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A little-known California law is Silicon Valley's secret weapon

Business Leaders And Government Officials Attend Washington Ideas Forum
John Krafcik, CEO of Waymo, Google’s self-driving car division.
Photo by Chip Somodevilla/Getty Images

Ford just agreed to invest a billion dollars in a self-driving car company you’ve probably never heard of. It’s called Argo AI, and it has only existed for a couple of months. Bloomberg reports that its “founders Bryan Salesky and Peter Rander are former leaders of the self-driving car teams at Alphabet Inc.’s Google and Uber Technologies Inc.”

Google — which recently rebranded its self-driving car project Waymo — has been having this problem a lot lately:

  • Last year, another group of engineers left their jobs on Google’s self-driving car team and started a self-driving truck company called Otto. Within months, it had been snapped up by Uber for $680 million.
  • Later that year, the leader of Google’s self-driving car project, Chris Urmson, announced he was leaving. He teamed up with a leader of Tesla’s Autopilot team — the team responsible for Tesla’s self-driving technology — to start a new company called Aurora.
  • Two top engineers on Google’s self-driving car team left at the same time as Urmson and created a company called Nuro.ai.

What’s going on here is that there are too many technology and car companies chasing too few engineers with the expertise necessary to build self-driving car technology. These lucky engineers are enjoying tremendous demand for their talents.

That’s especially true for people who already have hands-on experience with commercial self-driving car projects. And no one has more hands-on experience than veterans of Google’s Waymo division, who started working on the problem years before their major competitors. With Waymo taking its time introducing a commercial product, more and more Waymo engineers are seeing an opportunity to strike out on their own and get rich in the process.

As frustrating as this must be to Google’s top leadership, this kind of thing is deeply baked into Silicon Valley culture. The fact that any employee can quit and start his or her own rival firm is a key reason for Silicon Valley’s success over the last half century. And it’s made possible by an unusual characteristic of California law: Courts there refuse to enforce contracts that limit employee mobility.

This rule has helped to cement Silicon Valley’s role as the nation’s capital for high-tech innovation. It ensures that powerful incumbents can never keep good ideas bottled up inside their walls. Ideas naturally flow to whichever company can best put them to use.

Noncompete agreements may have killed the Silicon Valley of the East

The Boston technology boom of the 1980s was an important part of the “Massachusetts Miracle” that helped governor Michael Dukakis capture the Democratic nomination for president in 1988.
Herb Snitzer/Michael Ochs Archive/Getty Images

California’s approach to noncompete agreements is unusual. In most states, if an employee signs an agreement promising not to work for a competitor for a year after leaving, courts will enforce the requirement.

The practical effect of this can be seen in Massachusetts, a state where noncompete agreements are strictly enforced. Back in the 1970s, the Boston metro area was the home of computer companies like Digital Equipment Corporation, Wang Laboratories, and Prime Computer. They made minicomputers — washing machine–size devices that were only "mini" compared with the room-size mainframes that preceded them.

At the time, these companies were so important to the computer industry that it was far from obvious that the San Francisco Bay Area — not the Boston Metropolitan Area — would emerge as America’s high-tech capital.

But Boston’s minicomputer companies faced growing competition from dramatically cheaper "microcomputers," known today as PCs, some of which were designed by Silicon Valley companies like Apple. The Boston area’s tech giants never found a good response to the PC threat, and it drove most of them out of business by the end of the 1990s. At the same time, of course, Silicon Valley was thriving.

Why did Silicon Valley boom while Boston’s technology sector fizzled out? In an influential 1994 book, political scientist AnnaLee Saxenian argued that the difference was cultural. In Boston-area technology companies, engineers expected to work for one company for life. In the San Francisco Bay Area, by contrast, it was common for workers to hop from one company to another — and even to found new startups that competed with their old employers.

The stampede of Google veterans starting their own self-driving car companies is the latest example of this phenomenon. The earliest may have been in 1955, when a group of eight young employees left an established company, Shockley Semiconductor to create a rival, Fairchild Semiconductor. A decade later, some of them left Fairchild to found Intel.

In 1999, legal scholar Ronald Gilson identified a key reason there’s so much job-hopping in Silicon Valley: Most states, including Massachusetts, enforce noncompete agreements. California doesn't. The result was a strikingly open culture in the Bay Area. Companies couldn't prevent their employees from going to another company — or starting their own — which in practice meant it was very difficult for companies to keep secrets.

Not everyone is convinced that this difference explains Silicon Valley’s success.

Ted Sichelman, a scholar at the University of San Diego, is one skeptic. In an interview last year, he argued that Silicon Valley simply got lucky that it focused on PCs while Boston focused on minicomputers.

But the Bay Area technology cluster has proven resilient to the declining fortunes of the PC industry in the face of competition from smartphones, and Silicon Valley's job-hopping culture might be an important reason for this. The fact that employees are free to leave established companies and join startups — and so many take advantage of this freedom — gives Silicon Valley a resilience that was absent from Boston’s technology cluster. No matter how technology evolves, there’s likely to be a Silicon Valley company on the cutting edge.

The exodus of engineers is bad for Google but good for Silicon Valley

Transportation Sec'y Foxx Discusses Future Transportation Trends With Google CEO Photo by Justin Sullivan/Getty Images

Today’s drama in the self-driving car world, then, is just the latest chapter in a long Silicon Valley story. And in the long run, it’s likely to work out for the benefit of Silicon Valley as a whole.

Right now, there are a lot of unknowns about the emerging self-driving car industry. We don’t know if self-driving cars will be predominantly rented or owned. We don’t know if self-driving technology will require new cars to be designed, or if sensors can be bolted onto cars designed by conventional car companies. We don’t know if drivers will cede control gradually or all at once. We don’t know if self-driving cars requires the resources of a massive company like Google or if a handful of smart engineers can find clever ways to make cars drive themselves. We don’t know if the technology will be applied first to passenger cars or commercial trucks.

The proliferation of self-driving car startups is allowing the industry as a whole to explore all of these possibilities simultaneously. Otto focused on building self-driving trucks. Nuro.ai is reportedly working on developing a self-driving car. Argo AI will focus on bringing self-driving capabilities to cars made by its new majority shareholder, Ford.

This kind of parallel innovation makes it less likely that the American technology sector will collectively get into some kind of self-driving technology cul-de-sac. Many of the ideas these companies — and others not founded by Google veterans — are exploring won’t pan out. But some likely will.

And this pattern — repeated over and over again over the past 60 years — helps to explain why Silicon Valley as a whole has remained so vibrant. Lots of individual companies have failed in the region. But by making it as easy as possible for people to turn good ideas into new companies, California law has given the San Francisco Bay Area an unfair advantage over other aspiring high-tech hubs.

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