The Role of Transaction Cost Engineering in Standards Adoption : Evidence from Internet Security

The growing economic importance of technical standards has heightened the need for a better understanding of why they succeed or fail. While existing literature has scrutinized the role of public governance, particularly in the realms of regulation, antitrust, and intellectual property, to date legal scholars have largely overlooked the role of private organizational and contractual lawyering in determining the path of technical standardization.In this Article, we explore this dimension through a case study of the effects of private organizational governance and contracting practices on the fortunes of a nascent Internet security standard. The standard, known as Resource Public Key Infrastructure (“RPKI”), is designed to increase the trustworthiness of information about Internet routing. Through analysis of private organizational and contractual documents, semi-structured interviews with participants in the Internet operations industry, and attendance and participation in key industry conferences, we gained an embedded perspective on the role that private lawyering played in shaping would-be adopters’ perceptions and decisions regarding the technical standard. According to our interviewees, contract and organizational bureaucracy mattered greatly. Notably, we found that the terms of contractual agreements prevented some potential adopters from experimenting with the technology and deterred others from proposing that their organizations adopt the technology. This was due to the perceived costs of involving organizational lawyers in technology-adoption decisions. In addition, contract terms deterred actors from increasing the functional value of the standard via complementary innovation and the development of complementary information services. Remarkably, even the basic mechanisms for presenting and assenting to contract terms chilled prospects for adoption. Regarding organization, we found that stark differences of governance and mission between key North American and European nonprofits contributed to different patterns of adoption. Taken together, these findings reveal the continuing importance of old-school transaction-cost engineering even in the most technical realms of Internet operation and standardization