Tech Firms May Find No-Poaching Pacts Costly

Deal Book – by Andrew Ross Sorkin

It is the talk of the Valley.

A high-stakes negotiation is taking place in Silicon Valley among some of the biggest names in the industry — Apple and Googleamong them — over accusations that they were involved in a collusion to prevent their employees from being hired at rival companies. The employees filed a class-action suit, contending that the illegal hiring practices cost employees $9 billion in lost wages. Now the companies are locked in mediation sessions, hoping to settle the case in the next several weeks.  

The question being whispered all over town now is how much will Apple, Google, Intel and Adobe ultimately have to pay?

The companies privately scoff at the $9 billion figure that the plaintiffs are seeking, contending it amounts to extortion. The employees, who number about 100,000, suggest that the facts are so damning against the companies — and so embarrassing — that they won’t settle for anything less than a blindingly high number.

Indeed, the evidence against the firms, which already settled a Justice Department complaint in 2010 without paying any fine, appears to be about as one-sided as you can imagine.

Steve Jobs, the chief executive of Apple at the time, could not have been any clearer of his intentions to collude with Google and prevent his company from hiring away employees from his frenemy and vice versa.

“If you hire a single one of these people that means war,” he told a Google executive.

Apple’s human resources sent out a note:

“Please add Google to your ’hands-off’ list. We recently agreed not to recruit from one another so if you hear of any recruiting they are doing against us, please be sure to let me know.”

A trove of similar emails has emerged in the case, many of which have been unearthed and highlighted by Mark Ames of PandoDaily, who has diligently followed the case.

Google’s chief executive, Eric Schmidt, was just as explicit in an email after Mr. Jobs queried him about why Google was trying to hire one of his employees. “I believe we have a policy of no recruiting from Apple and this is a direct inbound request,” Mr. Schmidt wrote to his team. “Can you get this stopped and let me know why this is happening? I will need to send a response back to Apple quickly so please let me know as soon as you can.”

Mr. Schmidt clearly understood the legal jeopardy such an arrangement could create. In another similar email chain about the policy with another technology company that was ostensibly part of the no-hire cartel, he told a colleague to communicate it “verbally since I don’t want to create a paper trail over which we can be sued later.”

Well, here we are.

How deep was the no-hire policy? When Google sought to hire an Apple employee based in Paris, Google literally sought permission from Mr. Jobs first. “Google would like to make an offer to Jean-Marie Hullot to run a small engineering center in Paris. Bill, Larry, Sergey and Jean-Marie believe it is important to get your blessing before moving forward with this offer,” a Google vice president wrote to Mr. Jobs. “Google’s relationship with Apple is extremely important to us. If that relationship is any way threatened by this hire, please let me know and we will pass on this opportunity.”

Mr. Jobs later objected and Google rescinded the offer to Mr. Hullot’s team. “Steve is opposed to Google hiring these engineers,” the vice president wrote. “He didn’t say why, and I don’t think it is appropriate for me to go back for clarification. I can’t risk our relationship with Apple to make this happen over his objections.”

All of this does raise a reasonable question: Is it ever appropriate to agree with a “partner” company not to poach an employee?

Some lawyers I surveyed on the subject, most of whom refused to comment on the record because they work at one of the dozens of firms involved in the Silicon Valley case, said that it might be permissible for a company to decide against poaching an employee of a business partner in a specific instance — even if it was just about keeping good relations with the company — but that a blanket ban on hiring as part of systemic strategy would be plainly anticompetitive.

Some defense lawyers argued that as long as there was not a reciprocal stated arrangement, companies had wide latitude about their hiring practices.

“The alleged do-not-cold-call agreements between Google, Apple, Intel and Intuit did not reflect ‘parallel’ conduct from which to infer a conspiracy, as plaintiffs contend,” Google said in a motion.

But the executives involved at the highest levels of the no-hiring cabal appear to have known it was illegal, or at least in a substantially gray area.

“We have nothing signed,” Paul Otellini, the chief executive of Intel, told a colleague about the agreement he reached with Mr. Schmidt of Google. “We have a handshake ‘no recruit’ between Eric and myself. I would not like this broadly known.”

Sheryl Sandberg, the chief operating officer of Facebook and a former Google employee, said in a court filing, “Google agreed, at Intuit’s request, to not solicit the Intuit employees who would be involved in the discussions and/or the potential partnership.”

Of course, it may be hard to sympathize with the engineers in Silicon Valley, who are often paid mid-six-figure compensation packages, if not more.

So how to determine how much was truly lost by this no-hiring collusion?

That’s hard to determine. If the case ever gets to trial next month in San Jose — which is looking increasingly less likely because the companies are deep in settlement talks — it is possible that both sides will present a series of economic experts to estimate the damages. But at $9 billion, that would mean that each of the 100,000 employees was owed $90,000.

That’s a lot of money. It is hard to believe the settlement will be that high. In a town that mints billionaires, though, whatever the number is, it will be the equivalent of a rounding error.