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The Next New--Potentially Illegal--Thing

In part one of Inc.'s interview with Larry Downes, the author of the forthcoming The Laws of Disruption, he explains why the legal system is the enemy of innovation.
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Once, technological innovation was embraced by early adopters, who were followed by the masses. Today, technological innovation is embraced by early adopters, who are followed by the lawyers. According to Larry Downes, partner, Bell-Mason Group, a venture consulting firm focused on corporate investments in start-ups, it is the lawyers' job to shut down innovation before it reaches the masses. He warns that the market isn't the only place where innovators must prepare to fight.

Downes has written prodigiously about IT, business strategy, and law. His book on the subject, "The Laws of Disruption," comes out from Basic Books in October. Inc. magazine's Leigh Buchanan spoke to Downes about why fast-forwarding entrepreneurs should be cautious of the legal system's approach to technological change.

The premise of your book is that innovation—especially technological innovation—happens very fast, while legal systems move very slowly. What's a good example of that?

Historian Lynn White Jr. tells the story of the stirrup, which was adapted in Europe around 800 and turned the tide in invasions from the east by creating a mounted cavalry—the knights. But to keep these new troops trained and ready, Charlemagne needed to give them an indirect source of income. So he took land from the church and created the feudal economy that dominated Europe for centuries. Vestiges of feudal law still play a significant role in real-estate law in the U.K.

The Internet is our stirrup. We all know it's changed the way we do nearly everything. But we're just starting to sort out its impact on economic and legal systems. Internet telephony, for example, is a relatively simple innovation that adapts the powerful data-communication infrastructure for voice. But its popularity is forcing the FCC to think differently about a subject it thought it understood for decades.

In the gap between revolutionary change and incremental lawmaking, regulators get very uncomfortable. For example, the FCC keeps trying to tell Internet phone companies they have to offer emergency 911 support just as land-line and cellular carriers do. But for companies like Skype, the calling phone number no longer indicates where a caller is located. The architecture that makes their service inexpensive also makes it impossible to handle 911. The Commission is trying to fit Internet phone companies into familiar categories and apply old rules.

What can innovators do to head off problems?

When gotchas like these appear, innovators have to work them through with regulators, messy as that is. Where you can see it coming, even slightly ahead of the government, it's a good idea to give a heads-up and, where possible, to offer a solution. While you can't predict everything, most start-ups can do a much better job anticipating and minimizing some of the worst headaches.

Where innovators must improve is anticipating legal challenges at the heart of their products and services. These come not from the government but from competitors, who use the legal system to slow or stop the progress of innovations they don't like. The more radical the innovation, the more likely that traditional competitors will use the courts to slow or stop your progress. That's a natural consequence of the widening gap between technology's potential to change our lives and our ability to adapt quickly. The tendency for technological innovation to change the rules of an industry is invariably faster than the industry wants to change. Law is one of the principal weapons of resistance.

To stay with Internet telephony, the idea of free or nearly-free unlimited calling using the Internet infrastructure and existing broadband connections strikes at the very heart of what traditional phone companies do at a much higher price. So it's not surprising that in addition to putting pressure on the regulators to slow down Internet phone companies, the old guard have also unleashed their full legal muscle in a series of patent lawsuits that nearly killed Vonage. In some sense it doesn't even matter if these lawsuits have merit—that is, if the patents are any good or if Vonage is actually infringing on them. When a core service is at risk, incumbents will spend anything to slow or stop the innovation. Often, as here, they have very deep pockets. So you can find yourself fighting life-or-death lawsuits with much less money to spend than your adversary. That can spell the end for an innovation.

Do you think entrepreneurs like Shawn Fanning (Napster) and Chad Hurley and Steve Chen (YouTube) were brave rebels or simply had no idea what they were getting into when they launched businesses that acted like Velcro for lawsuits?

