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[2005] ZAGPHC 10
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Valuenet Solutions Incorporated dba Dinkum USA and Another v eTel Communication Solutions (Pty) Ltd (10497/04) [2005] ZAGPHC 10; 2005 (3) SA 494 (W) (26 January 2005)
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REPORTABLE
CASE NO: 10497/04
In the matter between
VALUNET SOLUTIONS INCORPORATED
FIRST APPLICANT
dba DINKUM USA DINKUM TECHNOLOGIES LIMITED SECOND APPLICANT and eTEL COMMUNICATION SOLUTIONS RESPONDENT (PTY) LTD
VAN OOSTEN J
INTRODUCTION
[1] It is generally known that Telkom holds the monopoly in this country in the telecommunications industry. On 22 October 2003 its monopoly was somewhat
relaxed, when the Independent Communications Authority of South Africa (“ICASA”) which is the statutory regulating authority of the telecommunications industry in South Africa, released its stamp of approval for a so-called “call on demand” (“COD”) international telecommunication service. This service allows telephony customers at substantially reduced rates to make international
telephone calls without using Telkom’s lines, by sending a signal inter alia by cell phone or on the internet network to an offshore operator (known as an international voice carrier), which then calls the customer
back with a dial tone.
[2] The applicants’ claim that the concept of COD was conceived by the first applicant and that both the first and second applicants developed the technology needed for its successful implementation. Such technology, the applicants maintain, was aimed at introducing legal competition in the telecommunications industry in countries that traditionally had limited or no competition in the international long distance telephony market, such as South Africa. [3] At the time ICASA approval was sought and obtained, the first applicant and the respondent were in the process of negotiations in terms of which the respondent wished to be appointed as a service provider for the first applicant’s COD service in South Africa. To this end the conclusion of a COD wholesale agreement governing the relationship between the parties, was envisaged. It is the applicants’ case that on 30 January 2003, during the early stages of the negotiations, a so called Confidentiality, Non–Solicitation and Non-Competition Agreement (“the confidentiality agreement”) was entered into between the second applicant and the respondent which was aimed at protecting the confidential information the second applicant had imparted to the respondent as well as the second applicant’s trade secrets and know-how of the COD-service. In anticipation of the COD wholesale agreement being concluded it was agreed that the first applicant would provide airtime to the respondent to enable it to operate the COD service through the first applicant’s established network in the USA. Pursuant thereto the respondent paid US$ 103 000 as a pre-payment for such airtime. Of that amount a balance of US$ 95 296,43 remains unused. [4] The negotiations broke off during January 2004. The reasons for the breakdown are in dispute. It is the applicants’ case that the respondent purposely delayed the signing of the wholesale agreement and eventually refused to do so in order to enable it to reverse engineer the applicants’ product and to set up its own similar business in competition with the applicants. The respondent on the other hand attributes the failure in the negotiations to the applicants’ unwillingness to grant to it exclusivity in respect of the provision of the proposed service. The end result of it all was that the signing of the anticipated wholesale agreement, although several drafts thereof were produced for consideration, never materialised. The applicants contend that an oral agreement along the lines of the discussions held during the negotiations was concluded, which is denied by the respondent. [5] It is common cause that the respondent at present is also providing an international callback service, to which it refers as the respondent’s variant of the applicants’ COD service. The applicants contend that the respondent has utilised the confidential information imparted to it by the applicants in order to “reverse engineer” a competitive service directly in opposition to and competition with the applicants’ COD service in South Africa. This prompted the applicants to launch the present proceedings, by way of urgency, in which certain interdictory relief, to which I shall presently refer, is sought. The respondent has filed a counter application, in terms of which it claims repayment of the said amount of US$ 95 296,43 together with interest and costs. THE RELIEF SOUGHT BY THE APPLICANTS [6] Although the application was originally brought on an urgent basis, the applicants as the matter proceeded did not persist in claiming urgency. [7] The applicants at the hearing of the application confined the relief sought to interim interdicts to operate pending the conclusion of an action to be instituted. The relief now sought is set out as follows in the notice of motion:
“3. Interdicting and restraining the Respondent forthwith from:
3.1
making known, disclosing, furnishing, making available or utilising directly or indirectly, whether as
an organisation stockholder, owner, partner, principle, or agent of any business, or in any other capacity any of the confidential
information of the First Applicant and/or Second Applicant;
3.2
engaging in, or otherwise directly or indirectly being employed by or acting as a consult or lender to,
or being a principal, licensor, trustee, broker, agent, stockholder, member, owner, joint venturer or partner of, or permitting its
name to be used in connection with the activities of any other business or organisation which is engaged in the same business as
the business of the First and Second Applicants;
3.3
directly or indirectly, for its benefit or for the benefit of any other person, firm or entity:
3.3.1
soliciting from any person or entity doing business with the First Applicant and/or the Second Applicant business of the same or of
a similar nature to the business conducted between the First Applicant and/or the Second Applicant and such person and/or entity;
3.3.3
make any statements or comments of defamatory or disparaging nature to third parties regarding the First Applicant and/or the Second
Applicant, their officers, directors, personnel, products or services;
3.3.4 attempt to create or to reverse engineer any product or applications substantially similar to products or applications related to the First Applicant’s and/or Second Applicant’s “Call-on-demand” service.”
