Times are tough all around the world these days. In the U.S., quantitative easing and government spending continue to be sold to the public as the way out of the current economic doldrums. They are abstract and complex financial measures, carried out within the machinery of the bureaucracy, unseeable, as if we are waiting for the Great Oz to float down in his balloon and save us from the Wicked Witch.
Listening to the talking heads on CNBC drone on about the Federal Reserve one morning, I dimly remembered the name Joseph Schumpeter from my college Econ 101 textbook. Schumpeter, an economist in the first half of the 20th century and a rival of John Keynes, wrote that innovation, which Schumpeter famously labeled “creative destruction,” produces economic growth. Capitalism, said Schumpeter in 1942 in Capitalism, Socialism and Democracy, “…incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
Innovation means applying new ways of doing something to create business value. Henry Ford, borrowing from the meat packing industry, starts manufacturing automobiles on an assembly line, instead of one by one. Jeff Bezos, seeing the explosion of Internet users in the early 1990s, starts selling books—and then everything else—on the Internet, doing away with brick-and-mortar store fronts.
About the time Bezos founded Amazon.com, I began my career as an in-house lawyer in information technology. I never was lucky enough to hitch on to one of those startups where the secretaries became multi-millionaires and the executives drove Lamborghinis to work. Still, it was exciting. Several times I was challenged with supporting the development and launch of an innovative new technology service.
During the dot-com boom, I drafted some of the first online contracts for hosting small business e-commerce websites. The work involved a lot of wrangling with product development managers about the online contracts following some bedrock principles of contract law, such as whether the terms should be presented on the same page as the “I Accept” button, whether the contract should attempt to reserve the power to unilaterally change terms, and whether we as provider could police website content and suspend hosting if we didn’t like what we saw. If all that now sounds mundane, in 2000 it was uncharted waters. Today, cloud computing—selling infrastructure, platforms and software applications as a service—is the big innovation in information technology. Like hosting, cloud computing presents its own set of legal quandaries.
Looking at the relationship between law and innovation is not a new area of study. The Ewing Marion Kaufmann Foundation’s Task Force on Law, Innovation and Growth published a collection of scholarly articles in 2011 entitled “Rules for Growth: Promoting Innovation and Growth Through Legal Reform.” Many law schools in the U.S. (and I’m certain in other parts of the world) maintain centers focusing on specific areas where law and innovation meet, such as intellectual property and biotechnology. The discussion in these forums is about the reshaping of existing laws and policies and the formulation of new ones to better foster innovation.
Optimizing laws and policies for innovation, or at least making them more accommodating of uncertainty, is necessary if countries are to sustain growth. But legislation and policy making aren’t particularly helpful to in-house lawyers who need to deal with innovation in the here and now, when someone walks into the legal department office and announces a breakthrough something or other and tells legal to put together the paperwork.
Innovation places in-house lawyers in a predicament. Any economic system has within it an infrastructure made up of laws, government and a judiciary that act as the rule book for economic activity. As Schumpeter observed, innovators diverge from or even defy the current system to create value. But lawyers aren’t supposed to do that. Lawyers literally are the guardians of the system. Just as trial lawyers stand up and articulate the law in court, in-house lawyers articulate how law and policy govern business in their companies. In-house lawyers have a duty to aggressively help companies drive innovation to success. They also have a duty to drive innovation within the limits of the law.
How can in-house counsel best support company initiatives to develop and commercialize innovation? Here are several anecdotal guidelines I have compiled from my own experience on how to recognize innovation initiatives and how to handle them; while I hope they are helpful, the guidelines don’t begin to address what I see as a huge topic demanding greater attention:
1. Innovative projects often do not have top management approval in the beginning. Innovative projects also may vary from the company’s existing organization charts, operating budgets, sales compensation plans, etc., creating resistance among some stakeholders. These conditions can make committing legal department resources to the project difficult.
2. The primary duty of the legal department in supporting innovative projects is to determine whether the company can achieve the project’s business objectives without conflicting with existing law and policy. Doing so requires a mindset of wiping the brain-board clean of assumptions about the business’s compliance with legalities. The legal department needs to go back and review basic governing law and policy. It also needs to see the innovation in its bigger commercial picture.
3. There can be a large universe of potential conflicts between innovative projects and existing laws and policies. The task of identifying conflicts should be broken down into categories such as the following:
- Ownership or licensing of rights in any “special sauce” technology or process that make the project innovative
- The business model and terms for commercializing the innovation, e.g., direct sales agreement
- Introduction of the innovation into target markets
- Reaction of competitors and governments to the innovation, i.e., disruption
4. It is very difficult to imagine an innovative project not involving some amount of intellectual property. Further, the breadth and depth of business and trade regulation presents the potential for conflicts that are “unknown unknowns.” Unless a legal department is large enough to possess the right expertise, supporting innovation will likely require engaging outside counsel. Note that in no way am I suggesting that the job should be handed over wholesale to outside counsel. To the contrary, the legal department must take the lead in working with the business.
5. Remember that innovation is not invention. What is innovation in one company or industry may be established practice in another. Time spent looking at similar initiatives by competitors and at the commercialization of products and services in other industries can yield good working examples to follow.
If that all sounds daunting, it shouldn’t. My attitude is that with enough research, input from other in-house counsel and creative lawyering, most conflicts between innovation and law and policy can be worked through. Where conflicts remain, inside counsel should keep in mind that, for innovation, the question to ask may not be “Does the innovation conflict with law and policy?” but rather “Can we bring the innovation to market and live with the conflicts?” The question is not an easy one to ask or answer. Conflict can mean litigation and governmental fines, the kind of thing in-house lawyers are supposed to avoid.
So the next time you are at a party sipping your microbrew, flavored vodka or glacier water, and you overhear someone talking about how QE XIX is going to turn things around, let them know that in-house lawyers are ready to make a difference now.