• Illinois Court Clarifies Scope of "Activity Restraints"
  • April 16, 2008
  • Law Firm: Winston & Strawn LLP - Chicago Office
  • A United States District court in Illinois provided welcome guidance when it clarified the scope of "activity restraints" in reasonable non-compete agreements and held that prohibiting misuse of confidential information is a sufficient activity restraint. In RTC Industries, Inc. v. Haddon, 2007 WL 2743583 (N.D. Ill. 2007), an executive signed a non-compete agreement that prohibited him from providing services that would involve the "actual or threatened unauthorized use" of confidential information. The executive argued that this language amounted to a blanket restriction that was overly broad and unenforceable without a geographic limit. The Court, however, held that the prohibition against "actual or threatened unauthorized use" was an activity restriction that only came into play when the executive took particular actions. The Court concluded that it was entirely reasonable for RTC to protect confidential information that the executive had access to and had already misused.

    The Court also affirmed that non-compete covenants can expressly restrain the use of confidential information. The Court noted that such agreements are akin to the "de-facto" non-compete covenants created by the inevitable disclosure doctrine. Under the inevitable disclosure doctrine, an employer can prove misappropriation by showing that an employee would inevitably rely on his former employer's proprietary information, given his former position and knowledge of company information. The Court held that because the courts indirectly restrain inevitable disclosure, employers can directly restrain their employee's disclosure of confidential information as part of a non-compete agreement.

    TIP: Activity restraints that focus on specific conduct by former employees may be a useful tool to preserve broad non-competes for rapidly expanding, or geographically spread out, businesses, particularly in jurisdictions that recognize the inevitable disclosure doctrine.