How to Avoid Legal Landmines: Homejoy & UGotPosted
In his 1997 best-selling book, “The Innovator’s Dilemma,” Harvard Business School professor Clayton M. Christensen articulated the term “disruptive technology.” Disruptive technology, as defined by Christensen, displaces an established technology and shakes up the industry or creates a completely new industry. According to Christensen, new technology falls into two categories: sustaining and disruptive. Sustaining technology, often associated with large corporations, relies on incremental technological improvements. In contrast, disruptive technology challenges the status quo, initially appeals to few, and may need refinement. Now, the term “disruptive technology” has become ubiquitous in technology and startup communities - and for some startups, has become their very reason for being. During this rise in popularity, disruptive technology has broadened to include more than just challenges to established technology, but rather to our very code of established laws and ethics.
While innovative, this style of business this can be risky and may jeopardize the long term success of any company, especially a startup that must rely on the confidence of its investors. The recent demises of Homejoy and UGotPosted provide cautionary examples of what can happen when a small company overtly challenges the established legal structure and common sense ethics. An in-depth look at these case studies shows exactly how these disruptive technologies crossed the line.
Learning from Homejoy: Coordinate around Change
A few days ago, Homejoy, an on-demand house cleaning service, sadly announced on its blog that the company will “officially close its doors on July 31st.” In a recent interview, Adora Cheung, Homejoy’s co-founder and CEO, suggested that lawsuits over whether Homejoy’s cleaners were properly classified as independent contractors led investors to question the sharing economy space, specifically Homejoy’s business model. A recent administrative ruling against Uber on a similar issue also contributed to the problem for Homejoy.
While the announcement and stated legal barriers are unfortunate, they are hardly surprising from a legal perspective. Most employment laws have historically increased protection of employees and have made it increasingly difficult to classify a worker as an independent contractor instead of a full-fledged employee. In the eyes of the law, the employee is clearly the weaker, less sophisticated party when compared with the employer. Therefore, employment laws worldwide aim to correct this disparity in power to help employees.
Homejoy unrealistically aimed to disrupt this very established legal trend, contradicting numerous federal and state administrative laws and regulations. While laws do change, it is generally at a much, much slower pace than technology changes. Moreover, such changes often require substantial lobbying efforts, if not a pivotal event. Generally speaking, showing profits or benefits has not historically inspired regulators to change these employment laws. Thus, established legal principles, such as the power balance between employer and employee, may not be an ideal opportunity for disruption.
Learning from UGotPosted.com: Unethical Tried as Illegal
UGotPosted.com is a more extreme example of an internet company that clearly crossed the line of legality, ethics, and decency. Kevin Christopher Bollaert, who operated UGotPosted.com, posted thousands of nude and sexually explicit photographs without the consent of the subject. These images were submitted by malicious strangers or vengeful acquaintances, often ex-lovers. Bollaert then used a second site, ChangeMyReputation.com, to extort $250 to $350 from those who wanted these unauthorized images removed.
Eventually, outraged California legislatures passed laws to address what became known as the “revenge pornography” problem. Bollaert was summarily arrested and prosecuted. During the trial, numerous victims testified to losing their jobs and experiencing severe depression and shame over the pictures posted by Bollaert. Eventually, Bollaert was found guilty of 21 counts of identity theft and eight counts of extortion. He was sentenced to 18 years in prison.
At a minimum, Bollaert crossed a very clear line of human decency and inspired the regulators to address the problem that his business exploited. The legality of UGotPosted.com’s business model was ambiguous, allowing Bollaert to humiliate and extort several victims. This has inspired the California and federal legislators to explicitly prevent others from using legal loopholes to harass and humiliate through the passage of new legislation. This shows that a lack of laws expressly forbidding a questionable practice or business model should not be seen as an invitation for companies – especially startups – to inspire legislators to close those loopholes. Bollaert might have found a legal loophole, but he took advantage of the opportunity in an unacceptable way. If a company finds a loophole that benefits their business model, they should not give legislators a reason to close it.
Innovation often moves more quickly than legislation. Understanding and collaborating with policymakers alongside building a disruptive technology business is a key strategy to assuring uninterrupted growth, but when the question of ethics is on the table, you might be in the wrong business in the first place.
Originally published on Startup Grind, the global startup community.
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