"The Legal Infrastructure of High Technology Industrial
Districts: Silicon Valley, Route 128, and Covenants Not to
Compete"
BY: RONALD J. GILSON
Columbia Law School
Stanford Law School
Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=124508
Date: July 1998
Contact: RONALD J. GILSON
Email: Mailto:ronald.gilson at law.columbia.edu
Postal: Columbia Law School
435 West 116th Street
New York, NY 10027 USA
Phone: (212)854-1655
Fax: (212)854-7946
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 Classification: D2, K2, L5, R1