2.1 The rise of the industry

In the early days of the industry, the US legal system was the primary reference for any nascent company looking for legal rules applicable to most innovative activities in the digital sector. Personal data processing for commercial purposes was no exception, and with respect to it, the widespread perception was that ‘laws are generally unclear on which constituency […] owns the right to collect, aggregate, disseminate, and use personal […] data for commercial purposes’ (McKinsey, 2011). The data-driven economy was not deterred by this uncertainty, but on the contrary, exploited it since its early stages of development to its own advantage.

The sources of legal uncertainty were multi-fold (Chander, Reference Chander2014), but they essentially revolved around two ostentatious legal unknowns. The first related to the possibility to create tradable entitlements over personal data – whose alienability was questioned since the beginning – through property by contract solutions. The second related to the existence of limits to the trade and the use of commodified personal data vis-à-vis interdependent hierarchically superior legal interests, other than those laid down by boilerplate contracts (Ben-Shahar, Reference Ben-Shahar2014). In both cases, the political choice was to avoid taking responsibility for elaborating a clear-cut decision with regard to this emerging industry (Sloan and Warner, Reference Sloan and Warner2014). Thus, the regulatory regime in place eluded the adoption of a clear position on the matter, delegating the clarification of any applicable legal rules and limits to courts.

The first legal question concerning the creation of tradable entitlements was positively managed through the adoption of open-ended norms and ‘notice and consent’ contracts. The core issue was finding the right balance between the economic interests attached to the commodification of personal data and the uncertainty regarding the potential harm caused to users’ fundamental rights (Allen, Reference Allen1999; Hijmans, Reference Hijmans2016), the proper functioning of the democratic order as well as the functioning of competitive markets (Stucke and Grunes, Reference Stucke and Grunes2016; Sunstein, Reference Sunstein2017).

This approach was supposed to progressively reduce ex-ante sectoral specific rules and transfer ‘the protection of privacy [and other rights] from the legal realm […] to the marketplace’ (Rotenberg, Reference Rotenberg2001: 2). The implicit authorization to define the ‘property rights by contract’ solution over these new resources (Bygrave, Reference Bygrave2015) offloaded ‘the task of establishing how to manage risk and find optimal solutions onto controllers [i.e. economic agents], a task that may be challenging as well as costly’ (EUAFR, 2020). In fact, it is true that economic agents were allowed to take the lead, and advance their favorite solutions, but that move was at their own risk. They faced the risk of ex-post rejection by the courts of the property rights solutions thus delineated, whenever they were found to be incompatible with the prevailing legal hierarchies. In turn, courts were left with the tough task of deciding how to solve ex-post emerging conflicts between ‘property rights by contract’ and the prevailing hierarchically superior rights (see Nicola and Pollicino, Reference Nicola and Pollicino2020).

Within this climate of legal uncertainty, leading tech companies have been competing over the control of the new resource and have been trying to seize dominant positions in the new industry (Srinivasan, Reference Srinivasan2019; Stucke and Grunes, Reference Stucke and Grunes2016). The business model they relied on has been based on bulk personal data collection and commodification via ‘notice and consent’ contracts (Ben-Shahar, Reference Ben-Shahar2014), ‘without much concern about social, economic, or legal consequences […] As the saying goes, it was better to ask for forgiveness than permission’ (Chitkara et al. Reference Chitkara, Gloger and Mccaffrey2018: 8). In a textbook example of economic pressure to secure property rights over a new resource (Hodgson, Reference Hodgson2015), economic agents have released suitable legal innovations to commodify privacy and personal data.

Entrepreneurs then tried to provide legal foundations to the new market and to this ‘economic race’ to gain users and market shares. They intended to turn a passing control over new resources into a stable, legally protected asset (Cole, Reference Cole2015; Schwartz, Reference Schwartz2004). The bid was twofold, as it also entailed the escape of as many legal limits as possible to the trade of personal data. In that phase, judicial recognition of their commodification claims was crucial, in order to rebuff sparse users’ claims of privacy violations, contractual breaches, and claims for damages. The success of this attempt to secure robust legal foundations for their investments was contingent on, at least, two conditions.

First, a positive narrative had to be provided to the public, including judges and policymakers, to convey optimistic views about the possible consequences of commodification and self-regulation (Casilli, Reference Casilli2015). They, therefore, should be stressed on the beneficial effects of these disruptive innovations, as foreseen by the ‘internet exceptionalism’ doctrine that was already dominant in policy making (Kirkpatrick, Reference Kirkpatrick2010; Wu, Reference Wu, Szoka and Marcus2010). The references to the ‘end of privacy’ and a ‘transparent society’ by leading companies played down the consequences of commodification on privacy and fundamental rights. The bid to downsize the legal relevance of personal-data protection and privacy has gone as far as to say that ‘privacy may be an anomaly’ from a historical perspective (Casilli, Reference Casilli2015; Hoffman et al., Reference Hoffmann, Proferes and Zimmer2018).

