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There's Gold in Them Thar Labor Regulations: Fueling the Second Gold Rush 

Wednesday, Oct 23 2013

It only took six years for San Francisco to spawn a boom town from a cluster of small settlements, with entrepreneurs flocking in from all parts of the world, extracting natural resources, building new transit systems, staking claims on land, and displacing the locals. As the population snowballed, real estate became so scarce that people slept outside, erecting makeshift dwellings and stuffing all their possessions in bindles. Meanwhile, a room could go for up to six times the market value.

Commentators describe the epoch as either a "gold rush" or a "land-grab" — two ready-made phrases that instantly call to mind a greedy speculator wielding a shovel. Flannel shirts, droopy mustaches, and scraggly beards were a scourge throughout the city; once the "hella homeless" look became fashionable, it was hard for casual observers to distinguish a newly minted millionaire from a broke, starry-eyed entrepreneur.

The year was 1872. A century and-a-half later, the same fashion trends apply; drop a flannel-shirted Forty-Niner at your nearest Google bus stop, and he'd probably fit right in. And so would the laws that enabled his success.

It turns out a vestige of the Gold Rush is also the secret sauce that created Silicon Valley, as venture capitalist Gregory Gretsch noted in an exuberant Wall Street Journal blog penned in September. Gretsch explains that it took a certain "cultural and legal foundation" to anchor a multi-billion dollar tech sector, and much of that owes to a clause in California's 1872 Civil Code to outlaw "non-compete agreements" — contracts that forbid an employee from moving to a rival company.

Though these covenants were originally enforced against auto mechanics and hairdressers, they've cropped up more recently in industries with a lot of money on the line and a huge cache of trade assets to protect. According to Gretsch, non-compete agreements are "a regular topic of Board conversation" at non-California companies. They want to poach certain talent, but can't; on the flipside, they want all new hires to pledge their loyalty.

In Gretsch's eyes, such clauses don't just erode trust in relationships, they also stifle new ideas and prevent new businesses from sprouting. They're the reason that various out-of-state Silicon Valley spinoffs — namely, Silicon Alley in Manhattan, and Silicon Prairie in the Midwest — haven't measured up. Contracts permit frivolous litigation, Gretsch says, and that stymies business. One captive hire does not an industry make.

He's hardly alone in making that argument. A whole bevy of tech lawyers and professors have already noted that free-spirited employee mobility is as much a staple of California culture as the orange poppy, alfalfa sprouts, or the word "hella."

"Originally, this law was not explicitly for Facebooks and Googles," Silicon Valley attorney Bradford Newman says. "It was more rooted in the California ethos that this is the west — not the Wild West per se, but sort of like we have to be open to people pursuing their professions."

The Facebooks and Googles of the last century were likely involved in the shipping industry, which made San Francisco a hub of global business and paved the way for bankers, real estate developers, and manufacturers. To date, no one has really undertaken an archival study on whether industries grew because of employee mobility prior to Silicon Valley. UC Irvine law professor Catherine Fisk cites early California cases involving ice distributors and other salespeople who tried, and failed, to enforce non-compete covenants, though she's unsure whether such laws had a profound effect on their businesses. Nonetheless, she believes the legislators who prohibited non-competes in 1872 probably thought their law would help promote economic development.

Once big manufacturers like Hewlett-Packard cropped up in the 20th century, the importance of a legal culture that encouraged worker mobility — and with it, innovation — became much more obvious. Laws alone didn't beget a healthy tech sector, according to UC Berkeley School of Information Dean AnnaLee Saxenian, who ascribes the genesis of Silicon Valley to cheap land, nearby universities, and the glut of talent being produced by those universities. Academics often use the term "agglomeration economics" to describe a combination of factors that create a bumper crop of infrastructure, and the South Bay tech sector — with its rich concentration of industry — is an embodiment of that term.

That said, permissive employment laws certainly helped, says UC Hastings professor Robin Feldman, who believes it's better for companies to spend their time on innovation, rather than squabbling over contracts and licenses in the courtroom. She points out that since patent enforcement is reaching a fever pitch, tech giants like Apple and Samsung are throwing buckets of money into litigation, when they could be devoting all of it to research and develop new products.

That's not to say that local tech companies never try to block an employee from defecting to a competitor. Though lawyer Bradford Newman publicly opposes non-compete covenants, he served as counsel to San Francisco gaming company Zynga when it sued former CityVille manager Alan Patmore for allegedly passing trade secrets to a rival company, Kixeye. Another San Francisco attorney, Allen Ruby, helped Hewlett-Packard file a complaint against ousted CEO Mark Hurd, alleging that he'd reveal HP's precious trade secrets if he took a high-ranking position at Oracle. Both suits were ultimately settled.

Those examples alone show that tech companies aren't inured to petty suspicions, though, as Feldman points out, trade-secrets law is generally strong enough to protect them against theft of confidential information, without preventing people from moving to new ventures.

That's something for venture capitalists like Gretsch to consider when they throw money at a new start-up — there's no use investing in a company that's in imminent danger of being shut down for trade secret misappropriation. As people who control the pursestrings that enable companies to form, they have every reason to want business and professional codes to be as lax as possible.

In that sense, they're perhaps no different from their antecedents in the mining or manufacturing or telegraph industries. There's truth to most clichés about "Wild West" culture, Rutgers School of Law professor Alan Hyde insists, explaining in an e-mail that Californians are by nature restless; their work culture diverges sharply from that of other states, where, well into the 1970s, major U.S. employers never hired managers outside the company. (That partly explains why top positions were always filled by men who spent their lives climbing the ranks and rotating through facilities internally.) In California the seeds of start-up culture were sprouting even a hundred years ago, when two Stanford emeriti left their Palo Alto-based venture, Federal Telegraph Company, to start new businesses, with no protest from the FTC.

Hyde and other academics argue that California's legal culture is of a piece with its aspirational character. Investors have always been more willing to spend money here than their counterparts in East Coast banks; company founders have long believed that heightened competition drives productivity. The 19th century legislators who drafted California's employee-mobility laws were operating mostly on intuition, knowing only that their state began industrializing when a group of roving entrepreneurs discovered gold in them thar hills. But their instincts panned out over time.

About The Author

Rachel Swan

Rachel Swan

Rachel Swan was a staff writer at SF Weekly from 2013 to 2015. In previous lives she was a music editor, IP hack, and tutor of Cal athletes.


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