Help! My competitor is stealing my customers!

“Just over two years ago I purchased a brand agency and included a restraint of trade clause in the sale agreement preventing the seller from also opening up a brand company in the same region. Now just over two years later, the seller has opened up another brand company in direct competition to me and is actively canvassing my clients to move to his company. I paid him for his company and now he is trying to take away my customers. Is there anything I can do to stop him?”

Firstly, I should commend you for including a restraint of trade clause. So many owners sell a business without a proper restraint of trade in place and thereby immediately weakening the value of their investment.

Secondly, your concern regarding the conduct of the seller is correct. The concept of “canvassing clients” is an age-old challenge for business owners – a seller, who has been compensated for the goodwill (client base) he sells, and opens up a directly competiting business and wilfully pursues his old clients.

Competing businesses and the canvassing of clients is a big risk due to the inherent value attached to a business’s clientele and has been ruled upon by many a court. As far back as 1869 an English Court held that, “that a person who sells the goodwill of his business is under no obligation to retire from the field. Trade he undoubtedly may, and in the very same line of business. If he has not bound himself by special stipulation, and if there is no evidence of the understanding of the parties beyond that which is to be found in all cases, he is free to carry on business wherever he chooses”. This approach has also been adopted in our South African law, and accordingly as long as there is not a clear restraint (such as a valid restraint of trade) prohibiting a person from practising in the same field, a person can compete again in the same field as the business he has sold.

Accordingly, in your case, seeing that the restraint of trade was for two years only and has since lapsed, it is therefore fair to assume that the seller is no longer prohibited from opening a competing brand agency.

That said, the same English Court also held that, “He may do everything that a stranger to the business, in ordinary course, would be in a position to do. He may set up where he will. He may push his wares as much as he pleases. He may thus interfere with the customers of his neighbour as a stranger and an outsider might do; but he must not, I think, avail himself of his special knowledge of the old customers to regain, without consideration, that which he has parted with for value”. Here the judge confirmed that even though a person may compete again in the same industry, he is prohibited from canvassing his old clients, as he has received his fair value in the sale and cannot try and regain such afterwards as that would be against principles of commercial morality.

This view has also been adopted into South African law, although the prohibition against the canvassing of old clients has been qualified to only apply to the seller of the business and not its former employees as well.

In your case it is clear that the seller is operating unlawfully by canvassing his former clients for which you remunerated him and we would advise that you seek legal help to consider obtaining an interdict against the seller stopping him from further canvassing as well as a possible claim for damages suffered by you as a result of his unlawful canvassing.

June 2, 2016

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