Century Long Effect of California Gold Rush ...
 
 Net History
 
From the Gold Mines of El Dorado to the “Golden” Startups of Silicon Valley

Gregory Gromov

 

Why was the law that enabled Silicon Valley’s successful development passed all the way back in 1872 and only in the state of California?



Main Difference of the Legal Framework of Silicon Valley

Which of the main historical features of Silicon Valley has been instrumental in its development? There have long been discussions on this subject and very different points of view have been expressed. Many believe the main reason is the unique features of Stanford University. Others point out that the Valley is an exceptionally favorable place to live on the Pacific coast and therefore any researcher, engineer or programmer who comes there for some reason is not usually willing to leave.

Finally, those who actually have an interest in seeing that the research park created somewhere with their participation would obtain adequate government funding usually pay attention first and foremost to the fact that the starting period for the formation of Silicon Valley occurred during the period of one of the peaks of the "Cold War," when high-tech enterprises benefited from the "windfall" of defense programs.

Of course, each in its own way is correct, as well as all of them together. The valley provides an exceptionally comfortable place to live, the climate is wonderful and the university is remarkable in all respects. Hardly anyone would dare to deny the well-known fact of the growth in military spending during the “Cold War” period. However, it is most likely that none of the aforementioned facts, as well as any combination of them, are and ever have been so very unique to just one state in America to explain why just one California research park in the entire country would eventually become Silicon Valley

Let’s then formulate the question more specifically for the present day – which of the differences of Silicon Valley is currently the most obvious? The answer to this question of course is known to everyone – the characteristic difference of Silicon Valley is that here you have world’s fastest paced unstoppable introduction of scientific and technological innovations.

Hence, it raises the following question: What was California’s totally unique characteristic “component” of the local socio-economic climate, which became the “catalyst” for the process of development of technical ideas that arose here (or were imported here) at the first attempts at their formulation by inventors to market the product?

With this catalyst of scientific and technological process acting locally in just one American state, a very special law was enacted in California in 1872.

The law in question declared null and void any contract between a business owner and employee if said contract in any way restricted the employee’s freedom to change employers, even if that meant joining the former employer’s competition.

In other words, any previously signed agreements—for example, an employee contract signed upon hiring—that could in any way limit the employee’s right to freely choose his or her place of work were deemed unenforceable in this 1872 law. More specifically, those clauses that were in conflict with this law were deemed unenforceable.

This law was initially ratified in 1872 as part of California’s Civil Code. It is now listed under California Code - Section 16600, also known as CAL. BPC. CODE § 16600, and reads:

Except as provided in this chapter, every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.

As a result of this cascade of direct and indirect consequences from the application of this law in Silicon Valley, today a number of generally operating U.S. legal standards, including some of the most important, are practically blocked (“de facto” canceled).

Let’s explain how this happens with a widely known example. Anyone who is hired to work in virtually any high-tech company in any of the American states signs an agreement that if he or she ever decides to change in his or her place of employment, then for a specified period (usually two years), determined in advance, after his or her retirement from the company, he or she shall not have the right to work for competitors. This is the so-called Non-Compete Agreement (NCA).

In addition, an agreement is usually signed that prohibits the employee from disclosing, without the express written permission of the employer, confidential information on the company’s activities, which this employee will have the opportunity to learn about during his work at the company – this is the so-called Non-Disclosure Agreement (NDA).

Despite the fact that such documents are usually signed by almost everyone who works in Silicon Valley, the crucial difference, in comparison to the same situation in other American states, is that here these agreements, when they are signed by an employee changing his place of employment, actually have the character of only the mutual good wishes of both parties: the employer and his employee...
The fact of the matter is that the mere signing upon employment of a standard pair of NCA & NDA documents essentially in no way limits the ability of the employee of any company in the Valley at any time to go work for another company, not excluding in this case direct competitors of the organization he just left.

What essentially is the reason it turns out that any employee of one of the California companies cannot interest his employer in an invention or some other promising technological solution he has come up with, then in California he or she , in stark contrast to other American states, without any special efforts can take his “brainchild” to another company or found his own company based on this idea.

