Econ 522 Economics of Law Dan Quint Fall 2013 Lecture 9

1  Introduced dynamic games, sequential rationality, subgame-perfect equilibrium  Saw problem of innovation when ideas could be appropriated or copied ex post  Introduced patents and copyrights as ways to solve the problem Monday

2  Should record labels sue music downloaders? Discussion question

3 patents copyrights trademarks trade secrets

4 Trademarks  Reduce confusion over who made a product  Allow companies to build reputation for quality  Don’t expire, unless abandoned  Generic names can’t be trademarked

5 Trademarks – example  WSJ article 9/17/2010: “Lars Johnson Has Goats On His Roof and a Stable of Lawyers To Prove It”  Restaurant in Sister Bay WI put goats on roof to attract customers  “The restaurant is one of the top- grossing in Wisconsin, and I’m sure the goats have helped.”  Suing restaurant in Georgia  “Defendant has willfully continued to offer food services from buildings with goats on the roof”

6 Trademark dilution

7 patents copyrights trademarks trade secrets

8  Protection against misappropriation  But plaintiff must show…  Valid trade secret  Acquired illegally  Reasonable steps taken to protect it Trade Secrets

9 patents copyrights trademarks trade secrets

10 Establishing, verifying, and losing property rights

11  We already saw two doctrines for how ownership rights are determined – First Possession and Tied Ownership  Next question: when should a resource become privately owned?  Cost of private ownership: owners must take steps to make the resource excludable – boundary maintenance  Cost of public ownership: congestion and overuse  An economically rational society will privatize a resource at the point in time where boundary maintenance costs less than the waste from overuse of the resource. When should resources become privately owned?

12  We already saw two doctrines for how ownership rights are determined – First Possession and Tied Ownership  Next question: when should a resource become privately owned?  Cost of private ownership: owners must take steps to make the resource excludable – boundary maintenance  Cost of public ownership: congestion and overuse  An economically rational society will privatize a resource at the point in time where boundary maintenance costs less than the waste from overuse of the resource.  (either because congestion got worse…  or because boundary maintenance became cheaper) When should resources become privately owned?

13  Adverse Possession (“squatter’s rights”)  If you occupy someone else’s property for long enough, you become the legal owner, provided:  1. the occupation was adverse to the owner’s interests, and  2. the owner did not object or take legal action How do you give up (or lose) property rights?

14  Adverse Possession (“squatter’s rights”)  If you occupy someone else’s property for long enough, you become the legal owner, provided:  1. the occupation was adverse to the owner’s interests, and  2. the owner did not object or take legal action  Pro: clear up uncertainty over time; allow land to be put to use  Con: owners must incur monitoring costs to protect property How do you give up (or lose) property rights?

15  Adverse Possession (“squatter’s rights”)  If you occupy someone else’s property for long enough, you become the legal owner, provided:  1. the occupation was adverse to the owner’s interests, and  2. the owner did not object or take legal action  Pro: clear up uncertainty over time; allow land to be put to use  Con: owners must incur monitoring costs to protect property  Estray statutes – laws governing lost and found property How do you give up (or lose) property rights?

16 Limitations and Exceptions to Property Rights

17  Property rights generally protected by injunctive relief, BUT…  Ploof v. Putnam (Sup. Ct. of Vermont, 1908)  Ploof sailing with family on Lake Champlain, storm came up  Tied up to pier on island owned by Putnam  Putnam’s employee cut the boat loose, Ploof sued  Court sided with Ploof: private necessity is an exception to the general rule of trespass  In an emergency, OK to violate someone else’s property rights; still must reimburse them for any damage done Private Necessity

18  Property rights generally protected by injunctive relief, BUT…  Ploof v. Putnam (Sup. Ct. of Vermont, 1908)  Ploof sailing with family on Lake Champlain, storm came up  Tied up to pier on island owned by Putnam  Putnam’s employee cut the boat loose, Ploof sued  Court sided with Ploof: private necessity is an exception to the general rule of trespass  In an emergency, OK to violate someone else’s property rights; still must reimburse them for any damage done Private Necessity

19  Property: “a bundle of rights”  Can you unbundle them?  Separate them, sell some and keep others  Usually, no  Prohibition on perpetuities  I can’t separate the right to own/live on my land from the right to sell it or turn it into a golf course  But in some instances, yes… Unbundling

20  Land ownership consisted of three separable pieces (“estates”)  Surface estate  Support estate  Mineral estate Example of unbundling: Pennsylvania and coal

21  Free unbundling of property rights generally not allowed  Civil law more restrictive than common law  For efficiency…  In general, efficiency favors more complete property rights  People would only choose to unbundle property when that increases its value, so we should allow it?  But unbundling might increase transaction costs  Increases uncertainty about rights  May increase number of parties involved in future transactions Unbundling

22 An example (sort of) of unbundling source:

23 More on Remedies

24  Maximum liberty: owner can do whatever he/she wants, as long as it doesn’t interfere with another’s property  When it does interfere, externality, or nuisance  Affects small number: private externality, or private bad  Transaction costs low  injunctions preferable  Affects large number: public externality, or public bad  Transaction costs high  damages preferable Remedies (review)

