Apple, Google, and the Hubris of Silicon Valley’s Hiring Conspiracy

Behind this weeks coverPhotographs by Harald Franzen/ZUMA (Jobs); Pete Marovich/ZUMA (Schmidt)Behind this week’s cover

Steve Jobs wouldn’t appear to have been an emoticon guy, but history will show that on at least one occasion, when words failed to convey his delight, he resorted to one. It was March 2007, and Jobs had received an e-mail from Eric Schmidt, then Google’s (GOOG) chief executive officer and a board member at Apple (AAPL). Schmidt wanted to let Jobs know that Google would terminate “within the hour” a recruiter who’d dared to contact an Apple employee in violation of a “do not call” policy between the companies. Schmidt abjectly apologized, adding: “Should this ever happen again please let me know immediately and we will handle. Thanks!! Eric.”

Jobs forwarded Schmidt’s groveling e-mail to an Apple subordinate. His cover note said, in its entirety, “:)”.

This telling material—and there’s oh, so much more of it—comes from the voluminous court record in the recently settled Silicon Valley hiring antitrust case. On April 24, Apple, Google, Intel (INTC), and Adobe Systems (ADBE) ran up the white flag in a class-action lawsuit filed on behalf of more than 64,000 programmers and engineers who accused the companies of conspiring not to raid one another’s workforces in the interest of stifling competition and suppressing wages.

The tech aristocrats, who from 2005 through 2009 secretly forged a series of no-recruit agreements, suspected what they were doing wasn’t quite kosher. Schmidt at one point instructed a junior executive to disseminate the pacts “verbally,” because, he explained, “I don’t want to create a paper trail over which we can be sued later.” But why did they think they could get away with it? And now that they’ve been exposed, what does the episode tell us about the nature of a corporate culture built on the labor of a relatively well-paid but evidently exploited cohort of digitally talented serfs?

“If you hire a single one of these people,” Steve Jobs told Sergey Brin, “that means war”

The first point that demands underscoring is that Jobs, Schmidt, et al did kind of get away with it. The $324 million Apple, Google, Intel, and Adobe agreed to pay works out to about 0.4 percent of their combined total revenue for the most recent quarter. At an earlier stage of the case, three other defendants—Intuit (INTU), Pixar (DIS), and Lucasfilm—bought their way out of trouble for a mere $20 million. Lump together both settlements, subtract some healthy lawyers’ fees, divide what’s left, and the individual plaintiffs will end up with a few thousand dollars apiece. (Which is not to say that the putative victims have been going hungry; many earn well into six figures, despite their employers’ obstruction of job mobility.)

It’s unlikely, moreover, that the defendants will suffer any lasting taint when it comes to new hires. One reason the bosses had the cojones to try this caper is that Apple and Google in particular are the dream factories of America’s digital and marketing elites. People would work at those places for free—and in some ways, that makes the exploitation even worse. “It’s shocking primarily because I’ve never heard of an industrywide web of bilateral agreements to suppress talent competition,” says Jeff Connaughton, a former Washington tech industry lobbyist and Clinton White House aide.

No one understood better the hold Silicon Valley came to have on the modern meritocratic imagination than Jobs. Nor was anyone his rival when it came to self-regard. In 2005 he relished the resurgence of his beloved Apple; soon he’d be obsessing over losing key personnel. His iPhone would help spark the renaissance of the tech economy in the wake of the dot-com bust, but the social networking boom would pique the curiosity of promising young employees.

Jobs’s immediate concern was Google. In February 2005 he demanded that Sergey Brin, co-founder of the search-engine giant, instruct his troops to cease recruiting from Apple’s ranks. “If you hire a single one of these people, that means war,” Jobs told Brin, according to Brin’s account in the court record. Apple’s co-founder can’t speak for himself, having died of cancer in October 2011 at the age of 56, but the Brin version sounds like classic Jobs.

Google’s obsequiousness reflected Jobs’s almost unfathomable influence and the industry’s penchant for corporate cross-pollination. The companies alleged to have participated in the no-recruiting conspiracy shared directors and senior advisers. Google and Apple had two directors in common: Schmidt and Art Levinson, then CEO of Genentech (ROG:VX). Brin and fellow Google co-founder Larry Page viewed Jobs as a mentor, regularly joining him on his meditative walks. During this period, Apple’s iPhone funneled users to Google’s map and search services.

Photograph by Paul Sakuma/AP Photo

The antitrust court files show that Google and Apple shared something else: fear of Facebook (FB), the latest magnet for top managers and programmers. In a deposition, Schmidt fretted about Google executive Sheryl Sandberg’s defection in March 2008 to become the social networking company’s chief operating officer. “Sheryl,” Schmidt recalled, “had built our recruiting organization, was an excellent recruiter, and as she went over to Facebook, many people left Google to work for her in jobs which they perceived as promotions.”

The tech industry “cannot make up its own rules. We all play by the same rules”

In her own pretrial testimony, Sandberg said her former Google comrades tried to persuade her to lean in and join the no-recruiting cabal. To her credit, she refused. Facebook was not named as a defendant in the case. Sandberg didn’t respond to requests for comment.

