1. Econ 522 Economics of Law
Dan Quint
Fall 2015
Lecture 8

2. Last week… Discussed how efficient property law system would look
Introduced dynamic games, sequential rationality, subgame-perfect equilibrium
Saw problem of innovation when ideas could be appropriated or copied ex post
Introduced patents as ways to solve innovation problem
(at the cost of introducing a new problem, monopoly)

3. Marginal Revolution (blog): “Patent Policy on the Back of a Napkin”
“Patent Policy on the Back of a Napkin” (Marginal Revolution)
New York Times a couple years ago
“Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products”
(“The Patent, Used as a Sword”, 10/7/2012)
references:
And that’s where we ran out of time.

4. Do the details matter?
Coase: without transaction costs, initial allocation of rights irrelevant for efficiency
But transaction costs may be high
Uncertainty on whether a patent is valid
Uncertainty of outcome of research
Many parties
Coase – in a world without transaction costs, the initial allocation of rights should not matter for efficiency – if the patent as initially granted is inefficient, firms should be able to bargain around it
(That is, as long as the initial grant of the patent gives the inventor enough surplus to overcome the initial incentive problem, Coase suggests we should be able to negotiate around any further inefficiencies.)
However, there are several impediments to this.
Patent law is often ambiguous
Until a patent has been tested in court, its breadth (and even whether or not it is valid) are often uncertain
So firms may not know what their threat points are, and therefore may find it hard to reach an agreement
Research itself is often uncertain
That is, if you make an investment in research or in developing a product, it is often unpredictable whether you’ll be successful
Consider the extreme case where a significant investment will lead only to a small probability of a discovery, but the discovery will be extremely valuable if it occurs
If the big discovery may infringe on an existing patent, it’s very hard to bargain around this problem beforehand – hard to agree on how likely the discovery is to be made, how valuable it will be, and so on
But it’s also risky to make the investment, knowing that you may still have to share your profits with the other patentholder if the discovery occurs.

5. Do the details matter?
Coase: without transaction costs, initial allocation of rights irrelevant for efficiency
But transaction costs may be high
Uncertainty on whether a patent is valid
Uncertainty of outcome of research
Many parties
In some areas, there is a belief that there are too many existing patents, and that it’s very difficult to innovate without infringing on existing patents
In biotech, many new projects require techniques, or even ingredients, that are patented; so there is a problem of “royalty stacking”, that is, having to pay multiple monopolists for rights to their good in order to do anything new
(The textbook mentions a Congressional act, and a Supreme Court ruling, meant to address this problem and encourage the development of new drugs and generic alternatives to existing ones.)
On the flip side, I have a friend who does microchip design, who told me that the conventional wisdom in chip design is, “Never ever try to find out what patents exist – just design the chip the way you want to, and deal with the patents later.”
This is because any design is likely to infringe on lots of patents
Their owners have to decide to sue you for it to matter
If they do, you may only be liable for damages
But if they can prove you knew about the patent beforehand, the penalty may be more severe
So you’re better off pleading ignorance, which is easier when you actually are ignorant!

6. Do the details matter?
Coase: without transaction costs, initial allocation of rights irrelevant for efficiency
But transaction costs may be high
Uncertainty on whether a patent is valid
Uncertainty of outcome of research
Many parties
research being risky also leads to the problem of “submarine patents”
There’s a significant lag (multiple years) between applying for a patent and it being granted; and the details of the application aren’t made public until the patent is granted
So someone could develop a product that infringes on a patent that hadn’t been granted yet!
For this reason, in many areas, patents are only valid if you can show that you were actively trying to commercialize the innovation, not just waiting around hoping someone else would do the work and then sue them for infringement
(This is what happened in a well-publicized case with Blackberry a couple years ago. Some Canadian firm which had no real business other than buying other peoples’ patents, claimed to have a patent that Blackberry was infringing on, and tried to get an injunction to shut down Blackberry unless they agreed to a huge settlement. In most patent cases, a preliminary injunction is granted – that is, the injunction is issued in advance of the case actually going to court. In this case, the injunction was denied, and the case subsequently went away.)
Of course, even when low transaction costs would lead to cooperative outcomes, this can sometimes be a problem in other ways
Often times, firms doing similar research are also competitors in the market; so attempts to cooperate (through joint research projects or in other ways) may be viewed suspiciously by antitrust authorities.
(A paper I wrote last year was on patent pools - … Much of the interest in patent pools stems from the need to figure out how they should be viewed by antitrust regulators.)

