So-called "no-hire" or "non-raiding" clauses, used by companies to prohibit a vendor or former employee from soliciting its current employees, have become increasingly common in California's mobile workforce. In some instances, these contracts go beyond a "no-solicitation" bar, and include an outright ban on hiring. Until recently, there has been little case law addressing the enforceability of such "no-hire" clauses. With the release of VL Systems, Inc. v. Unisen, Inc. this past month, California companies are now on notice that broad "no-hire" clauses may run afoul of state law.

VL Systems addressed an agreement between Star Trac Strength ("Star Trac") and its vendor, VLSystems, Inc. ("VLS") which furnished computer services on a limited project for Star Trac. The contract included a provision whereby Star Trac agreed not to hire, or attempt to hire, VLS' personnel for one year after the termination of the project. The agreement included a liquidated damages provision, requiring Star Trac to pay VLS an amount equal to 60% of the annual salary for any employee it hired in violation of the 'no-hire' clause. After the project was completed, in April 2004, David Rohnow went to work for VLS. In September 2004, while employed at VLS, Rohnow responded to an Internet classified ad, and was hired by Star Trac. VLS demanded payment of liquidated damages in the amount of $60,000 for breach of the 'no-hire' provision in its contract with Star Trac. When Star Trac declined to pay, VLS filed suit.

The California Court of Appeals held that the broad 'no-hire' clause contained in the parties' contract violated California Business & Professions Code Section 16600, and was unenforceable. That statute provides that, subject to certain exceptions, "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." In addressing the scope of the 'no-hire' clause here, the court expressed concern that it impacted a broad range of third parties, including VLS employees who had not even worked on the Star Trac project, but who nevertheless were barred from going to work for Star Trac.

Citing an earlier decision, Loral Corp. v. Moyes, the court noted that narrower restrictions might pass muster under Section 16600, in that "reasonably limited restrictions which tend more to promote than restrain trade and business do not violate the statute." In this regard, the court acknowledged that a narrower restraint, for example, one which merely prevents "solicitation of employees who actually performed work for the client," might be enforceable. In short, the court took some care in limiting its holding, so as to avoid any suggestion it was calling into question prior cases upholding "non-solicitation" clauses under Section 16600.

In the wake of VL Systems, California employers should carefully assess any "no-hire" provisions in contracts with vendors, current or former employees, or others. Please feel free to contact any member of Schiff Hardin's Labor and Employment Group for additional information or assistance. Our San Francisco office is carefully monitoring this and related developments impacting employee mobility issues in California.