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Summary Company Law
Heldeweg – legal design of smart rules and regimes: regulating innovation
3.1 INTRODUCTION
- concept of ‘smart rules and regimes’ aims to focus on legal instruments that foster technological
innovation while providing safeguards against technological risks.
3.2 THE ‘DUTCH (INNOVATION) PARADOX’
- ‘An excellent record in knowledge creation, but a mediocre record in innovation activity’ – with
‘innovation activity’ being defined as, ‘… successful development and application of new knowledge in
a new product and/or process’.
Innovation
- Innovation is regarded as a concept embracing both a process and it results in terms of a new
functionality, both in the private and the public sector
- a ‘complex system’, also about changes in organization, management and labor, towards faster
recognition, diffusion and application of (new) knowledge
o not only about exploration but also about exploitation.
Failure at and in innovation
- Major causes of market failure concerning innovation are: reluctance to initiate innovation with positive
external effects, uncertainty on returns on investment, insufficient or slow knowledge transfer, small
profit margins, and insufficient cooperation between firms.
- Next to market failure, there is ‘systematic failure’ within the innovation process itself.
Government opportunities
- Government may have the potential to rectify market and systematic innovation failure
- Taken intrinsically, government will focus on securing innovation as such, through securing or
improving the ‘general rules of the innovation game’
- Taken extrinsically, government interventions are geared by the promise of a particular technology to
either function as a ‘breakthrough’ or ‘general purpose
More failure
- Government should operate on the basis of the ‘additionality-principle’
o intervene only when and where necessary and must retreat as soon as possible
A smart approach?
- Clearly ‘dumb regulation’ must be avoided; especially technology-dependent regulation
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- X may be understood as conduct favorable to technological innovation and Y depicts the agent(s)
addressed.
- In the prohibitive (y shall not do x) perspective, the focus is on risk regulation
o regulatory safeguarding of public interests in a clean environment
=> innovative risk regulation
Innovation-efficiency is about avoiding over-inclusiveness of norms
Innovation-effectiveness is about promoting more desirable innovations by placing
restrictions on existing or emerging technologies
- In the permissive (y may or may not do x) perspective, our focus lies with creating favorable regulatory
conditions towards enhancing technological innovation as a matter of private choice.
=> innovation-facilitating regulation
o ensure the presence of a legal infrastructure favourable to technology innovation
- In a compelling (y shall do x) perspective, innovation is a public interest that warrants active
persuasion, through regulation that obliges innovative conduct.
=> innovation-compelling regulation.
o 1. Through direct regulation, where conduct follows ‘command and control’ and breaches are
punishable under law
o 2. Through indirect regulation, where conduct follows efficiency considerations and is
sanctioned by economic disadvantage
o 3. Through self-regulation, where conduct follows social considerations and is sanctioned by
criticism and ostracism
o 4. The use of inherent regulation, where conduct follows inbuilt or systematic constraints of
functionalities
Balancing act
- Not only must technological innovation be fostered, but there is also the public interest of securing
against technological risks.
3.3 THE CONCEPT OF ‘SMART RULES AND REGIMES’
- Rules = linguistic statements
o Y is the subject
o X is the conduct
- Regime = system of rules, which in conjunction includes not only norms
Wicked problems, smart response
- A combination of two circumstances – high dynamics and major conflict – presents a ‘wicked
(regulatory) problem’
- these problems pose a challenge to regulatory governance, that is, to the design of smart rules and
regimes, aimed at balancing both dynamics and conflicts.
Variables and maxims
- The smartness of rules and regimes related to balancing two variables: high dynamics and strong
conflicts of interests
- Design of smart rules and regimes must rest upon guidelines, which do justice to these legal governance
dimensions and accompanying principles of good legal governance.
Four dimensions, four principles
- Legitimacy is about ‘which particular regulatory interventions can legally be brought about by who?’
o focus is on the id quod dimensions of the regulatory power to bind others.
o In the context of technological innovation ‘legitimacy’ is the dimension determining which
agents can authoritatively decide on the introduction and use of new technologies.
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- Legal validity is about ‘how a particular regulatory intervention may/shall or can legally be brought
about?’
o focuses on the modus quo dimension of regulation in terms of the availability of regulatory
legal tools
o In the context of technological innovation this is the dimension where, in particular, the
distribution of risks and benefits of innovation will be tested.
- Effectiveness is about ‘what particular regulatory intervention can practically be brought about?’
o focuses on whether a rule or regime can result in intended (changes of) conduct.
- Efficiency is about ‘how a particular regulatory intervention can practically be brought about?’
o concerned, with whether regulating is a ‘cost-effective’ policy effort to create presumably
effective rules or regimes
o addresses the ‘cost-effectiveness’ of the rule or regime as regards the impact on the regulated
conduct.
- From the standpoint of technology innovation ‘dynamic appropriateness’ needs to be ensured
o Regulatory ergonomics (or ergonomics of regulatory governance) not only call for a lowering
of the regulatory burden, but also the efficient allocation of obligations and (correlative)
property rights (or entitlements).
Name of the game
- Interdependencies between legitimacy, legal validity, effectiveness and efficiency, place the ideal of
smartness of rules and regimes on a range between satisficing and optimising.”
3.4 THE CONCEPT OF A LEGAL DESIGN METHODOLOGY (TOWARDS
‘SMART RULES AND REGIMES’)
An institutional approach
- Legal institutions depict a normative mode of human behaviour in the form of (1) a system of rules (2)
projecting a state of affairs (3) that ought to be realised (4) by a social practice regulated by those rules
and (5) expressive of a common belief that the state of affairs is (6) actually the case.
An internal perspective
- A fitting methodology could firstly address rules projecting legal norms of conduct and, secondly, rules
projecting power conferring norms legal acts.
- As to the design of legal norms of conduct (‘x shall/may (not) do y (when Z)’), Ruiter proposes that
their design should adhere to the following three guidelines:
o 1. take into consideration the four basic components of every norm: Subject (‘x’), Object (‘y’),
Operator (‘shall or may (not)’), and Conditions (‘z’);
o 2. decide to which extent the logical oppositions are relevant determinants of the design;
o 3. establish whether the design is such as to generate legal relations of a ‘claim-duty’ or
‘privilege-no-claim’ nature
- Combining the positions of the components object and operator, yields four basic types of norms of
conduct (‘command’, ‘prohibition’, ‘permission’ and ‘dispensation’) together with their reciprocal
relations: contradictory, contrary, subaltern or subcontrary.
- Reflection on (1) norm-components, (2) logical oppositions, and (3) types of legal relations is vital to
the making of (regimes of) legal rules, and the specific nature of norms of competence should be well
understood.
3.6 CONCLUSIONS AND THE WAY FORWARD
Internal and external
- At this stage of analysis, we must acknowledge that the focus on the internal structure of legal
institutions must be matched by a broader design scope, encompassing both rules and regimes.
- The focus on the internal structure needs to be matched by an external view on the legal consequences
of regulatory governance or policy considerations.