The original Apple-Google arrangement expanded into “a series of six bilateral agreements,” U.S. District Judge Lucy Koh observed in a March 28 order denying the defendants’ request for summary judgment. The companies had conceded that the pacts “contained nearly identical terms, precluding each pair from affirmatively soliciting any of each other’s employees,” Koh noted. The judge stressed how unusual this kind of systematic plotting is—in the Valley or anywhere else. CEOs of rival companies may nod and wink to each other over drinks at the club. Competitors may refrain from going after a select number of one another’s most highly valued employees. In the antitrust case, Koh said, the defendants’ own experts admitted “they are unaware of these types of long-term, all-employee agreements ever occurring between other firms.”

The chiefs of the Valley normally boast of their dedication to merit and market forces. The antitrust case revealed another side. “This is one of hundreds of examples in which our economy has been corrupted by the intense concentration of power and wealth,” says Roger McNamee, co-founder of Elevation Partners, a private equity firm specializing in technology and media.

Ultimately, brazenness on such a broad scale was impossible to conceal. By 2009 the U.S. Department of Justice got wind of the situation, leading to a federal investigation and a court-approved settlement in 2011. The companies didn’t admit wrongdoing or pay fines but agreed to refrain from restraints on “soliciting, cold calling, recruiting, or otherwise competing for employees.” The DOJ action, in turn, inspired the private litigation, the settlement of which included the companies reiterating that they hadn’t done anything illegal.

Apple and Google declined to comment on the settlement; spokesmen for Adobe and Intel said the companies settled to avoid the burdens of further litigation. Indeed, Koh had issued a series of interim rulings hinting they faced a real risk of losing in front of a jury at the scheduled late-May trial—and risk much larger damages. Last October she allowed the plaintiffs to amass their claims into a single class action, despite a series of recent Supreme Court rulings discouraging trial judges from certifying mass suits. Koh’s March 28 order refusing summary judgment indicated she’d open the door wide to embarrassing e-mail and deposition evidence. From the deposition of Edward Catmull, president of Pixar, she plucked his assertion that it was economically sensible for the alleged conspirators to cooperate because intercompany talent raiding “messes up the pay structure.” From the e-mail account of Paul Otellini, Intel’s CEO and a member of Google’s board, she selected this description of the Intel-Google agreement: “[W]e have a handshake ‘no recruit’ between Eric [Schmidt] and myself. I would not like this broadly known.” Even without a law degree, one could get Koh’s drift: This trial would have been ugly for the tech overlords.

On the other hand, the judge did nothing to reassure the plaintiffs that lead members of the class would be able to avoid intense public scrutiny of their personnel records. That prospect doubtless played into their willingness to settle for the modest-seeming $324 million. Kelly Dermody, a lawyer for the plaintiffs, declined to comment on or confirm the dollar figure. She praised the settlement and emphasized that it constituted “a wake-up call for the Valley” and a reminder that the tech industry “cannot make up its own rules. We all play by the same rules.”
Koh’s role in the antitrust case highlights her growing status as the face of commercial law in Silicon Valley. While shepherding the no-hire suit to a resolution, the 45-year-old judge has simultaneously been presiding over the main battle in a worldwide smartphone-patent war pitting Apple against Samsung Electronics and other device manufacturers that use Google’s Android operating system. In both matters, Koh, who wears a trademark strand of white pearls against her black robe, has demonstrated an impressive mastery of abstruse civil jurisprudence and a blunt common sense.

The smartphone conflict began in 2010 with Jobs’s outrage that Google—via Android—was encroaching on the iPhone and its walled-off iOS software. Near the end of his life, Jobs told his authorized biographer, Walter Isaacson, he was “willing to go to thermonuclear war on this.” The provisional Apple-Google solidarity bred only a few years earlier by common anxiety over Facebook gave way to antagonism over which company would predominate in what’s become a $340 billion global phone market.

Google has gone so far as to indemnify Samsung against some of Apple’s claims that the South Korean company’s phones infringe on Apple patents. Apple was awarded $930 million in damages after the first jury trial before Koh two years ago. Now the companies are back in her courtroom, with a jury poised to decide whether Apple deserves an additional $2 billion. The inevitable appeals guarantee that, barring a settlement, the patent litigation will continue for years.

Koh may be ideally suited to serve as the Valley’s modern-day Solomon. The double-Harvard graduate (college and law school) worked for the U.S. Senate Committee on the Judiciary and the Justice Department before earning a partnership at the law firm McDermott, Will Emery, where she represented tech clients. In 2008 the Republican governor of California at the time, Arnold Schwarzenegger, appointed her to a state judgeship; two years later a Democratic president, Barack Obama, elevated her to the federal bench. The Senate confirmed her unanimously.

While steering the antitrust defendants toward a settlement, Koh has been signaling to the smartphone combatants that they, too, would be wise to call off the litigator pit bulls and work out some kind of cross-licensing truce. Smartphones rely on so many layers of innovation that it’s difficult to look at the final products and declare with absolute certainty who invented what. Koh has on occasion observed in court that even as their lawyers snarl and gnash their teeth, Samsung remains one of Apple’s main component suppliers, a relationship akin to a multibillion-dollar-a-year co-dependency.

The judge has also joked that she’d send Apple and Samsung to mediation with “boxes of chocolates” if that’s what it takes to get them to compromise. So far, conciliation hasn’t worked. Significantly, though, Koh has refused to convert Apple’s 2012 trial victory into a ban on U.S. sales of infringing Samsung devices, a goal the iPhone maker has said is more important than monetary compensation.

One suspects, Apple, Google, and Samsung will eventually come to terms on just what Apple’s allegedly infringed intellectual property is worth, and that amount—plus a lot of legal fees—will be amortized by the accountants as the cost of doing business.

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