When Protecting Privacy Reveals Secrets

The California policy gadfly is back with a new ballot initiative in 2020. Last year, San Francisco real estate developer Alastair Mactaggart used the threat of a ballot measure to all but force the state legislature to enact dramatic new privacy regulations that were not ready for primetime. Earlier this year, that law had to be amended to even be workable and consistent. Even though that law is not yet in effect and its consequences are still unknown, he is pushing ahead with another new proposal for voters to consider on top of the damage already done.

In June 2018, the legislature passed the California Consumer Privacy Act with little reflection or review. under threat of an impending ballot measure proposed by Mactaggart which had language lawmakers knew was severely lacking. In California, lawmakers have a very narrow window to reach agreement with proponents to enact an amended proposal legislatively, or else gamble at the polls.  Typically, ballot measures can’t be amended once passed absent a specific provision allowing changes or another vote of the people.  So, the legislature had to act fast instead of acting with care to pass a revised law and have the original language removed from the ballot.

The resulting bill was so deficient, that it was passed with a 2020 effective date to give the legislature some chance to try to fix what it could. Much work had to be done on the law throughout 2019, including attempting to address whole paragraphs of ambiguous language. While compliance costs are still likely to be unaffordable by most small, medium, and even some large businesses, the exact economic impact is unknown. Now, adding to the costs and confusion, Mactaggart is circulating a new ballot proposal, the California Privacy Rights and Enforcement Act, which could appear on the November 2020 ballot. This new proposal suffers from the same lack of thoughtful analysis and redraft.

One serious problem in the new ballot proposal is its broadside against intellectual property, the very foundation for much of the success of California’s economy. The state is considered something of a world headquarters for technology innovation. California boasts almost 1.2 million tech sector employees, 7.2 percent of its workforce. In part because of this concentration, California is first in the nation for the most innovation per capita.

But errant public policy choices can put it all at risk, like requiring the exposure of trade secrets such as algorithms. The proposal would also create a new state agency to handle complaints and review algorithms, stripping the California attorney general’s office of such oversight, presumably an office of attorneys where intellectual property issues would be understood thanks given their legal training. Instead bureaucrats and functionaries will replace them.

Algorithms are nothing magical. They are a programmed mathematical equation designed to produce a result, such as connecting friends, finding the product a consumer will most likely enjoy or serving up the correct news story. As simple as they sound, they are often the most valuable asset that an online company owns. These assets are protected as a trade secret, and hence the value is secure as the formula is not generally known. So, anytime that secret is shared the value diminishes.

If put in the government’s hands a company’s most valuable asset will be vulnerable to inadvertent or purposeful disclosure such as through leaks or Freedom of Information Act requests. Once released, even if that release was determined to be criminal or negligent, the trade secret permanently loses its value.

There is little doubt that the current Mactaggart ballot proposal weakens property rights. Those rights are fundamental to functioning markets. Without them, investors will not invest and innovators will not take risks. Without property rights, contracts are not executed because they are neither dependable nor enforceable. An economy based on innovation withers.

Mr. Mactaggart has written, “what this new law comes down to is giving consumers the right to take back control over their information from thousands of giant corporations.” But he misses an even larger point, that it is in the best interests of companies that use algorithms, and also of consumers, is to protect trade secrets and the property secured by our current legal regime. Weakening protections because of some confused understanding of the meaning of “openness” only harms Californians. Innovation and economic activity will always depend on and demand protection of property rights.

Bartlett Cleland is senior fellow in tech and innovation at the Pacific Research Institute.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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