A California appellate court held in a recent decision that a broad “no-hire” provision contained in a consulting agreement was unenforceable as a matter of law because it was an impermissible restraint on trade in violation of the California Business and Professions Code Section 16600.
Despite the frequent use of “no-hire” and “non-solicitation” provisions in consultant and employment agreements, the validity of these provisions in California, especially broad “no-hire” provisions, is far from certain in light of the Court of Appeals for the Fourth Appellate District’s recent decision in VL Systems Inc. v. Unisen Inc., 152 Cal.App. 4th 708 (2007).
The full text of the Court’s decision can be found at http://www.courtinfo.ca.gov/opinions/archive/G037334.PDF
Though the holding in VL Systems appears to be limited to broad “no-hire” provisions, the Court’s policy analysis in the decision suggests, though it is far from certain, that even more narrow “non-solicitation” provisions would be subject to scrutiny by California courts and enforceable only to the extent that they are necessary for legitimate business reasons and are not overly broad in time and scope.
The contract in question included a “no-hire” provision. Specifically, the contract provided that defendant would not hire any of plaintiff’s employees for 12 months after the computer consulting contract’s termination, subject to a liquidated damages provision.
In analyzing the validity of the “no-hire” provision, the Court found that this type of contractual provision may seriously impact the rights of a broad range of third parties, including those who were not even employed by plaintiff at the time of its contract with defendant.
To this end, the court noted that the employee in question was not employed by plaintiff at the time the contract was performed, and that the employee had independently sought employment with defendant.
The court recognized that certain narrower restrictions have been held valid in the past by California courts and expressly stated that it took no position on whether a more narrowly drawn and limited “no-hire” provision would be permissible under California law.
However, it found that the “no-hire” clause at issue was too broad in that it covered not only solicitation by defendant, but all hiring, and it applied to all of plaintiff’s employees, regardless of whether they worked for defendant or were even employed at the time.
The court’s emphasis on the employees’ freedom of mobility protected by Section 16600 of the Business and Professions Code suggests that any contractual restriction on such mobility will be highly scrutinized by California courts.
In light of VL Systems, businesses should reconsider the inclusion of broad “no-hire” provisions in both business service agreements and employment agreements.
Prior to requiring your California employees to sign agreements containing such restrictive covenants, a consultation with a Seyfarth Shaw LLP attorney is recommended.