The Legal Infrastructure of High Technology Industrial Districts: Silicon Valley, Route 128, and Covenants Not to Compete

Abstract:     
Recent scholarship has argued that the comparative success of the Silicon Valley high technology industrial district and failure of Route 128 outside of Boston, resulted from different patterns of inter-firm employee mobility which, in turn, led to differing patterns of industrial organization: network organization as opposed to traditional vertical integration. The cause of the different patterns of employee mobility is said to be cultural differences between California and Massachusetts. This paper offers a different causal analysis. After reviewing the new economic geography's emphasis on inter-firm knowledge transfers as an agglomeration economy, I focus on the critical role of employee mobility -- the vehicle for inter-firm knowledge transfers -- in facilitating second-stage agglomeration economies: those that allow the district to transcend its original product cycle and reinvent itself. In this account, the legal rules governing employee mobility are a causal antecedent of the construction of each district's culture. In fact, California law prohibits the most effective means of protecting trade secrets embodied in tacit knowledge -- a contractual post-employment covenant not to compete. Massachusetts law, in contrast, allows their enforcement. Consistent with the new economic geography's emphasis on path dependence, the paper shows that California's unusual legal regime dates back to the early 1870's, a serendipitous result of the historical coincidence between the codification movement in the United States and the problems confronting a new state in developing a coherent legal system. The paper concludes with a cautionary note concerning the implications of the analysis for three related subjects: the standard law and economic prescription to fully protect property rights in intellectual property; a disturbing recent line of cases concerning claims of "inevitable disclosure" that threatens to turn trade secret law into the judicial equivalent of a covenant not to compete; and the right strategy for policy analysts assessing reform of a region's legal system to encourage high technology industrial districts.

JEL Classifications: D2, K2, L5, R1

Working Paper Series