In this case, as a general rule for the Valley, there is no way anyone can stop him from doing this. And accordingly, all levels of managers of any company here, as a rule, understand this situation well.
You cannot hold on to talented, productive employees, dismissed from a position of authority…

As is clear from the above excerpt, the version of the 1872 law currently in effect in California does not specify the kind of contract—be it NCA, NDA, or anything else—that a company might ask its employees to sign in order to create legal obstacles for employees who might decide to join the competition or start their own competing firm.

California courts must declare void any such contract to the extent that it concerns itself with changes in employment made by the employee.

In other words, the court must declare legally unenforceable those contract clauses that employers might use to limit the employee’s ability to find new, lawful employment with any other establishment or to start their own business, even if said business would be in direct competition with their previous employer.

In this sense, a court in California need not consider what type of contract — NCA, NDA, or any other form — that the employer uses to legally restrict former employees from going to work at competing firms.

The only difference in formats is that the non-compete agreement (NCA) is by definition essentially invalid in California and such a contract will simply be ruled out of consideration. As far as the non-disclosure agreement (NDA) is concerned, the court might in certain circumstances decide to take up the case, if the worker in question has been charged by the company with breaking the terms of their signed NDA.

The court will still first be required to determine whether or not the NDA is being used by the company to encumber the employee’s inalienable right (in California) to quit in order to find work in any legally sanctioned capacity.

In other words, when California’s legislators adopted a law in 1872 guaranteeing residents of this state full freedom to choose and change jobs, they thus created, among other things, a guaranteed secure “legal corridor” which cannot, as it now turns out, be narrowed either by the NDA or any additional agreements concluded by the company with its workers.

The court follows particularly closely to ensure that charges of a violation of the NDA are not used in such cases for the functional transformation of the NDA into the NCA and therefore they are extremely wary of any kind of not direct, but only “indirect situational” evidence of the breach of the NDA.

For this reason, the doctrine of “inevitable disclosure” that is popular in other American states hardly works in the courts of California. The logical point of this “doctrine” would allow a California employer without any particular problems to breach the restrictions of the 1872 Law. In this case, the typical evidence base of violations of the NDA would then be lined up as follows, simply in execution to read: "we cannot provide the court with specific evidence of disclosure by our former employee of company secrets, but for this situation there is every reason to believe that he simply cannot work in this position, which he was offered by our competitor without disclosing our commercial secrets there…

It is this, "incidentally", that was the basic logic of evidence of a violation of the NDA on the part of Mark Hurd, stated in appeal to the court of Santa Clara County on September 7, 2010 by the company HP. The company claimed in its appeal to the court that Hurd could not fail to disclose HP secrets, working in the position to which he was invited by Oracle. In other words, HP’s lawyers sent the court a document actually stating that they are trying to use the NDA to block its former CEO from starting work at Oracle.

It is clear that given this type of logic in their statement to the court that they were well aware that under no circumstances could they win the process they had undertaken in California.  It was apparent by the very ostentatious character of the presentation of the legal attack, not the attack in and of itself … Respectively, three business days after filing suit in a court HP drops fight to block Hurd's Oracle hire:

 HP reached a settlement Monday with its former CEO that requires him to relinquish about $14 million in stock in exchange for the all-clear to work for rival Oracle. The truce ends two weeks of uncertainty over whether HP, the world's biggest technology company, would drag out its lawsuit against Mark Hurd and try to cripple him in his new job leading Oracle's fight against HP. The deal lets HP save face over the handling of Hurd's ouster. It also removes the specter of a long court battle over whether Hurd, with his trove of secrets about HP, could be barred from working at Oracle as a co-president, reporting to Oracle's CEO Larry Ellison.
http://www.usatoday.com/tech/news/2010-09-21-hp-hurd_N.htm


"The deal lets HP save face over the handling of Hurd's ouster" and that was a real goal of the HP's lawsuit -- merely this and nothing more.

The company employee most knowledgeable about all HP secrets leaves to work for its competitor, and as it turns out once again, nobody was able to prevent him from doing this, and even more - he was even generously rewarded with a severance payment totaling about $20 million (he received upon signing another NDA when departing HP about $36 million, and then returned to HP about $15 of these $36 million).

In other words, the “Hurd Saga" was another convincing illustration that it is almost impossible in California, even by relying on the NDA, to legally prevent the transition of a Silicon Valley employee to any lawful job, including even a job for a direct competitor of his former employer.

