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Why does Soft Law Have any Power Anyway?

  • Bryan H. DRUZIN (a1)
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Abstract

This paper explains why so much soft law is widely adopted and followed despite lacking legal and coercive force. It argues that legal standards are susceptible to network effects. Network effects occur when the value of a standard to a user increases as the number of other agents using the same standard grows, which in turn draws more users to the standard. This can trigger a spontaneous coalescence around a standard in a “snowball effect” fashion. The paper argues that many areas of soft law exhibit strong network effects, rendering such soft law uniquely calibrated to induce voluntary adoption and even compliance. The model helps explain why certain soft law gains traction, and has important implications for international governance. Finally, the paper argues that policy-makers can strategically harness this dynamic to stimulate legal harmonization, but cautions that policy-makers must also remain mindful of the negative consequences that network effects can generate.

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Assistant Professor and Deputy Director of LLM Programs, Faculty of Law, The Chinese University of Hong Kong. PhD in Law, King’s College London; LLM, LLB, BA, University of British Columbia. My deepest thanks to an anonymous reviewer for his or her helpful suggestions.

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1. The term “soft law” first emerged in diplomatic language in the 1980s, and has since become a common term in international law circles.

2. DIEHL Paul F. and KU Charlotte, The Dynamics of International Law (Cambridge: Cambridge University Press, 2010) at 123 .

3. For an excellent overview of soft law in relation to arbitration, see Lawrence W. NEWMAN and Michael J. RADINE, eds., Soft Law in International Arbitration (New York: JurisNet LLC, 2014).

4. NOLTE Georg, ed., Peace Through International Law: The Role of the International Law Commission (Berlin: Springer-Verlag, 2009) at 186 .

5. For a good, in-depth treatment of soft law’s significance for international governance, see SHAFFER Gregory C. and POLLACK Mark A., “Hard vs. Soft Law: Alternatives, Complements, and Antagonists in International Governance” (2010) 94 Minnesota Law Review 706 .

6. I use the terms interchangeably here. The basic definition of a network effect is an increasing-return dynamic that arises “where current users of a good gain when additional users adopt it”: KLEMPERER Paul, “Network Goods (Theory)” in Steven DUNLAUF and Lawrence BLUME, eds., The New Palgrave Dictionary of Economics and the Law, 2nd ed. (London: Palgrave Macmillan, 2008), 915 .

7. See LIEBOWITZ S.J. and MARGOLIS Stephen E., “Network Effects and Externalities” in Peter NEWMAN, ed., The New Palgrave Dictionary of Economics and the Law (London: Palgrave Macmillan, 1998), at 671 . This and the section that follows partially draws upon earlier research published as a book chapter. See DRUZIN Bryan, “Spontaneous Standardization and the New Lex Maritima” in Miriam GOLBY, ed., Oxford International Arbitration Series: The Continued Development of Shipping Law (Oxford: Oxford University Press, 2016), 6379 (arguing that network effects manifest powerfully in shipping law as a consequence of the high level of natural interconnection implicit in shipping networks, and that this helps spontaneously standardize the legal practices of the lex maritima). In the present paper, I extend my analysis to soft law, expanding the model’s breadth of application.

8. Note that I am referring here to what is known as direct network effects, as opposed to indirect network effects. For a deeper explanation of this distinction, see DRUZIN Bryan, “Buying Commercial Law: Choice of Law, Choice of Forum, and Network Externalities” (2009) 18 Tulane Journal of International and Comparative Law 131 at 149151 .

9. For a very good overview of other network effect examples in a wide range of contexts, see FERRELL Joseph and KLEMPERER Paul, “Coordination and Lock-In: Competition and Switching Costs and Network Effects” in Mark ARMSTRONG and Robert PORTER, eds., Handbook of Industrial Organization—Volume 3 (Amsterdam: Elsevier, 2006), at 4654 .

