Enforceability of business-to-business employee anti-poaching clauses

One frequently encountered provision in software license, support or development agreements is an employee non-solicitation clause, in which the customer agrees not to solicit, recruit or hire the vendor's employees during the term of the agreement and for a period of time thereafter, typically six to twelve months. While such clauses can lead to acrimony during negotiations, for the most part customers typically understand the reasoning of and the need for such clauses, and most often agree to them in some form.

What may not be widely understood, however, is that such clauses may run afoul of California's statutory prohibition against non-competition covenants, embodied in section 16600 of California's Business & Professions Code. This statute renders void and unenforceable "every contract by which anyone is restrained from engaging in a lawful profession, trade or business of any kind …." Any company domiciled in California, or any company doing business with a California company, should be aware of the issues and risks employee non-solicitation and similar no-hire clauses resulting from application of section 16600.

Non-compete agreements directly between employers and employees are most commonly viewed as being the subject of section 16600. However, a 2007 California Court of Appeals decision demonstrates that even business-to-business contracts which purport to restrict the mobility of employees can violate section 16600.  The case is VL Systems Inc. v. Unisen, Inc. (Cal. App. 4th Dist. 2007).

In this case, VL Systems, a systems consulting firm, entered into a consulting agreement with Unisen which contained a VL employee no-hire clause, obligating Unisen to pay liquidated damages to VL in the event Unisen hires any employee of VL during the contract's performance period and twelve months thereafter. After the contract services were completed, Unisen hired a former employee of VL as a result of an Internet directory listing. Unisen was aware of the fact that the employee had worked at VL and that the consulting contract contained the no-hire clause, but concluded that because this particular employee had no involvement in the provision of services to Unisen, the no-hire clause was not applicable (indeed, the employee in question was not even employed by VL at the time VL's performance of services to Unisen). VL brought suit against Unisen seeking to enforce the no-hire clause and recover the specified liquidated damages.

The Court of Appeals rejected the claim, ruling that the no-hire clause, particularly as applied to this specific employee who had no involvement in providing services to Unisen, was void under section 16600 and unenforceable.  The court held, "… upholding such a contractual provision would unfairly narrow the mobility of an employee who had never worked for [Unisen] and had independently sought out … the job opportunity." Enforcement of such a clause "would present many of the same problems as [direct] covenants not to compete …."

The court was careful to note that its ruling was limited to the facts at issue. The court intimated that a more narrowly-drawn and limited no-hire clause, perhaps one that included within its scope only employees that actually performed services for the customer and/or that restricted only the solicitation, and not the hiring of, such employees, might be permissible under section 16600. It would appear that no-hire clauses which go beyond this face a significant risk of unenforceability.

Query whether requiring employees to agree not to solicit or poach fellow employees after that employee leaves is permissible under section 16600. It is noteworthy that the stakes in this context are much higher than mere unenforceability. California Labor Code § 432.5 provides, "No employer, or agent, manager, superintendent, or officer thereof, shall require any employee or applicant for employment to agree, in writing, to any term or condition which is known by such employer, or agent, manager, superintendent, or officer thereof to be prohibited by law."  An intentional violation of this provision is a criminal misdemeanor and exposes the violator to civil liability for treble damages and attorneys' fees.

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