June 25, 2007 Court Strikes Down No-Hire Provision
In VL Systems v. Unisen, VL Systems ("VLS"), a computer software consulting company, and Star Trac Strength ("Star Trac") entered into a short-term consulting contract that included a provision prohibiting Star Trac from hiring any VLS employee for 12 months after the contract's termination. After the contract was completed, Star Trac hired a senior engineer who worked for VLS, although he had no role in the prior consulting relationship. VLS sued Star Trac for breach of contract and damages.
The trial court ruled that VLS breached the agreement, but yesterday the California Court of Appeals reversed, finding the no-hire provision to be an unlawful restraint on employment under California Business and Professions Code section 16600, essentially ruling that the contract was a back-doored covenant not to compete. The appellate court made this ruling even though the engineer had not performed any services for Star Trac while employed by VLS, Star Trac had not solicited the employee, and VLS did not demonstrate that it suffered any actual damages.
What This Means
Although non-compete agreements are, at best, difficult to enforce in California, this case goes one step further by holding that even a limited agreement between employers not to hire one of the other's employees was unenforceable. Employers who wish to enter or enforce such agreements should try to tie the obligation to some sort of protectable confidential information in order to make the agreement as enforceable as possible.
This E-Update was authored by Lisa Hird Chung. For more information, please contact Ms. Chung or any Paul, Plevin attorney at 619-237-5200.
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