Regulatory and Legal Barriers to Tech-Company Market Entry, Success, Stubbornly Persist

FTC_Man_Controlling_TradeLast month at The Atlantic Festival, FTC Commissioner Slaughter and former FTC Chair Ohlhausen participated in an enlightening interview on technology regulation. When discussing how the United States approaches regulation compared to other nations, Ohlhausen said the U.S. has such an “enormous presence in the tech space” due in part to America’s “lighter touch” on regulation.

Slaughter questioned whether regulation stifled innovation to the extent Ohlhausen inferred, noting that Silicon Valley is located in a state with a particularly challenging regulatory and legal environments.

Commissioner Slaughter’s comments, and the perspective they represent, merit serious reflection and analysis, especially with the FTC holding an ongoing series of Hearings on Competition and Consumer Protection in the 21st Century. Stakeholders participating in and commenting on those hearings should remind the Commission of regulation’s impact on innovation. Evidence abounds of that connection.

Consider, for starters, Slaughter’s example of Silicon Valley. The area has thrived as an incubator of new ideas and technology, but California’s harsh climate for free enterprise is beginning to take its toll. The Economist reported in August that more people are leaving San Francisco County than are arriving, and many more are planning to depart within two years. The gauntlet of mandates and controls businesses must navigate, along with punishing taxes and fees, have sent the cost of living, and the cost of labor, in Silicon Valley skyrocketing. Venture capitalists are increasingly taking their money elsewhere, as startups look to other cities and countries.

California’s elected officials seem determined to pile on more disincentives. This past summer, the legislature passed the California Consumer Privacy Act. The act creates a panoply of data-privacy rights and imposes rigid data-security and breach-notification requirements. Plaintiffs’ lawyers will help enforce the law’s data-security provisions through private lawsuits that seek statutory damages.

California’s law follows in the footsteps of Europe’s General Data Protection Regulation (GDPR). Some, in fact, have labeled the Golden State’s law “The American GDPR.” Consumers and businesses in the U.S. better hope that’s not an accurate moniker. The GDPR has dramatically disrupted the balance between regulation and innovation, erecting a barrier to European market entry for startups and propelling some established companies to either physically or virtually exit Europe.

Mobile marketing company Verve and media-buying business Drawbridge closed their operations in Europe before the GDPR went into effect on May 25, 2018.  A trio of genealogy testing and information sharing sites also shut down their operations prior to May 25. Social-reputation service Klout did so as well.

Other U.S.-based businesses have blocked European consumers from their websites. The head of a small company that does online consulting and training for Microsoft’s SQL Server wrote regretfully about how all of GDPR’s hoops are “just not worth the hassle.” The owners of the Chicago Tribune and the Los Angeles Times decided to deny European readers access to the papers’ websites. Others that either temporarily or permanently blocked European visitors due to GDPR include A&E Networks, History.com, news-link aggregator Instapaper, and, ironically, Unroll.Me, a service that helps users unsubscribe from unwanted emails.

Also, GDPR and the principles behind it seem incompatible with blockchain, a technology that has become synonymous with cryptocurrency, but could do more to protect the privacy and security of data than any government regulation could achieve. GDPR demands identification of data controllers and data processors; blockchain by its very nature is decentralized and has no one single person occupying those positions. Blockchain is organized in a way that makes it nearly impossible to delete data. Consumers’ ability to demand data erasure is one of GDPR’s most highly touted rights.

Shifting back to the U.S., more evidence of privacy regulations’ impact can be found in Illinois and Texas, who have laws meant to protect the privacy of fingerprints and facial images. Such “biometric privacy” laws led Google to block Android-based phone consumers’ use of its Arts and Culture selfie app. The vague language and private-enforcement feature of Illinois’ law have set off an explosion of class-action litigation. Some judges have allowed claims to proceed where no actual harm can be alleged. Later this month, the Illinois Supreme Court will hear arguments in a case, Rosenbach v. Six Flags, which could put an end to such no-injury claims.

The actual or potential enforcement of outdated laws, regulations, and common-law legal theories are impeding advancements in specific technologies, such as unmanned aircraft (a.k.a. drones) and autonomous vehicles. Existing federal regulations are incompatible with most uses and types of drones, and those tasked with writing new rules are focused excessively on precaution.

Autonomous-vehicle development faces significant regulatory and legal uncertainty, including how the courts will assign liability for accidents and whether current auto-safety rules can be applied to self-driving technology. That uncertainty prevented Audi from releasing 2019 A8 models equipped with automated “Traffic Jam Assist” in the U.S. Some states, such as Pennsylvania and even the District of Columbia are taking innovative steps to facilitate self-driving vehicle testing. That is an encouraging sign in the short term, but in the long term, a patchwork of regulatory approaches could hinder the industry’s growth.

And then, of course, there is California (home of Tesla, Waymo, and Uber), whose DMV laws complicate testing, and whose legislature just passed a law that allows San Fransisco to impose a tax on autonomous vehicle trips that originate in the city.

Finally, perhaps the most potent cautionary tale one can tell of allowing rigid regulation to prevail over innovation is the plight of Flytenow. The company intended to take an old idea—passengers and small airplane pilots posting flight plans on airport corkboards to facilitate ride sharing—and digitalize it into a computer app. Regulators specifically approved of the analog version of this practice. But upon seeking Federal Aviation Administration approval of the app, Flytenow was told the business was akin to an unregulated commercial airline and thus unlawful. The company unsuccessfully sued FAA and is now pursuing a legislative solution that at this point remains grounded.

Christopher Coopman, a scholar from Utah State University, told the U.S. Congress Joint Economic Committee last May that flight sharing is flourishing in Europe. That’s because the European Union’s aviation regulator “expanded its existing regulations to include these internet-based platforms, and it has actively worked with flight-sharing platforms such as Wingly to promote safety.” The innovative idea did not simply die in America, Coopman explained. Instead, it found a more hospitable, entrepreneurial environment, a concept known as “innovation arbitrage” (a term coined by the indispensable Adam Thierer of The Mercatus Center).

Innovation arbitrage is a concept regulators like Commissioner Slaughter, as well as her FTC colleagues and the participants in the ongoing competition and consumer protection hearing, must keep in mind. If America is to retain its leadership in technological innovation, regulation at all levels of government must be carefully targeted, risk-based rather than driven by precaution, and focused on encouraging, not punishing, success.

Also published by Forbes.com on WLF’s contributor page.

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