Is California Trying to Kill Its Tech Economy?
Europe’s stringent tech regulations could be coming California.
SACRAMENTO — In a recent report commissioned by the California Legislature to consider new antitrust regulations to govern the state’s tech industry, the California Law Review Commission at least acknowledged the significance of this sector. It notes that 1.5 million Californians are part of the tech workforce. Tech companies account for nearly 17 percent of the state’s economy. These companies’ revenues and sales account for nearly a third of California’s Gross Domestic Product. The state’s capital-gains-dependent budget relies on these companies’ tax revenues.
California is indeed the national — and international — leader in the tech economy. Even though it’s been hemorrhaging tech jobs since the COVID-19 crisis, California still accounts for 30 percent of the nation’s “tech output,” according to a review by Apricitas Economics. And the European Union’s “industry is a dwarf in comparison,” per venture capitalist Mark Minevich, writing in Forbes. “Europe’s tech companies as a whole are worth about 30 percent of any one of the Big Four American firms.”
The European comparison is vital because the law review commission is setting the stage for a wave of legislation that would model California’s tech laws on the EU’s regulations. The commission isn’t widely known and only holds advisory powers, but its recommendations are influential. “While the commission’s hearings tend to be overlooked, it is notable – and unsettling – that reportedly 90% of its legislative recommendations have become law,” notes Angela Harris in a CalMatters commentary. She fears this assault on Big Tech will harm small businesses, too.
One of the key reasons the U.S. tech industry has soared while Europe’s has wallowed is that the United States has traditionally taken a lighter hand toward regulation. Minevich points to Europe’s inflexible labor laws, trade restrictions, and “complex regulatory frameworks” that punish innovation and impose hurdles to startups. If California follows the EU model — and California often turns to Europe for inspiration in labor and environmental law — then it could stifle our homegrown industry. And California laws often become the de facto national model.
The commission’s 17-page working group report on tech platforms reads in a fairly even-handed manner, as it sets up three different scenarios: 1) maintaining the (relatively) free-market status quo; 2) enacting legislation that addresses single-firm conduct by limiting “monopolization”; or adopting far-reaching legislation addressing the basic design and operation of tech platforms. The latter echoes the EU approach. It’s clear from a number of the reports the commission authorized by experts that this is the direction the California Legislature might go.
The legislature’s directive gives the game away. It directs the commission to study “whether the law should be revised to outlaw monopolies by single companies,” “whether the law should be revised in the context of technology companies so that analysis of antitrust injury in that setting reflects competitive benefits such as innovation and permitting the personal freedom of individuals to start their own businesses and not solely whether such monopolies act to raise prices,” and “whether the law should be revised in any other fashion such as approvals for mergers and acquisitions.”
The California Legislature appears frustrated that Congress has failed to pass any of the wide-ranging tech laws that California progressives support. Per the report, this includes the American Innovation and Choice Online Act, which bans companies from engaging in “self-preferencing” — e.g., limiting the ability of platforms to give preference to their own integrated products. Other stalled federal measures would require app stores to provide open access to third-party products and create a new federal bureaucracy to oversee tech platforms.
Those are terrible ideas modeled largely on the European Digital Markets Act (DMA), yet California lawmakers are likely to revive them in our state in next year’s legislative session. “The DMA exhibits three core features that are incompatible with the two-fold commitment to innovation and free-market competition that are hallmarks of California’s tech ecosystem,” argues a 2023 analysis from the Chamber of Progress, a tech-related trade group.
First, the DMA “institutes ‘ex-ante’ prohibitions of certain common business practices that federal antitrust and California state antitrust law typically assess on an ‘ex post’ case-by-case basis,” the chamber explained. In other words, the European approach is to impose prior restraint on companies rather than look at any particular practice. Second, the DMA takes a “big is bad” approach that punishes companies for growth. Third, it adds that the DMA “reflects a rule-bound regulatory apparatus that would necessitate a permanent regulatory agency.” When has any government agency — particularly one in California — encouraged innovation?
Basically, the California Law Review Commission includes many of the troubling tech-regulation ideas that have come down the pike in recent years. One of its working-group reports proposes model legislation that would make it “unlawful for one or more persons to engage in anticompetitive exclusionary conduct that affects any part of the trade or commerce within the state.”
Anti-competitive conduct is defined so broadly that it would include “a meaningful risk of diminishing the competitive constraints imposed by the defendant’s rivals and thereby increase or create a meaningful risk of increasing the defendant’s market power.” So a state bureaucracy could intervene any time a company was successfully expanding its market share. This is just one proposed idea, but it provides insight into the legislature’s thinking.
State officials continually tout the strength of the state’s tech economy in response to critics who note a business exodus to states including Texas and Florida. But if Gov. Gavin Newsom and lawmakers want to maintain that strong economic showing (and shore up its deficit-plagued budget), they need to quickly put the kibosh on the commission’s tech-industry-stifling proposals.