine is dismissed.
I turn to the merits of the restraint. I have already dealt with the background giving rise to my hearing the application on 24 August 2006.
Before I heard argument on the point in limine, Mr Van der Walt told me that if I found against the Respondents on the point in limine, he would ask me to receive an affidavit in which the Respondents deal extensively with the merits of the application brought against them. Given the background to this application – and, in particular, the two undertakings to file an answering affidavit before 15 August 2006, the court’s order of 15 August 2006 and the Respondents’ election when it filed its answer – I asked Mr Van der Walt on what authority he relied for adopting this novel approach. Apart from submitting that in urgent applications this should be permitted, he was unable to refer me to any authority. What he could not suggest was any reason why the Respondents, who had been given a full opportunity to file an answering affidavit, should, in the event of the point in limine being dismissed, be given a further opportunity to file an answering affidavit on the merits. Faced with the authority of Standard Bank of South Africa Ltd v RTS Techniques & Planning (Pty) Ltd & Another 1992 (1) SA 432 (T), Mr Van der Walt could not advance any reason why I should give the Respondents an opportunity to file a further answering affidavit on the merits that would invariably have led to a further postponement of an urgent application that required a speedy resolution. I accordingly exercised my discretion against allowing the Respondents to file a further answering affidavit.
In the answering affidavit filed by the Respondents on 14 August 2006 it is said that “there are many factual disputes between the parties that will come to light” when they file their answering affidavit. Promises to file such an affidavit before 14 August 2006 were not kept. The court order requiring the Respondents to file their answering affidavit by 15 August 2006, which by implication included theirs dealing with the merits, was unmeritoriously ignored. In the result, there is no answering affidavit dealing with the merits.
The issues on the merits raised in the answering affidavit filed on 14 August 2006 do not create any material dispute of fact. Accordingly, and on the merits, my decision must be based on the Applicant’s founding affidavit and its reply insofar as it deals with the merits.
In the course of their employment with the Applicant, each of the three Respondents acquired trade secrets and confidential information of the Applicant. The restraints imposed on each of them were reasonable and enforceable for the purpose of protecting the Applicant’s legitimate interest.
It is clear that each of the first three Respondents are, by reason of their employment with the Fourth Respondent, in breach of their separate restraint agreements.
Turning to the Fourth Respondent, it is clear that through its sole member, the husband of the First Respondent, it at all times knew that the First, Second and Third Respondent were acting in breach of their restraints. The Applicant states that the Fourth Respondent has intentionally used the three Respondents to breach their restraints and thereby created the situation whereby the Fourth Respondent could organise and promote the conferences referred to in paragraph 5.4.1 to 5.4.6 of the Notice of Motion. Such conferences are the fruit of the unlawful acts of the four Respondents in using the Applicant’s confidential information and trade secrets. In respect of these conferences, the Applicant has made out a case for an interdict against the Fourth Respondent. Here I would refer to what was said in IIR South Africa BV (Incorporated in the Netherlands) t/a Institute for International Research v Tarita and Others 2004 (4) SA 156 (W) at pages 170I to 172A – a judgment with which the First Respondent is no doubt familiar. I also refer to what was said by a full bench of this division in the unreported judgment of IIR South Africa BV (Incorporated in the Netherlands) t/a Institute for International Research v Hall & Another (Case number A5017/03).
For these reasons, as amplified in the Applicant’s founding affidavit and in the reply, the Applicant is entitled to the relief set out in paragraph 2 to 5 of the Notice of Motion. In terms of paragraph 7 of the Notice of Motion, the Applicant is also entitled to a joint and several costs order against the four Respondents that includes any reserved costs.
To meet the urgency of this application I have had to prepare this judgment in haste. I would like to thank both Counsel for providing me with supplementary heads dealing with the European and American law that I found of considerable assistance.
I accordingly make an order in terms of paragraphs 2 to 5 of the Notice of Motion, and paragraph 7, which costs order shall include any reserved costs.
I W SCHWARTZMAN
JUDGE OF THE HIGH COURT
Counsel for the Applicant: Mr J Campbell SC
Instructed by: Mr D Wanblad
Deneys Reitz Attorneys
Counsel for the First to Fourth Respondent: Mr T Van der Walt
Instructed by: Ms J Venter
Leppan Beech Incorporated
Date of Judgment: 30 August 2006