It is noteworthy in the context being discussed as well as the following circumstance. In contrast to the absolute majority of employees of the Silicon Valley companies who routinely sign the NDA as just one of many documents upon being hired (without any additional financial compensation), Hurd signed his own NDAs in exchange for very significant remuneration in terms of money for his signature, which usually further enhances the guilt of the offender of such an agreement. And nevertheless it was clear to the parties to the conflict, which arose when it became known that Hurd was leaving to work for HP's competitor, from the very beginning that any attempt to legally prevent the transition of the HP CEO to work at Oracle would be absolutely futile in a California court…

Does all the aforementioned meant that the NDA in no way restrict the behavior of law-abiding citizens in the California?

No, of course, this is not so. As was already stipulated above, at the very beginning of this report, the NDA is practically void in the Valley in any situation where it could prove an obstacle for  transition of an employee from one work place to another. But only just. In all other cases, in no way related to the process of transition of an employee from one company, NDA also effectively protects the confidentiality of information, which is shared with someone in California, as in any other place in the U.S.

Why was the law that enabled Silicon Valley’s successful development passed all the way back in 1872 and only in the state of California?

In order to understand why it was in this time and place—California, 1872—and not in any other state or point in time in American history that lawmakers would have the inclination to apply this particular legal framework to these particular labor disputes, it is worth examining exactly how California came to be the 31st state of the USA.

After some examination of various analogous moments in history, it becomes apparent that Silicon Valley was essentially built on groundwork laid by its first inhabitants—the gold seekers.

49er_and_mull

To get from El Dorado County to Silicon Valley by car takes two or three hours, but 100 years went by between the construction of the first El Dorado County Mining Camps (1848-1851) and the arrival of first high-tech firms at Stanford University industrial park.

The aforementioned law was motivated by a desire to minimize the number of shootings in and around the gold mines of El Dorado and other California areas. If the fortune-seeker, venturesome by nature and armed to the teeth, was unable to resolve a dispute in his favor in a court of law, then it is obvious how and with what tools such conflicts were likely to be settled in the Wild West.

Thus, it was necessary to create a law that would dramatically reduce the likelihood of disputants resorting to violence to resolve the potentially quite dramatic misunderstandings between gold mine owners and hired hands.

Judge_crowd

Conflicts between mine owners—between owners of neighboring claims, for example—also had the potential to turn violent. However, such occurrences can be assumed to be rather rare when we take into account the fact that the mine owners were grossly outnumbered by their employees.

Most importantly, in comparison to their employees, the owner of a registered gold claim generally had much more motivation to do everything in their power to ensure that all business problems were resolved in a court of law.

This is one of many reasons that California’s lawmakers developed a legal framework that protected the rights of the employee by guaranteeing access to the most peaceful of all methods for resolving any problem he might have with the owner of the enterprise—to turn and walk away, to leave for any of the surrounding gold claims and the potential new employers they promised.

Again—and this is vital for a proper understanding of the topic—it was necessary to pass a law guaranteeing workers of any level or position the right to leave an employer and then and there (without any legal obstacles) find a position anywhere he or she wanted, even joining the former employer’s competition in a neighboring mine.

For hired help bound to an employer by some version of a “contract of non-competition”, or any other similar hiring agreement, all too often the only alternative was to let the offences and injustices accumulate until the moment when one’s hand, of its own accord, started creeping towards the holster...

As exploitation of the gold mines grew more and more intense, and more and more gold mines were exhausted and subsequently abandoned. By the 20th century, the law appeared to lawyers to be some sort of legal anachronism, and it was unclear why California should so dramatically differ from all the other states in the union.

Moves to revise this law were periodically proposed, but without much enthusiasm. The fact is that many states to this day preserve a great number of wildly diverse—even exotic—laws that have long since lost their applicability and are no longer used in modern legal practice.

Such a fate might have met this section of California’s 1872 Civil Code, but the San Francisco Bay Area—geographically speaking quite close to El Dorado’s now long-abandoned mines—became the driving force behind California’s next Gold Rush.

People from all over the world were once again drawn to America’s Golden State, to another new enterprise—the apparently bottomless gold mines of profits to be found in the high technology expansion at the state’s main technology park.

