Solving the Privacy “Patchwork” Through Choice of Law

National markets need a national regulator, right? It makes no sense to have our large American companies face as many as 50 regulators. The inefficiencies are obvious, and the logic is simple. So let’s have our multi-national companies regulated globally, by the UN or something.

Did you stop short at that, like Tonto’s horse arriving at a rattlesnake?

You don’t have to be an opponent of world government to see the weakness of remote government. Our own Congress isn’t all that great. News flash. But is there another way around the problem of multiple regulators? Through repetition, we’ve become so annoyed by the legal “patchwork” that some of us get surly around a quilt, positively angry at the jeans that the cool kids wore in the ’70s.

Via Adobe Stock

The Washington Consensus—Washington’s tech consensus, that is—is that federal privacy legislation would solve the problem because it would preempt state law and get rid of the patchwork. But as I’ve written before, states “left to act as laboratories of democracy, would undoubtedly converge on a small suite of regulatory practices.” The patchwork argument is overstated, and its strength would fall over time.

But it is real, and in a paper released today Geoff Manne of the International Center for Law and Economics and I argue for a different solution: choice of law.

It’s curiously unrecognized in tech that national businesses regularly choose the law that will apply to their operations. Sometimes that is by re-homing their headquarters and operations to states with favorable policies or expertise, and sometimes it is by including choice of law clauses in their contracts. Parties to contracts can choose their law, within reason.

I can already hear the howls of derision. Letting big corporations choose the law that applies to them does nothing! Well, it doesn’t do everything but, as Manne and I point, many advocates would “replace ‘take it or leave it’ policies crafted in the crucible of the marketplace with ‘take it or leave it’ policies crafted in a political and regulatory crucible.” Especially given the power of corporations in the political and regulatory arena, their results are not likely to be all that much better.

To see our logic, you must recognize how people make commercial decisions, a topic that is rather remarkably under-studied. “[C]onsumers do not carefully read privacy policies and balance their implications. Rather, a hive mind of actors including competitors, advocates, journalists, regulators, and politicians pores over company policies and practices. Consumers take in branding and advertising, reputation, news, personal recommendations, rumors, and trends to decide on the services they use and how they use them.”

Choice of law moves one locus of the privacy debate. Choice of law, we argue

would strengthen and deepen competition around privacy. If firms believe privacy is a consumer interest, they could select highly protective state laws and advertise that choice, currying consumer favor. If their competitors choose relatively lax state law, they could advertise to the public the privacy threats behind that choice. The process would help hunt out consumers’ true interests through an ongoing argument before consumers. Businesses’ and consumers’ ongoing choices—rather than a single choice by Congress followed by blunt, episodic amendments—would shape the privacy landscape.

Do peruse our paper to see more of this argument and our answer to the arguable charge that there would be a “race to the bottom” in a choice-of-law environment.

As it stands, states are increasingly able to regulate nationally, whether because of economic power (California) or statutes that specifically bar parties from choosing the law that applies to them (Utah). Federal protection for choice of law would diminish this practice without further upsetting one of the balances of power set up in the Constitution. That is the arrangement to preserve state and local authority over many matters, while the national government oversees areas naturally appropriate for a national authority.

Privacy is important, but so is having a governmental system that works. The “rejectionist” strain in American politics epitomized by the Trump insurgency may be borne at least partly of a remote Congress and even more remote bureaucrats officiating highly personal interests and values like privacy. Geoff Manne and I have an idea for solving the patchwork problem without rending the fabric of our government and society even more.