Econ 522 Economics of Law Dan Quint Spring 2014 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

patents copyrights trademarks trade secrets

 Property rights over original expressions  writing, music, other artistic creations  Creations like this tend to fit definition of public goods  nonrivalrous  nonexcludable  so private supply would lead to undersupply  Several possible solutions  government subsidies  charitable donations  legal rights to creations – copyrights Copyright

 Copyright law less rigid than patent law  Unlike patent law, allows for certain exceptions  Copyrights last much longer than patents  Current U.S. law: copyright expires 70 years after creator’s death  No application process  Copyright law automatically applies to anything you’ve written/created  Copyrights more narrow than patents  Cover exact text, not general idea Copyright

 Retelling of Gone With The Wind, from point of view of a slave on Scarlett’s plantation, published in 2001  Margaret Mitchell’s estate sued to halt publication  Eventually settled out of court  Was there really any harm? Copyright

 Retelling of Gone With The Wind, from point of view of a slave on Scarlett’s plantation, published in 2001  Margaret Mitchell’s estate sued to halt publication  Eventually settled out of court  Was there really any harm? Copyright

patents copyrights trademarks trade secrets

8 patents copyrights trademarks trade secrets

9 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

10 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”

11 Trademark dilution

12 One more example of dilution  In court papers, the oil behemoth effectively argues that it owns the exclusive right to put two X’s next to each other.  Deadline notes, “This double-cross brawl may come as a surprise to Dos Equis…”  An FX spokesperson called the suit “entirely meritless” and said, “We are confident that viewers won’t tune into FXX looking for gas or motor oil and drivers won’t pull up to an Exxon pump station expecting to get ‘It’s Always Sunny in Philadelphia.’” source:

13 patents copyrights trademarks trade secrets

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

15 patents copyrights trademarks trade secrets

16 Establishing, verifying, and losing property rights

17  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?

18  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?

19  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?

20  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?

21  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?

22 Limitations and Exceptions to Property Rights

23  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

24  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

25  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

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

27  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

28 An example (sort of) of unbundling source:

29 More on Remedies

30  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)

31  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

32  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

33  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

34  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)

35  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)

36  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