“Techtopus”: Wage-Fixing Lawsuit Uncovers Ugly Side of Working in Tech

Remy Merritt |

silicon valley salaries, silicon valley wage fixing, companies in tech wage fixing, wage fixing scandal silicon valley, silicon valley talent

Take a minute to think of the largest names in technology. When you’re as big as Google (GOOG) , dealing with lawsuits is just part of business — patent infringement and misleading privacy policies are the most common reasons behind corporate court dates. In fact, Apple (AAPL) faced 59 patent lawsuits in 2013, more than any other company in the United States that year.

There’s a particularly large Silicon Valley lawsuit that has flown under the radar despite its size, but PandoDaily.com has provided substantial coverage of what it has coined “Techtopus.” Nearly 65,000 current and former employees of the biggest tech names — Apple, Google, Intel (INTC) and Adobe (ADBE) — have joined the case, alleging a wage-fixing scheme orchestrated between corporate executives. The case has expanded since its commencement in 2011, when a former Lucasfilm employee alleged that Lucasfilm, Pixar and Intuit Inc. (INTU) had also made anticompetitive agreements with the Silicon Valley tech giants. Internal emails reveal collusive conversations from individuals at the highest level of each corporation, including Google’s Eric Schmidt, Apple’s Steve Jobs and George Lucas of Lucasfilm.

The deals primarily focused on upper-level talent, preventing coordinated companies from extending offers to managers, producers and other executives. General engineers were not off limits, but with such weighty anticompetitive agreements in place, any hiring offer would have been frowned upon to avoid salary increases across the board. Employees talk, and demands for equal pay in an industry are best avoided by keeping wages fixed.

Facebook (FB)  COO Sheryl Sandberg has spoken out against what appears to be a common occurrence between Silicon Valley giants. A Google executive approached her in 2008, requesting she take part in the collusion; she rebuffed his advances. And this lawsuit is exposing just how much these corporations are and have been in conversation with each other. No-solicitation agreements began in the early 2000s, precisely when tech workers’ salaries were soaring and demand for software innovators was insatiable.

Considering those employees were already working for the companies with the most desirable corporate cultures, it is hard to feel sympathetic. In the midst of these wage-fixing deals, the average salary for a software engineer in 2005 was just under $90,000. Today the national average is lower at $85,000, though interestingly enough, the 2014 average salary for the same employee at Google is $118,989. IT managers averaged a yearly $108,000 in 2005, and $102,000 today.

However, the principle of antitrust law remains the same regardless of pay scale. The reasoning behind wage fixing is to distribute cash flow away from labor and into company profits, and often into executives’ pockets. Collusion is only organized in order to benefit the key players involved, whether the rest of the workforce is making minimum wage or six figures.

Silicon Secrets of Worker Immobility and Suppressed Wages

After almost two decades of increasing demand for the best in software engineering and computer science, it is difficult to imagine that the early employees in Silicon Valley were systematically prevented from moving between the name-brand corporations in the area. In fact, they were unaware of the no-poaching deals that were being made under the table, deals that were not just cross-company but also cross-industry.

A 2007 email between current Walt Disney and Pixar Animation Studios president Ed Catmull and former Disney (DIS) chairman Dick Cook explicitly admits to the no-raid policy while protesting that Bob Zemeckis of ImageMovers Digital (IMG) was poaching employees from DreamWorks Animation (DWA) . In just under 100 words, Catmull summarizes both the integration of Bay Area tech firms as well as the reasoning behind their agreements: disrupting the fixed pay structure would drive up employee salaries, an outcome they were actively suppressing.

“[Zemeckis] has hired several people away from Dreamworks at a substantial salary increase… every time a studio tries to grow rapidly, whether it is Dreamworks in 2D animation or Sony in 3D, it seriously messes up the pay structure.

“I know that Zemeckis’ company will not target Pixar, however, by offering higher salaries to grow at the rate they desire, people will hear about it and leave. We have avoided wars up in Norther[n] California because all of the companies up here – Pixar, ILM [Lucasfilm], Dreamworks, and couple of smaller places [sic]- have conscientiously avoided raiding each other.

