How Law Made Silicon Valley

• Publication year: 2014

How Law Made Silicon Valley

Anupam Chander

HOW LAW MADE SILICON VALLEY

Anupam Chander^*

Abstract

Explanations for the success of Silicon Valley focus on the confluence of capital and education. In this Article, I put forward a new explanation, one that better elucidates the rise of Silicon Valley as a global trader. Just as nineteenth-century American judges altered the common law in order to subsidize industrial development, American judges and legislators altered the law at the turn of the Millennium to promote the development of Internet enterprise. Europe and Asia, by contrast, imposed strict intermediary liability regimes, inflexible intellectual property rules, and strong privacy constraints, impeding local Internet entrepreneurs. This study challenges the conventional wisdom that holds that strong intellectual property rights undergird innovation. While American law favored both commerce and speech enabled by this new medium, European and Asian jurisdictions attended more to the risks to intellectual property rights holders and, to a lesser extent, ordinary individuals. Innovations that might be celebrated in the United States could lead to imprisonment in Japan. I show how American companies leveraged their liberal home base to become global leaders in cyberspace. I argue that nations seeking to incubate their own Silicon Valley must focus on freeing speech, and so must the United States, if it hopes not to break this new industry.

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Introduction..............................................................................................641

I. Making America Safe for Silicon Valley.................................647

A. Intermediary Liability.................................................................650
B. Copyright....................................................................................657
C. Privacy ....................................................................................... 664

II. Constraints in Europe and Asia..................................................669

A. Intermediary Liability ................................................................. 670

1. European Union...................................................................670
2. South Korea..........................................................................673
3. Japan....................................................................................675

B. Copyright .................................................................................... 676

1. European Union...................................................................676
2. South Korea..........................................................................678
3. Japan .................................................................................... 679

C. Privacy.......................................................................................682

1. European Union...................................................................682
2. South Korea .......................................................................... 685
3. Japan .................................................................................... 686

D. Application: Social Networks ..................................................... 686

III. Avoiding "from Wow to Yuck"....................................................689

Conclusion: The Hacker Way.................................................................694

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INTRODUCTION¹

Nearly every company set up in a garage in Silicon Valley hopes to take over the world. There is reason for such optimism. Again and again, Silicon Valley firms have become the world's leading providers of Internet services. How did Silicon Valley become the world's leading supplier of Internet services?

Popular explanations for Silicon Valley's recent success revolve around two features. First, Silicon Valley bestrides the great academic centers of Stanford University and the University of California, Berkeley, and sits near the artistic and intellectual hub of San Francisco. Second, the center of venture capital in the United States also happens to be in Menlo Park, California, allowing both industries to profit from each other in a symbiotic relationship. But education and money coincide in other parts of the United States as well. Why did those parts not prosper in the manner of Silicon Valley? More fundamentally, did not the Internet make geography irrelevant? Scholars answer that Silicon Valley's advantage lies in the economies of agglomeration.² Ronald Gilson argued that California's advantage was its labor law, which he believes encourages "knowledge spillovers" and agglomeration economies by facilitating employee mobility.³ While these standard accounts do much to explain the dynamism of Silicon Valley relative to other parts of the United States, they do not explain the relative absence of such Internet

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innovation hubs outside the United States, or the success of Silicon Valley enterprises across the world.⁴

Law played a far more significant role in Silicon Valley's rise and its global success than has been previously understood. It enabled the rise of Silicon Valley while simultaneously disabling the rise of competitors across the world. In this Article, I will argue that Silicon Valley's success in the Internet era has been due to key substantive reforms to American copyright and tort law that dramatically reduced the risks faced by Silicon Valley's new breed of global traders.⁵ Specifically, legal innovations in the 1990s that reduced liability concerns for Internet intermediaries, coupled with low privacy protections, created a legal ecosystem that proved fertile for the new enterprises of what came to be known as Web 2.0. I will argue that this solicitude was not accidental—but rather a kind of cobbled industrial policy favoring Internet entrepreneurs. In a companion paper, Uyên Lê and I show that these aspects of copyright and tort law were not driven by commercial considerations alone, but were undergirded in large part by a constitutional commitment to free speech.⁶ As we argue there, a First Amendment-infused legal culture that prizes speech offered an ideal environment in which to build the speech platforms that make up Web 2.0.

I will compare the legal regimes not between Silicon Valley and Boston's Route 128, but between the United States and key technological competitors across the globe. The indulgence of American law for Internet enterprise appears in sharper relief when contrasted with the legal regimes faced by web entrepreneurs elsewhere. In Europe, concerns about copyright violations and strict privacy protections hobbled Internet startups. Asian web enterprises faced not only copyright and privacy constraints, but also strict intermediary liability rules. I will contrast the leading cyberlaw statutes and cases in the United States, with their explicit embrace of commerce and speech, with those

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from Europe and Asia, which are more attendant to the risks of this new medium for existing interests. I will show that Google and Yahoo were so worried that Japanese copyright law would make search engines illegal that they placed their search servers offshore.⁷ A Japanese computer science professor advised his students to publish their software outside Japan.⁸ British Prime Minister David Cameron suggested that Google's search engine might have been illegal under English copyright law.⁹

This Article upends the conventional wisdom, which sees strong intellectual property protections as the key to innovation—what the World Intellectual Property Organization calls a "power tool" for growth.¹⁰ Understanding the reasons for Silicon Valley's global success is of more than historical interest. Governments across the world, from Chile to Kenya to Russia, seek to incubate the next Silicon Valley.¹¹ My review suggests that overly rigid intellectual property laws can prove a major hurdle to Internet innovations, which rely fundamentally on empowering individuals to share with each other. This study helps make clear what is at stake in debates over new laws such as the Stop Online Piracy Act (SOPA) and its relatives, highlighting the effect of these laws on Silicon Valley's capacity for

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innovation.¹² I show that government has the power to enable, or disable, a new industry. The power to make in this case implies the power to break.¹³

Innovation scholars worry about the "valley of death," the stage between start-up idea and successful commercialization, in which most start-up enterprises founder.¹⁴ Cyber scholars fond of citing Joseph Schumpeter's "creative destruction" need to attend to his focus as well on the finance needed by innovators.¹⁵ Imagine the boardroom in a Silicon Valley venture capital firm, circa 2005. A start-up less than a year old has already attracted millions of users. Now that start-up, which is bleeding money, needs an infusion of cash to survive and scale up. The start-up lets people share text, photos, and videos, and includes the ability to readily share text, pictures, and videos posted by one's friends. If that start-up can be accused of abetting copyright infringement on a massive scale, or must police its content like a traditional publishing house lest it face damages claims or an injunction, your hundred-million-dollar investment might simply vanish to plaintiffs' lawyers in damages and fees.¹⁶

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An injunction might stop the site from continuing without extensive human monitoring that could not be justified by potential revenues. Because of the insulation brought by U.S. law reforms in the 1990s, American start-ups did not fear a mortal legal blow. The legal privileges granted to Internet enterprises in the United States helped start-ups bridge the valley of death.

Let me anticipate criticism. First, legal realists might object that I have spoken about law on the books. What about law in action? I...