7. Alternatives to patents for encouraging innovation
government purchase of drug patents
prizes
Google $30 million prize for landing a rover on the moon
direct government funding of research
~25% of research spending in U.S. is funded by government
Of course, a patent system is not the only way to encourage innovation; and given the inefficiency inherent in a monopoly, there may be other ways to do it better
One proposal with drug patents has been that when a particularly valuable drug is invented, the government should buy the patent, and then allow multiple firms to produce the drug, leading to lower pricing and higher overall welfare
Since the government could pay the fair value (say, the discounted present value of expected monopoly profits) to the firm, there is no problem of incentives
The question then becomes how to calculate the economic value of the patent itself
(One proposal was to let the market decide – hold an auction for the patent, with the understanding that once the auction was complete, a coin would be flipped; with a high probability, the government would buy the patent at that price, but with some probability, the winner of the auction would buy the patent
This way, a decent estimate of “fair value” could be obtained, and the deadweight loss associated with monopoly could still be eliminated “most of the time”.)
Another way to give incentives for innovation is through prizes
A couple years ago, Google announced a $30 million prize for any private citizen landing a rover on the moon
Similar prizes have been offered by governments, and by private foundations, to encourage innovation in particular directions
And finally, government (or a private foundation) can simply give grants to subsidize research directly – which they do – reducing the need for ex-post incentives.

8. patents
copyrights
trademarks
trade secrets

9. Copyright 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
Copyrights are property rights over “original expressions” – writing, music, or other artistic creations
Creations like this tend to fit the definition of a public good
nonrivalrous – one more person reading a book, or listening to a song, or using a piece of software, doesn’t impose any costs on the creator or on other users
nonexcludable – this isn’t quite as literally true; but technology has made it very cheap, often free, to copy and share music or software, so in some instances it’s very difficult to prevent people from accessing it
(This has become more dramatically true in the last decade – once something is available digitally, it’s very hard to limit access to it.)
So it is natural to think of creations like these in terms of public goods
As with any public good, if they are privately supplied, we would expect them to be undersupplied
That is, without any specific sort of reward system, creators could not capture the full social benefit of their creations, and so the free market would likely produce an inefficiently low level of “original expressions.”
However, there are several possible ways to remedy this problem:
Have the government subsidize it, that is, have it publicly supplied
Happens with scientific research; happens with art
Another is for these activities to be paid for with charitable donations
This is implicitly what happens with shareware – you download it for free, but are asked to pay for it voluntarily if you use it
(Of course there’s the usual freerider problem.)
And a lot of art is supported by private foundations and donations.
Finally, the creator of a song, or of a computer program, can be given legal rights to it, which make it illegal for others to disseminate it, so that in order to use it legally, people have to buy it from the creator (or from someone else who pays fees to the creator)
This last one is the case of copyright – exclusive legal rights to written material.

10. 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 law is less rigid than patent law
Patents serve as injunctions against any unauthorized use of the idea
But copyright law allows for certain exceptions
For example, a few lectures ago, I handed out Xerox copies of the amputated leg story
The article was copyrighted, but I wasn’t breaking the law by handing out copies, because educational use is recognized as “fair use” of copyrighted material, and is therefore exempt
Similarly, small selections from a book can legally be quoted in reviews, or used in satires, and pieces of songs can be sampled in other songs.
On the other hand, copyrights last much longer than patents
the lifetime of a copyright has been extended several times
in the U.S., copyrights currently expire 70 years after the death of the creator
Unlike patents, you don’t have to apply for a copyright – it automatically applies to anything you’ve written or created.
Copyrights are generally more narrow than patents
In theory, they cover only the specific text, not the general idea, of a creation
Although this line is sometimes a bit vague

