As far as I know (not a lawyer) "License Agreements" have no real legal authority, and unless they signed a "Non-complete clause" (which obviously they didn't), there's nothing Apple can really do preventing former Apple engineers from performing their job at a new company., unless they actually want to take it to court and risk having their EULA ruled invalid. I really don't think this iPod+iTunes thing really wants to go to cout.
AFAIK, all Apple employees sign non-compete agreements. My wife had to sign a non-compete cause. She can be sued if she uses her proprietary knowledge of company products. She can also go to jail if she were to use certain trade secrets from her old company. This is called theft.
There are ways around this and these agreements are not always enforced, but Apple could at any time choose to enforce them, both civilly and criminally depending on the type and scope of violation.
Hacking iTunes could lead to DMCA and other legal issues just like what happened to some guys recently trying to crack satellite TV algorithms.
Just like stealing music. Most people get away with it, but this doesn't make it legal. Is this right the way in which laws such as DMCA are enforced. I dont' think so, but laws are laws.