Investors recently valued the local transportation service Uber at more than $40 billion, an astonishing figure for a 5-year-old startup. At the same time, though, Uber faces lawsuits from state governments, protests from drivers, property seizures by local authorities, criticism of its “surge pricing” practices, controversy over rapes and assaults of riders, accusations that it abuses its customers’ privacy, suggestions that it threatens journalists and even an indictment of its CEO in South Korea. Its penchant for controversy is almost as breathtaking as its valuation.

Uber as example of operational disruption and innovation

The pugnacious Uber is an extreme case, but it’s not alone. Other high-profile startups that use the Internet to manage resources in the physical world, such as Airbnb and Nest, are also stirring up hornets’ nests of concern around consumer protection, privacy, licensing, taxation and business practices. The narrative in Silicon Valley is that “disruptive innovators” face rear-guard actions from threatened competitors and befuddled bureaucrats.Airbnb and its privacy and regulatory concerns

Unfortunately, the language of disruption is less than helpful in the domain of public policy. The means of regulation may indeed be inefficient, even counterproductive; yet that in no way diminishes its ends. Internet-based companies tend to claim instinctively that they belong outside traditional legal regimes. In most cases, their efforts to defend this position will fail. And they’ll be better off for it.

It has all happened before.

Almost 20 years ago at the dawn of the commercial Internet, there was a strikingly similar debate. Academics and pundits argued that cyberspace, impossible to constrain through territorial law, was an exception. In response, cyberrealists noted that law has always had to deal with technological evolution and difficult questions of cross-jurisdictional application. There are a number of practical mechanisms to address conflicts. And if needed, governments would simply use brute force to get their way.

The exceptionalists won the rhetorical battle in the mid-1990s, but soon after, the realists won the war. The legal system fashioned imperfect but largely workable solutions to the problems of jurisdiction, property rights, freedom of expression, contract and competition policy. Government actors such as China, with its Great Firewall, and as we now know, America, with its National Security Agency, had little difficulty drilling beneath the virtual superstructures to the physical-world anchors they could manipulate.

Uber’s argument that a software company shouldn’t be subject to rules designed for taxi owners parallels AOL’s argument in the mid-1990s that it shouldn’t be subject to the “access charge” regime established for telephone companies. AirBnB’s assertion that it shouldn’t be liable when one of its guests burglarizes a host parallels Yahoo!’s argument that it shouldn’t be punished if one of its users uploads illegal material. Nest’s claim that we should trust it to manage our own electricity usage data parallels Google’s views about search queries.

Why should one set of rules, set by a local commission, necessarily apply when I step into a taxi, and another set apply when I step into an Uber car (in some cases involving the same driver, or even the same car)? Are safety, insurance, fair labor practices, transparent pricing and antitrust considerations no longer relevant? Is it inconceivable that Uber’s black-box algorithms would discriminate against disfavored drivers or riders?

Here’s the good news. As imperfect as the legal system and regulation may be, they aren’t static. The Federal Communications Commission and Congress refused to impose crippling fees and taxes on Internet companies. A vibrant Internet application and digital media market grew up after the Justice Department engaged in an aggressive antitrust action against Microsoft, which accused the company of using anti-competitive tactics to prevent competitors from undermining its dominance. The “safe harbor” provisions in communications and copyright legislation shielded U.S.-based Internet companies from liability for their users’ actions, so long as they responded to requests to remove illegitimate material. And online service providers learned to exercise more responsible stewardship of customer data after large fines imposed by the U.S. Federal Trade Commission and European regulators.

Sean Parker, co-founder of Napster, a firm that believed its new technology could trump old laws. Photo credit: Amager at English Wikipedia.

Sean Parker, co-founder of Napster, a firm that believed its new technology could trump old laws. Photo credit: Amager at English Wikipedia.

Uber and its compatriots have a choice. They can follow the path of Napster, confidently believing that new technology will inevitably beat old law. (Ask Napster’s executives and investors how that worked out.) Or they can figure out ways to work within the system. YouTube began life with an outlaw mentality, ignoring copyright concerns in a headlong pursuit of growth. After its acquisition by Google, it changed its tune. While still fighting overreaching demands by content owners and governments, YouTube has turned itself into a major channel for media companies.

There should be debates about the hard policy questions raised by the Sharing Economy, Internet of Things and Big Data. In Uber’s case, the question is whether drivers and riders need legal protections above and beyond basic contract rights, and if so, how best to achieve them. “Trust us. We’re disruptive,” isn’t enough.