Post-termination confidentiality restrictions: are they worth anything?

The value of post-termination confidentiality and non-disclosure restrictions on employees is often questioned, with employers (and employees) suspicious of their value and enforceability. Earlier this month, the Labour Appeal Court (“LAC”), in Arthur Owen Carolin v World Power Products (Pty) Ltd, handed down an interesting judgment confirming precisely what value provisions such as these can hold for employers.

Background

The employee commenced employment with World Power Products in 1990. In June 2016, an extremely strained relationship had developed between the employee and the managing director of the company. Due to this strained relationship, the company approached the employee with a view to bringing the employment relationship to an end amicably, through the conclusion of a termination agreement.

A termination agreement was then concluded. Of particular importance was clause 2.3 of the termination agreement which stated:

“The Employee undertakes not to disclose information, of any nature regarding the Company or this agreement, to any person or organisation. Such information shall include methods, processes, computer software, documentation, client lists, programmes, trade secrets, technical information, intellectual property, drawings, financial information, or any other information which could be damaging to the Company’s operations or which could benefit other parties to the detriment of the Company.” (our emphasis)

The agreement further provided that before 26 June 2016, the company would pay the employee ZAR400 000 in full and final settlement of any disputes between the parties.

The employee left the company on 10 June 2016 and duly handed in his company cell phone and laptop. On 20 June 2016, the employee commenced employment at Remcor (Pty) Ltd, a competitor of the company.

On 22 June 2016, while employed by Remcor, the employee sent an email from his new Remcor email address to a number of people in which he wrote; “please see my new contact details below”. Underneath this message appeared “Arthur Carolin Remkor Technologies”. The list of addressees constituted a range of clients of his former employer, World Power Products.

News of this travelled fast and on 24 June 2016, World Power Products’ attorney addressed a letter to the employee, alleging that he had repudiated the termination agreement by sending this email to his former employer’s customers and that this conduct entitled World Power Products to withhold payment of the ZAR400 000 as per the termination agreement.

On 28 June 2016, the employee’s attorney wrote back, denying that the employee had repudiated the termination agreement, and included an undertaking to delete and destroy all World Power Products’ property that the employee still had in his possession, including business cards that he had accumulated while in the employ of World Power Products.

This did not satisfy World Power Products who then sought relief in the Labour Court.

Labour Court

The Labour Court found that, contrary to the clear terms of the termination agreement, the employee had “disclosed information emanating from the business cards amassed during his employment, that information is clearly customer connections. Customer lists have been held by our Courts to be worthy of protection and need not necessarily be embodied in the document to be construed as confidential information.”

The Labour Court held that the employee had repudiated the termination agreement which entitled the employer to accept this decision and regard the agreement as having been cancelled, which meant that World Power Products did not have to pay the employee the ZAR400 000 separation payment amount.

Labour Appeal Court

On appeal to the Labour Appeal Court, the employee argued that the Labour Court should have concluded that:

the employee had sent the email in question to addresses he had taken from business cards, as opposed to customer lists;
this source of information did not fall within the scope of confidential information and thus there had been no breach of clause 2.3 of the termination agreement; and
the Labour Court had erred in concluding that the employee had demonstrated an intention to repudiate the agreement, particularly because the agreement did not contain a lex commissoria clause which would have allowed World Power Products to cancel the agreement, in the event that the employee breached clause 2.3 of the termination agreement.

The Labour Appeal Court did not accept the employee’s argument and found in favour of World Power Products, holding that:

the wording of the termination agreement was clear: it embraced the prohibition of the disclosure of information, including client lists, and there was no suggestion from the wording that a disclosure had to be regarded as confidential information; and
the fact that the employee generated an email which was captured on the system of his new employer, and which contained the email contacts of a range of the employee’s former employer’s customers manifestly constituted a disclosure of the former employer’s client lists. The clear consequence was that a list of customers of World Power Products was now on Remcor’s computer system.

The Labour Appeal Court also reiterated the law regarding repudiation, confirming that a repudiation occurs where one party to a contract, without lawful grounds, indicates to the other party in words or by conduct a deliberate and unequivocal intention no longer to be bound by the contract. It was clear in this case that the conduct of the employee fell within the scope of this dictum: by his conduct, the employee had exhibited a clear and unequivocal intention not to be bound by the terms of the termination agreement. The other party to the agreement, World Power Products was entitled to accept this repudiation, which it did, which meant that it did not have to abide by the further terms of the agreement which required it to pay the separation payment to the employee.

The Labour Appeal Court upheld the decision of the Labour Court (dismissing the appeal, with costs), which meant that World Power Products was not required to pay the employee the ZAR400 000 separation payment as provided for in the termination agreement.

Conclusion

This case highlights the importance of and value to employers of post-termination confidentiality and non-disclosure obligations.

It also demonstrates that disclosure of a “client list” (something which is often prohibited in termination agreements and other similar agreements, like those in restraint of trade) does not necessarily have to take the form of disclosure of a physical list or “phone book” of client contact details. In this case, the list of email addresses generated when the employee sent out an email to various of his former employer’s customers was sufficient to constitute a “client list” which was now in the hands of his new employer.

This judgment should provide comfort to employers as it represents a tangible example of the actual value post-termination restrictions such as these can have for their businesses. On the other hand, the judgment should sound a clear warning to employees seeking to bypass legitimate post-termination obligations owed to former employers that doing so may have considerable negative consequences for them.

Henry Rossouw

Employment | Executive

hrossouw@ENSafrica.com

+27 82 708 0469

Curtis Nhliziyo

Employment | Associate

cnhliziyo@ENSafrica.com

+27 64 761 1268