Former Palm CEO, Ed Colligan, spurned an approach from Apple CEO, Steve Jobs, when the latter proposed both refrain from hiring each other’s employees.

Colligan had the conversation with Jobs in August 2007,  Bloomberg reports. He refused the request, saying: “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.”

The conversation took place two months after Apple’s introduction of the iPhone, shortly after Palm hired former Apple exec, Jon Rubinstein (now Palm CEO), to aid development new smartphones.

Jobs told Colligan he was concerned Rubinstein was recruiting Apple employees. “We must do whatever we can to stop this,” he said.

Rubinstein, of course, was a highly-placed Apple exec who had worked with Jobs for 15 years. At the time he left he was head of Apple’s iPod unit.

While the exact details of what Jobs proposed haven’t been revealed, it comes as the US DOJ quietly investigates collusion in hiring practices in Silicon Valley.

In the background, Bloomberg reveals Apple hired away “at least 2 per cent of Palm’s employees” as it developed the iPhone. Since then, Palm has been hiring away Apple and ex-Apple employees to head key strategic points in its executive line-up.

The news emerges as Palm and Apple lock together in a smartphone battle, with Apple working to prevent the new Palm Pre syncing content with iTunes.