[8] In essence, the applicants rely on two grounds for the interdictory relief sought; firstly the respondent’s alleged breach
of the confidentiality agreement and secondly unlawful competition.
[9] Before dealing with the merits of the application, it is necessary to refer briefly to the progress of this matter until it came
up for hearing for the first time some 7 months after the launching thereof. Due to time constraints the matter could then not be
finalised which necessitated a further hearing some two months later. Extensive affidavits dealing with a variety of issues were
filed resulting in a voluminous and somewhat burdensome record extending to some 1160 pages. The time lapse since the launching of
the application to which I have referred obviously has a bearing on the relief sought by the applicants and the significance thereof
will be considered later in the judgment.
[10] I turn now to deal separately with each of the main issues.
THE CONFIDENTIALITY AGREEMENT
[11] As already alluded to the applicants essentially rely on the confidentiality agreement for the relief sought. It is common cause that the agreement was signed by one Ruan Malan, who ex facie the written document acted as a director of the respondent. Although Malan did eventually become a director of the respondent he commenced his employment with the respondent only two days after the agreement was signed. Thereafter he was intimately involved in the negotiations between the parties. The basis of the respondent’s denial is that Malan at the time of signing the agreement was not yet employed as a director of the respondent and accordingly “could not and did not have authority to sign”. Although a factual dispute regarding this issue exists I will assume for purposes of this application without deciding that the respondent is bound by the terms of the confidentiality agreement. This brings me to an examination of those terms of the agreement that are germane to this application.
[12] Firstly, the definition of confidential information in the agreement needs to be quoted in extenso:
“Confidential information” includes any information that derives economic value, actual or potential, from not being generally
known to those other than the Company. Such Confidential Information shall refer specifically to the Call-On-Demand service and include,
without further limitation, technical data, or know-how, including, but not limited to, that which relates to research, product plans,
patterns, compilations, products, services, customers, potential customers, suppliers, potential suppliers, markets, software, developments,
inventions, processes, methods, designs, techniques, drawings, engineering, formulas, hardware configuration information, marketing
or finances. Financial plans, employees, and all information entrusted to the Company by third parties, that derives economic value,
actual or potential, from not being generally known to those other than the Company. Confidential information does not include information, technical data or know-how which (i) is in possession of the receiving party at the time of disclosure as shown
by the receiving party’s files and records immediately prior to the time of disclosure and was not obtained from the Company
or its agents, or (ii) prior to or after the time of disclosure becomes part of the public knowledge or literature other than as
a result of any improper inaction or action of the receiving party, (iii) is approved by the disclosing party, in writing for release,
or (iv) is required to be disclosed by applicable law or proper legal, governmental or other competent authority (provided that the
party whose information is to be disclosed shall be notified sufficiently in advance of such requirement so that it may seek a protective
order (or equivalent) with respect to such disclosure.” (emphasis added).
[13] The nature of the confidential information to which the respondent according to the applicants was given direct access to, included
inter alia “information on how calls were triggered including schematic drawings and signalling protocols”. It further involved
not only the concept of the COD service but also the manner in which service operates. It is true that the respondent when the negotiations
ensued was a newcomer to the telephony industry. Although the respondent denies the sharing of confidential information it no doubt
must be accepted that the applicants introduced it to the basic COD concept resulting in it gaining knowledge of how the service
was to be used. Against this background two distinct features concerning the service arise for consideration: firstly the concept
of COD and secondly the methodology employed by the applicant in operating the service.
