Abstract: A legal bubble is a term that refers to the creation of the legal basis for innovative services. A legal bubble is created when economic actors plan their economic actions in relation to a new resource in the light of real estate law solutions provisionally supported by the courts in the belief that they are stable. This leads to a period of accumulated expectations about the possibility of obtaining strong property rights to the newly discovered resource, which leads to further investments. In fact, the support of the courts is only temporary and the expectations of economic operators turn out to be wrong, because the first property rights were granted by the courts out of haste and ignorance of the impact of new activities on hierarchically superior rights – for example fundamental rights. Once the courts become aware of the real effects of the newly created activity, they begin to revise the balance between demands for commodification and competing hierarchically superior rights. The bursting of legal bubbles is the result of the retrospective attempt of the courts to bring the legal bases back into line with the real legal effects that were previously ignored. The economic consequences of revising the first property law solutions can lead to investment devaluation and economic disorder, as can speculative bubbles. Indeed, entrepreneurs discover that their investments were made in light of still adapted real estate law solutions destined to be reversed – often retroactively – with the potential disappearance of an entire industry. The entrepreneurs then tried to give a legal basis to the new market and to this “economic race” for users and market shares. They intended to transform temporary control over the new resources into a stable, legally protected asset (Cole, Reference Cole2015; Schwartz, reference Schwartz2004). The offer was twofold, as it also involved circumventing as many legal restrictions as possible on the trade in personal data. At this point, judicial recognition of their commodification claims was crucial to dismiss users` scattered claims for data breaches, breaches, and claims for damages. The success of this attempt to establish a solid legal basis for their investments depended on at least two conditions.
These simple assumptions, which are far from standard in the asset valuation literature, explain why prevailing views on prices tend to rise, regardless of the normal distribution of beliefs among investors, as well as why uncertainty about economic value is important. Admittedly, cost asymmetry alone is not the only factor influencing the development of costs. Scheinkman`s model neglects feedback mechanisms and the importance of “triggers”, which certainly play a role and contribute to over-excitement among some investors, whose views then spread easily (Scheinkman, reference Scheinkman2014: 11; see also Shiller, reference Shiller 2006). The key message of his report, however, is that, from the point of view of institutional asymmetry, the expression of optimistic views leads to the arrival of speculative bubbles as soon as a trigger factor emerges. In fact, court review results in a form of unexpected retroactive reallocation of legal claims within the innovative industry. The possible consequence of unforeseen losses incurred by economic operators in the context of previous transactions carried out at the time when the legal consensus in force at the authorised time now gives rise to liability. In addition, many economic actors could find themselves in an economic model whose core lies in the economic exploitation of resources, whose commodification is severely restricted or even prohibited altogether. Such a transformation leads to a significant destruction of economic value in the same way as speculative bubbles. If that is the general rule, there are exceptions. This is particularly true in the field of technological innovation (Martini, Reference Martini, Ebers and Navas2020), where ex post facto solutions are more frequent than expected. In some cases, policymakers may not be willing to legally save the new industry if it eliminates the fundamental legal interests of the political regime and thus causes an unforeseen constitutional crisis (Beswick, reference Beswick2020). In these circumstances, the courts give priority to the survival of the legal system over the safeguarding of economic interests, accepting the resulting economic disruptions.
However, due to its limited scope, this article focuses on the knowledge problem and uncertainty surrounding the legal implications of the data-driven economy, highlighting the learning processes that create legal instability. However, law is a form of mediated action (Graziadei, reference Graziadei2009), in which shared knowledge and convincing application of rules are a prerequisite for stable legal development (Grief and Mokyr, Reference Grief and Mokyr2017). If the interplay between legal rules, emergent reality and broader common cognitive rules is not well understood, the legal foundations of markets may become unstable in unexpected ways (Zywicki and Boettke, Referenz Zywicki, Boettke, Zywicki and Boettke2017). The initial predominance of a management-based regulatory solution (Bonnín Roca et al., reference Bonnín Roca, Vaishnav, Morgan, Mendonça and Fuchs2017) implied that economic agents could contractually prototype legal solutions. This approach delegated to investors the legal balance between the short-term benefits of commodification – by offering “free” services in exchange for users` personal data – and the risk of infringing on hierarchically superior rights. In such a context, entrepreneurs such as Facebook, Google, Apple and other companies (hereinafter “Big Tech”) have taken the initiative to define the property rights to the data (Bygrave, Reference Bygrave2015; van Erp, Reference Van Erp2015), thus contractually allowing the commodification of personal data. Bold legal innovations have been published on the trail of exaggerated optimism, opening avenues for technological innovation. Second, these narratives had to be codified into legally compelling arguments and contracts (Pistor, Pistor reference 2019).
Industry “Terms of Use and Data Policies” have become increasingly complicated and flexible (Bygrave, Reference Bygrave2015:95), but they have essentially prioritized commodification claims over fears of undermining hierarchically superior rights. As Van Dijck argued (reference Van Dijck2013), “Facebook`s sharing ideology has `underpinned new legal decisions regarding privacy and [users`] acceptance of new forms of monetisation` (Hoffman et al., reference Hoffmann, Proferes and Zimmer 2018: 202), assuming that `a globally acceptable trade-off between information confidentiality and the benefits of information processing` through their notification and consent was assured” (Sloan and Warner, reference Sloan and Warner2014: 374). This article traces the main legal-economic dynamics underlying the rise of the data-driven economy and argues that a legal bubble has shaped its evolution to date. A legal bubble is triggered by a kind of “legal innovation hype” within the justice system, where rapid consensus is formed when expectations about the validity of legal solutions are exaggerated, which in turn increases investment in the industry. This opens the door to the possibility of a slowdown and, eventually, a disruptive loop. In recent years, however, this widespread assumption has been undermined when courts and policymakers have woken up to the real impact of commodification of personal data in relation to their conflict with other dominant rights. Some observers argue that the industry has long since reached a legal “boiling point” and that there is growing concern that the “trade with fundamental rights” sector will be (Buttarelli, reference Buttarelli2018; Flórez Rojas, reference Flórez Rojas2016). Courts and legislatures in Western countries (e.g. US and EU) have sought to regain control of the legal foundations of the industry (Hijmans, reference Hijmans2016).
Policymakers are also ready to introduce stricter regulation in the area of data protection and privacy, as well as other related areas. However, at the time of writing (May 2020), the data-driven economy is at record stock market valuations and continues to attract investment at a record pace. However, from a legal and economic point of view, it is surprising that economic operators and investors do not immediately adapt their business models to the emergence of significant restrictions on the commodification of personal data. As if a market could prosper despite the lack of a legal basis. This amounts to a form of legal “exuberance” in which, instead of adapting to the emergence and evolution of laws, economic agents double down on their “commodification bet” as if they could count on some form of implicit “legal bailout” to save an increasingly strategic industry. This is an effective example of Collingridge`s dilemma, well known in innovation studies (Collingridge, reference Collingridge1980), where the fact that massive trust interests have built up on early IP solutions within an industry is seen as a substitute for the lack of a solid legal basis. In order to understand the possible economic consequences of the abnormal functioning of the legal foundations of the industry, this article articulates the theory of legal bubbles.