11. 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?
Copyrights are generally more narrow than patents
In theory, they cover only the specific text, not the general idea, of a creation
Although this line is sometimes a bit vague
In 2001, Alice Randall published the book “The Wind Done Gone,” which was meant as a retelling of “Gone With The Wind” from the point of view of a slave on Scarlett’s plantation
The estate of Margaret Mitchell sued the book’s publisher; an injunction was initially issued, halting publication, but was later overturned; in the end, a settlement was reached.
In this case, though, even if the book did violate the copyright, it’s hard to see any financial damage to Mitchell’s estate
That is, it’s hard to imagine there are many people who would see an “unauthorized parody” as a substitute for the original; hard to imagine a lot of people who planned to buy a copy of Gone With The Wind, then read the parody and felt they no longer needed to.
In my own opinion, copyright holders sometimes defend their copyright aggressively as a reflex, without giving much thought to whether the activity they’re opposing actually hurts their interests
Lots of book publishers were opposed to Google Book Search, which would allow people to search the text of books, but would only return the relevant paragraph, not the whole work
Again, it’s hard to imagine that searching for a phrase or an idea, and finding it contained in a book you didn’t know about, would make you less likely to buy that book; yet the publishers felt some instinctive need to oppose the idea
(Google Book Search is now mostly limited to books in the public domain, that is, works whose copyrights have expired or which are not protected by copyright for other reasons.)
A similar argument could be made about the well-publicized RIAA lawsuits against music downloaders
(There is little doubt that unlicensed copying of music does violate copyright; there is less clarity that treating potential customers as criminals is the best long-term strategy for the music and movie industries.)

12. 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?
(Commenting on the lengthening of copyright life, Cooter and Ulen comment that technology has made it easier to avoid paying copyright royalties, and that the lengthening of copyright therefore “allows creators a longer time to recoup their just royalties.”
I wince at the use of the word “just”
They seem to be implying that intellectual property protection is somehow the natural state of the world, or a moral imperative, that these rights are somehow inherent and deserved
People forget sometimes that the protection of intellectual property is artificial, a man-made legal creation
Copyright holders lobby for strengthening copyright law because that’s in their own financial interest, just like patentholders lobby for stronger patent protection because it’s in their interest
There may be many good reasons for an author to have certain exclusive rights to their own work, but these rights are a calculated invention, not a natural or moral entitlement.)
Separate from that, one could wonder whether the royalties received between, say, year 40 and year 70 after your own death really enter into one’s calculations when deciding how much time to invest in writing a book or a song
so if we see copyrights, like patents, as existing mainly to give an incentive for creation, it may be hard to argue there’s an added benefit in having them last this long

13. patents
copyrights
trademarks
trade secrets

14. 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
Probably less controversial than patents and copyrights are trademarks
This is protection for brand names, as well as distinctive commercial symbols such as McDonald’s golden arches and Nike’s swoosh
Trademark protection prevents competitors from putting the same mark on their products; thus, it helps establish who a product is made by, allowing consumers to rely on a firm’s or a product’s reputation for quality – which gives the company more of an incentive to produce high-quality goods
(Without trademarks, if I spend more to make a better product, someone else could build a cheap version and put my name on it. Customers wouldn’t know which one they’re getting, so they wouldn’t be willing to pay more. Which means I have no reason to invest in quality in the first place. With trademarks, this problem is eliminated.)
Unlike other forms of intellectual property, trademarks last forever, unless they are abandoned
Makes some sense – unlike patents and copyrights, there doesn’t seem to be the same tradeoff of long-term incentives versus short-term inefficiency.
Generic names cannot be trademarked – for example, nobody can trademark the word “camera”, and sue anyone else who advertises a product called a camera
Sometimes, this goes in the other direction: occasionally, a brand-name product is so successful that their name becomes synonymous with the product
“Kleenex,” “Xerox,” “Scotch tape,” and “Band-Aid” are all commonly used to refer to generic products
The name “Aspirin” was once the name of acetacylicilic acid sold by the Sterling Drug Company; in 1921, a federal court ruled that the name had become the common word for the drug, and other companies were allowed to start using the term “aspirin.”
(Bayer currently holds a trademark on the word “aspirin” in Mexico and Canada, where nobody else can sell a product with that name.)
The book also talks about a program by Coca-Cola, which employs 25 “investigators” who order Coke all over the place and analyze what they’re given, in an effort to ensure that people don’t start using the term to refer to any generic soda and destroy the trademark

15. 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”
From the article:
Some patrons drive from afar to eat at the restaurant and see the goats that have been going up on Al Johnson's roof since The restaurant 14 years ago trademarked the right to put goats on a roof to attract customers to a business. "The restaurant is one of the top-grossing in Wisconsin, and I'm sure the goats have helped," says Mr. Johnson, who manages the family-owned restaurant.
So when a tourist spot 750 miles away decided to deploy a rooftop-caprine population, Mr. Johnson made a federal case of it.
Last year, he discovered that Tiger Mountain Market in Rabun County, Ga., had been grazing goats on its grass roof since Putting goats on the roof wasn't illegal. The violation, Al Johnson's alleged in a lawsuit in the U.S. District Court for the Northern District of Georgia, was that Tiger Mountain used the animals to woo business.
The suit declared: "Notwithstanding Al Johnson's Restaurant's prior, continuous and extensive use of the Goats on the Roof Trade Dress"—a type of trademark—"defendant Tiger Mountain Market opened a grocery store and gift shop in buildings with grass on the roofs and allows goats to climb on the roofs of its buildings."
Al Johnson's "demanded that Defendant cease and desist such conduct, but Defendant has willfully continued to offer food services from buildings with goats on the roof," the suit continued.

