Tech Firms Behaving Badly

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SAN FRANCISCO – What's Silicon Valley's latest export?

Try corporate misbehavior.

In the past two weeks, Google has been spanked for obstructing federal regulators, Apple was slapped with a Justice Department suit for conspiring to drive up e-book prices, and seven tech companies were told they'll go on trial for allegedly colluding to stop employees from jumping from one to the other.

It's a major turn of events for an industry that once held itself up as a "don't be evil" alternative to old-school corporate greed.

And suddenly, consumers, courts and regulators are having a hard time seeing tech titans in a different light than any other industry or even the robber barons whose actions gave rise to antitrust laws they're now accused of breaking.

"There has been a state of mind in Silicon Valley that they are sufficiently new and sufficiently different from traditional American industry that they can get away with things," said Herbert Hovenkamp, a professor at the University of Iowa College of Law.

That state of mind is changing – and fast. Tech firms can't even trust each other to play by the rules – to the extent that there are rules – as witnessed by the ongoing courtroom CEO smackdown over patents in Oracle v. Google, or Larry vs. Larry as it's known here.

"It's a Type A world," explained Carl Guardino, president and CEO of the Silicon Valley Leadership Group, which represents more than 360 of Silicon Valley's employers, including many tech firms. "We don't have friends. We don't have enemies. We have frenemies."

Tech has a reputation for being fiercely competitive in the marketplace, but watchdogs and regulators say some of that cut-throat DNA has been turned against the little guy, with big tech firms driving up prices, stiffing workers and laughing at the law.

"There has been all too often in the tech community a mindset, 'Gee, we know best, so just trust us,'" said John M. Simpson, consumer advocate at the Consumer Watchdog. "They have been driven by data and a mindset to push the envelope and a tendency to look at regulation and other constraints as mere
annoyances that ought to be ignored."

But it's getting harder for Silicon Valley to ignore Washington. Tech companies want things from Congress – like a tax holiday on overseas earnings – and Congress wants things from them. Sometimes it's campaign contributions; sometimes it's answers about corporate wrongdoing.

Rep. Joe Barton (R-Texas) took Google to task last week for supplying FCC investigators looking into the so-called Wi-Spy scandal  "with robotic, generic responses," and Rep. Ed Markey (D-Mass.) called for a hearing. Sen. Mike Lee (R-Utah), ranking member of the Senate's antitrust panel, said he has "serious
concerns" about Apple and the e-book market. Meanwhile, Sen. Al Franken (D-Minn.), called last month for antitrust officials to keep a closer eye on Google and Facebook – lest they become monopolies.

"The high tech community has had some big victories in D.C. recently, but there are reputational concerns that many individual companies are facing and big policy battles looming," said one lobbyist familiar with tech issues. "Growing and already established tech companies, especially ones that are household names, need to engage today to protect their long-term interests in Washington."

Some firms are trying to protect their interests in D.C. – the old fashioned way. Google spent $5 million to lobby in the first quarter of 2012 – nearly half of what the company spent in all of 2011, according to lobbying disclosures filed this weekend. Facebook, likewise, saw a big jump, although Apple's spending dropped a bit.

A congressional source noted that other industries – including health care and the airlines – have also faced questions about their anti-competitive antics, but argued that tech is enjoying a particularly disproportionate share of the spotlight due to the wow-factor of iPads and Androids. "It's more the flavor of the moment rather than anything crazy going on in this sector," the Hill insider said.

Tech firms are still wildly popular with the American public – more so than politicians – with one recent ABC News/Washington Post poll putting Google's favorable rating at 82 percent, Apple's at 74 percent and Facebook's at 58 percent.

But some of the exploits outlined in court papers and regulatory findings recently may give pause to even the most ardent Apple addict or Google groupie.

On Thursday, a federal judge in San Jose refused to dismiss a lawsuit against seven Valley companies – Apple, Google, Intel, Intuit, Pixar, Lucasfilm and Adobe – in which five engineers say the firms engaged in a conspiracy to eliminate competition between them for skilled labor" with the goal of driving down pay and limiting mobility.

U.S. District Judge Lucy Koh found that the existence of "Do Not Cold Call" agreements among the companies "supports the plausible inference that the  agreements were negotiated, reached and policed at the highest levels" of the boardrooms. The companies in 2010 settled a Justice Department lawsuit containing similar charges – without admitting wrongdoing but detailing practices they would stop.

In Silicon Valley, the devil is often in the email.

Court records detailed a reported email exchange from 2007 between the late Steve Jobs and Google's then-CEO Eric Schmidt, over an apparent Google attempt to woo an engineer from Apple.

Jobs wrote to Schmidt: "I would be very pleased if your recruiting department would stop doing this."

Schmidt forwarded the email to others, requesting that they "get this stopped."

The companies had sought to dismiss the suit on grounds that the facts didn't support the claim of an "overarching conspiracy" to suppress wages, that the conspiracy is implausible and that the engineers lack standing.

Neither Apple nor Google would comment for this article.

Meanwhile, a week ago, the FCC fined Google $25,000 for having "deliberately impeded and delayed" the agency's effort to determine whether the company ran afoul of anti-eavesdropping rules when it gathered data from home Wi-Fi networks while trying to map the world through its Street View project. The FCC accused Google of deliberately stalling the investigation, claiming at one point that searching its employee email would be too onerous. One Google employee pleaded the Fifth rather than be deposed by investigators.

A Google spokeswoman disputed the agency's "characterization of our cooperation." The firm plans to file a response.

Two weeks ago, it was Apple's turn. Apple and five publishers were sued by the Justice Department for e-book price fixing in a scheme that allegedly cost consumers "tens of millions of dollars more for e-books than they would have otherwise paid." Apple lawyer Daniel Floyd told a federal judge last week that the case was "not appropriate" and it is seeking a trial because it "would like the case to be decided on the merits," according to Reuters.

Tech troubles seem to be mounting.

Google, for one, is the subject of an antitrust probe by the FTC into search services and also for allegedly bypassing privacy settings of Apple Safari browser users. Facebook, set to go public on May 17, settled an FTC case last year over its privacy practices, and it's currently embroiled in a tit-for-tat patent fight with Yahoo.

The European Commission, meanwhile, is exploring antitrust complaints against Motorola Mobility, which is being acquired by Google, over its use of standards patents in smartphone and mobile device technology to block rival products. ,Apple and Microsoft brought the complaints.

And as tech companies snap up patents, they are battling each other in courts around the world.

"Mutually assured destruction" is what antitrust attorney Gary Reback called it. "That's the way antitrust lawyers describe it. If someone has a lot of weapons, we'll let someone else buy weapons as an offset. The problem is that the patents get into the hands of crazies and they shoot at smaller people who can't buy 20,000 patents."

An insider's view of the competitive atmosphere in Silicon Valley is coldly calculating, where "companies can cooperate with each other and gouge each other's eye out and experience no dissonance," Reback said.

It's a long way from Bill Hewlett and Dave Packard working together in their Palo Alto garage – or even Larry Page and Sergey Brin working together on a Stanford Ph.D. project. And some caution that Washington not crush what makes Silicon Valley unique and successful.

"The amount of damage you can do with an injunction in an industry you don't understand is pretty severe. So you want to make sure you're right," Hovenkamp, the law professor said.

Silicon Valley knows it may have to man up for its missteps.

"Everyone loves startups, everyone loves small business – unless and until you have the temerity to be successful and grow large. Then the gloves are off," said Silicon Valley Leadership Group's Guardino. "In a sense, that's OK. As we mature, we are even more accountable for all of our actions as well as all of
our deeds and misdeeds."

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