Unfair Disruption

Abstract

New technologies disrupt existing industries. They always have, and they probably always will. Incumbents don’t like their industries to be disrupted. And they often rely on intellectual property (IP), unfair competition, or related legal doctrines as tools to prevent disruptive entry. What that means is that many of the cases in these areas are really about whether competition from new players can force incumbents to change their business models, generally to the advantage of particular players and the detriment of others. These cases are, in an important sense, all unfair competition cases; they are about the ways in which the law permits new entrants to compete with incumbents.

Unfortunately, we lack any comprehensive way of thinking about market disruption in these settings. As a result, courts react quite differently to disruptive technology or business models in different cases. As one example, consider intellectual property (IP) cases brought against new technologies. Sometimes courts find the disruptive technology to infringe existing IP rights. New technology might fit within the legal definition of a prior invention, appropriately construed. Sometimes the technology might not itself infringe any prior invention, but makes it easier for third parties to infringe IP rights and is deemed illegal for that reason.

Other areas of law reflect similarly mixed feelings about market disruption. Business tort claims like unjust enrichment—and even nominally procompetitive laws like antitrust—are often asserted by companies with a vested interest in restricting a competitor’s new technology. We have seen similar variability in antitrust, unfair competition, and business tort cases. Antitrust and unfair competition cases are brought against incumbents that try to prevent competition, but they are also brought by incumbents upset that their markets are being disrupted. Whether those laws encourage or inhibit market disruption depends critically on what kinds of competition courts deem “unfair.”

Our goal in this paper is to address the broader question of when competition by market disruption is “unfair.” In our view, courts are often overly receptive to market disruption arguments because they tend to be concerned about upsetting the status quo and affecting the settled expectations of market players, particularly when presented with arguments that some new technology will radically alter the industry.

Courts should intervene to prevent market disruption only when they have very good reasons—reasons connected to the fundamental policy concerns of the legal systems called upon to prevent the disruption. To achieve that goal, we must know what the legitimate ends of the asserted law are. Sometimes the legal doctrine used to prevent market disruption is one like unjust enrichment, interference with economic advantage, or unfair competition that doesn’t have a clear animating principle. We think those doctrines should be disfavored, and courts should employ them only when they are tied to some independent metric for deciding whether the defendant’s conduct is unfair or unjust. Other doctrines, like antitrust and IP, have clearer purposes. There, we can evaluate legal challenges to market disruption by testing the fit between the goals of the statute and its use in a particular case.

Courts in many types of cases have recognized this problem and begun to develop tools for dealing with them. But IP law has lagged behind, rarely even recognizing that what seem to be cases of infringement are really challenges to market disruption. We suggest a test that helps separate legitimate cases of IP infringement from cases of pure market disruption. Drawn from the antitrust injury doctrine, our test would treat market disruption as relevant to an IP case only if the disruption is traceable to the act of infringement itself. If the plaintiff would suffer the same injury from a market intervention that is not infringing, that injury cannot be evidence of IP infringement.