Lori Liu
September 2007

The Luminary by Brisbane Chamber of Commerce

Does your company hire consultants or other temporary personnel to perform specialized services? Then you should know about a recent judicial opinion holding that broad "no-hire" provisions in consulting contracts may be unenforceable. A California Court of Appeal ruled in VL Systems, Inc. v. Unisen, Inc. that a "no-hire" provision in a consulting contract was unenforceable as an unfair restraint on an employee's mobility. "No-hire" provisions are common in the consulting industry because they deter clients from directly hiring the consultants as employees and protect the consulting business' key asset, the expertise of its consultants.

In VL Systems, a computer consulting company called VL Systems entered into a consulting contract with Star Trac, which restricted Star Trac from hiring away VL Systems' consultants. The contract required Star Trac to pay liquidated damages if it hired any of the consultants within 12 months after the contract was terminated. After the contract wa completed, VL Systems hired a new consultant, who never performed any work for Star Trac, and independently responded to an Internet job posting at Star Trac. Star Trac hired the consultant, and VL Systems then sent Star Trac an invoice for $60,000, representing the liquidated damages for Star Trac hiring one of VL Systems' consultants. Star Trac refused to pay, and VL Systems sued.

The Court of Appeals ruled that the "no-hire" provision was unenforceable because it violated an employee's right to a profession and unfairly restricted an employee's ability to change jobs. The court rejected the consulting company's argument that the "no-hire" provision did not prevent the business from hiring away the consultant, but merely required the business to pay a fee.

Companies hiring consultants or other temporary personnel should consider VL Systems when deciding whether to agree on a "no-hire" provision in a contract. Companies should consult with legal counsel if unclear whether such provision sin their existing contracts are enforceable.

Lori Liu, a Brisbane resident and attorney with Buchalter Nemer, specializes in commercial litigation. She can be reached at (415) 227-3603 or