By Connie Guglielmo

Aug. 20 (Bloomberg) -- Former Palm Inc. Chief Executive Officer Ed Colligan rejected a proposal from Apple Inc.’s Steve Jobs to refrain from hiring each other’s employees two years ago, calling it wrong and “likely illegal,” according to their communications.

Colligan, who stepped down as CEO in June, discussed the matter with Jobs in August 2007, as the mobile-phone war heated up, according to the communications. Apple had introduced the iPhone two months earlier, just as Palm hired a former Apple executive, Jon Rubinstein, to develop new smart phones. Jobs, Apple’s CEO, told Colligan he was concerned that Rubinstein was recruiting Apple employees. “We must do whatever we can to stop this,” Jobs said in the communications.

The U.S. Justice Department is investigating possible collusion in hiring among technology companies, a person familiar with the probe said in June. Derick Mains, a spokesman for Palm, said the company hasn’t been contacted by the Justice Department. Bloomberg News reviewed the communications between Jobs and Colligan.

The exact details of what Jobs proposed to Colligan aren’t known; Jobs didn’t mention a proposal in the communications reviewed by Bloomberg. Jobs said Apple had patents and more money than Palm if the companies ended up in a legal fight, according to the communications. Apple, maker of the Macintosh personal computer, declined to comment, said Katie Cotton, a spokeswoman for the Cupertino, California-based company. Jobs didn’t respond to an e-mail seeking comment.

Escalating Tension

The discussion highlights the tension between the companies as Rubinstein took over product development to help lead a turnaround at Palm, a pioneer in handheld computing. Rubinstein was head of Apple’s iPod unit before he left the company in 2006 and had worked with Jobs for more than 15 years. Palm hired him as executive chairman in 2007 and he succeeded Colligan, 48, as CEO this year.

“Your proposal that we agree that neither company will hire the other’s employees, regardless of the individual’s desires, is not only wrong, it is likely illegal,” Colligan said to Jobs, 54, according to the communications. Colligan said he thought about Jobs’s proposal and considered offering hiring concessions, before deciding against it, according to the exchanges.

Employees are entitled to seek work wherever they want, including at rival firms, said Donald Russell, an antitrust lawyer who worked at the Justice Department for more than two decades before going into private practice in Washington. Competing offers may result in higher salaries and better benefits, he said.

Hiring Competition

“It’s a form of competition that is usually protected by antitrust laws that prohibit agreements that restrict competition,” said Russell, who wasn’t commenting specifically on Apple or Palm.

The Justice Department may investigate the exchange between the companies even though Palm rejected Apple’s proposal, said Daniel Rubinfeld, a former deputy assistant attorney general for antitrust.

“If I were at DOJ, I would definitely be interested,” said Rubinfeld, who is now a law professor at the University of California at Berkeley.

Palm, based in Sunnyvale, California, declined to comment, as did Colligan and Rubinstein, Mains said. Colligan didn’t respond to a separate phone call seeking comment. Gina Talamona, a spokeswoman for the Justice Department, declined to comment.

Pre Software

Under Rubinstein, Palm created a new mobile operating system called WebOS. In June, the company introduced the Pre, a smart phone that competes against the iPhone.

Rubinstein, 53, joined Palm as part of an investment deal by Elevation Partners, a private-equity firm in Menlo Park, California. The company has received $425 million in funding from Elevation, which helped steer development of the Pre. When Colligan stepped down in June, Palm said he would take some time off and then join Elevation.

Palm and Apple, based about 5 miles (8 kilometers) apart in Silicon Valley, have a history of hiring each another’s employees. Around December 2007, Mike Bell joined Palm as senior vice president of product development. He spent 16 years at Apple, where he oversaw microprocessor software.

Public Rivalry

In his August 2007 communications with Jobs, Colligan said Apple had hired at least 2 percent of Palm’s workforce as the company developed the iPhone. Apple released the iPhone in June 2007.

Apple rose $1.73 to $166.33 today in Nasdaq Stock Market trading. The shares have gained 95 percent this year. Palm, whose shares have risen fourfold this year, fell 3 cents to $13.51.

The government stepped up its scrutiny of technology companies this year under President Barack Obama’s administration. In addition to the Justice Department’s hiring probe, the Federal Trade Commission is looking into whether Apple and Google Inc. broke antitrust law by sharing board members. Google CEO Eric Schmidt resigned from Apple’s board this month because of growing competition between the companies, Jobs said at the time.

The spat between Jobs and Colligan has given way this year to an increasingly public rivalry between Apple and Palm. Both the Pre and the iPhone are touch-screen devices that let users swipe their fingers to navigate the software, make calls and select applications.

Touch Gestures

“There are a lot of features in the Pre that mimic features in the iPhone, namely touch gestures,” said Charlie Wolf, an analyst at Needham & Co. in New York.

In January, the month Palm first unveiled the Pre, Apple Chief Operating Officer Tim Cook said Apple would go after companies that copy the iPhone’s features.

“We’ll use whatever weapons we have at our disposal” to protect Apple’s intellectual property, Cook said on a conference call with analysts in January.

Apple hasn’t sued Palm over the Pre’s technology.

In the past two months, the companies have sparred over a feature that lets Pre owners access their music in Apple’s iTunes software. Last month, Apple updated iTunes to prevent it from working with the Pre. About a week later, Palm released an update to the Pre’s operating system that re-established the link to iTunes.

Palm stepped up its campaign to woo software developers for the Pre this week, releasing details of its applications store. Developers will get 70 percent of the royalties for software sold for the Pre, with Palm retaining 30 percent, Palm said.

Palm?s Colligan Said to Snub Jobs?s Recruiting Offer (Update2) -