Billions on the Line in Antitrust Fines

The plaintiffs intended to seek upwards of $3 billion in damages had the case gone to trial. Additionally, wage fixing falls under antitrust law — if the companies involved were found guilty, the combined corporate payout could triple to $9 billion in what would be considered stolen wages.

However, the parties involved reached a settlement for $324 million just one month before the case was set to go to trial. But with such massive tech companies involved, it is unsurprising that U.S. District Judge Lucy Koh has rescinded her approval of the settlement.

Judge Koh has already given her seal on settlements totaling $20 million for Disney’s movie units and Intuit, but she has expressed concern that $324 million doesn’t cut it for the bigger tech players. The recent uncovering of documentsthat could add Dell (DELL) , IBM (IBM) , eBay (EBAY) , Comcast (CMCSA) , Microsoft (MSFT) , DreamWorks and Clear Channel (CCO) as participants in the collusion has added even more layers. These developments have exposed the case as unfinished and much larger than it first appeared, and it expands the employees involved to a number well over one million.

Techtopus, King of Oligopolis

Antitrust laws are in place to avoid corporate giants like Google and Apple from working together to become an oligopoly. The widely accepted model of capitalism involves free market competition, in which companies are free to enter or exit the market without unfair advantage. In theory, all those involved on the supply and demand side will reach an equilibrium where each party is benefitting the best it can (in this case, suppliers are the corporations and consumers are their employees, with wages representing the product in question).

However, competition is never perfect. In reality, products are differentiated even within the same sector, and certain companies naturally outperform others. This is what has allowed Apple, Google and the like to rise in popularity, almost monopolizing the technology and Internet market. What this lawsuit is exposing is an attempt to create an oligopoly, where multiple large companies collude to enable price-fixing or, in this case, wage-fixing.

Results of this type of collusion are manifold, but there is only one way for the results to swing: in favor of the companies, and to the detriment of employees. By making agreements with the only other companies that would be able to offer higher salaries, the companies in play secure their employees and don’t have to offer promotions. This type of wage setting artificially suppresses wages below fair value, and while software engineers do make a sizeable salary, the shadiness of antitrust violation still stands.  

Moving Forward, Tech Giants Will Scramble to Save Face

While the case drags on, it is unclear whether this will result in any changes in Silicon Valley. This lawsuit involves the largest companies in the world, and if the price to pay is purely monetary, there is no question whether they can find the resources to meet the cost of their actions. What is more important to question is whether the glossy image of these corporations as ideal workplaces will ever be as shiny as it was before the lawsuit. Google and Apple pride themselves on providing an image of cozy corporate culture, but with an exposed history of anticompetitive behavior that pulled from employee salaries, they suddenly appear no different from any other large company.

Each company involved has developed products that will continue to be popular, and the future of those businesses is unlikely to be affected. However, this may affect individual players like Schmidt and Catmull. In terms of accountability, there may be more important shifts in power at the highest level of these corporations as more reports of underhanded actions are exposed. Depending on the lawsuit’s future publicity, the only way for these companies to save face may lie in an entire overhaul of their executive branches.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

Companies

Symbol Name Price Change % Volume
FB Facebook Inc. 119.68 0.77 0.65 17,464,736
DWA Dreamworks Animation SKG Inc. n/a n/a n/a 0
INTC Intel Corporation 35.76 0.06 0.17 16,326,925
IBM International Business Machines Corp 166.52 1.16 0.70 3,146,930
EBAY eBay Inc. 29.97 0.55 1.87 13,548,980
AAPL Apple Inc. 113.95 1.83 1.63 34,402,627
ADBE Adobe Systems Incorporated 104.31 0.81 0.78 2,620,553
CCO Clear Channel Outdoor Holdings Inc. Class A 5.55 -0.05 -0.89 89,537
DIS Walt Disney Company (The) 104.86 1.48 1.43 12,173,909
GOOG Alphabet Inc. 789.29 12.87 1.66 1,821,914
INTU Intuit Inc. 116.98 -0.69 -0.59 1,174,984
MSFT Microsoft Corporation 61.97 0.96 1.57 27,349,356
CMCSA Comcast Corporation Class A Common Stock 69.45 0.22 0.32 8,580,877
COP:CX2 Coro Mining Corp. n/a n/a n/a n/a

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