Regulatory Entrepreneurship

Recent headlines have been filled with regulatory battles, sparked by innovative companies operating businesses in legal gray areas—or even breaking the law.  Uber has pushed the boundaries of local transportation laws around the world, rallying its riders and drivers, and using their popular support as leverage to wrest legal change from politicians and regulators.  Tesla went public in the United States with a business model of directly distributing its cars, which necessitated fighting state laws that require car manufacturers to sell through independent dealerships.  Fantasy sports sites DraftKings and FanDuel have paid millions to settle investigations and have mobilized their users to help secure legislation allowing their businesses to operate.

In our forthcoming article, we examine what we term ‘regulatory entrepreneurship’: pursuing a line of business in which changing the law is a significant part of the business plan.  Regulatory entrepreneurship is not a new phenomenon, but it has become increasingly salient recently, as a number of high-profile companies have devoted enormous amounts of resources to pursuing lines of business that carry tremendous legal risk.

We conceptualize this activity and identify three creative techniques that modern regulatory entrepreneurs have adopted in various combinations: they break the law and take advantage of legal gray areas, asking forgiveness instead of permission; they seek to grow ‘too big to ban’ before regulators can act; and, perhaps most striking, they mobilize their users and stakeholders as a political force.

Further, we build on this analysis to explore the conditions that are most likely to foster regulatory entrepreneurship.  We believe three variables are of particular importance: the nature of the business, the nature of the laws creating uncertainty, and the company’s stage and status.  Well-funded, scalable, and highly connected startup businesses that appeal to an economically diverse audience have significant advantages.  This is especially the case when they aim to change state and local laws through the political process instead of in court.

Understanding regulatory entrepreneurship is important because it is likely to increase in coming years and shape existing and future laws.  It may lead to different coalitions being formed, and different laws being enacted than has been the case historically.  Whereas politicians usually take advantage of pre-existing, organized interest groups, regulatory entrepreneurs have mobilized previously unorganized groups.  And, whereas politicians are typically motivated by ideological, values-based preferences, or by advancing their political careers, regulatory entrepreneurs are primarily motivated by the desire to earn profits.  Differences between politicians and companies may also drive differences between how policies spread across jurisdictions.  Whereas politicians usually focus on a particular position of office and generate specific geographic support, the number of businesses of a particular size is not intrinsically constrained and companies may pursue wide-ranging customer bases—and thus legal change.

The potential benefits of regulatory entrepreneurship are intriguing.  For example, regulatory entrepreneurs can be a force against laws with asymmetric costs and benefits, such as occupational licensing and restrictive zoning regulations.  This can happen both because the entrepreneur’s business may position it as a new actor with strong incentives to push for change, and because the entrepreneur can lower the cost of civic engagement for its users.  Uber, which takes a cut of each fare it facilitates and connects its users to relevant petitions through its app, provides a useful illustration.

Yet regulatory entrepreneurship is not an unmitigated good and may create significant social costs in some instances.  These companies are profit-seeking entities and they will generally use their political power to pursue their own interests, not those that are best for society.  Overall, whether one considers this activity a positive or negative development may vary by context, taking into account a full range of social and economic implications.

Elizabeth Pollman is a Professor of Law at Loyola Law School, Los Angeles, and Jordan M. Barry is the Herzog Endowed Scholar and Professor of Law at the University of San Diego School of Law.