Second, these narratives had to be codified into legally persuasive arguments and contracts (Pistor, Reference Pistor2019). The ‘terms of services and data use policies’ adopted in the industry have become increasingly complicated and flexible (Bygrave, Reference Bygrave2015: 95), but they substantially prioritized commodification claims over fears of subverting hierarchically superior rights. As Van Dijck argued (Reference Van Dijck2013), ‘Facebook's ideology of sharing has undergirded “new legal rulings concerning privacy and [users] accepting new forms of monetization” (Hoffman et al., Reference Hoffmann, Proferes and Zimmer2018: 202), on the assumption that “an acceptable overall trade-off between informational privacy and the benefits of information processing” was secured by their notice and consent contracts’ (Sloan and Warner, Reference Sloan and Warner2014: 374).

The campaign was a success both in the economy and in courts (Chander, Reference Chander2014). In less than a decade, the Big Tech companies have dominated the digital economy and the financial markets. Mark Zuckerberg was named Man of the year in 2010Footnote ² and was regarded as a quasi-ruler in the field of social media (Kirkpatrick, Reference Kirkpatrick2010). On the spur of such technological enthusiasm, he declared that the protection of privacy no longer corresponded to the social norm,Footnote ³ because the praxis of sharing personal information had eventually become the default assumption in society (Tene and Polonetsky, Reference Tene and Polonetsky2014).

The widespread optimism about the legal implications of personal data commodification became entrenched in case law too. In fact, the majority of courts sided with the commodification claims by dismissing lawsuits that alleged the violation of ‘consumers rights’, ‘consent breach’, and ‘violation of privacy expectations’ (see Ballon, Reference Ballon2016). Moreover, the lack of experience about the way in which citizens and users may be exploited in the digital domain led to the widespread conviction that ‘lack of an injury in fact’ would have prevented any damage compensation.Footnote ⁴ Early concerns for the risks related to the unconstrained commodification propped in a minority of courts. However, the threat their rulings represented was dealt with through ‘cheap out-of-courts settlements’ (Ballon, Reference Ballon2016: 336). These settlements were considered the mere ‘cost of doing business in today's digital economy’ (Ballon, Reference Ballon2016: 418).

The ‘codification’ of optimistic views into case law resulted in the rise of contractually defined property rights over personal data (Noto la Diega and Walden, Reference Noto La Diega and Walden2016). In other words, an expansive interpretation of contractual freedom made personal data the ‘currency of the internet’, used as remuneration for services within the industry (Langhanke and Schmidt-Kessel, Reference Langhanke and Schmidt-Kessel2015). In this context of ‘commodification consensus’, the legal protection of commodification claims spurred further investments in the industry and any attempt to establish stricter data protection rules was seen as an attempt to impose ‘price control policies’ (Fuller, Reference Fuller2018).

2.2 The faltering legal foundations of the industry

In recent years, as the industry has reached maturity, the ‘commodification consensus’ has started to wane. This has happened both with respect to the validity of users’ consent to the transferring their personal data, and in terms of the commodification implications in terms of hierarchically superior rights. Big scandals such as Cambridge Analytica and Snowden's revelationsFootnote ⁵ clearly exposed the negative implications of the commodification hype for the fundamental interests of the polity – democratic order, competition, and fundamental rights protection. Let alone the rising awareness of the degree of cyber insecurity exposed by several data breaches, threatening the actual protection of lawfully stored personal data. The wave of unintended consequences became clear and so did the degree of overestimation of the short-term gains in terms of liberty and autonomy against the losses in terms of prevailing legal interests that commodification implied (Morelli and Pollicino, Reference Morelli and Pollicino2020).

The optimistic narratives engraved in early case law crumbled under the ensuing political and social outcry, which debunked the myth of personal data commodification to achieve users’ empowerment and democratization of the social discourse (Buchi et al., Reference Büchi, Fosch-Villaronga, Lutz, Tamò-Larrieux, Velidi and Viljoen2020). Instead, the opposite became clear and the paramount role of privacy and data protection in a democratic market economy stood out with previously unseen clarity (Hijmans, Reference Hijmans2016). The concerns have expanded to privacy issues, consumer law issues, and antitrust issues, and thus, started to shed light on the wider structural implications of the data-driven industry (Stucke and Grunes, Reference Stucke and Grunes2016).