[14] Prior to the commencement of the negotiations between the parties the first applicant in the marketing of its new product published a brochure containing details of the operation of its COD service, which in the opening paragraph thereof is introduced as follows:
“Introducing Call-On-Demand by Dinkum USA (Dinkum). Call-On-Demand is a unique service that has been developed by Dinkum USA allowing end- users world wide (mobile or fixed) the ability to trigger international call access from any country in the world using
our patent-pending Call-On-Demand triggers. Call-On-Demand uses SMS (Short Messaging Service) E-Mail, WAP (wireless application protocol)
and WEB triggers which have the following advantages…”
It is common cause though that the service has neither been patented nor do the applicants rely on copyright. In the absence thereof
the applicants now seek protection of the concept and methodology of the service based on the confidential agreement. To revert to
the brochure, it explains the COD service in detail almost identical in form to a user’s manual. The very same information
is disclosed with the blessing of the applicants as an annexure to the respondent’s application for approval of the COD service
to ICASA. Those details and therefore the core idea underlying the COD service were thus fully exposed to the public by the applicants
themselves and must accordingly be regarded as being expressly excluded from confidential information as defined in the confidentiality
agreement. I did not understand counsel for the applicants to seriously contend to the contrary. But, so counsel for the applicants
submitted, it is not simply the idea that should be protected but the applicants’ methodology in operating the service.
[15] The applicants as well as the respondent have annexed affidavits by several computer experts. They deal extensively with the methodology utilised by the applicants as opposed to that used by the respondent in the service they provide. In the view I take of the matter I do not think it would serve any useful purpose to traverse the evidence of the experts. Suffice to say that they hold opposing views and that those views can hardly be reconciled on paper. Whichever is to be preferred is obviously a matter for the consideration of the trial court. Nor am I able to find, as was contended for by counsel for the applicants that the probabilities at this stage, strongly favour the applicants. On the contrary, it is my understanding of the evidence that the initial introduction of the COD service by the applicants indeed constituted a novelty in the telephony industry. In the computerised world of today however it seems to me that the innovator of a novel concept or idea can only preserve it by jealously guarding it as a secret or secure its protection by patent or otherwise. Once disclosed its impetus and hopes of remaining unique are short-lived. Experience in this particular field learns that a novelty of today is merely history tomorrow (Cf Harvey Tiling Co (Pty) Ltd v Rodomac (Pty) Ltd and Another 1977 (1) SA 316 (T) at 325F). [16] On the other hand it has authoritatively been stated that
“…a person who has obtained information in confidence is not allowed to use it as a springboard for activities detrimental
to the person who made the confidential communication, and springboard it remains even when all the features have been published
or can be ascertained by actual inspection by any member of the public…Therefore, the possessor of the confidential information
still has a long start over any member of the public”
per Roxburgh J in Terrapin Ltd v Builder’s Supply Co (Hayes) Ltd 1960 RPC 128, quoted with approval in several cases inter alia by Broome J in Multi Tube Systems (Pty) Ltd v Ponting Others 1984 (3) SA 182 (D) (at 189B-I).
[17] As is the case with a new concept or idea the benefit of the springboard conferred by confidential information is likewise time-constrained.
In the Multi Tubes Systems - case Broome J opined that the advantage “is usually of limited duration and that there must come a time when the matters in
question are no longer secret and that an interdict would then not be warranted”. A similar view was expressed by Smit J in
Triomed (Pty) Ltd v Beecham Group p/c and Others 2001 (2) SA 522 (T) at 560-561. Applying these principles to the present matter I am satisfied that whatever springboard benefit the applicants may have enjoyed resulting from the confidential information,
has by now without doubt, abated. As already alluded to, the concept of COD almost immediately became completely exposed in the public domain. The applicants’
complaint is that the respondent has been providing an international call back service in competition with them since 5 March 2004.
