COMPETITION IS LAWFUL, UNTIL IT ISN'T

South African law protects the right to compete. A business may win a rival's customers, undercut its prices and simply do the job better. Competition becomes unlawful only when it crosses a line the law has drawn, and that line is not found in any single statute.

This article explains where the line sits, how a court decides whether it has been crossed, and what businesses can do to stay on the right side of it.

What is unlawful competition?

Unlawful competition is a delict, a civil wrong recognised at common law. No dedicated statute governs it, and there is no closed list of conduct that qualifies. Courts decide each case on its own facts.

The claim rests on the lex Aquilia, the same foundation as most claims for financial loss, and its origin is usually traced to Matthews v Young 1922 AD 492. A claimant must therefore prove the ordinary elements of Aquilian liability: conduct, wrongfulness, fault, harm and causation. The main interest the law protects is the claimant's goodwill, which includes its reputation, product names, trade marks and trade secrets.

Two points follow. First, competition is not wrongful in itself. Second, familiar categories such as passing off, misuse of confidential information and false statements about a rival are examples of unlawful competition, not its limits.

How the courts decide: wrongfulness

In Schultz v Butt 1986 (3) SA 667 (A), the Appellate Division confirmed that a claimant must prove all the requirements of Aquilian liability, including a wrongful act. The general rule is that anyone may carry on a trade in competition with rivals, provided the competition stays within lawful bounds.

Wrongfulness is measured against the boni mores, the general sense of justice of the community. Fairness and honesty in trade are central, but the court stressed that they are not the only criteria. Later decisions add the morals of the trade concerned, public policy, and the protection the law already gives the claimant through other means, such as copyright or trade mark law.

The test is flexible by design and turns on the facts of each case.

One caution: Schultz v Butt does not mean that copying a competitor's product is unlawful. The courts have held that identical copying of an unprotected product does not, in itself, amount to unlawful competition. What usually tips the balance is something more, such as deception or taking unfair advantage of another's skill, effort and investment.

The constitutional backdrop

Section 22 of the Constitution gives every citizen the right to choose their trade, occupation or profession freely, and allows the practice of a trade to be regulated by law.

That right sits on one side of the scale. On the other are the interests the delict protects: goodwill, confidential information and fair dealing in the marketplace. The courts weigh the two, which is why they are slow to restrain a business merely for competing, and quicker to act where a competitor has used improper means.

The starting point therefore favours competition. A claimant must show something more than commercial harm.

Where the line falls in practice

Because the list is open, it helps to know the patterns that recur in the courts.

• Misuse of confidential information. To qualify, information must relate to trade or industry, be secret rather than public knowledge, and have economic value to its owner. Public knowledge and everyday know-how fall outside it.

• Springboarding. A former employee may use general skills and experience, but may not use confidential information, proprietary assets or client relationships to leap ahead of the competitive process. In Dispro Tech SA (Pty) Ltd v Soot Science (Pty) Ltd, one employee emailed himself the employer's software before both resigned, and a competing company was incorporated eleven days after they left. The court granted an eighteen-month interdict and awarded punitive costs.

• Passing off. This means presenting one's business as connected to another's, and it is a species of unlawful competition. The Supreme Court of Appeal recently upheld an order against a new entrant whose trading name was practically indistinguishable from an established competitor's.

• False statements about a rival. A competitor may be interdicted from publishing an injurious falsehood.

• Gaining an edge by breaking the rules. Trading in contravention of regulatory standards to win business can itself be challenged as unlawful competition.

Unlawful competition or competition law?

The two are different. Unlawful competition is a private claim between traders, brought in the High Court under the common law. The Competition Act 89 of 1998 is a statute that promotes and regulates competition in the economy, and it is enforced by the Competition Commission and the Competition Tribunal.

Conduct that is not prohibited under one regime may still be actionable under the other, and in some situations both may be in play.

Remedies. A court may grant an interdict to stop the conduct and award damages for the loss it caused, although quantifying that loss can be difficult. An interdict can be limited in time, as in the eighteen-month order described above.

In summary

Competition is the engine of a healthy economy, and the law is built to protect it. It steps in only when a competitor has used improper means, such as deception, a stolen advantage, or disregard for the rules everyone else follows. A business that understands where that line lies can compete hard without crossing it, and can recognise early when a rival has.