Consistent with this social and political awakening, courts have shifted their stance too.Footnote ⁶ They revised their early enthusiastic support of commodification claims and started clearing the way to collective redress actions across the USA. For instance, the most prominent American class actions were consolidated in multi-district litigation in California, reuniting all class actions across the USA with more than 70 million individuals linked to the Cambridge Analytica scandal. In this new phase, courts begin to reject the big techs’ views on privacy protection, holding them wrong. Awarding damages for privacy violations.Footnote ⁷ On similar grounds, a collective action involving more than 7 million users was filed in Illinois, alleging that Facebook ‘illegally collected and stored biometric data from millions of users without their consent’, prohibited under the Illinois Biometric Information Privacy Act. Out-of-court settlements have reached much bigger orders of magnitude, as high as half a billion dollars.Footnote ⁸ At the time of writing, many other lawsuits appear to be in store.

In response to the raising legal turmoil affecting the US-based legal foundations of the industry, EU Courts have emerged as the guardians of privacy, data protection, and the prevailing order of fundamental rights under the Charter of Fundamental rights of the EU vis-à-vis unconstrained personal data commodification (Hijmans, Reference Hijmans2016). Over the last 6 years, EU courts have spearheaded courageous interpretations, and the Union has taken subsequent regulatory initiatives culminating in the General Data Protection Regulation, (EU Regulation 2016/679, also known as GDPR), which had a knock-on effect on global standards (Bendiek and Romer, Reference Bendiek and Römer2019).

In particular, several groundbreaking decisions of the EUCJ have turned upside down the legal foundations of the market for personal data,Footnote ⁹ by clarifying the hierarchies between the legal interests involved. In these decisions, the EUCJ consistently established that ‘the rights of the data subject override both the economic interests of search engines and those of the public in finding information’ (Bougiakiotis, Reference Bougiakiotis2016: 314). Consequently, in one of its most recent decisions – the Schrems II caseFootnote ¹⁰ – the EUCJ invalidated the administrative agreement called ‘privacy shield’Footnote ¹¹ made in the attempt to mitigate the consequences of an earlier EUCJ similar ruling on a previous administrative decision (Case C-362/14, Schrems), thereby sending further legal shockwaves across the industry (Krouse, Reference Krouse2018).

Along similar lines of reasoning, other state courts and independent authorities across the EU have endorsed the paradigm shift with a series of decisions.Footnote ¹² For instance, in July 2020, the Bundesgerichtsof reaffirmed the decision of the German antitrust authority holding that ‘contrary to Facebook's view’,Footnote ¹³ consumers retain the right to privacy, despite the alleged silent assent to predatory contractual terms. The Italian top administrative Court (Consiglio di Stato) touched upon the extra commercium nature of personal data with unclear implications, thereby inflicting further blows to the commodification paradigm.Footnote ¹⁴

Antitrust agencies both in the USA and in the EU have also changed their stance and have begun dismissing early optimistic views about the actual degree of competition within the data-driven economy (Khan, Reference Khan2018; Srinivasan, Reference Srinivasan2019; Stucke and Grunes, Reference Stucke and Grunes2016). On July 24th, 2019, the Federal Trade Commission fined Facebook with a record-breaking 5 billion dollar penalty for violating the Consent Order of 2012. In their announcement, the commissioners notably wrote, ‘if you've ever wondered what a paradigm shift looks like, you're witnessing one today’.Footnote ¹⁵ Antitrust initiatives loom in the USA at both the State and Federal levels, with accusations of monopolist behavior within the personal data-driven industry. At the time of writing, antitrust agencies on both sides of the Atlantic are gearing up for unseen antitrust battles against some of the major big techs, which face a serious risk of being broken up.

These paradigm shifts coupled with the progressive constitutionalization of cyberspace are generating the balkanization of the internet. This in turn further jeopardizes the commodification consensus, and highlights growing geopolitical tensions over the transatlantic flow of personal data (Nicola and Pollicino, Reference Nicola and Pollicino2020; Schwartz and Peifer, Reference Schwart and Peifer2017). The bottom line is that violent shock waves are shattering the legal foundations of the industry,Footnote ¹⁶ and that litigation is spiraling out of control over the ‘chain of title’ of personal data.Footnote ¹⁷

The ‘fundamental questions about what data companies can collect about individuals, what they can do with them, and the circumstances under which they can be disclosed to third parties, will be shaped to a great extent through civil litigation’ (Demarco and Fox, Reference DeMarco and Fox2019: 1017), with persistent legal uncertainty and potential ex-post facto legislation. In light of the different stances of courts and rule makers, the digital ecosystem appears to have long reached a ‘boiling point’, with concerns over the apparent activity of ‘trading fundamental rights’ (Buttarelli, Reference Buttarelli2018; Flórez Rojas, Reference Flórez Rojas2016).