Two months however went by before the urgent application was brought. A further seven months was taken up by the filing of affidavits
before the matter was heard for the first time. Then followed a further postponement of two months for the hearing to continue. In
addition hereto further allowance must moreover be made for the time it will take before the action envisaged in the notice of motion
finally gets to trial. In a market where some 500 service providers compete a substantial time lapse as has occurred in this case,
will evidently diminish if not totally destroy any springboard advantage. It is finally necessary to add that no evidence has been
placed before me to prove the duration of the springboard, if it existed. In the Triomed - case it was held (at 560J -561B) that
“A springboard must be proved and cannot simply be alleged for it is an important part of the respondent’s (should read
‘applicant’s’) case to satisfy the Court as to the period for which it should be entitled to prevent the respondent
from competing with it. See Harvey Tiling Co (Pty) Ltd v Rodomac (Pty) Ltd and Another 1977 (1) SA 316 (T); Aercrete South Africa (Pty) Ltd and Another V Skema Engineering Co (Pty) Ltd and Others 1984 (4) SA 814 (D)”.
[18] For all these reasons I have come to the conclusion that the applicants have not satisfied the requisites of an interim interdict
(Cf LF Boshoff Investments (Pty) Ltd v Cape Town Municipality 1969 (2) SA 256 at 267 B-D). In any event the applicants are not left remediless; there is no reason why damages in the circumstances of this case
cannot be claimed as an alternative remedy to the interim relief claimed (See John Waddington Ltd v Arthur Harris (Pty) Ltd 1968 (1) SA 38 (T)).
UNLAWFUL COMPETITION [19] In terms of the confidentiality agreement the applicant’s confidential information is protected by way of a restraint of trade prohibiting the respondent from competing in business with the applicants for a period of 10 years. In this regard the agreement provides as follows:
(e) From the date of this agreement until the tenth anniversary of this Agreement (the “Non-Competition Period”), confidant
(ie the respondent) shall not engage in Competition (as defined below) with the engaging in, or otherwise directly or indirectly
being employed by or acting as a consultant or lender to, or being a director, officer, employee, principal, licensor, trustee, broker,
agent, stockholder, member, owner, joint venture or partner of, or permitting its name to be used in connection with the activities
of any other business or organisation which is engaged in the same business as the Business of the Company’s the same shall
be constituted at any time during or following Confidant’s engagement; provided that, it shall not be a violation of this Agreement
for confidant to (i) become the registered of beneficial owner of less than five percent (5%) of any class of the capital stock of
a competing corporation registered under the Securities Exchange Act of 1934, as amended or (ii) be employed by an entity that engages
in the same business as the Business of the Company, so long as confidant does not directly perform services for or work within a
division or business unit of such entity that engages in such business other than the business of distributing services provided
exclusively by Dinkum.
(f) Without limiting the generality of the foregoing, during the Non-Competition Period, confidant agrees that it will not, directly or indirectly, for its benefit of any other person, firm or entity, do any of the following: (i)
……….
(ii) ………. (iii) ………. (iv) Attempt to create or to reverse engineer any product or application substantially similar to products or applications related to Dinkum’s Call-On-Demand service”.
[20] The general principles, which are applicable in the consideration of the validity of an agreement in restraint of trade are well
entrenched (Cf Magna Alloys and Research (SA) (Pty) Ltd v Ellis [1984] ZASCA 116; 1984 (4) SA 874 (A)). An agreement in restraint of trade is prima facie valid. But
“…like all other contractual stipulations, however they are unenforceable when and to the extent that, their enforcement
would be contrary to public policy. It is against public policy to enforce a covenant which is unreasonable, one which unreasonably
restricts the covenantor’s freedom to trade or to work. In so far s it has that effect, the covenant will not therefore be
enforced. Whether it is indeed unreasonable must be determined with reference to the circumstances of the case. Such circumstances
are not limited to those that existed when the parties entered into the covenant. Account must also be taken of what has happened
since then and, in particular, of the situation prevailing at the time enforcement is sought.”
Per Didcott J in J Louw and Co (Pty) Ltd v Richter 1987 (2) SA 237 (N) at 243 B-D.
