Historically, one of the biggest barriers to entry to disruptive technologies is not the technology itself, but various regulatory hurdles that incumbent providers have instituted to stifle competition. These laws have only the most faintest relationship to the health, safety, and welfare of the people.
Uber, for example, is an awesome service that allows users to request a livery cab pick them up wherever they are. It is a revolutionary idea that renders obsolete the process of hailing a cab, or scheduling a car service. So what’s the problem? Why isn’t this in every city? Well, many Taxi Commissions have opposed Uber, as it provides competition. And who wants competition in a regulated industry, right? The District of Columbia, among other places, has been one of the most egregious opponents of Uber.
In the past, Uber has simply entered markets, and let the chips fall where they may. This has proven to be quite expensive, and not too successful. In response to the high cost of litigating in these closed markets, Uber has changed course:
The company is tired of that fighting just to maintain its business, so it’s defining its expansion policies through a new white paper. Deployments will occur in regions where Uber sees “tacit approval” from regulators — in other words, areas where there hasn’t been direct legal action against competing services for at least 30 days. Just in case authorities change their minds, the company plans to go “above and beyond” commercial licensing requirements, including a $2 million insurance policy on trips and more stringent background tests. While Uber would much rather have explicit permission to operate as it sees fit, the strategy could have the firm venturing into territories where competitors with unlicensed drivers have (seemingly) free rein.
Uber’s white paper recognizes the high costs of barriers to entry for disruptive technology.
In most cities across the country, regulators have chosen not to enforce against non-licensed transportation providers using ridesharing apps. This course of non-action resulted in massive regulatory ambiguity leading to one-sided competition which Uber has not engaged in to its own disadvantage. It is this ambiguity which we are looking to address with Uber’s new policy on ridesharing:
- Uber will roll out ridesharing on its existing platform in any market where the regulators have given tacit approval;
- In the absence of regulatory leadership, Uber will implement safeguards in terms of safety and insurance that will go above and beyond what local regulatory bodies have in place for commercial transportation.
In the face of this challenge, Uber could have chosen to do nothing. We could have chosen to use regulation to thwart our competitors. Instead, we chose the path that reflects our company’s core: we chose to compete.
Elon Musk, the Chief Executive of Tesla Motors–those cool electric vehicles I saw on every corner in Palo Alto–is taking a different approach to regulatory barriers. Under Texas law, Tesla can’t sell any vehicles without any franchised dealerships in the state (and obtaining such a franchise is extremely onerous). Musk is going the rent-seeking route, and trying to pass legislation to benefit his company:
Musk testified Monday before a committee of the Texas Legislature in support of HB 3351 and SB 1659, bills that would allow U.S.-based manufacturers of 100% electric- or battery-powered vehicles to sell directly to Texas consumers.
Musk reiterated his contention at a news conference Wednesday. “The ability to sell cars through Tesla-owned stores is important for sustainable transportation and is the best chance a new electric car company has of succeeding,” he said.
Of course, the dealers of Texas have strenuously opposed this new technology, not because it is dangerous or anything, but because it will undercut their profits.
So what does this mean for the disruptive industry I am most closely involved with?
Recently, I was talking with a friend at a legal tech startup about what the high costs of the barriers to entry are to products that disrupt the legal marketplace. Specifically, I was talking about technology that can offer legal advice, which borders on the unauthorized practice of law. For some time, I have feared that the first huge wall that legal-technologists will encounter is the entrenched bar using regulatory hurdles to stop the development of this technology. We have already seen the early traces of this battle in suits against LegalZoom.
I conveyed these thoughts to my friend, and he said that they were plausible but he wasn’t concerned, for a few reasons. First, he noted that these technologies will likely benefit attorneys directly, rather than benefit nonlawyers, right away at least. This is a distinction between something like LegalZoom, which is already in court defending against UPL suits. Thus, UPL suits are unlikely because lawyers will be using the products.
Second, he noted that if this technology can gain enough of a foothold before the regulators catch on, it will be too late for them. I am dubious about this one. Regulators only take notice when a product begins to disrupt. Flying under the radar only works for so long.
Third, he closed with what I think is the most ominous thought–he was prepared to fight it in court if the challenge comes. He said he has funding, and that this industry has a lot of potential, and can attract money. This, I think, is the most troubling aspect.
While Tesla can go to the people, and champion the benefits of an electric car, or Uber can champion the benefit of revolutionizing transportation, legal tech will have a harder fight. If these are products just for lawyers, there will hardly be a groundswell of support to take on the regulatory barriers. Lawyers will be fine to limit the use of this technology to licensed attorneys. But this defeats the entire purpose of the disruption.
To the extent that non-lawyers want to use these tools, but can’t due to UPL laws, they will likely be the very people too poor to hire lawyers in the first place–the least likely movement to oppose a regulatory barrier. The entrenched bar will have all the power.
What makes this most difficult–and is a point I didn’t fully pursue with my friend–is how would they challenge it. Courts are unbelievably deferential to defining UPL. You think the Taxi and Limo Commission has some clout, wait till you go up against the state bar! Unless there is some kind of due process or First Amendment challenge here (something I am writing about elsewhere), these challenges will continue to fail.