Upon Silicon Valley’s rise, this 1872 law ended nearly a century of obsolescence to acquire crucial significance in California, although in a significantly different context than that in which it had originally been written. It quickly turned out to be the most effective catalyst for the research technology rush that steadily, year by year, turned Stanford’s technology park into such a unique hotspot for high technology development in the United States

Shockley touches off the chain reaction leading to Silicon Valley’s formation

In the early 1950s, the industrial park on land adjacent to Stanford University in California was one of many such parks in the country and was far from being the most notable.

The spark that set off the explosive boom of “Silicon startups” in Stanford Industrial Park was a personal dispute in 1957 between employees of Shockley Semiconductor and the company’s namesake and founder, Nobel laureate and co-inventor of the transistor William Shockley.

As is likely true for the majority of outstanding scientists, Shockley was not known for his easygoing nature. As a result of this ordinary “production disagreement”, eight of his leading employees decided to quit to form their own firm, in direct competition with Shockley.

Shockley had only just formed his company “from scratch” a year earlier by hiring top performers from various universities, and this mutinous group of his former “students” formed Fairchild Semiconductor immediately following their departure, having received a USD 1.5 million investment from the New York company Fairchild Camera and Instrument.

After several years, Fairchild gained its footing, becoming a formidable presence in this sector. Its founders began to leave to start companies based on their own, latest ideas and were followed on this path by their own former leading employees. Thus, these generations of Silicon Valley’s latter-day pioneers are called “Fairchildren”.

Then began a sort of “nuclear fission” in personnel, where another crop of companies formed around the Fairchildren, and those leaving invited their coworkers along, who then went on to do the same...
The process gained momentum and what had once began in a Stanford’s research park became a veritable startup avalanche...

startup financing cycle diagram

One of the most well-known of startups appeared in the earliest stages of this chain reaction. Gordon Moore and Robert Noyce, two of Shockley’s “Traitorous Eight”, left Fairchild Semiconductor to form Intel.

Thus, over the course of just 20 years, a mere eight of Shockley’s former employees gave forth 65 new enterprises, which then went on to do the same...

The aforementioned “personal conflict” at Shockley Semiconductor can be found at the center of practically any study of the history of Silicon Valley. It is surprising that these histories fail to note that it was only in California that this conflict—a perfectly ordinary disagreement, easily found in any industrial park all across America—inspired this unique chain reaction and gave rise to the next generation of startups, who then went on to divide and reproduce, and so on in this sort of nuclear fission.

We again take up this question, critically important as it is in understanding the reasons that only California’s Silicon Valley hosted such a boom. Can it be that there had never been a personal flare-up of this kind, or even on a much greater scale, in all the other high tech companies, long-established in various industrial parks around the country?

Why was Stanford’s Research Park only host to Silicon Valley’s growth and development?

Conflicts between creative teams and their veteran leadership were of course common in all American industrial parks, both before and after the aforementioned disagreement at Shockley. However, the crux of the matter is that, with the exception of California, all across America there are many different agreements signed between business owners and their employees that restrict the employee’s right to quit and join competing firms or, even worse, go on to create his or her own company in direct competition with their former employer.

These non-compete agreements, which new recruits are required to sign (generally in the form of NCAs or NCA & NDAs) play the role of graphite rods in a nuclear reactor, slowing the chain reaction of creation of new startups all over America.

Thus it was that these decelerators in the process of creating companies to compete with the industry’s established figures were legally withdrawn from the nuclear reactor of innovations in what would many years later become Stanford Research Park.

As was noted earlier, it was in California (and only in California) that a particular law emerged in 1872 that defended the employee’s freedom of movement, the right to leave his or her employer at any moment, even to immediately go to work in direct competition with their former employer or to create a competing firm on their own.

States startups local grades founders

    Source: "Education and Tech Entrepreneurship" by Vivek Wadhwa, Richard Freeman, Ben Rissing.
    Ewing Marion Kauffman Foundation, 2008


Timeline of events in the 100 years leading to Silicon Valley’s creation

1848—The first year of the Gold Rush. All over the world spread rumors of fabulous gold reserves discovered on the west coast of North America. Gold was discovered in El Dorado County, not far from Sacramento, the current state capital of California, and “El Dorado” entered the vocabulary of treasure-seekers around the world.

