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Regulating Disruptive Innovation

54 Pages Posted: 13 May 2014 Last revised: 14 Jun 2014

Nathan Cortez

Southern Methodist University - Dedman School of Law

Date Written: May 12, 2014

Abstract

Disruption theory tells us that certain innovations can undermine existing products, firms, or even entire industries. Classic examples include the Kodak camera, the Bell telephone, and the Ford Model T. Modern examples abound. The market entrant’s innovation ultimately displaces industry incumbents. Regulators, too, are challenged by such disruptive innovations. The new product, technology, or business practice may fall within an agency’s jurisdiction but not square well with the agency’s existing regulatory framework. Call this “regulatory disruption.”

Most scholars intuit that regulators should be cautious rather than firm in such situations. Tim Wu, in Agency Threats, argues that agencies confronting disruptive innovations should avoid traditional rulemaking and adjudication, and instead rely on “threats” packaged in guidance documents, warning letters, and the like. Threats, he argues, are less burdensome, more flexible, and avoid regulation that is miscalibrated or premature. However, this Article argues that a flexible initial posture based primarily on “threats” can calcify, creating weak defaults that lead to suboptimal regulation in the long term. Regulatory inertia can be hard to break without an external shock, usually a tragedy or some other massive failure that reignites interest in regulation. As a case study, this Article shows how the FDA’s approach to a disruptive technology (computerized medical devices) twenty-five years ago fits the threat framework strikingly well, and how it failed. The FDA’s threats became stale and counterproductive — during a profound computer revolution, no less. This Article counterposes the FDA’s approach to software with the FCC’s approach to the Internet, which initially relied on threats, but later codified them via binding regulations and enforcement shortly thereafter.

This Article argues that agencies need not be so tentative with innovations. If agencies are concerned about regulating prematurely or in error, then they can experiment with timing rules, alternative enforcement mechanisms, and other variations on traditional interventions. If agencies do choose to proceed by making threats, then they should use them as a short-term precursor to more decisive, legally binding action, as the FCC did, and avoid relying on them as a long-term crutch, as the FDA did.

Keywords: technology, innovation, regulation, administrative law, regulatory theory, FCC, FDA, mHealth, mobile health, internet, federal agencies

Suggested Citation

Cortez, Nathan, Regulating Disruptive Innovation (May 12, 2014). Berkeley Technology Law Journal, Vol. 29, 2014; SMU Dedman School of Law Legal Studies Research Paper No. 137. Available at SSRN: https://ssrn.com/abstract=2436065 or http://dx.doi.org/10.2139/ssrn.2436065

Nathan Cortez (Contact Author)

Southern Methodist University - Dedman School of Law ( email )

P.O. Box 750116
Dallas, TX 75275
United States
(214) 768-1002 (Phone)

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