I can't say for sure in those examples, but you'd have to imagine they had some idea the major media companies wouldn't be happy. On the other hand, how much real planning--legal or otherwise--went on before those services went live? One of the greatest features of innovation in the digital age is that it's relatively cheap and simple to experiment.

In the very early stages of innovation, little thought is likely given to regulatory obstacles or potential litigation. For applications such as Napster and YouTube, however, which are going to host user-provided content, a smart entrepreneur can probably anticipate legal problems. Even if the developers intend for users to work solely with their original content, users will have other ideas. In the end Napster tried hard to work out deals with the music industry, but ultimately litigation shut them down. YouTube found a deep-pocket buyer in Google, and also a company with considerable clout in the content business. So despite a pending $1 billion lawsuit by Viacom, the company has been doing deals even as it tries to reign in users' most egregious behavior.

In the gaming world, the very inventive PlayStation 3 game Little Big Planet is a sandbox in which users can create their own game levels and share them with others over the network. The game itself doesn't use third-party content, but some of the user-created levels are filled with homages to favorite movies, TV shows and other protected intellectual property. That content is a hornet's nest of copyright and trademark violations. Content owners these days seem to keep fans on a pretty short leash. The user forums are already buzzing about levels being deleted, presumably because Sony has either been threatened with or wants to avoid lawsuits.

If you want to launch a company or product you believe will attract litigation, what is the best way to go about it?

If you think you're building something that's going to attract lawsuits, for goodness sakes get good outside legal counsel. I don't know how many times I talk to executives at start-ups (and, to be fair, corporations also) who think they know the rules and how to stay inside them. "As long as we don't encourage or help the users, we can't be sued for what they do." Or, "as long as they don't copy more than 15 percent of the song, it's a fair use." Or, "We're pretty sure no one has a patent on any of this already." In some cases, under some circumstances, that may be true. In many others, it isn't.

Law, especially business law, is often not intuitive or obvious. A little knowledge can be dangerous. And having the winning argument in a lawsuit doesn't help if you can't afford to pursue it as far as your adversary. Many law firms, particularly here in Silicon Valley, specialize not only in working with start-ups but also in these particular problems. You need a lawyer who understands both your business and the field of law you're wading into.

Companies test physical products in labs or in the field, or they bring in experts to make sure their offerings do no harm. Is there or should there be a virtual version of that kind of tire-kicking to avoid liability?

No matter how sophisticated they are, scenario-planning models can't account for all the variables in the legal system. Modern business law is remarkably complex, even when you're just talking about one country. Global aspects put you off the complexity charts. A good lawyer can certainly help identify many issues you're likely to run into, but you've got to be prepared for surprises.

When major retailers and consumer products manufacturers, including Procter & Gamble, Gillette, and Wal-Mart, began preliminary tests of new Radio Frequency Identification (RFID) tags to replace the current static UPC codes, how could they possibly have predicted that religious groups would view the technology as a harbinger of the Apocalypse? (A group called CASPIAN believes the RFID tags are the mark of the beast prophesized in the Book of Revelations.) I don't fault them for being caught off-guard on that one. But I do think every innovator should get ahead of its critics and start their public education as soon as possible to promote the benefits of new technologies.

Technology is moving from business applications to personal applications, and that's exciting. It's also more likely to scare people who don't understand it. The RFID industry has been in a defensive posture from the beginning. Some states have passed, or at least considered, anti-RFID laws even before the technology has been deployed. The innovators have failed to make the case to consumers about how this technology will revolutionize the supply chain and how that, in turn, benefits consumers. No matter how great the potential is for your innovation, you won't get far if it's banned before you have a chance even to test it.

Last updated: May 1, 2009

LEIGH BUCHANAN | Staff Writer | Editor-at-large, Inc. Magazine

Leigh Buchanan is an editor-at-large for Inc. magazine. A former editor at Harvard Business Review and founding editor of WebMaster magazine, she writes regular columns on leadership and workplace culture.




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