The belated attempts of the industry leaders to self-regulate the tradability of data are falling short. The kind of contractual changes being adopted along with the chain of titles over personal data, justifies the suspicion that big techs are attempting to limit personal data commodification at the sole expense of the downstream economic agents. There are even doubts that these unilateral contractual changes may amount to antitrust infringements.Footnote ¹⁸ The dilemmas arising from competitive, fundamental rights, and political aspects of personal data commodification are further signals of the instability of the commodification consensus.

Likewise, the legislative branches across both the EU and the USA are still struggling to find a balanced approach to commodification vis-à-vis the protection of fundamental rights as suggested by courts and much of the legal community (Marciano et al., Reference Marciano, Nicita and Ramello2020). Even after the legislative initiatives within the EU, the regulatory model has not changed in substance, and ‘legal certainty and a favorable investment climate […] does not yet exist’ (Kop, Reference Kop2021: 2).

In the face of such an evolving scenario, courts remain the keepers of the legal system and are consistently shifting toward establishing a higher level of protection of fundamental rights, fair competition, and democratic order with retroactive revision of their early interpretations (Nicola and Pollicino, Reference Nicola and Pollicino2020). And yet, economic agents keep investing in the essential resource of personal data (Kop, Reference Kop2021), as if the legal foundations of the industry were stable, or the courts were sooner or later to give in. Their entrepreneurial attempts at convincing courts not to decide against the commodification and trade of personal data have not stopped,Footnote ¹⁹ and little has been done by most of them to adapt to the emerging reshaping of the legal foundations of the market (Krouse, Reference Krouse2018).

3.1 The legal-economic puzzle

The previous section outlines how economic agents have been making investments into this novel industry, on the spur of the assumption that courts would have backed their claims over the new assets and turned their technological control into legally protected property rights. In particular, the combination of entrepreneurs’ bets and courts’ temporary legal support to commodification claims has paved the way for the rise of the ‘commodification assumption’ in the industry, which is based on the dominance of optimistic thinking both in courts and in the economy.

Admittedly, the analysis concentrates on entrepreneurs’ and courts’ learning dynamics, while leaving the users’ role on the background even if it plays an obvious role in catalyzing these evolutionary dynamics. In fact, users’ role has mainly been reactive to the changing institutional environments. That is because entrepreneurs’ prototypation of legal innovation has rarely been negotiated over by users (Rubinstein and Good, Reference Rubinstein and Good2013; Stucke and Grunes, Reference Stucke and Grunes2016), and that courts’ decisions have been the main filter of legal innovation for many years now. It is no accident if some observers have described users’ condition as a ‘take it or leave’ situation, when forms of ‘private legislation’ ruled out any form of meaningful negotiated agreements (Bygrave, Reference Bygrave2015).

In this context, entrepreneurs and courts are central. Especially, the role of courts is pivotal as they are the ultimate arbiters of the validity and the compatibility of any legal innovation with the legal order. At the level of the judiciary, over-optimistic expectations related to the fitness of property rights by contract solutions have triggered a form of ‘legal innovation hype', thus generating a temporary consensus on the constructive legal implications of personal data commodification. Thus, in turn reinforces economic agents’ reliance on the apparent stability of the legal foundations of the soaring industry.

However, this form of stability has proved to be only apparent. Because akin to any hype cycle (O'Leary, Reference O'Leary2008), courts’ views have eventually shifted from ‘over-inflated expectations’ to a ‘trough of disillusionment’, when the actual characters of a legal innovation come to light in one with the unintended legal implications of unconstrained commodification. As a result, the same reinforcing dynamics that originally gave rise to the emergence of the commodification consensus eventually turned into disruptive loops.

The courts have been revising their earlier views retroactively, thus jeopardizing the stability of the legal foundations of the commodification assumption. Nevertheless, economic agents are acting as if the emerging instability of their legal entitlements at the core of their business model did not harm their investments. As a matter of fact, the gradual and consistent divergence between expectations of legal protection held by economic agents and the actual legal practice in courts is opening a period of legal fragility with potential disruptive economic effects. The larger the time lag, the worse for the economy once the alignment occurs between over-inflated legal expectations and the actual legal foundations of the industry.

