Are Employee “No-Hire” And Non-Solicitation Provisions Enforceable Under California Law?

In most states, non-competition agreements are enforceable if reasonably necessary to protect trade secrets and other confidential information. California, however, has a long-standing public policy generally prohibiting non-competition agreements. This policy is embodied in California Business & Professions Code section 16600 ("Section 16600"). Limited exceptions are set forth in subsequent sections of the California Business & Professions Code, such as the "sale of business" exception in section 16601.

In VL Systems v. Unisen, Inc.,[1] the California Court of Appeal found that an employee no-hire provision in a business-to-business computer consulting agreement was overbroad and unenforceable. The holding was based in part on the public policy established by Section 16600. As drafted, the no-hire clause in the consulting agreement purported to prohibit the client from hiring: (1) employees of the consulting company who did not provide any consulting services to the client; and (2) individuals who were hired by the consulting company after its engagement by the client ended.

The Court of Appeal, however, was careful to point out that its decision was limited to the facts of the case, and that a "more narrowly drawn clause limited to soliciting employees who had actually performed work for the client might pass muster."[2]

Below is a summary of the facts and analysis set forth in the VL Systems case, and other relevant California cases addressing employee no-hire and non-solicitation clauses.

Case Background

In VL Systems, Star Trac Strength ("Star Trac") engaged VL Systems ("VLS") to provide approximately 16 hours of computer consulting services. The contract between the parties included the following no-hire provision:

BUYER WILL NOT ATTEMPT TO HIRE SELLER'S PERSONNEL. Any hiring, or offer of employment entitles, but does not require VL Systems, Inc. to immediately cancel the performance period of this agreement. If, during the term of, or within (12) months after the termination of the performance period of this agreement, buyer hires directly, or indirectly contracts with any of seller's personnel for the performance of systems engineering and/or related services hereunder, BUYER AGREES TO PAY TO THE SELLER SIXTY PERCENT (60%) OF EITHER THE NEW ANNUAL COMPENSATION PAYABLE TO SUCH PERSONNEL or the fees paid to, or in favor of such personnel for one (1) year after such personnel separates from service with seller, whichever is applicable, as liquidated damages.[3]

After the contract was completed, Star Trac hired a VLS employee (David Rohnow), who had been working for VLS for a total of 22 weeks as a senior engineer. Rohnow was hired following his response to Star Trac's Internet job ad. Rohnow did not provide any services to Star Trac during the term of the consulting agreement. In fact, VLS had only hired Rohnow after its contract with Star Trac had been completed. Nevertheless, VLS sent Star Trac a bill for $60,000 pursuant to the no-hire provision, which Star Trac declined to pay.

Court Action

VLS subsequently filed a lawsuit against Star Trac for breach of...

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