10. LEMLEY Mark and MCGOWAN David, “Legal Implications of Network Economic Effects” (1998) 86 California Law Review 479 at 494 (“Language, for example, is the fundamental medium of communication and could be said to have both negligible inherent value to the first speaker and increasing value over the range of additional speakers.”). See also LIEBOWITZ S.J. and MARGOLIS Stephen E., “Network Externality: Uncommon Tragedy” (1994) 8 Journal of Economic Perspectives 133 at 136 ; AVIRAM Amitai, “A Network Effects Analysis of Private Ordering”, Berkeley Program in Law and Economics, Working Paper Series, 2003 . For a more in-depth analysis of the network effects of language, see e.g. CHURCH Jeffrey and KING Ian, “Bilingualism and Network Externalities” (1993) 26 Canadian Journal of Economics 337 .

11. See Druzin, supra note 8 at 151.

12. These four criteria are based upon direct network effects. Indirect network effects (network externalities mediated indirectly though the market) require less stringent structural requirements; see Druzin, supra note 8.

13. I am using the term “legal standard” in an expansive sense: it is not restricted to merely the rules of domestic legal systems but includes in its sweep rules promulgated by private, non-state institutions as well.

14. For this reason, network effects are unable to manifest with respect to most domestic laws where actors do not have the luxury of choice. However, network effects may take hold in contract in that actors can select relevant contract provisions. See KLAUSNER Michael, “Corporations, Corporate Law, and Networks of Contracts” (1995) 81 Virginia Law Review 757 (arguing that network effects help shape the prevalence of common contract provisions).

15. See Druzin, supra note 8 (arguing that network effects induce standardization in choice of law and choice of forum clauses in transnational commercial contracts). See also DRUZIN Bryan, “Anarchy, Order, and Trade: A Structuralist Account of Why a Global Commercial Legal Order is Emerging” (2014) 47 Vanderbilt Journal of Transnational Law 1049 at 10761083 (discussing the impact of network effects upon merchant practices).

16. See GILLETTE Clayton P., “Harmony & Stasis in Trade Usage for International Sales” (1999) 39 Virginia Journal of International Law 707 at 723 (“As courts begin to interpret the vagaries of such terms, parties can use them with confidence (relative to novel terms) about how they will be construed in both commercial and legal environments.”).

17. Because legal practices in such settings are usually selected by both parties, they will not typically inordinately favour one side over the other, and so in this sense are comparable to rules of co-ordination like left- or right-hand drive.

18. I revisit this idea in Part III below.

19. BARNES William, GARTLAND Myles, and STACK Martin, “Old Habits Die Hard: Path Dependency and Behavioral Lock-in” (2004) 38 Journal of Economic Issues 371 at 371 .

20. LIEBOWITZ S.J. and MARGOLIS Stephen E., “Should Technology Choice be a Concern of Antitrust Policy?” (1996) 9 Harvard Journal of Law & Technology 283 at 292 .

21. For instance, the International Monetary Fund [IMF] Santiago Principles are pure soft-law mechanisms that lack enforcement mechanisms but which have been increasingly adopted as a regulatory benchmark since 2008 because of the clarity they provide with regard to standards that states may want to apply to sovereign wealth funds. See CHAISSE J., “Demystifying Public Security Exception and Limitations on Capital Movement—Hard Law, Soft Law and Sovereign Investments in the EU Internal Market” (2015) 37 University of Pennsylvania Journal of International Law 583 .

22. Although the importance of soft law is unmistakable on the state level. See e.g. CHAISSE Julian and MATSUSHITA Mitsuo, “Maintaining the WTO’s Supremacy in the International Trade Order—A Proposal to Refine and Revise the Role of the Trade Policy Review Mechanism” (2013) 16 Journal of International Economic Law 9 (demonstrating the importance of soft-law principles and mechanisms in the legal order created by the World Trade Organization, and which mainly applies to states).

23. Economists have long pointed out that network effects “inhibit multiple equilibria and the market will finally lock-in to a monopoly situation with one standard gaining total market share”. WEITZEL Tim et al., “Reconsidering Network Effect Theory” in Kurt GEIHS, Wolfgang KÖNIG, and Falk VON WESTARP, eds., Networks: Standardization, Infrastructure, and Applications (Springer Science & Business Media, 2012) at 6 .

24. For a succinct overview of soft-law theories in relation to financial markets, see BRUMMER Chris, Soft Law and the Global Financial System: Rule Making in the 21st Century (Cambridge: Cambridge University Press, 2012) at 128130 .