In hindsight, the acts of doubling down by the economics agents are sort of ‘commodification bets’ rather than conforming to the emerging laws, which are somehow surprising in at least two aspects. First, because their complacency defeats the common view about the constitutive role of property rights in the economy (Deakin et al., Reference Deakin, Gindis, Hodgson, Huang and Pistor2017), as if a market could thrive and value be secured despite unstable legal foundations (see Pistor, Reference Pistor2019). Second, because it is incompatible with the rational choice models which equate legal rules to prices that form economic agents’ opportunity sets (Engel et al., Reference Engel, Klement and Weinshall2018; Medema and Mercuro, Reference Medema and Mercuro2006: 104). If the rules are substantially changing, even more so when change is retroactive, there is no apparent economic reason for economic agents not to adapt (Medema and Mercuro, Reference Medema and Mercuro2006: 102). That is true insofar that we do not acknowledge, there are ‘anomalies’ in place in the way the order of actions and the order of rules (fail to) adjust.

If that is the case, there is no comprehensive theory to explain the legal-economic rationale and implications of such an unresponsive systemic behavior. This paper thus advances the theory that these anomalies can be understood as ‘legal bubbles’. The theory based on this notion aims at explaining how a form of systemic overlook of the economic implications of legal dynamics can arise at the core of innovative markets. Recent developments seem to corroborate the hypothesis that one is developing in the data-driven economy.

3.2 Legal bubbles for the digital economy

The rationale behind the theory is indeed rather simple. Legal rules and the price system are both coordination mechanisms in place within the market economy, although they serve different functions (Cooter, Reference Cooter1984). In this perspective, they both concur to establish the value of economic activities (Pistor, Reference Pistor2019). Yet, when their functioning is heavily reliant on over-inflated expectations, they can both be exposed to bubbles-wise phenomena with the consequence of systemic misallocation of capital and economic disruption. Moreover, unlike the price system, the evolution of legal rules and the stability of their outcomes are subject to ex-post courts’ judgment, which adds an additional layer of instability and uncertainty. If that is the case, in a context of uncertainty and ignorance about the legal implications of innovative activities, legal bubbles are prone to arise in the economy.

Legal bubbles emerge when economic agents plan their economic actions for a new resource, in light of property rights provisionally granted by courts which are unduly regarded as stable. In fact, the initial feedback between economic agents’ legal bets and courts’ support reinforces systemic over-optimism, which leads to an overlooked widening of legal fragility of the innovative market.

That gives rise to a period of accumulation of expectations about the possibility of securing robust property rights over the newly discovered resource, without much concern for the stability of the legal foundations over time. Eventually, courts begin revising early property rights solutions as described in the previous sections. Such a shifts, generates an institutional change that paves the way for the waves of consumers’ litigation, government pressure and further strategic actions aimed at taking advantage of the reaffirmation of hierarchically superior legal interests.

In fact, courts’ revision enacts a form of unexpected retroactive reassignment of legal entitlements within the innovative industry. Thus, the possible consequence of which the economic agents find themselves with unexpected losses relating to past transactions, which were performed at the time when the then prevailing legal consensus appeared to allow is now leading to liabilities. Moreover, many economic agents may find themselves stuck in a business model at the core of which lies the economic exploitation of resources whose commodification has become highly restrained if not entirely prohibited. Such a reshaping elicits a substantial destruction of economic value in ways similar to speculative bubbles.

4.1 Entrepreneurs’ commodification bid of newly emerging resources

Entrepreneurs must plan their economic activities by facing a certain degree of legal uncertainty (Lamoreaux, Reference Lamoreaux2011; Lehavi, Reference Lehavi2013; Nicita et al., Reference Nicita, Rizzolli and Rossi2007). That is particularly true in the context of technological innovation, when the innovative activities are based on a newly discovered resource or technology surrounded by strong economic interests attached to its commodification and little consensus as to how to legally categorize the new relationships (Barzel, Reference Barzel1997; Bell and Ibbetson, Reference Bell and Ibbetson2012; Hodgson, Reference Hodgson2015).

Since there is no specific legal provision to regulate the new resource or activity, entrepreneurs must experiment with both the economic and the legal dimension of innovation by combining the existing legal materials in innovative ways (Bell and Ibbetson, Reference Bell and Ibbetson2012; Graziadei, Reference Graziadei2009). They press ahead to exploit the new resource and create an institutional environment that is functional to market their innovations, including favorable legal innovations to be codified in case law (Dekker and Kuchař, Reference Dekker, Kuchař, Fiorito, Scheall and Suprinyak2019; Kuchař, Reference Kuchař2016). The entrepreneurs’ incentive structure favors the release and adoption of audacious and risky legal innovations coupled with narratives to play down the risk of harming the prevailing order of rights.