1849—The first tens of thousands of the more adventurous of gold-seekers from all over America arrive in California, in what was at that time still a territory of Mexico. Not counting the Native Americans, only about 2000 Americans lived there at the time... Thus, the first tens of thousands of California gold seekers went down in history as the “Forty-niners”.

1850—California gains statehood, becomes known as "The Golden State” ( California is also known variously as The Land of Milk and Honey, The El Dorado State, and The Grape State).

1853—The number of new arrivals to California exceeds 300 thousand people...

1872—As a result of the state’s experience during the regulation of the more violent of business disagreements during the first two decades of the state’s existence (as noted earlier, this experience was accrued particularly quickly in the first days of the Gold Rush, when the groundwork was laid for California’s government) the California Civil Code was adopted, in which the state’s lawmakers included a special provision guaranteeing the freedom of employees in the state of California to choose their own place of work.

1891—Stanford University is founded by former governor of California Leland Stanford.

1910 — Lee de Forest arrives in San Francisco Bay Area. He was by then already well-known as the inventor of the triode (US Patent 879532, February 1908). Of all the influential inventions in the development of electronics and radio technology in the first half of the 20th century, the triode turned out to be the most critical component in the development of transcontinental telephone communications, radio, television, radar and early digital electronics.

deforest15_il.jpg (7491 bytes)

Lee De Forest, Palo Alto, 1915

Lee de Forest’s arrival in what would later become Silicon Valley began the process of transformation that turned this area into one of the world’s central confluences of talent and professional knowledge in electronics. A couple of years later Silicon Valley’s development got its first big boost from a series of important defense contracts related to World War I, reaching critical mass 40 years later, in the first decade following World War II.

1951—Stanford Industrial Park is established as a high tech center by businesses working in close partnership with the university. Among the first companies to rent space in the Park were Varian Associates, General Electric, and Eastman Kodak.

1956—William Shockley, co-inventor of the semiconductor triode arrived in San Francisco Bay Area and founds Shockley Semiconductor as a division of Beckman Instruments in Mountain View. On the road to Silicon Valley’s development, the baton was thus passed from Lee de Forest, inventor of the vacuum tube triode, to Shockley, inventor of the solid-state triode - transistor.

William Bradford Shockley
 

The Nobel Prize in Physics 1956 was awarded jointly to William Bradford Shockley, John Bardeen and Walter Houser Brattain "for their researches on semiconductors and their discovery of the transistor effect".

1957—The “Traitorous Eight” leave Shockley Semiconductor to found Fairchild Semiconductor.

Fairchild Semiconductor's founders - Traitorous Eight
Fairchild Semiconductor's founders, clockwise from far left: Jean Hoerni, Julius Blank, Victor Grinich, Eugene Kleiner, Gordon Moore, Sheldon Roberts, Jay Last, Robert Noyce.

1968—Gordon Moore and Robert Noyce leave Fairchild Semiconductor to found Intel.

1971 - Intel created the world's first microprocessor: the Intel  4004,  term 'Silicon Valley' by the press.

1872 Law’s Weight in Gold

The amount of gold extracted per year during the Gold Rush amounted to 80 million of that period’s dollars, worth about $2 billion in today’s money.

It might be possible to compare this figure with the “gold mines” discovered by the companies operating in Silicon Valley, which were able to expand on the first generation of startups only by provision of this 1872 law.

For example, the New York Times described gold-rushing pioneer Apple Computer’s financial impact as “the iPhone Gold Rush”. Apple's sales in 2010 were valued at around 60 billion USD.

One might also take into account the “gold” extracted by Intel, which—like many other Silicon Valley startups—would not have got its start had not the 19th century California Gold Rush given rise to the aforementioned 1872 law. Intel’s patented “silicon gold mine” produced about 40 billion dollars of sales this year.

This modern-day gold extraction, legally speaking a direct result of a law dating back to the California Gold Rush 100 years previous, has brought financial gain on the order of hundreds of billions of dollars, earned by tens of thousands of high tech companies in Silicon Valley, all mining the seemingly bottomless gold reserves of information technology.


See also:

Silicon Valley Versus Route 128  by  Annalee Saxenian

Silicon Valley and Route 128  by Paul Mackun

NDA Experiment Set up by Mark Hurd by  Gregory Gromov


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