The Silicon Valley No-Poach Conspiracy: Recap and Reminder

The Silicon Valley no-poach conspiracy was legally settled back in 2010. However, its presence continues to hover over current concerns that employers are taking advantage of their market power to hold down pay to employees. Eric A. Posner and Ruth Zheng offer an introduction for those who are unfamiliar with the case and a recap and follow-up for those who are in “The Silicon Valley No-Poach Conspiracy” (University of Chicago, Coase-Sandor Institute for Law & Economics Research Paper Series. 25-18). From the abstract:

The Silicon Valley no-poach conspiracy is the most important cartel no one has heard of. It is rarely discussed in the cartel literature and is lost to public memory. More than forty tech firms, including Apple and Google, agreed not to poach employees from one another over three decades, causing an estimated $3.1 billion in lost wages. The Justice Department discovered and broke apart the cartel in 2010, but did not punish the cartel members, who quickly settled with employees and never admitted guilt. However, the case foreshadowed, and perhaps helped spur, two major developments in antitrust law a decade later: the rise of labor antitrust and the erosion of the tech companies’ aura of antitrust invincibility.

When I was living out in the Silicon Valley area in the mid-1980s, the job market for high tech talent was white-hot. There were often stories about an engineer who had a fight with a boss in the morning, walked down the street to an employer at lunchtime, and had a new job the same afternoon. Employers cold-called high performers at other companies, called it “recruiting,” and offered them jobs. Indeed, some researchers attributed the technological growth of many company to this high-velocity flow of talent.

But of course, employers who lost talent weren’t so fond of these practices. Starting in the 1990s and spreading into the early 2000s, executives at one Silicon Valley company began to call those at other companies and propose a truce in the war for talent–or to put it another way, stop hiring “my” workers and I’ll stop hiring “your” workers. Posner and Zheng describe the beginning of the conspiracy this way:

The origins of the Silicon Valley no-poach conspiracy can be traced back to 1986, when filmmaker George Lucas sold the computer graphics division of his company Lucasfilm to Steve Jobs for $5 million. Jobs invested an additional $5 million in the venture and renamed it Pixar, after the Pixar Image Computer invented by Lucasfilm’s computer group. Jobs served as Pixar’s CEO until 2006, when Disney acquired Pixar. Jobs joined Disney’s board of directors where he oversaw its animation business. According to the court presiding over the follow-on class action in the Northern District of California, Lucas and Edward Catmull, Pixar’s president, agreed not to compete for each other’s employees as soon as Pixar was established in 1986. As Lucas explained, his firm’s general rule was simple: “we cannot get into a bidding war with other companies because we don’t have the margins for that sort of thing.”

The internal policy was circulated by Pixar’s Vice President of Human Resources, Lori McAdams, to her department in a document entitled “Lucasfilm candidate process,” which outlines Pixar’s “gentleman’s agreement with the Lucas companies.” The document is undated but was drafted before 1984. The agreement included (1) a no cold call provision, (2) a commitment between the firms to notify each other before making offers to workers who independently applied, and (3) a no bidding wars provision. The combined effect of these terms was to block the employers from recruiting each other’s employees, and to suppress wage competition if workers independently applied for positions at both employers. The agreement was policed through email contact between senior human resources employees at Pixar and Lucasfilm.

Posner and Zheng trace spread of these no-poaching policies as they spread across large and small Silicon Valley firms:

The company at the center of the conspiracy was Apple, one of the world’s most beloved, successful, and (today) richest companies—which was led by one of the world’s most admired entrepreneurs, the CEO Steve Jobs. The conspiracy involved many of the most celebrated Silicon Valley firms of the time—including Google, eBay, Adobe, Intel, and Pixar. It also extended well beyond Silicon Valley, encompassing Dell, Microsoft, Nike, J. Crew, IBM, Best Buy, Genentech, Cingular, Disney, Nvidia, Garmin, WPP (one of the largest advertising agencies in the world) and, for all its mockery of Informix—Oracle. The central conspirator was Jobs, who initiated many of the no poach agreements. Eric Schmidt of Google was also an important participant in the conspiracy. Bill Campbell, a Silicon Valley executive who was friendly with several of the main conspirators, facilitated many of the agreements. The agreements were informal and involved a relatively limited number of individual actors in each firm (primarily top executives and heads of recruitment).

You may find yourself wondering: Isn’t this collusion between firms pretty illegal? Posner and Zheng go through the details of the legal arguments, but the answer is pretty obviously “yes.” The firms knew it as well: the documentary record includes a number of cases in which people are admonished to communicate with other firms by phone, and thus to avoid paper records. When the Antitrust Division of the US Department started investigating in 2009, and private lawsuits began, the negotiations started toward a settlement: ” Intuit, Pixar, and Lucasfilm settled for $20 million. The remaining firms, Adobe, Apple, Google, and Intel, agreed to settle just days before the parties were set to go to trial at the end of May 2014. After rejecting an initial settlement proposal of $324.5 million, Judge Koh approved the final settlement of $415 million in September of 2015.” A follow-up set of lawsuits for “animation and visual effects employees” was settled for $168 million in 2016.

As Posner and Zheng note: “The final figure likely undercompensated the employees. One might add that lower wages at a large number of key firms didn’t just affect those specific employees, but surely also affected wages at competing firms not involved in the no-poach agreements.

But at the end of the day, the big tech companies and their leaders didn’t seem to suffer any long-term reputational hit or personal punishment. Posner and Zheng:

Because the DOJ did not criminally prosecute the executives of the defendants, none of them faced a legal sanction. Nor did they face sanctions in the court of public opinion. The executives did undergo ritual humiliation in the media, which cheerfully reported the damning emails and painted them as secretive and cold in their dealings. Journalists drew attention to Steve Jobs as the “central figure in the alleged conspiracy,” a man who inspired “fear” in Silicon Valley. Yet he did not suffer any penalty from the bad publicity. “His reputation is pretty much set in stone,” as one tech reporter observed. Nor did any of the other executives face repercussions …

But the echoes of the case continue. In the economics of antitrust doctrine, a common argument is that new entrants may tend to undermine agreements between incumbent firms. In this case, however, the collusive agreement between firms just kept expanding in size, absorbing new entrants, for several decades.

In the practice of antitrust, it seems likely that the collusive no-poaching agreement knocked some of the shine off the big tech companies. It had become obvious that they were willing to collude and to engage in anticompetitive behavior over long periods. The antitrust authorities became more willing to monitor and sometime to challenge the behavior of these firms in all areas, not just hiring. In addition, most antitrust cases over the years have focused on firms colluding to raise prices to consumers, but there is now renewed interest in the possibility of firms colluding to hold down wages to employees. That, too, is a legacy of the Silicon Valley no-poaching case.

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