No free market paradise

Silicon Valley's reputation endangered by wage-fixing

A group of 64,600 workers belonging to the information technology (IT) industry is suing seven technology firms in a class action suit, which is due to come to trial in May. The suit claims that Apple, Google, Intel, Adobe, Intuit, Pixar and Lucasfilm entered an "overarching conspiracy" with mutual non-compete agreements between 2005 and 2007. It is alleged these companies shared wage structures and the senior managements secretly agreed not to recruit from each other's companies. The suit claims $9 billion as compensation for the potential earnings lost by IT workers owing to no-poaching agreements. There are rumours the lawsuit could expand to target more IT firms, which were also allegedly part of the wage-fixing cartel. The lawsuit arises from an earlier investigation by the US Department of Justice (DoJ) and it is based on evidence that was unearthed by the department. The DoJ case was settled out of court after the companies under investigation agreed to end such hiring practices. Allegations of conspiracy and collusion are based on emails, including exchanges between the late Steve Jobs of Apple, Eric Schmidt of Google and Bill Campbell of Intuit. Recruiters who transgressed the no-poaching pact were sacked unceremoniously. One exchange between Steve Jobs and Eric Schmidt details an incident in which a Google recruiter was sacked for approaching an Apple employee.

Non-compete agreements are legal between an employer and an employee. But if a non-compete hiring agreement is made by two companies, it results in artificially low wages and denies employees the opportunity to move to a better-paying job. The money saved by wage-fixing could also be distributed as compensation to senior management, which made those agreements. This is clearly against free market principles. But wage cartelisation is quite common. It generally targets low-paid blue-collar workers and is cited by experts as one prime cause for the rapid rise of trade unions in the early 20th century. However, the Silicon Valley agreements affected highly paid, non-unionised white-collar workers. Clearly, workers would lose out in terms of both concrete compensation and accurate information, although calculating lost opportunity costs is always difficult. The $9-billion claim is obviously contestable.

What makes this most ironic is that the Silicon Valley IT companies are considered poster children for free market capitalism. These businesses were all kick-started by smart entrepreneurs who developed interesting ideas into billion-dollar businesses with the aid of risk capital financing. Silicon Valley is supposedly fiercely competitive, with every company leveraging every atom of competitive advantage to push its services and products. And yet, emails show Google pleading with Apple for "permission" to recruit a team of ex-Apple engineers in Paris. One reason why such agreements could be hammered out between rivals is the incestuous nature of company boards. Most Silicon Valley boards recruit external directors from other IT companies and those directors build bridges between competitors. These wage-fixing, non-compete hiring practices may have stopped, as the DoJ was assured. However, workers who lost out are surely entitled to their day in court. If more IT firms are revealed to have been involved, the wage-fixing scandal could snowball into an even larger controversy. The reputations of many Silicon Valley icons are likely to be questioned even if no conspiracy is proved. The suit threatens to expose the hypocrisy of a corporate culture that publicly celebrates the wisdom of free markets while privately subverts its principles.