Silicon Valley Keeps Winning Because Non-Competes Limit Innovation

Talent plus capital. Whether you’re building a company, a city or a national economy, these are the raw materials that make it possible to do things that others can’t.

Silicon Valley is the world’s most magical mixing chamber for these two simple ingredients, home to the most exciting, creative and valuable companies on the planet. Every city in the U.S. — and around the world — wants to be the “Silicon Valley for X,” because somehow that simple recipe of talent plus capital produces such radically different outcomes there than anywhere else.

Money flows to opportunity; if you can turn singles into twenties, somebody will write you a check no matter where you are. But humans have a stickier relationship to geography: they have friends and families, spouses with careers, mortgages and kids in school. Talent flows to places where the opportunities are greatest and the risk of getting stuck is lowest over the long term, so if things don’t work out in one job, you can move on to the next big thing without changing locations.

How did Silicon Valley became the world’s leading innovation economy? The reasons are many, but one of the least celebrated and most fundamental drivers of that success is an obscure-but-powerful legal provision passed into law back in 1872. In that year, the California Civil Code was amended to include the following language:

“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.”

In other words, human capital — talent — working in the State of California can’t be contractually bound to any employer for any reason (excepting a very narrow and well-defined set of edge cases). This is very different from many other states in the U.S., including several that aspire to compete with Silicon Valley for leadership in the innovation economy.

By writing that simple human freedom into law, California ensured the free flow of talent to the best and most promising opportunities, whether or not that’s what their previous employer had in mind. From the “traitorous eight” that created Fairchild Semiconductor to the present day, human capital in California does whatever the hell it wants, and that free flow of talent makes the Bay Area what it is.

Washington and Massachusetts aspire to greatness in innovation. Both have solid track records of success in nurturing world-class technology companies. Both are home to great cities, with outstanding research universities that attract talent from around the world. But both are also home to “champion” companies that have used lobbying power to block the passage of laws similar to California’s that would outlaw the use of non-compete agreements.

Strong Federal statutes exist to protect intellectual property (via patents) and block the sharing of trade secrets (through enforceable non-disclosure agreements). Non-compete agreements don’t exist to protect trade secrets — as their defenders claim — but rather to prevent workers from pursuing goals that might conflict with those of their employer.

Legislators in both Washington and Massachusetts have recognized the harm that non-compete agreements do to their innovation economies and introduced legislation to match California’s talent-centric policy. But in both cases, incumbent companies with powerful lobbyists — specifically, EMC in Massachusetts and Microsoft in Washington — have used their economic power to block any change to state non-compete laws.

So in Washington, a Microsoft employee who spots a more interesting career opportunity at Amazon is likely to be sued just for taking a better job. And an Amazon employee who wants to leave to create a startup is equally likely to be sued for “competing” with their ($250 billion market cap) employer. The solution in both cases isn’t to stay put, but rather to — you guessed it — move to California where Washington non-compete claims can’t be enforced.

Seattle and Boston are both fantastic places to build companies, and some founders will always prefer to pursue their dreams in those cities instead of pulling up stakes for the Bay Area. But as long as legislators in Washington and Massachusetts keep listening to lobbyists instead of founders and entrepreneurs, California will maintain its unfair advantage in the global war for talent.