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

June
1999
Ronald J. Gilson

In recent years, scholars and policymakers have rediscovered the concept of industrial districts--spatial concentrations of firms in the same industry or related industries. In this Article, Professor Gilson examines the relationship between high-technology industrial districts and legal infrastructure by comparing the legal regimes of California's Silicon Valley and Massachusetts's Route 128. He contends that legal rules governing employee mobility influence the dynamics of high technology industrial districts by either encouraging rapid employee movement between employers and to startups, as in Silicon Valley, or discouraging such movement, as in Route 128. Because California does not enforce post-employment covenants not to compete, high technology firms in Silicon Valley gain from knowledge spillovers between firms. These knowledge spillovers have allowed Silicon Valley firms to thrive while Route 128 firms have deteriorated. Professor Gilson concludes with three cautionary notes. First, the success of Silicon Valley firms suggests that per capita firm value will be greater where intellectual property protection is somewhat diluted, in contrast to tie traditional law and economics prescription that emphasizes full protection of intellectual property. Second, the doctrine of inevitable disclosure, as developed in recent trade secret cases, threatens to undermine the advantages conferred by California's legal regime and should be considered with caution. Third, other regions may not be able to emulate California's success simply by replicating its legal rules. Rather, policymakers in other states should consider the characteristics of local industries, weighing the advantages to those industries of knowledge spillovers against the reduced incentives for initial innovation that result from decreased employer intellectual property rights.

This article appears in the June 1999 Issue: Volume 74, Number 3