Entrepreneurs usually do so by releasing ‘property rights by contract’ solutions to turn their actual control over the new resource into a legally protected claim to it (Pistor, Reference Pistor2019; van Erp, Reference Van Erp2015). The success of both the legal and the economic dimension of their innovation rests on a substantial degree of persuasion whereby narratives and frames play a substantive role (Hedoin, Reference Hedoin2019; Goff, Reference Goff1987; McCloskey and Klamer, Reference McCloskey and Klamer1995). In fact, entrepreneurs are not only rule takers, but they are foremost rule shapers (Kuchař, Reference Kuchař2016, see also Pistor, Reference Pistor2019). In its theory of economic change, Schumpeter (Reference Schumpeter and Casson1934) saw the ‘producer as being responsible for educating a submissive public into wanting new products and accepting change (…)’. In doing so entrepreneurs are ‘innovators on a grand scale, their actions contributing to the “creative destruction” of entire industries’ (Horton, Reference Horton1999). Such performative role is not confined to economic preferences as it extends onto the innovation of institutional and legal dimensions (Hedoin, Reference Hedoin2019).

In fact, ‘entrepreneurs must come up with institutional innovations to “help dismantle cognitive, legal and political obstacles, letting the market-supporting institutions emerge”’ (Kuchař, Reference Kuchař2016: 351). Legal innovations must be primarily ‘sold’ to rule-makers, with courts becoming their main target of the persuasive bids. That is especially true for management-based regulation (Bonnin Roca et al., Reference Bonnín Roca, Vaishnav, Morgan, Mendonça and Fuchs2017), whereby agents themselves lay down the foundation for the new activities via ‘property rights by contract’ subject to ex-post courts’ scrutiny (van Erp, Reference Van Erp2015). In this view, the supply of over-optimistic narratives – e.g. the ‘end of privacy’ or the ‘transparent society’ – is instrumental to the shaping of the legal environment favoring the newly emerging activities.

Moreover, entrepreneurs can avail themselves of further litigation management options to influence courts’ decisions and have their narratives used as normative interpretive tools. As they are repeated players, they enjoy a high stock of knowledge and access to specialized attorneys and they can also ‘play for the rules’ rather than play for the outcome of every single case (Galanter, Reference Galanter1974). Hence, they can also play for establishing favorable rules rather than only focusing on single cases’ monetary outcome.

This strategic hedge allows them to favor the creation of favorable precedents and makes them more influential in the way consensus is formed within the judiciary. They can partly control which legal views are to be made public first, while keeping private unfavorable views through the recourse of out-of-court settlements. If their commodification bets are successful, they would secure property rights over new resources and influence the legal incentives in a way it attracts further economic agents and investments.

4.2 Courts’ duty to decide and the legal innovation hype

Courts are the keepers of legal systems and are entrusted with filtering out those economic agents’ legal solutions they find legally unsound. They must do so despite their lack of adequate knowledge and interpreting tools to gage the actual implications of the new reality. Which is often the case in a world of increasing technological complexity (Macey, Reference Macey1989: 97), when courts lack both the knowledge to immediately form their judgments and the ability to anticipate all the legal implications of property rights solutions advanced by entrepreneurs (Mandel, Reference Mandel, Brownsword, Scotford and Yeung2017; Zywicki and Boettke, Reference Zywicki, Boettke, Zywicki and Boettke2017).

Moreover, because no fully formed legal doctrine, sector-specific statute or legal scholarship are available, they must at a large extent rely on speculative and ‘mutually exclusive theories that [are] of little practical use’ (Bennet, Reference Bennett2019: 754).

The result is that courts find themselves in an unpleasant position. On the one hand, they have to learn about the underlying reality in order to formally articulate their judgments in a way ‘to achieve an intellectually satisfying body of rules and principles’ (Bell and Ibbetson, Reference Bell and Ibbetson2012: 163; see also Graziadei, Reference Graziadei2009). On the other hand, they must solve conflicts around the new resources, without the possibility to avoid deciding upon the opposing claims, just because they haven't formed their views yet.

They must do so under entrepreneurs’ pressure to secure legal protection for their investments, with the high risk of hampering innovation with no guarantee of effectively defending fundamental rights if their earlier decisions turn out to be too strict on personal data commodification (Chander, Reference Chander2014). As a result of such a context, courts face an asymmetric cost structure when it comes to deciding whether to back a legal innovation or not.

In fact, the way in which their views are expressed in the case law is influence by the fact that ‘going short’, i.e. filtering out, a newly emerging solution, is more costly than embracing it. No wonder if legal literature acknowledges that courts tend to be ‘blinded by spectacular technological achievement and consequently neglect the underlying legal concerns’ (Mandel, Reference Mandel, Brownsword, Scotford and Yeung2017: 235), insofar entrepreneurs offer a persuasive enough interpretive frame (Sayo’ and Ryan, Reference Sayo', Ryan, Pollicino and Romeo2016).

