Perverse innovation.

Author:Burk, Dan L.


An inescapable feature of regulation is the existence of loopholes: activities that formally comply with the text of regulation, but which in practice avoid the desired outcome of the regulation. Considerable ingenuity may be devoted to exploiting regulatory loopholes. Where technological regulation is at issue, such ingenuity may often be devoted to developing new technology that avoids the regulation; such innovation may be termed "perverse" because it is directed to avoiding the regulation that prompted it. Nonetheless, in this Article I argue that such regulatory circumvention may result in socially beneficial innovation. Drawing on insights from innovation policy in the law of intellectual property, I suggest several principles that should be adopted to channel such perverse innovation toward constructive activity.

TABLE OF CONTENTS INTRODUCTION I. EXPLORING LOOPHOLES A. Loophole Incentives B. Cost Complexities II. TECHNOLOGICAL AVOISION A. Copyright Avoision B. Avoiding Public Transmissions C. Private and Social Costs III. LESSONS FROM PATENT LAW A. The Cost of Inventing Around B. Controlling Avoision Incentives C. Avoision Equivalents CONCLUSION INTRODUCTION

Recombinant crops are unpopular in Europe. (1) Known as "GMO," an acronym for genetically modified organisms, (2) crops that have been altered by recombinant DNA technologies have sparked public concern over potential safety and health risks. (3) While there is little scientific evidence to support such concerns, (4) the possibility of unknown risks from such plants prompts European consumers to avoid foods derived from GMO crops, and both GMO plants and their products are subject to strict and costly regulatory controls. (5) Prominent labeling is required for GMO-derived products, and regulatory oversight for GMO planting is stringent. (6) Only a handful of European Union applications for planting GMO crops have ever been approved, and these have generally not found a market. (7)

As a consequence, seed producers have moved away from recombinant DNA technology for producing new seed varieties in Europe. (8) Instead, they have adopted a different approach, producing new crops with desired characteristics--such as herbicide tolerance--through mutagenic chemical or radiation treatments. (9) Mutagenic plant varieties may be produced by exposing seeds to nuclear radiation, which causes random changes in the plant genome. (10) Alternatively, seeds may be exposed to mutagenic chemicals, again causing random changes in their genes, some of which may be commercially beneficial. (11) Mutated plants with desirable traits are then selected from the altered seeds and propagated for sale. (12)

These mutagenic crops are subjected to essentially no regulation and, unlike recombinantly modified crops, can be readily grown and distributed in the European Union. (13) For example, the German chemical firm BASF has successfully produced and marketed herbicide resistant crop varieties through chemical mutagenesis, while the "Roundup Ready" herbicide resistant crops produced by Monsanto via recombinant DNA technology have been restricted. (14) There is no indication that mutagenic crops are any safer or healthier than GMO crops--indeed, unlike GMO crops, some mutagenic crops have had to be withdrawn from the market because of inadvertently increased levels of naturally occurring toxins, such as cyanide. (15)

There is little question that mutagenic crops have been "genetically modified" in any common or ordinary sense of that term. To the degree that uncertainty about possible harms is an issue, one might actually expect mutagenic crops to be a greater concern, as mutagenesis introduces multiple random and unpredictable changes into a plant's genetic structure, rather than the targeted, controlled changes introduced by recombinant DNA techniques. (16) However, because they were not modified via recombinant DNA technology, mutagenic crops do not meet the formal requirements for strict oversight under the European Union regulatory scheme and so escape the restrictions imposed on GMO plants. (17)

The European shift toward mutagenic crops offers an example of what I dub "perverse innovation": perverse not (necessarily) in the prurient sense, but rather in the sense of being contrary to what might otherwise be expected or desired. The innovation that has gone into exploiting a formal loophole in GMO regulation is in at least two senses perverse. First, it seems perverse in outcome; seed companies avoid GMO regulation by producing seeds that ironically may be a greater risk to public health than the products they replace. But second, from a purely legal standpoint, mutagenic crops provide a technical work-around to ingeniously dodge the intended outcome of regulation, while still formally adhering to the text of the regulation.

