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JUDICIAL UPDATES No-Hire Provision was Unenforceable The Court of Appeal has held that a broad no-hire provision contained in an agreement between a company and consulting firm, by which the company could not hire any of the consulting firm’s employees for a period of 12 months after the termination of the performance period, was unenforceable. In 2004, VL Systems (“VLS”), a computer software consulting company, and Star Trac Strength, a fictitious name of Unisen, Inc. (“Star Trac”), entered into a short-term computer consulting contract. The contract provided that Star Trac (the client) would not hire any VLS (the consultant) employees for 12 months after the contract’s termination, subject to a liquidated damages provision (“no-hire” clause). In April 2004, after the Star Trac Contract was complete, VLS hired David Rohnow as a senior engineer. In June 2004, Star Trac’s information technology manager, Anthony Stella, informed Star Trac that he intended to leave the company but would stay on to find his replacement. In July, Star Trac posted an Internet job listing for the position. Rohnow responded to the listing, was hired, and began work on September 20, 2004. (He had worked for VLS for just under 6 months.) At the time Star Trac hired Rohnow, it was aware of the no-hire clause, but believed it was not relevant since Rohnow was not even an employee of VLS at that time. After Rohnow was hired, VLS sent Star Trac an invoice for $60,000, pursuant to the liquidated damages provision of the no-hire clause. Star Trac did not pay and VLS filed suit in February 2005 for breach of contract, breach of the implied covenant of good faith and fair dealing, and declaratory relief. The trial court found that Star Trac did violate the agreement but found $28,500 to be a reasonable amount of damages. The Court of Appeal disagreed. It found that the no-hire clause was unenforceable, relying on Business & Professions Code section 16600, which states: “Except as provided in this chapter, every contract by which anyone is retained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” The Court found that this type of contract could seriously impact the rights of a broad range of third parties, including not only VLS employees who actually performed work for Star Trac under the contract, but all of those who did not, and who may not have even been employed by VLS at the time. The Court made sure to note that “perhaps a more narrowly drawn clause limited to soliciting employees who had actually performed work for the client might pass muster.” The Court noted that Star Trac did not solicit Rohnow’s application for the position, and that Rohnow chose to apply independent of any connection between VLS and Star Trac. Thus, a no-hire clause included in a consulting/performance agreement, by which the client company is barred from hiring any employees of the consulting company, even if that employee was not solicited, did no work under the contract, and was not even an employee of the consulting company until after the performance of the contract, would likely be unenforceable. (VL Systems, Inc. v. Unisen, Inc., California Court of Appeal case number G037334.)
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