In this view, entrepreneurs’ ability to offer optimistic views is instrumental to factually justify their claims that property rights by contract solutions do not harm any fundamental legal interests. The adoption of these interpretive frames is favored by the fact they are cognitively cheap as they allow to ‘take only a limited number of factors into serious consideration’ (Simon and Scurich, Reference Simon and Scurich2013: 419), without taking any political risk connected to challenging the emerging consensus (Lessing, Reference Lessing1996: 874, Tokson, Reference Tokson2015).

Moreover, group dynamics may favor the diffusion of early solutions, because they make conformism socially rewarding and cognitively cheap. The more the courts are showing support to the legal innovation, the higher the costs of opposing it, due to the network effect that is attached to legal doctrines in the legal decision making (see Harnay and Marciano, Reference Harnay, Marciano, Porrini and Ramello2006). That is especially true when such frames allow courts not ‘to rethink the merits of a particular legal doctrine’ and thereby save cognitive, writing and persuasive costs (Macey, Reference Macey1989: 71).

These incentive structures pave the way for ‘precedential cascades’ (Daughety and Reinganum, Reference Daughety and Reinganum1999; Harnay and Marciano, Reference Harnay, Marciano, Porrini and Ramello2006; Talley, Reference Talley1999), with the result that optimistic views are incorporated in early legal decisions, become normative and rapidly spread within the judiciary (Sayo’ and Ryan, Reference Sayo', Ryan, Pollicino and Romeo2016). Hence, the over-inflated narratives get hyped, thus becoming the reference for the analysis of the emerging legal issues (Morelli and Pollicino, Reference Morelli and Pollicino2020).

Collective enthusiasm, however, may come to a ‘trough of disillusionment’ especially if early decisions were based ‘on unrealistic empirical assumptions’ (Petersen, Reference Petersen2013), being corroded by learning and experience (Arruñada Reference Arruñada2020). As courts learn and the practical implications emerge they may turn more activists and revise their decisions (Arruñada, Reference Arruñada2020; Morelli and Pollicino, Reference Morelli and Pollicino2020). As a result, courts’ conditional sustain to legal innovation remains precarious and potentially be revoked insofar courts have adequately learned and collectively gaged its implications in terms of the prevailing legal order.

4.3 Temporary appearance of legal stability

The peak of the legal innovation hype inside the judiciary corresponds to the maximum of cost asymmetry in the market in favor of optimistic views, thus creating the condition for the legal bubble to form. Such an asymmetry can persist for some time, despite disillusion and dissatisfaction with the prevailing legal solution spreads within the group (Kuran, Reference Kuran1989: 42). This phenomenon aggravates the potential economic fallout for economic agents because it delays the public disclosure of the newly emerging legal consensus.

In fact, the revision of the prevailing legal rules cannot occur overnight nor immediately (Büchi et al., Reference Büchi, Fosch-Villaronga, Lutz, Tamò-Larrieux, Velidi and Viljoen2020). Due to the political and social dimension of legal adjudication and legislative evolution (Harnay and Marciano, Reference Harnay, Marciano, Porrini and Ramello2006; Tokson, Reference Tokson2015: 923), the majority of courts may be reluctant ‘to take the lead in publicizing their opposition’ (Kuran, Reference Kuran1989: 42) to the prevailing property rights solutions. As a result, even in the presence of rising privately held opposition to the prevailing legal regime, courts may not immediately change their decisions and a ‘spiral of silence’ begins (Noelle-Neumann, Reference Noelle-Neumann1974). In this context, judges monitor the social environment and retain opinions that benefit of widespread consensus – at least for some time (Tokson, Reference Tokson2015).

‘A window of fragility opens up when the economy remains temporary stuck in a sort of ‘lock-in’ equilibrium where [better considered legal] innovation never spreads’ (Bogliacino and Rampa, Reference Bogliacino and Rampa2012) or spreads more slowly than it would if group dynamics were not in place. The result is that economic agents find themselves planning their investments on precarious entitlements.

5.1 The breaking of apparent consensus within courts

The burst of a legal bubble is sparked by the collapse of a consensual order within the judiciary, which in turn triggers a fallout of litigation because of economic agents’ reaction, although delayed, to the newly emerged incentive structure (see Dughera and Giraudo, Reference Dughera and Giraudo2021). The burst of the bubble tends to originate within the judiciary, when unforeseen events contribute to the undoing of the prevailing legal consensus. As it is typical of group deliberation processes (see e.g. Kuran, Reference Kuran1989), the shifts in the way legal entitlements are assigned and protected sometimes need a ‘spark’ to trigger the change (Goff, Reference Goff1987).

In the legal domain, external shocks as contributing factors are not rare. Public scandals or incidents expose tensions and disagreements concerning the prevailing legal regime (Reference Epstein2016; Van Elten and Rehedera, Reference Van Elten and Rehder2020). Such an input can legitimize and help a judge to take leadership in publicizing opposition to the prevailing consensus (Friedman, Reference Friedman and Drobak2006), thereby eliciting others to follow.