25  Compensatory Damages  intended to “make the victim whole”  compensate for actual harm done  make victim as well off as before  Can be…  Temporary – compensate for harms that have already occurred  Permanent – also cover present value of anticipated future harm Types of damages

26  Temporary damages  Only cover harm that’s already happened  Require victim to keep returning to court if harm continues  Create an incentive to reduce harm in the future  Permanent damages  Include value of anticipated future harm  One-time, permanent fix  No incentive to reduce harm as technology makes it easier Temporary versus permanent damages

27  If a nuisance affects a small number of people (private nuisance), an injunction is more efficient  If a nuisance affects a large number of people (public nuisance), damages are more efficient  If damages are easy to measure and innovation occurs rapidly, temporary damages are more efficient  If damages are difficult/costly to measure and innovation occurs slowly, permanent damages are more efficient  What’s done in practice for public nuisances?  temporary damages and injunction against future harm  but… Efficient nuisance remedies

28  Atlantic owned large cement plant near Albany  dirt, smoke, vibration  neighbors sued  plant was found to be a nuisance, court awarded damages  neighbors appealed, requesting an injunction  Court ruled that…  yes, this was a valid nuisance case  and yes, nuisances are generally remedied with injunctions  but harm of closing the plant was so much bigger than level of damage done that court would not issue an injunction  ordered permanent damages, paid “as servitude to the land” Boomer v Atlantic Cement Co (NY Ct of Appeals, 1970)

29  Atlantic owned large cement plant near Albany  dirt, smoke, vibration  neighbors sued  plant was found to be a nuisance, court awarded damages  neighbors appealed, requesting an injunction  Court ruled that…  yes, this was a valid nuisance case  and yes, nuisances are generally remedied with injunctions  but harm of closing the plant was so much bigger than level of damage done that court would not issue an injunction  ordered permanent damages, paid “as servitude to the land” Boomer v Atlantic Cement Co (NY Ct of Appeals, 1970)

30  Government can limit how you use your property  Regulation  The government can take your property  “Eminent domain” Next: two important limitations on property rights imposed by government

31 Eminent Domain

32  One role of government: provide public goods  When public goods are privately provided  undersupply  Defense, roads and infrastructure, public parks, art, science…  To do this, government needs land  (which might already belong to someone else)  In most countries, government has right of eminent domain  Right to seize private property when the owner doesn’t want to sell  This type of seizure also called a taking Takings

33  U.S. Constitution, Fifth Amendment: “…nor shall private property be taken for public use, without just compensation.”  Government can only seize private property for public use  And only with just compensation  Consistently interpreted to mean fair market value – what the owner would likely have been able to sell the property for Takings

34  Why allow takings? Takings

35  Why allow takings?  Why these limitations?  why require compensation? Takings

36  Why allow takings?  Why these limitations?  why require compensation? Takings $3 MM$1 MM $9 MM $10 MM

37  Why allow takings?  Why these limitations?  why require compensation?  why only for public use? Takings

38  Why allow takings?  Why these limitations?  why require compensation?  why only for public use?  The government should only take private property (with compensation) to provide a public good when transaction costs preclude purchasing the necessary property through voluntary negotiations Takings

39  1981: GM was threatening to close Detroit plant  Would cost city 6,000 jobs, millions in tax revenue  City used eminent domain to condemn entire neighborhood  1,000 homeowners and 100 businesses forced to sell  land then used for upgraded plant for GM  city claimed employment and tax revenues were public goods, which justified use of eminent domain  Mich Sup Ct: “Alleviating unemployment and revitalizing the economic base of the community” valid public purposes; “the benefit to a private interest is merely incidental”  Overturned in 2004 ruling (Wayne v Hathcock) Poletown Neighborhood Council v Detroit

40  Posner (Economic Analysis of Law) describes:  …Pfizer had decided to build a large research facility next to a 90- acre stretch of downtown and waterfront property in New London. The city hoped that Pfizer’s presence would attract other businesses to the neighborhood. The plaintiffs owned residential properties located on portions of the 90-acre tract… It might have been impossible to develop those areas… had the areas remained spotted with houses. The city… solved the problem by condemning the houses. It said, “the area was sufficiently distressed to justify a program of economic rejuvenation.”  Attorney arguing case:  “If jobs and taxes can be a justification for taking someone’s home or business, then no property in America is safe.” More recent case: Kelo v. City of New London (2005 US Supreme Court)

41  Bruce Ratner owned the Nets from  Bought for $300 MM, sold for less (80% for $200 MM)  This “loss” held up by David Stern as evidence NBA owners were losing money, players needed to make concessions  Recent Malcolm Gladwell article on Grantland  Ratner didn’t want the Nets – he wanted development rights to a 22-acre site in Brooklyn  Buying it all up would be difficult  Seizure a la Kelo would be possible, but politically unpopular  If plans included a basketball stadium, becomes clear-cut case for eminent domain  Even if Ratner took a “loss” on the team, he got what he wanted out of the deal Recent example of eminent domain