25. GUZMAN Andrew T., How International Law Works: A Rational Choice Theory (Oxford: Oxford University Press, 2007) at 138 .

26. For a fascinating treatment of legal emergence without enforcement mechanisms, see MCADAMS Richard H., “A Focal Point Theory of Expressive Law” (2000) 86 Virginia Law Review 1649 (explaining how, without the need for enforcement, stable order can emerge from law through the creation of focal points around which actors’ behaviour then converges). McAdams’s approach borrows conceptually from the work of Thomas Schelling on focal points. For the idea of focal points and salience, see SCHELLING T.C., The Strategy of Conflict (Cambridge, MA: Harvard University Press, 1960) at 57 .

27. See Schelling, ibid.

28. See McAdams, supra note 26. McAdams similarly argues that his model continues to be applicable in games other than games of pure co-ordination.

29. BESEN Stanley and FARRELL Joseph, “Choosing how to Compete: Strategies and Tactics in Standardization” (1994) 8 Journal of Economic Perspectives 117 at 124126 .

30. See Schelling, supra note 26.

31. See McAdams, supra note 26.

32. The technical term for this is “lock-in”. I revisit the concept of lock-in in greater detail in Part IV, discussing its negative implications.

33. The claims that follow have the benefit of being falsifiable and open to empirical inspection. See also infra note 45.

34. See DRUZIN Bryan, “The Parched Earth of Cooperation: How to Solve the Tragedy of the Commons in International Environmental Governance” (forthcoming) 27 Duke Journal of International and Comparative Law (noting the proliferation of international environmental agreements following the 1972 Stockholm Intergovernmental Conference).

35. DRANOVE David and GANDAL Neil, “Surviving a Standards War: Lessons Learned from the Life and Death of DIVX”, CEPR Discussion Paper No. 3935, June 2003 at 9 .

36. Lon Fuller famously used the term to describe the difficulty of tinkering with interlocking complex networks with the image of pulling on a net of connected spiders’ webs. See FULLER Lon, “The Forms and Limits of Adjudication” (1978) 92 Harvard Law Review 353 .

37. There is a relatively new and bourgeoning literature in economics on local network effects. For some early contributions in this vein, see SUNDARARAJAN Arun, “Local Network Effects and Complex Network Structure” (2007) 7 B.E. Journal of Theoretical Economics 1 ; DUTTA Bhaskar and JACKSON Matthew, eds., Networks and Groups: Models of Strategic Formation (Heidelberg: Springer, 2003); AN Mark Y. and KIEFER Nicholas M., “Local Externalities and Social Adoption of Technologies” (1995) 5 Journal of Evolutionary Economics 103 .

38. GOLDENBERG Jacob, LIBAI Barak, and MULLER Eitan, “The Chilling Effects of Network Externalities” (2010) 27 International Journal of Research in Marketing 4 at 5 .

39. Given that the international community is growing increasingly less insulated with the ever-accelerating pace of globalization, legal polycentricity (at least with regard to commercially oriented law with its built-in propensity towards interregionalism) is arguably fated to disappear but for the artificial insulation generated by national legal systems.

40. See Ferrell and Klemperer, supra note 9 at 85.

41. Ibid., at 60.

42. This is sub-optimal from the perspective of agents having to switch between these standards.

43. Network effects have been identified with respect to ISO standards; see e.g. MATTLI Walter and BÜTHE Tim, “Setting International Standards: Technological Rationality or Primacy of Power?” (2003) 56 World Politics 1 at 42 . See also Barnes et al., supra note 19.

44. TETLEY William, “The General Maritime Law—The Lex Maritima” (1995) 20 Syracuse Journal of International Law and Commerce 105 at 134 .

45. This provides another opportunity to make the model falsifiable. We may do this by articulating a set of precise predictions: (1) where network effects are strong, soft law will tend to gain traction—while there may be exceptions as a result of exogenous factors, a strong correlation should be present; (2) the success rate of soft law should begin to stumble as incentives to cheat or not adopt a standard begin ratcheting up, offsetting the co-ordination gains offered by network effects; and (3) soft law should tend to gain the greatest traction where actors possess largely indifferent attitudes regarding what standard to use, and the impact of network effects in these circumstances are therefore most robust. If these three predictions—particularly the first—prove wrong, the inference we can draw is that the model is flawed.