I have already dealt with the circumstances of this case particularly those existing at the present time. In particular, and by way
of a summary, it appears to me that the concept of COD as well as its methodology, in the words of Schutz JA, had but a limited shelf-life
which by now has long expired. (See Gordon Lloyd Page & Associates v Rivera and Another 2001 (1) SA 88 (SCA) at 95 B-G). Not only has the idea by now become fairly commonplace, the information on the methodology for providing the service
must have become readily accessible and on my assessment of the evidence of the computer experts it certainly does not require any
special skills for any reasonably competent computer programmer to create and write the computer programming necessary to operate
such a service. Even if it be assumed that the applicants have established a market for this particular product, the exploitation
thereof by a competitor can in itself never be regarded as a form of unlawful competition (Cf Taylor & Horne (Pty) Ltd v Dentall (Pty) Ltd 1991 (1) SA 412 (A) at 422 B-E). That being so, the applicants in my view have failed to show an interest worthy of legal protection at this stage (Cf Basson v Chilwan [1993] ZASCA 61; 1993 (3) SA 742 (A) at 767 E-I). To enforce the restraint clause against the respondent under these circumstances would in my view not only place
an unreasonable fetter on its freedom to trade (See Sunshine Records (Pty) Ltd v Frohling and Others 1990 (4) SA 782 (A) at 794 B-E) but also be in violation of the sound economic principle that competition is the life blood of commerce (Taylor & Horne (Pty) Ltd v Dentall (Pty) Ltd supra at 421 J) which would clearly be contrary to public policy.
[21] The conclusion that I thus come to for the reasons set out above is that the applicants have failed to show an entitlement to the interim interdict sought in respect of the alleged unlawful competition. THE RESPONDENT’S COUNTERCLAIM [22] The respondent, as I have already indicated has paid the amount of US$ 103 000 up front to the first applicant in respect of airtime to be used. Of that amount the respondent has in fact used US$ 7703 -57, resulting in an unused balance which is still being held by the first applicant of US$ 95 296 – 43. What I have thus far set out is not disputed by the applicants. [23] It is the applicants’ version that the payments were made by the respondent pursuant to an agreement, which has now been cancelled. The respondent denies such an agreement. On either basis, however the respondent is entitled to repayment of the balance outstanding. Counsel for the applicants did not attack the validity of the counterclaim, he merely suggested that it should be heard pari passu with the applicants’ claims in the proposed action. In my view no good reason exists for delaying the adjudication of the counterclaim. No defence has been shown to exist and it follows that the respondent’s entitlement to repayment of the amount claimed in the counter application is undisputed. IN THE RESULT THE FOLLOWING ORDER IS MADE: 1.
THE APPLICATION IS DISMISSED.
2. THE APPLICANTS ARE ORDERED TO PAY THE COSTS OF THE APPLICATION INCLUDING THE COSTS CONSEQUENT UPON THE EMPLOYMENT OF TWO COUNSEL, JOINTLY AND SEVERALLY THE ONE PAYING THE OTHER PRO TANTO SUCH PAYMENT TO BE ABSOLVED. 3. THE FIRST APPLICANT IS ORDERED TO PAY TO THE RESPONDENT THE AMOUNT OF US$ 95 296 – 43, OR THE EQUIVALENT THEREOF IN SOUTH AFRICAN RAND AT THE TIME PAYMENT IS MADE AT AN EXCHANGE RATE TO BE PROVED BY AN AFFIDAVIT FROM A REGISTERED DEALER IN FOREIGN EXCHANGE, TOGETHER WITH INTEREST THEREON AT THE RATE OF 15,5% PER ANNUM FROM 9 MARCH 2004 TO DATE OF PAYMENT. 4. THE FIRST APPLICANT IS ORDERED TO PAY THE COSTS OF THE RESPONDENT’S COUNTER APPLICATION, SUCH COSTS TO INCLUDE THE COSTS CONSEQUENT UPON THE EMPLOYMENT OF TWO COUNSEL.
__________________________________________
FHD VAN OOSTEN JUDGE OF THE HIGH COURT OF SOUTH AFRICA COUNSEL FOR THE APPLLICANTS ADV R MEYER SC ADV A WILLIAMSON APPLICANTS’ ATTORNEYS MENDELOW JACOBS COUNSEL FOR THE RESPONDENT ADV AP JOUBERT SC ADV HH STEYN
RESPONDENT’S ATTORNEYS
BREYTENBACH-MOSTERT
DATES OF HEARING 15 OCTOBER 2004 & 8 DECEMBER 2004 DATE OF JUDGMENT 26 JANUARY 2005 |