16. Trademarks – another example
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.’”
The FX TV network launched two new stations – FXM, which is for movies, and FXX, which it describes as “more X!”
They’re being sued by ExxonMobil
Here’s the article I found on Friday 15
source: 15

17. Trademark dilution
In 1989, Toyota introduced the Lexus name (L-E-X-U-S)
They were sued by Lexis (L-E-X-I-S), a company that provides searches of legal sources (now Lexis-Nexis, which those of you who go to law school will get to know quite well)
The court ruled for the car company, saying they were not infringing.
The first time I taught this class, I stumbled on an article that for the second time in a year, Toyota was suing a porn star who’s adopted the stage name “Lexus”
Taken together, these seem to suggest that Toyota believes that:
you are unlikely to mistake a luxury car for an online legal search
but you might mistake a luxury car for gay porn
(The CEO of EBoys Studios claims the actor took the name “in honor of the Greek god Lexus”, which would be a better story if there had been a Greek god Lexus.)
Of course, Lexus isn’t really claiming that people will be confused about whether they’re getting a car or gay porn
Obviously, trademark law prohibits someone else from selling a soft drink called Coca-Cola
Less obviously, it also prohibits someone else from selling, say, a clothing line or a sandwich meat called Coca-Cola
The legal doctrine here is “dilution of the distinctive quality of a mark or trade name,” which can be claimed even in “the absence of competition between the parties or the absence of confusion as to the source of goods or services.”
That is, once you’ve established a brand name, people can’t use it in a way that hurts its image, even if it doesn’t create genuine confusion about whose products are whose.
The economic argument for trademark protection seemed pretty clear – reduce buyer uncertainty, increase seller incentives to maintain a reputation for quality
The argument against trademark dilution is a bit harder – seems more to be protecting vested interest
But I thought it was interesting

18. patents
copyrights
trademarks
trade secrets

19. Trade Secrets Protection against misappropriation
But plaintiff must show…
Valid trade secret
Acquired illegally
Reasonable steps taken to protect it
I mentioned that if you apply for a patent, the details of your invention become public
As a result, rather than using patents, some business simply refuse to disclose how they do things
This is a trade secret
A trade secret is any information "used in one's business" that gives its owner "an opportunity to obtain an advantage over competitors who do not know or use it."
For instance, the exact formula for Coca-Cola or for the Big Mac “special sauce” are supposedly closely-guarded trade secrets
In order to charge someone with misappropriating a trade secret, I have to show three things:
One, that it is a valid trade secret, that is, that it is commercially valuable, and that it was not already commonly known throughout the industry.
Two, that they acquired it illegally. Buying my product and reverse-engineering how I built it is not illegal. However, breaking into my lab and stealing my notes is.
Three, that I took reasonable steps to protect it.
Trade secrets behave like property – they can be transferred or sold
The protection does not expire, as long as the secret remains a secret
Trade secret protection is limited, however
Suppose my firm hires an engineer to work on a secret project, and I have him sign a non-disclosure agreement, agreeing not to disclose my secrets
After a while, he quits, and begins working for my competitor
If he reveals my secrets to them, I can sue him for breach of contract
But if my competitor did not know about the contract, I have no recourse against them, and now they have my secret.
(Nondisclosure agreements tend to be difficult to enforce. Particularly in Silicon Valley, where people change jobs very frequently, trade secret protection is not felt to be particularly effective.
Silicon Valley vs 128 Corridor, Kozmo/Urbanfetch)

