In this Article, I will offer a few observations on the troublesome relationship between technological innovation and government regulation. That relationship is neither simple nor linear. In many instances, regulation is strictly necessary because the alternative--a form of case-by-case-litigation--can easily prove to be worse. (1) In other cases, regulation is necessary to secure the creation of property rights in individuals that are good against the rest of the world--a state of affairs that no system of voluntary contracts can hope to create. (2) In other situations, the security of various transactions may depend on regularizing contractual relations by creating state registries. (3) Every system of law needs a system of regulation. Even in purely competitive markets, a system of property rights must be established. Systems of recordation and a statute of frauds are needed to make the system operate properly, and taxes and other income streams are required to support the public activities that are needed to make the system work. The belief that a disembodied free market, one which does not rest upon government force, will function effectively is certainly a mistake of epic proportions, if not an anarchist myth. At bottom, the proper inquiry never poses the stark choice of regulation versus no regulation. Instead, the inquiry is much more modulated; it seeks to find what kinds of regulation are desirable due to the positive consequences they bring about and, conversely, what kinds of regulations are generally dubious because of the negative consequences they bring about.
So we need to find some test that allows us to sort regulations into those which should be welcome and those which should be opposed. For the business activities at issue in this discussion, I propose one test that should go a long way to organize this inquiry. In virtually every case, desirable regulations are those that are designed to fortify a system of competitive markets through reverse engineering. Robust (but never pure) competition is what is desired. Which regulations, then, will move the overall operation of the legal system in that direction? Strong property rights protected by regulation, statutes of frauds on formalities of contract, prevention of inducement to breach of contract, and the use of force against contracting parties all fortify a competitive market system. No one can quarrel with the need for regulation in these areas nor treat such regulation as part of a vast regulatory state that should be the object of our collective wrath.
This Article discusses two important fields within technology. Each field requires at least some deviation from, or at least some modification of, the kinds of solutions that are welcome in competitive markets involving standard goods and services. The first of these two fields is the intellectual property system, which chiefly comprises copyrights, patents, trademarks, and trade secrets. The other field is the network industry system, which deals with railroads, telecommunications, and other related technologies. What makes these two areas unique? What kinds of regulations ought we to welcome in them? And what kinds of regulation should be rejected as excessive or counterproductive?
I. INTELLECTUAL PROPERTY
I begin with intellectual property, a field in which the first possession rule--invariably used to acquire title in land, chattels and animals--cannot do the job. (4) It is simply not enough to allow people to take first physical possession of property and then announce that they own it. Recognizing this fundamental point, Congress in 1790 passed the Patent (5) and the Copyright Acts. (6) What makes these statutes, at least in large measure, a long-term success? First, neither statute is meant to be technologically coercive within its respective domain. The Patent Act provides a system in which priority goes either to the first to invest for the first to file--there is a dispute as to which of these two is more important--the law will furnish an examiner, through the Patent and Trademark Office (PTO), (7) who makes an initial determination as to whether or not the patent is valid. …