The deployment of mutagenic crops in the European Union thus provides a striking example of activity that produces unexpected and unintended technical innovation in response to state regulation. In a highly regulated and technologically complex world, examples of this effect occur with increasing frequency. Actors that are subject to regulation often look for loopholes or work-arounds to avoid complying with the regulation without formally violating the regulation. (18) Where the regulation is technically oriented, such loopholes or work-arounds may take the form of technical redesign of the regulated item. Often such technical innovation is orthogonal, and sometimes even directly contrary, to the intent that was manifest in the precipitating regulation.

To the extent that such perverse innovation frustrates the purpose of regulation--perhaps negating the expected benefit of the animating regulation, perhaps even creating new risks that were unanticipated by the regulation--the exploitation of such loopholes may seem socially counterproductive. (19) But, at the same time, technical innovation is frequently considered to be a social benefit, and entire bodies of law and policy are devoted to promoting innovation. (20) Some perverse innovation is likely socially wasteful, but some may prove to be unexpectedly beneficial. Rather than try to close the formalist loopholes that prompt perverse innovation, which would likely become an ongoing exercise in futility, regulators might intentionally design loopholes so as to purposefully, rather than haphazardly, promote innovative responses.

Recent scholarship has identified a range of underutilized policy options that might promote innovation. (21) In this Article I will similarly argue that one adjunct to intellectual property and other legal innovation incentives may be explicit recognition of, and purposeful reaction to, the perverse innovative outcomes that occur in response to imposition of state regulation. I begin by offering several examples of perverse innovation arising from different regulatory loopholes. (22) I then explore whether such responses to state regulation may not only be anticipated, but potentially harnessed as a source of innovation. (23) I ask in particular whether the design of the patent system, which not only anticipates but encourages similar responses to patents, can point the way toward regulatory design that might winnow instances of socially beneficial innovation from instances of socially wasteful innovation. (24)


    Perverse innovation is to some degree a subspecies of a broader phenomenon, which is the exploitation of "loopholes" in regulatory imperatives. The exploitation of legal loopholes is a familiar occurrence and by no means limited to the provision of seed varieties in Europe. (25) It happens routinely, in all areas of social activity, producing unexpected and often undesired outcomes as regulation changes behavior in unanticipated ways. Considerable energy and ingenuity may go into identifying and exploiting loopholes or alternatives. The outcome is often counterproductive and may or may not be innovative.

    For example, in the United States, Chrysler Corporation's popular "PT Cruiser" automobile was lauded for its innovative, retro styling, reminiscent of 1930s automotive silhouettes. (26) But in a different sense, perhaps the most significant aspect of the PT Cruiser design was instead its "footprint," a regulatory metric derived from a calculation incorporating the vehicle's wheelbase--the distance between the centers of its front and rear wheels--and its track width--the distance between the wheels on each side of the vehicle. (27) This measurement is used by the U.S. Environmental Protection Agency in classifying vehicles for regulation. (28) The PT Cruiser's footprint places it in the EPA's Corporate Average Fuel Efficiency (CAFE) classification for "light trucks" rather than "passenger cars." (29) This definitional loophole allowed Chrysler to follow a less stringent fuel efficiency requirement than would have been required for a passenger car, allowing the manufacturer to avoid some of the costs associated with building a more fuel efficient vehicle. (30)

    Such loopholes in the law are as a general matter unavoidable--the inevitable result of various combinations of incompleteness, formalism, and textual ambiguity. When textual terms are subjected to formal interpretation, the limits articulated in the text will always include certain activities and exclude other activities. Those who are subjected to the regulation are thus in a position to search for excluded, unregulated activities that are formally permissible. Some of these will inevitably have been unforeseen when the text was drafted, as legal texts are well understood to be incomplete. (31) No drafter can foresee all possible contingencies, especially where innovation is concerned, and it is not only futile, but expensive to try to incorporate every possible factual scenario into the ambit of a regulatory text. (32) Consequently, some situations will certainly...

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