20. patents
copyrights
trademarks
trade secrets

21. Discussion question
Should record labels sue music downloaders?

22. Establishing, verifying, and losing property rights

23. When should resources become privately owned?
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.
First possession and tied ownership are two different doctrines for how ownership rights are established
The next question is, when should unowned resources become owned?
Typically, when property is commonly owned and accessible to all, the rule of first possession holds
For example, everyone has common access to the ocean; so fish generally belong to whoever catches them
As a consequence, many fish and marine mammals have been overhunted, nearly to extinction
Similarly, we mentioned earlier, common hunting land is often overhunted, common pasture land overgrazed, and public forests overharvested.
How do we fix this problem?
Tied ownership is one solution. An example we’ll see on Wednesday:
In the Icelandic farming communities, summer grazing rights in the common pasture were tied to private land on which you would graze your cattle in the winter
Another solution is to privatize the resource, that is, to transition it from public to private ownership
The cost of privatization, of course, is that now owners must take steps to make the resource excludable, which may be costly
These costs are referred to as “boundary maintenance.”
In the case of pastureland, this may involve putting up fences to keep out other peoples’ cattle
The cost of continued public ownership, on the other hand, is congestion and overuse
Thus, 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

24. When should resources become privately owned?
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)
This can happen either because congestion becomes a greater cost, or because technology makes boundary maintenance cheaper
In the Demsetz example of Native American land rights, the cost of congestion became higher as the fur trade led to overhunting
On the other hand, the invention of barbed wire lowered the cost of boundary maintenance, and would be expected to have encouraged privatization of land rights in the American West.
Similarly, Friedman’s observation that we owe civilization to the dogs

25. How do you give up (or lose) property rights?
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
We already asked the question, how do you establish property rights over something?
Also worth asking is, how do you give up (or lose) property rights over something?
One way that this can occur is Adverse Possession
Suppose that you own a vacant plot of land next to my house, and decide to build yourself a house there
By mistake, you build it so that it intrudes into my land by a couple of feet
Now suppose that I don’t notice for a long time
15 years later, I decide to replant my garden, examine the property line, and realize you have trespassed on my property
Do I still have the right to force you off my property?
Or by being there for long enough, have you established a legal right to that bit of my land?
Adverse possession is so named because the trespasser’s possession of the land is adverse to the owner’s own interests
In such a case, if you occupy the property for a long enough time (specified by law), you gain legal rights to it; provided
the occupation is adverse to the owner’s interests
and the owner did not object or take legal action
That is, if an owner “sleeps on his rights” and allows you to trespass, he eventually gives up his ownership.

26. How do you give up (or lose) property rights?
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
Why does such a law make sense?
One benefit is that, over time, it clears up any uncertainty about ownership
For example, suppose you want to buy a house that was built in 1910 and sold in 1925, again in 1937, and again in 1963
When you research the title, there seems to be some confusion about whether the 1937 sale was legal
However, if the current tenant has lived there since 1963 without legal challenge, he has gained legal right to the land; and so you can buy it from him without worry
So by making rights unambiguous over time, these laws facilitate trade, making it easier for the property to be sold to whoever values it the most
So one defense of adverse possession is that it resolves uncertainty
Another defense is that it prevents valuable resources from being left idle for too long, by specifying a way for a more productive user to gain title to the resource.
Of course, adverse possession also has a cost – property owners must actively monitor their land against possible trespass
Now if you’re renovating your garden close to the property line, I have to keep an eye on you, to make sure you stay on your side of the boundary
If you cut into my land a little, I can’t say to myself, “I’m not using that bit of land now, so I’ll let it go, and complain later if I decide I want to use it.”
Thus, I incur monitoring costs, which are inefficient
So whether adverse possession laws are efficient depends on whether the costs – basically, these monitoring costs – are outweighed by the benefits

27. How do you give up (or lose) property rights?
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
One other way I can give up my property rights to something is to lose it
Suppose you’re walking down the street and find a diamond ring
Is it yours, or do you have to try to find the rightful owner?
The relevant legal area is estray statutes.
A typical estray rule specifies a procedure for a finder to establish ownership of lost or abandoned property
If the property is above a certain value, the finder may have to go to court and document where and how he found the object
The court may then place an ad in the newspaper
After a certain amount of time, if the owner has not claimed the property, it belongs to the finder
A finder who does not go through this process is subject to a fine.
Estray rules discourage theft, by eliminating one excuse a thief could give when caught with stolen property (“i found it”)
They also increase information spread about lost property, reducing the search costs of owners who lose things
To the extent that the original owner is likely to value the object most, this is likely efficient.