As a result, forms of legal ‘prairie fires’ à la Kuran (Reference Kuran1989) may erupt. Courts then start enforcing their revised views retroactively to past facts. The activation of cascades similar to those that at first favored the adoption of the now rejected early solution marks a turn in the sequence of events. New legal rulings rapidly spread, thus amplifying the ensuing investment debasement. In turn, users’ oscillating strategies in response to the new courts’ activism fuel the evolution of the bubble through litigation in courts (see Dughera and Giraudo, Reference Dughera and Giraudo2021).

5.2 The delayed adaptation of economic agents

If change is both fast and retroactive economic agents have little chance to divest from the industry in an orderly fashion, and thus significant economic disruption becomes unavoidable. When ‘rule makers speak and nobody listens’ (Engel et al., Reference Engel, Klement and Weinshall2018: 1), economic disruption is further exacerbated, as it happens –when most economic agents overlook early signals of the legal shift, thus delaying the prompt adaptation of their business models.

It may take years before newly announced legal rules are widely followed (Engel et al., Reference Engel, Klement and Weinshall2018), even if potentially disruptive in their implications. The literature on institutional change explains that the acquisition of information is not enough to learn that something has changed and act upon it (Hodgson, Reference Hodgson1998). Information about changes requires implementation by individual agents to learn the behavioral implications of the new entitlements structure and trust it (see Engel et al., Reference Engel, Klement and Weinshall2018: 1), which is not obvious or costless.

Gathering knowledge about the normative implications of legal change is costly, as experts and information are expensive (Macey, Reference Macey1989: 100). As a result, not all economic agents equally learn about the legal change, or uniformly invest in legal expertise to anticipate possible legal implications of such change. In fact, in the legal domain as well there are ‘muppets’ and ‘gazelles’ (Nightingale and Coad, Reference Nightingale and Coad2014; see also Engel, Reference Engel2008: 8). Only the market leaders, who have already invested heavily in the edification of the legal foundations of the industry, possess knowledge and resources to effectively monitor the evolution of law, and possibly anticipate any undesired change so as to minimize any economic adverse impact (Engel, Reference Engel2008; Kutchar, Reference Kuchař2016).

The group of followers, instead, learn the law in terms of behavioral expectations on them, by imitating exemplars, or following the social mirror rule present in their environment (Engel, Reference Engel2008: 287). They autonomously react only to those decisions that directly involve them. As a result, followers, tend not to anticipate changes, even if they might access information about case law (Macey, Reference Macey1989), and are more prone to be caught unprepared by legal shifts that are already underway.

5.3 The retroactive revision of legal entitlements and the possibility of unexpected liabilities

When courts announce a new rule, its retroactive impact can be limited. This is possible under the ‘prospective overruling doctrine’ (Beswick, Reference Beswick2020: 279). This judicial technique is adopted especially when the social and economic relevance of the reliance interests are big. The retroactive reshuffling of property rights is particularly relevant in economic terms because such rights ‘are typically treated as merely a recognition of what the law has always been’ (Calabresi, Reference Calabresi2018: 164; Chen, Reference Chen2016), meaning that the shifts ‘affect conduct that already has occurred’ (Macey, Reference Macey1989: 100). Thus, the retroactive application of new rules may generate the emergence of unexpected liabilities relating to past transactions, while also making it necessary to set reserves aside to cover the previously overlooked legal risk.

For this reason, courts tend to preserve reliance interests as much as they can, when the economic and social implications of retroactivity would have unacceptable destructive effects for entire industries (Tritt-Lee Ford, Reference Tritt2016). As Collingridge pointed out (Reference Collingridge1980), it is typical at the early stages of development of any new technology for rule makers not to know about how to properly gage the implications of the new activities. This is the reason for their initial support to the consequent legal innovations which are based on mere expectations, if not mere guesses. By contrast, when the undesirable consequences are discovered, the degree of penetration within the economy and society is already so profound that it tends to shield the industry from any hindsight attempt to re-regulate it (Reference Collingridge1980).

If that is the general rule, there are exceptions. That is especially the case in the domain of technological innovation (Martini, Reference Martini, Ebers and Navas2020), where ex-post facto solutions are more frequent than expected. In some cases, rule-makers may not be willing to legally bail-out the new industry if it's doing it away with fundamental legal interests of the polity, thereby generating an unforeseen constitutional crisis (Beswick, Reference Beswick2020). In those circumstances, courts prioritize the survival of legal order over the preservation of the economic interests, with the acceptance of the ensuing economic disruption.