Connecting Business Innovation to Policy Disruption

Recent legal scholarship on the platform economy – also known as the sharing economy – often invokes the term ‘disruptive innovation’ to suggest that these new forms of business organization require rethinking the role of law in regulating economic activity. In a forthcoming article, Regulating Business Innovation as Policy Disruption: From the Model T to Airbnb [1],  we and our co-authors contend that by focusing too narrowly on the novelty of the platform economy, legal scholars have missed an opportunity to tell a broader story about the kind of punctuated equilibria that arise in the ongoing relationship between business innovation and regulatory policy changes.

History is full of technological and management advances that have fundamentally disrupted existing business models. While management scholars led by Clayton Christensen of the Harvard Business School have developed a theory of disruptive business innovation to explain how large firms can be outmaneuvered by upstarts to gain market share, disruptive business innovation does not always lead to what we call policy disruption. Indeed, the management theory of disruptive business innovation generally lacks any account of the role of the regulatory state either as a facilitator of or hindrance to disruptive forms of business, or a theory of how business innovation can require regulatory responses.

When business innovation upends a pre-existing business model in a regulated industry, the result can be a disjunction between the structure of the regulatory system governing incumbent firms and the firms disrupting the industry: a policy disruption. Our Article is the first to offer a comprehensive analytical framework of how business innovation can create policy disruption and how regulators should respond. We contend that policy disruptions come in four types: End-runs, Exemptions, Gaps, and Solutions. Entrepreneurs can take advantage of ambiguous laws (End-runs), as in the case of whether taxi regulations apply to Uber or Lyft; or may fall into express legal exceptions (Exemptions), as in the case of anti-discrimination laws that do not apply to roommate rentals, potentially including those arranged through Airbnb. But policy disruption can just as easily result from business innovations to which the existing regulatory regime simply does not apply (Gaps); or innovations that solve problems that regulatory systems are designed to address (Solutions) and yet are stymied by overinclusive regulations.

Just as there are four types of policy disruptions, we lay out four different types of regulatory responses: to Block the new firm’s entry into the market; to give the innovator a Free Pass in which regulators do not apply existing laws; to attempt to apply existing legal rules to the incumbent and the innovator (OldReg); or to develop new legal rules entirely (NewReg).  The four types of policy disruption do not map perfectly onto the four regulatory responses, however; thus we develop a three-step process that should guide regulators in responding to policy disruptions suggesting that, as a default, regulators should strive to be neutral as between incumbents and innovators. We conclude by offering specific policy instruments that regulators can use to draft laws more neutrally to avoid or limit such policy disruptions in the future.

[1] Eric Biber, Sarah E. Light, J.B. Ruhl & James Salzman, 70 Vanderbilt L. Rev. (forthcoming 2017).

Sarah E. Light is Assistant Professor of Legal Studies and Business Ethics at the Wharton School of Business, University of Pennsylvania.

J.B Ruhl holds the David Daniels Allen Distinguished Chair in Law at Vanderbilt Law School.