How California Legally Permits Innovation

Although the physicist William Shockley had been a brilliant scientist who brought the semiconductor and transistor to mankind, his brilliance ended in guiding people. In the same year that he won the Nobel Prize in Physics, he had founded Shockley Semiconductors in Mountain View, not far from where Google’s headquarters is located today. And 1956 was also the year he was able to attract a number of young engineers and scientists to work in his company to bring semiconductors to market.

In a way, he succeeded, but not in the way he had imagined. Only a year later, in 1957, eight employees left Shockley in a dispute because they disagreed with his leadership style. Shockley had been, bluntly put, an asshole as a manager. The eight engineers, whom their veiled former boss called “The Traitorous Eight,” founded Fairchild Semiconductors, which itself became an early success story in computer history, and laid the foundation for today’s Silicon Valley.

Among the eight founders were Robert Noyce and Gordon Moore, the latter being known for his “Moore’s Law”, which called for a doubling of the number of transistors every two years. The two were later to found the chip company Intel together with their colleague Andrew Grove – actually Gróf András István from Budapest. Then there was Eugene Kleiner, born in Vienna, who had to flee from the National Socialists as a Jew and later founded the venture capital company Kleiner Perkins, whose investments in turn were to enable start-ups such as Genentech, Sun Microsystems, Sybase, Compaq, Amazon, AOL, Intuit, Citrix, Netscape, Google, Twitter, Spotify and Uber. The trio around Sheldon Roberts, Jay Last and the Swiss Jean Hoerni founded a forerunner company of today’s industrial conglomerate Teledyne. And Julius Blank was to found the computer chip company Xicor.

In just a few years, one company had given rise to some 65 companies without which computer history would have been unimaginable. To date, at least 2,000 companies can be traced back to Fairchild Semiconductors. And not only that: the Fairchild founders thus also spread their engineering-driven philosophy, which had already manifested itself before in William Hewlett and Dave Packard – founders of Hewlett-Packard – even though it had probably never been explicitly expressed in this way. When an engineer has an idea on which a company can build, we help him build it by becoming not only the first investors, but also the first customers. The generous way in which the people of Silicon Valley share information and help with one another is still the secret of success of the most innovative region in the world.

An intentional “mistake” in the legal understanding has helped. California labor courts are very strict in allowing non-compete clauses for employers. Unlike in Germany, Austria and Switzerland, where a non-competition clause can prohibit a terminating employee from starting with the competition or even starting a business in the same industry for one to three years, Californian courts do not allow such clauses. They interpret these clauses as too restrictive, depriving an employee of the opportunity to earn a living and thus becoming a burden on the California welfare system.

The effects on the economy are significant. Every new technology, every new business model, every innovation is driven very quickly not only by the first company to deal with it, but also by many newly founded companies. For example, the first company to seriously engage in the development of self-propelled cars has now given rise to dozens of new companies. Google’s sister company Waymo was created by former employees of Aurora, Kodiak Robotics and Otto, among others, and many ex-Waymo employees are now employed by dozens of start-ups that are developing technology for them.

This ensures that a promising or risky development cannot be stopped by one person – a manager in a company. Even if one company stops working on it, several other companies continue to compete with different approaches for marketability. Even though the first company that took up this idea may call it “idea theft” and interpret it as damage suffered, from a macroeconomic point of view this is positive. The result can be seen in California’s status as an economic power in its own right, and how that state brings innovation to the world.

It would be time for us to calculate the economic effects of non-competition clauses. How much “damage” can be calculated for the company concerned, how much is the burden on the social security system caused by a former employee condemned to unemployment thanks to a competition clause, and how much is the fiscal and economic gap caused by the active prevention of a company that creates a marketable product from this technology?

William Shockley, by the way, did not stay long in his own company. He had become increasingly dominant and paranoid. Only a few years after the departure of the Fairchild Eight, he too was removed from his directorship and retired to a Stanford professorship, where he died in 1989, retired and estranged from family and friends.

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