46. The analysis that follows assumes legal harmonization to be a desired end. Of course, the fact that policy-makers can exploit the energy of network effects to advance legal harmonization does not entail that they should. The first claim is descriptive, while the second is prescriptive. However, the point is that network effects may serve as a powerful tool to help achieve legal harmonization if it is deemed desirable.

47. Indeed, this is the very mandate of UNCITRAL. The United Nations describes UNCITRAL’s mandate as follows: “The General Assembly considered it desirable to [sic] that the process of harmonization and unification of the law of international trade be substantially co-ordinated, systematized and accelerated and that broader participation by States be secured.” UNCITRAL: The United Nations Commission on International Trade Law, UN Doc E.86.V.8 (1986).

48. MISTELIS Loukas A., ed., Concise International Arbitration (Leiden: Kluwer Law International, 2010) at 582 .

49. Ibid.

50. Here the normative issue is even more compelling than in the case of the previous recommendation (as many may assert that legal harmonization is not an end policy-makers should pursue).

51. KEMPER Andreas, Valuation of Network Effects in Software Markets: A Complex Networks Approach (Heidelberg: Physica-Verlag, 2010) at 72 .

52. For the foundational work on the concept, see generally ARTHUR W. Brian, “Competing Technologies, Increasing Returns, and Lock-In by Historical Events” (1989) 99 Economics Journal 116 ; ARTHUR W. Brian, “Positive Feedbacks in the Economy” (1990) 262 Scientific American 92 ; LIEBOWITZ S.J. and MARGOLIS Stephen E., “Path Dependence, Lock-In and History” (1995) 11 Journal of Law, Economics, and Organization 205 . For a discussion of lock-in in relation to trade usages standards, see Gillette, supra note 16 at 711–12 (discussing lock-in in relation to trade usages standards).

53. WEITZEL Tim, Economics of Standards in Information Networks (Heidelberg: Physica-Verlag, 2004) at 16 .

54. As one scholar describes it: “The negative implication of standardization … is that the incentive to produce an improved system is diluted because no single user within the existing network can be induced to shift to the new system without assurances that a critical mass of potential users will do likewise”; GILLETTE Clayton, “Lock-in Effects in Law and Norms” (1998) 78 Boston University Law Review 813 at 818 .

55. Kemper, supra note 51. See also DAVID P.A., “Clio and the Economics of QWERTY” (1985) 75 American Economic Review 332 ; Arthur, supra note 52.

56. PAGE William H. and LOPATKA John E., “Network Externalities” in Boudwijn BOUCKAERT and Gerrit DEGEEST, eds., Encyclopedia of Law and Economics (Cheltenham: Edward Elgar Publishing, 2000), at 952 , 961.

57. LIEBOWITZ S.J. and MARGOLIS Stephen, Winners, Losers, and Microsoft: Competition and Antitrust in High Technology, 2nd. ed. (Oakland: Independent Institute, 2001) at 227 .

58. Ibid., at 10.

59. Ibid., at 110.

60. See United States v. Microsoft Corp, 87 F. Supp. 2d 30 (D.D.C. 2000). For a discussion of the case with respect to network effects, see GEIER Mark, “United States v. Microsoft Corp” (2001) 16 Berkeley Technology Law Journal 297 ; WEINSTEIN Samuel Noah, “United States v. Microsoft Corp” (2002) 17 Berkeley Technology Law Journal 273 .

61. BESSON Samantha and TASIOULAS John, eds., The Philosophy of International Law (Oxford: Oxford University Press, 2010) at 180 .

62. CRAWFORD James and KOSKENNIEMI Martti, eds., The Cambridge Companion to International Law (Cambridge: Cambridge University Press, 2012) at 198 .

63. The model articulated in this paper forms the basis of a lengthier empirical examination of network effects and soft-law adoption that I am currently drafting.

* Assistant Professor and Deputy Director of LLM Programs, Faculty of Law, The Chinese University of Hong Kong. PhD in Law, King’s College London; LLM, LLB, BA, University of British Columbia. My deepest thanks to an anonymous reviewer for his or her helpful suggestions.

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