California Fostered America’s Tech Industry. It Is Becoming a Great Adversary.

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California, the birthplace of the American tech industry, is emerging as a great foe.

On Monday, the state legislature resumes and will consider a bill that, if passed, could classify drivers for ride-hailing companies like

Uber Technologies
Inc.


UBER -6.80%

and

Lyft
Inc.


LYFT -4.80%

as employees, entitled to better wages and benefits.

The bill, along with state laws pending or passed on issues ranging from privacy to net neutrality, could substantially reshape companies across the technology sector, many of which are based in the Silicon Valley area where local ordinances targeting tech are also taking hold. The push by policy makers against local companies is an unusual turn that is setting a precedent for greater tech governance throughout the country.

The state has witnessed both the promise and the perils of technology firsthand. The tech sector accounted for about 19% of California’s economy last year, according to CompTIA. While that has helped increase owners’ property values and contributed to tax revenue, it has also helped the Bay Area become one of the country’s least affordable regions as nearby Silicon Valley companies have prospered. The median price for a single-family home in the area has nearly tripled to $940,000 from $327,000 since 2009, according to the California Association of Realtors.

Broader controversies over consumer-privacy breaches and the outsize power of some tech giants have prompted California lawmakers to act, even as federal regulators are just beginning to probe some of the nation’s largest tech companies, including

Facebook
Inc.,

Alphabet
Inc.

’s Google,

Apple
Inc.

—all based in northern California—and Seattle-based

Amazon.com
Inc.

to examine their market power and influence.

The state is set to debut a law next year that will give privacy rights to consumers unprecedented in the U.S. Passed last year, the California Consumer Privacy Act broadens the definition of what constitutes as personal information and will give California residents the right to prohibit the sale of personal data to third parties and opt out of sharing it altogether. Corporate lobbyists are pushing several bills that would put in place certain exemptions.

The legislation has reverberated throughout the country. New Jersey, Massachusetts, Hawaii, Rhode Island and a handful of other states introduced similar privacy bills after the CCPA passed. In April, Massachusetts Democratic Sen. Edward Markey introduced a bill in the U.S. Senate that borrows from both the CCPA and General Data Protection Regulation, or GDPR, passed three years ago in Europe, which has been Big Tech’s most aggressive international regulator.

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Regulation Inspiration

Regulatory measures introduced in California are setting the precedent for greater tech governance throughout the country.

Calif. Consumer Privacy Act passes

When some states/nation introduced regulatory measure(s) related to consumer privacy after CCPA passed:

California also boasts the strongest net neutrality law in the country and recently enacted a law requiring online bots—applications that do automated tasks over the internet—to reveal their “artificial identity.” California is home to what is known as the gig-economy bill, officially titled Assembly Bill 5, that would affect Uber and Lyft drivers. That bill is working its way through the legislative process.

While AB5 would affect companies across a variety of industries, ride-hailing companies Uber and Lyft, both based in San Francisco, would face a direct threat to their business model if it passes. The companies are unprofitable even with labor costs at current levels.

At a rally in early July outside of the California capitol, drivers for Uber and Lyft joined dozens of other independent contractors to cheer on the bill. At the center of the crowd stood a staunch supporter: Anthony Rendon, speaker of the California State Assembly.

“When you hear about folks talking about the new economy, the gig economy, the innovation economy,” Mr. Rendon said into a mic, waving his hands up and down, “it’s f—king feudalism all over again.”

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Spokesmen for Uber and Lyft said the companies are proposing changes to state labor laws that would give drivers more benefits without officially classifying them as employees, arguing that most drivers don’t want to lose the flexibility they get being contractors.

Assemblywoman Lorena Gonzalez (D, San Diego) celebrates at a rally after her measure to limit when companies can label workers as independent contractors was approved by a Senate committee in Sacramento.


Photo:

Rich Pedroncelli/Associated Press

Rigorous business regulation has come to define California, where Democrats control every statewide office and a supermajority in the legislature. California was the first to enact appliance- and equipment-efficiency standards, as well as to mandate that companies hire female board directors. It has among the strictest fuel-efficiency requirements for vehicles and has helped set air-quality standards, pay standards and paper-trail requirements for ballots cast in elections.

Silicon Valley is overwhelmingly liberal and regularly elects Democrats to local office and the state legislature, including officials who support the privacy and gig-economy legislation.

The state’s size often compels companies to shift their practices to meet standards set there. In 2018, California’s gross domestic product was nearly $3 trillion, making the state the fifth-largest economy in the world, according to federal data.

Even so, California’s regulatory actions toward its flagship industry is the kind of self-aim not commonly seen in government. States are typically quick to champion their economic engines, as Michigan, one example, often does with the auto industry.

But the rapid rise in living costs as technology jobs have surged has led to vast gentrification and growing wealth disparity that some residents resent and have prompted policy makers to respond.

The California Legislature will consider a bill that could classify drivers for ride-hailing companies such as Lyft as employees entitled to better wages and benefits.


Photo:

Jason Henry for The Wall Street Journal

In May, San Francisco became the first U.S. city to ban the use of facial recognition by local law-enforcement agencies amid privacy concerns, prompting a wave of similar legislation proposed across the country and a U.S. House bill to ban the technology in federally funded public housing. The city and the tech industry have clashed in recent years over self-driving car testing and electric-scooter permits.

Kevin Ortiz has witnessed the downside of tech’s influence from his home in the city’s Mission District, where streets lined with taquerias, Mexican bakeries and Latin culture-themed murals have long been home to many of the city’s Hispanic population.

As the tech industry has boomed, longtime residents have been displaced, said Mr. Ortiz, 25. His parents moved roughly 90 miles away to Sacramento years ago after experiencing regular rent increases.

Facebook and Google are among the Silicon Valley-based companies that have pledged millions for local developers to create more affordable homes. Facebook Chief Executive Mark Zuckerberg has said he is open to increased regulation after the company faced a backlash for allowing its users’ privacy to be violated and for failing to catch misuse of their data. When CCPA passed last year, Facebook Chief Operating Officer Sheryl Sandbergsaid the company supported the bill.

Google CEO Sundar Pichai, in a blog post announcing a $1 billion investment in Bay Area housing, described how Google is one of the largest employers in the area and talked about the company’s desire to be “a good neighbor.”

Some tech companies are bristling, said Bradley Tusk, a former Uber consultant who helped the company successfully oppose minimum pay and other ride-hailing rules in New York.

“They feel like, ‘We’re creating jobs, we’re creating a huge amount of revenue, we’re the golden goose, and you’re turning us into the whipping boy,’ ” said Mr. Tusk, who advises tech companies on navigating politics though his firm, Tusk Strategies.

Lawmakers will pick up negotiations regarding AB5 on Monday, when the legislature reconvenes from summer recess. If the statute passes, it will go into effect on Jan. 1, 2020.

Silicon Valley should pay close attention, Mr. Tusk said.

“The Valley takes politics more seriously than they used to, but I still talk to startups that say, ‘Yeah, we’ll deal with those regulators when we have to,’ and as a result, they get upended by problems,” Mr. Tusk said. “You have to figure out where the politics are going. The world where you can wave a shiny object and people ooh and aah isn’t really here anymore.”

Write to Sebastian Herrera at Sebastian.Herrera@wsj.com

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