Internet-based companies tend to claim instinctively that they belong outside traditional legal regimes. This position often fails—for good reasons. Instead, companies focused on the sharing economy, Internet of Things and big data should learn to work within the system.
By Kevin Werbach
Does Uber represent the power of networked technology at its best, or its worst? Investors most recently valued the local transportation service at more than $40 billion, an astonishing figure for a five-year-old startup. Users rave about the experience. At the same time, though, Uber faces lawsuits from state governments, protests from drivers, local authorities impounding its cars, criticism of its “surge pricing” practices, controversy over rapes and assaults of riders, accusations that it abuses its customers’ privacy, suggestions that it threatens journalists and even an indictment of its CEO in South Korea. Its penchant for controversy is almost as breathtaking as its valuation.
The pugnacious Uber is an extreme case, but it’s not alone. Other high-profile startups that use the Internet to manage resources in the physical world, such as AirBnB and Nest, are also stirring up hornets’ nests of concerns around consumer protection, privacy, licensing, taxation and business practices.
The industries these startups are challenging have traditionally been subject to special forms of regulation: taxi cabs are licensed by local authorities; apartment dwellers are prohibited from operating like hotels; utility companies are subject to heavy limits on pricing and use of customer data.
The narrative in Silicon Valley is that “disruptive innovators” face rear-guard actions from threatened competitors and befuddled bureaucrats.
Unfortunately, the language of disruption is less than helpful in the domain of public policy. The means of regulation may indeed be inefficient, even counterproductive; that in no way diminishes its ends. Internet-based companies tend to claim instinctively that they belong outside traditional legal regimes. In most cases, their efforts to defend this position will fail. And they’ll be glad they did.
How can I be so confident about how this conflict will play out? Because it all happened before.
Almost 20 years ago, at the dawn of the commercial Internet, there was a strikingly similar debate. Websites and Internet service providers were muscling in on the territory of telephone and media companies.
Academics and pundits argued that cyberspace was impossible to constrain through territorial law. Because the Internet did not recognize national borders and had no central point of control, they claimed, it would be both futile for existing courts, legislatures and administrative agencies to meddle with it. So, for example, if users of online services infringed intellectual property rights or violated laws, the legal system couldn’t come after those services in response.’’
In response, cyberrealists note that law has always had to deal with technological evolution and difficult questions of cross-jurisdictional application. There are a number of practical mechanisms to address conflicts. And if needed, governments would simply use brute force to get their way.
The exceptionalists won the rhetorical battle in the mid- 1990s, but soon after, the realists won the war. The legal system fashioned imperfect but largely workable solutions to the hard problems of jurisdiction, property rights, freedom of expression, contract and competition policy. Government actors such as China with its Great Firewall, and as we now know, America with its National Security Agency, had little difficulty drilling down beneath the virtual superstructures to the physical-world anchors they could manipulate.
Yet the fact the Internet didn’t supersede all law and regulation turned out to be, in many cases, a benefit. Companies such as Google, Amazon, Twitter and Netflix benefited from the trust that the legal system fosters. Pro-consumer initiatives stopped the first generation of Internet startups from eating the seed corn for the subsequent ones. And a few key legal enactments became important foundations for their success.
History is repeating itself. Uber’s argument that a software company shouldn’t be subject to rules designed for taxi owners parallels AOL’s argument in the mid-1990s that it shouldn’t be subject to the “access charge” regime established for telephone companies. AirBnB’s assertion that it shouldn’t be liable when one of its guests burglarizes a host parallels Yahoo’s argument that it shouldn’t be punished if one of its users uploads illegal material. Nest’s claim that we should trust it to manage our own electricity usage data parallels Google’s views about search queries. (Appropriately enough, Google acquired Nest last year for $3.2 billion.)
True, many legal and administrative requirements should be eliminated, or at least not extended beyond their historical application. The forces of progress need to make clear that what they’re doing is actually beneficial for consumers, workers and the economy. That being said, why should one set of rules, set by a local commission, necessarily apply when I step into a taxi, and another when I step into an Uber car (in some cases involving the same driver, or even the same car)? Are safety, insurance, fair labor practices, transparent pricing and antitrust considerations no longer relevant? Is it inconceivable that Uber’s black-box algorithms would discriminate against disfavored drivers or riders?
Similarly, why is my telephone company legally prohibited from using the personal information they collect as a matter of course for marketing or other purposes, but Nest has no such limitation on the data from my thermostats, smoke detectors, lights and other home devices? There are reasonable arguments that Google should be trusted to use that information to innovate on behalf of its users, but such arguments apply equally well to telecommunications providers. At some point, we can’t have it both ways.
Here’s the good news. As imperfect as the legal system and regulation may be, they aren’t static. The FCC and Congress refused to impose crippling fees and taxes on Internet companies. A vibrant Internet application and digital media market grew up after the Department of Justice engaged in an aggressive antitrust action against Microsoft, which was using anti-competitive tactics to prevent competitors from undermining its dominance. Among the great enablers of the rise of U.S.-based Internet companies like Google were the “safe harbor” provisions in the communications and copyright legislation of the late 1990s, which shielded them from liability for their users’ actions, so long as they responded to requests to remove illegitimate material. And online service providers (most of them, at least) learned to exercise more responsible stewardship of customer data after a series of large fines imposed by the U.S. Federal Trade Commission and European data privacy agencies.
Uber and its compatriots have a choice. They can follow the path of Napster, confidently believing that new technology will inevitably beat old law. (Ask Napster’s executives and investors how that worked out.) Or they can figure out ways to work within the system. YouTube began life with an outlaw mentality, ignoring copyright concerns in a headlong pursuit of growth. After its acquisition by Google, it changed its tune. While still fighting overreaching demands by content owners and governments, YouTube has turned itself into a business powerhouse and a major channel for media companies.
There should be debates about the hard policy questions raised by the sharing economy, Internet of Things and big data. In Uber’s case, the question is whether drivers and riders need legal protections above and beyond basic contract rights, and if so, how best to achieve them. “Trust us: We’re disruptive” isn’t enough.
Kevin Werbach is an associate professor in the Department of Legal Studies and Business Ethics and the organizer of the Supernova technology conference. He was a member of the Presidential Transition Team for the Obama administration, and he served until recently as a consultant to both the Federal Communications Commission and the National Telecommunications and Information Administration.