Recent headlines from the Silicon Valley suggest that “no-hire” agreements are illegal, immoral, and unsustainable. But, those headlines address blanket restrictions negotiated between competitors. Targeted restrictions between supplier company and customer company are entirely different.
The Department of Justice’s Competitive Impact Statement (“DOJ CIS”) in those Silicon Valley cases acknowledges that distinction: “An agreement that would normally be condemned as a per se unlawful restraint on competition may nonetheless be lawful if it is ancillary to a legitimate procompetitive venture and reasonably necessary to achieve the procompetitive benefits of the collaboration.” What is ancillary and reasonably necessary? The DOJ CIS offers as illustrations contracts with consultants or recipients of consulting services, auditors, outsourcing vendors, recruiting agencies or providers of temporary employees or contract workers.
For such restrictions, the operative issue is not antitrust law but rather the traditional issues in restrictive covenants under state law. There, the touchstone will be “reasonableness” which is typically measured on three levels: (1) the burden on affected employees; (2) the employer’s legitimate business interests; and (3) the scope of the restrictions. Ultimately, agreements must be designed to protect an employer’s investment in people who possess the critical “know-how” to make the business successful and, as the Virginia Supreme Court recognized, to avoid becoming an “involuntary and unpaid employment agency[.]” Therapy Servs., Inc. v. Crystal City Nursing Ctr., Inc., 239 Va. 385, 388 (1990).
In that case, a nursing home attempted to poach employees from an outsourced rehabilitation services, despite a “no hire” clause in its service agreement. When sued, the nursing home argued that the “no hire” clause violated public policy. The Virginia Supreme Court held that the clause did not violate public policy because individuals do not have a “right to employment by an employer of their choice or by any specific employers”; it also noted that this type of restrictions is less onerous than traditional restrictive covenants against employees because it only limited employment options with one other business. Therapy Servs., Inc., 239 Va. at 388.
While the Wisconsin Supreme Court invalidated a “no hire” clause under similar circumstances, it denied enforcement because the employees were unaware of the clause: Wisconsin law “requires that employees know that they are subject to a restrictive covenant and that they consent to such a restriction[.]” Heyde Cos. v. Dove Healthcare, LLC, 258 Wis. 2d 28, 41 (2002). Yet, Wisconsin is unique in imposing that limitation. See e.g., H&M Commercial Driver Leasing, Inc. v. Fox Valley Containers, Inc., 805 N.E.2d 1177, 1183 (Ill. 2004) (holding that a no-hire agreement between an employee leasing company and its customer was valid, explicitly rejecting the reasoning by the Wisconsin Supreme Court in Heyde); Celtic Maintenance Servs. v. Garrett Aviation Servs. LLC, 2007 BL 178404, 4 (S.D. Ga. Dec. 21, 2007) (also explicitly rejecting the reasoning of the Wisconsin Supreme Court in Heyde); Crown Castle USA, Inc. v. Howell Eng’g & Surveying, Inc., 981 So.2d 413, 423 (Ala. 2006) (implicitly rejecting Heyde by finding a no-hire agreement between a business and contractor enforceable and rejecting an earlier line of Alabama cases that required the employee to also have entered into a non-compete agreement).
This leaves the ultimate question of: when is a “no hire” clause appropriate?
First, decide whether a “no hire” agreement is better than individual non-compete or non-solicitation agreements. If you are placing employees within another company (e.g. providing on-site specialists), then a “no hire” agreement is likely much easier to craft and enforce than multiple non-compete agreements.
Second, consider state law on non-competes in general. Because “no hire” agreements are partial restraints on trade, the tendency to enforce non-competes should act as a barometer for whether or not a “no hire” clause will be upheld.
Third, think carefully about what you are trying to accomplish. For example, placing a clause in a joint venture agreement to prevent your business partner from stealing your development team is entirely reasonable. In contrast, a no hire agreement in a leasing or sales agreement where there is little risk that key employees may be poached wastes ink and customer good will.
For any business that depends on placing employees within a client’s operations on a regular basis, “no hire” agreements offer much promise (even for jobs that fall below the Plimsol line for more traditional noncompetes). It might just be time to consider protecting the investment in such on-site employees by defining what hiring is off-limits to protect against becoming an “involuntary and unpaid employment agency” for clients.