It probably began as a friendly gentlemen a agreement. "Don't steal my engineers. I won't steal yours. Helps keeps costs down. It's all in the shareholders interests right?"
I don't understand why the Palm CEO didn't just say "Fine. We'll tell everyone why you're doing that."
Seems to me the downside to Apple of having their illegal collusion exposed would have had to be far greater than the cost of the engineers Palm could have hired away.