California: maximizing employee mobility since 1872

14 Jan 24

Enacted in 1872, section 16600 of the California Business & Professions Code proclaims that "every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void." Courts have "consistently affirmed that section 16600 evinces a settled legislative policy in favor of open competition and employee mobility." Edwards v. Arthur Anderson (Cal. S. Ct. 2008). Recent legislation has only strengthened the bite of the law, rendering non-compliance quite costly for businesses.

California and Massachusetts offer two contrasting lessons on the impact of non-competes in the technology industry. In contrast to California's policy of maximizing employee mobility, Massachusetts has long permitted non-competes, and even after reform legislation was passed in 2018, routinely enforces them.

Both states were well positioned in the early 1970s to become the global high tech hub that Silicon Valley is today. Yet Massachusetts high tech companies’ use of noncompetes made it harder for talented employees to start their own ventures. By contrast, the computer industry accelerated in California, and inventor networks in the Bay Area became denser, even as it stagnated in Massachusetts around an older generation of companies.

Mark Lemley & Orley Lobel, Banning Non-Competes is Good for Innovation, Harvard Business Review (February 6, 2023).

Observing that California's ban on non-competes "has been hugely important to the history of the state," noted science fiction author and digital rights activist Cory Doctorow expounds on this contrasting history of the two states' experiences with non-competes:

The first semiconductor company in California was founded by William Shockley, who shared a Nobel Prize for figuring out how to make transistors, a key step in the development of computing technology. Shockley Semiconductor Laboratory opened for business in 1955 and recruited brilliant technologists to work on semiconductor devices, but closed in 1968. It never made a successful microchip.

That’s because William Shockley was more or less a Nazi.

Shockley was an ardent eugenicist who devoted his energy to touring America and offering Black women shares of his Nobel prize money if they promised to be sterilized and thus removed from the gene pool. He was a brooding, paranoid, hateful man, prone to wiretapping his employees and even his family, and his company struggled to develop any sort of high-tech products, much less bring them to market.

Working for William Shockley was no fun. But because California banned noncompetes, eight of Shockley’s top engineers (“The Treacherous Eight,” in tech lore) were free to quit their terrible jobs, raise investment capital and start Fairchild Semiconductor, the first successful microchip company in Silicon Valley.

Fairchild was a nerd’s playground — at first. But as time went by, the company ossified, coming under the sway of a straitlaced management committee, prompting two of the company’s top engineers to quit and start their own company. They swiftly devastated the ranks of Fairchild, poaching the best of their former colleagues to work for them at their startup, which they called Intel.

Contract law is a powerful lever for encouraging — or starving — competition. California’s policy of blocking noncompetes gave us Silicon Valley. Massachusetts’s tolerance for noncompetes left the state’s once-promising tech sector in California’s dust. Neither Massachusetts nor California had a monopoly on companies founded by bad people with good ideas — but if you were unfortunate enough to join one of those companies in Massachusetts, you were stuck working for them. Until 2018, if you quit, you had to leave your chosen field for three years until your noncompete expired. Massachusetts startups became a place where good ideas went to die, dragging skilled technologists behind them.

Cory Doctorow, Freeing Ourselves from the Clutches of Big Tech (Dec. 5, 2023).