42 Regulation (probably won’t get to)

43  Open Access  Anyone free to use the resource  Leads to overutilization (Tragedy of the Commons)  Example: oyster beds  Unanimous Consent  Opposite of open access – multiple owners must all agree to any use of the resource  Leads to underutilization  Example: empty storefronts in post-Communist Moscow  “Anti-commons” caused by existing intellectual property  Political Control/Regulation Multiple forms of public ownership

44 Dividing the mountain pasture among individual owners would require fencing it, which is prohibitively expensive. Instead, the highland pasture is held in common, with each village owning different pastures that are separated by natural features such as lakes and mountain peaks. If each person in the village could place as many sheep as he or she wanted in the common pasture, the meadows might be destroyed and eroded by overuse. Third form of public ownership: political control/regulation

45 In fact, the common pastures in the mountains of Iceland have not been overused and destroyed, because the villages have effective systems of governance. They have adopted rules to protect and preserve the common pasture. The sheep are grazed in common pasture in the mountains during the summer and then returned to individual farms in the valleys during the winter. The total number of sheep allowed in the mountain pasture during the summer is adjusted to its carrying capacity. Each member of the village receives a share of the total in proportion to the amount of farmland where he or she raises hay to feed the sheep in the winter. Third form of public ownership: political control/regulation

46  Open access would lead to overfishing, deplete fishing stock  Government of Iceland decides how much fish should be caught in total each year  People own permits which are right to catch a fixed fraction of each year’s total  Permits are property – can be bought, sold, etc. Similar to how Iceland maintains fishing stock

47 Regulation

48  1800s: PA Coal purchased mineral and support estates, Mahon owned surface  1921: Kohler Act prohibited “mining of anthracite coal in such a way as to cause the subsidence of, among other things, any structure used as a human habitation.”  PA Coal sued government, claiming the regulation was same as seizing their land (without compensation)  “…While property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” Regulation: Pennsylvania Coal v. Mahon surface estate support estate mineral estate

49  1800s: PA Coal purchased mineral and support estates, Mahon owned surface  1921: Kohler Act prohibited “mining of anthracite coal in such a way as to cause the subsidence of, among other things, any structure used as a human habitation.”  PA Coal sued government, claiming the regulation was same as seizing their land (without compensation)  “…While property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” Regulation: Pennsylvania Coal v. Mahon surface estate support estate mineral estate

50  1800s: PA Coal purchased mineral and support estates, Mahon owned surface  1921: Kohler Act prohibited “mining of anthracite coal in such a way as to cause the subsidence of, among other things, any structure used as a human habitation.”  PA Coal sued government, claiming the regulation was same as seizing their land (without compensation)  “…While property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” Regulation: Pennsylvania Coal v. Mahon surface estate support estate mineral estate

51  1800s: PA Coal purchased mineral and support estates, Mahon owned surface  1921: Kohler Act prohibited “mining of anthracite coal in such a way as to cause the subsidence of, among other things, any structure used as a human habitation.”  PA Coal sued government, claiming the regulation was same as seizing their land (without compensation)  “…While property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking.” Regulation: Pennsylvania Coal v. Mahon surface estate support estate mineral estate

52  Support compensation for regulatory takings  Shifting burden of regulation from owners of affected property to all taxpayers  Equivalent to selling everyone insurance against harmful regulation  If such insurance were available, people would buy it  But it’s not available, for usual reasons insurance markets may fail  adverse selection  moral hazard  So government should provide it instead…  …by paying compensation for regulatory takings Blume and Rubinfeld, “Compensation for Takings: An Economic Analysis”

53  Support compensation for regulatory takings  Shifting burden of regulation from owners of affected property to all taxpayers  Equivalent to selling everyone insurance against harmful regulation  If such insurance were available, people would buy it  But it’s not available, for usual reasons insurance markets may fail  adverse selection  moral hazard  So government should provide it instead…  …by paying compensation for regulatory takings Blume and Rubinfeld, “Compensation for Takings: An Economic Analysis”

54  Zoning laws  Distinguish industrial areas from residential areas Zoning

55  Zoning laws  Distinguish industrial areas from residential areas  Nollan v California Coastal Commission (US Sup Ct, 1987)  Nollans owned coastal property  Asked for permit to expand building, which would diminish view  Commission: donate a public walking path, and you get permit  Supreme Court: such a deal only legal if there is clear connection – a nexus – between the harm being done and the remedy Zoning

56  Zoning laws  Distinguish industrial areas from residential areas  Nollan v California Coastal Commission (US Sup Ct, 1987)  Nollans owned coastal property  Asked for permit to expand building, which would diminish view  Commission: donate a public walking path, and you get permit  Supreme Court: such a deal only legal if there is clear connection – a nexus – between the harm being done and the remedy Zoning

57  What are benefits and costs of…  having property rights at all?  expanding property rights to cover more things?  introducing an exception/limitation to property rights?  When will benefits outweigh the costs? Property law: the big-picture question End of material on first midterm  Up next: contract law