28. Limitations and Exceptions to Property Rights

29. Private Necessity
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
We said before that property rights are typically protected by injunctive relief
Using another owner’s property without permission is typically considered criminal trespass
When transaction costs are low, this leads to bargaining and through bargaining to efficient use of the property.
However, these restrictions are not absolute
We already noted there are “fair use” exceptions to copyright protection
even though a copyright is a form of ownership, there are ways in which I can use others’ property legally, such as for educational purposes or in satire
There are also exceptions in general property law
The Supreme Court of Vermont decision established one such exception, in the case of Ploof v Putnam, decided in 1908.
Ploof was sailing on Lake Champlain with his wife and two children when a storm came up very suddenly and they needed a safe harbor quickly
The nearest one was on an island owned by Putnam
Ploof tied his boat to a pier on the island to wait out the storm
But an employee of Putnam’s worried that the boat would bang against the pier and cause damage, so he untied the boat (with Ploof and his family still aboard) and pushed it away
Ploof sued, claiming that the eventual wreckage of his boat and injuries to his family were the fault of Putnam (through his employee)
Ploof claimed that the emergency justified his trespassing on the defendant’s property without permission; he asked for damages
Putnam answered that property owners have the right to exclude trespassers, and claimed that it was so obvious the case should not even go to trial
The Vermont Supreme Court agreed with Ploof, saying that private necessity was an exception to the general rule of trespass.

30. Private Necessity
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
Thus, in an emergency, one person can use another’s property without permission, and must only compensate the owner for the cost of use
So if Ploof’s boat had indeed damaged Putnam’s dock, Ploof would have had to pay to repair the dock, but would not be punished for trespassing.
Similarly, a lost hiker is allowed to break into a remote cabin for food and shelter, but must pay for the damage to the cabin and whatever food he took.
Other examples where private necessity justifies unauthorized use of another owner’s property
breaking into a pharmacy when someone is deathly ill and the owner cannot be found
using someone’s valuable vase as a weapon against a murderer.
This is also similar to the rule we saw in Demsetz as property rights over land were being established among Native Americans - you could kill an animal for food on someone else’s land if you were starving, but you could not keep its valuable fur.
This type of exception to the general rule of property law makes perfect sense, if we see property law as an attempt to encourage individuals to bargain over the most efficient use of property
Clearly, in an emergency, there is no time for bargaining
Or, transaction costs can be thought of as being prohibitively high
So a damages rule is more efficient than a property rule, since it ensures that the property will be put to its most efficient use.
(If Ploof had been able to find Putnam and had tried to bargain with him, Putnam would have found himself in a very strong bargaining position, and might have demanded an unreasonable amount of money
Ploof might have agreed to pay it, and then tried to get out of it after the fact
Once we get to contract law, we’ll discuss, among other things, the legality of contracts signed under situations like this.)

31. Private Necessity
Makes perfect sense as an exception when you think about transaction costs
With private goods like land…
“Normal times”: TC are low, so property rule typically efficient
“Emergency” is a time when TC are high, so damages rule efficient
(“When TC are high, structure the law to minimize harm due to failures of private bargaining”)

32. Unbundling 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…
Earlier in the course, we defined property as “a bundle of rights,” that is, a collection of rights that you have over the use of your property
In some instances, an owner may want to unbundle these rights
that is, separate them, so that he could sell some of them and hold onto others
In most instances, this is not allowed – an owner may be permitted to sell the bundle as a whole, but not in pieces.
One situation where it isn’t permitted: I can’t place permanent restrictions on how my heirs will use my property
so I can’t separate the right to live on my property from the right to turn it into a golf course
that is, I can’t pass on to future generations the right to own and live on the property, but keep for myself the right to determine how it’s used
Similarly, the owner of a vacant lot might be able to sell it whole, but zoning restrictions may prevent him from dividing it up into smaller pieces and selling them separately
However, in some instances, unbundling is permitted

33. Example of unbundling: Pennsylvania and coal
Land ownership consisted of three separable pieces (“estates”)
Surface estate
Support estate
Mineral estate
A great example of unbundling comes from Pennsylvania
Pennsylvania was largely built on coal
lots of land has coal under it
lots of money was made by mining this coal
In Pennsylvania, as of the late 1800s and early 1900s, land ownership consisted of three separable pieces, referred to as “estates”
the surface estate – the rights to use the surface of the land (build a house on it, grow corn on it, whatever)
the mineral estate – the rights to whatever coal lay underneath the surface
and most interestingly, the support estate – the rights to whichever parts of the underground structure are holding up the surface.
If I owned the surface and support estates, I could build a house on the land and live there
If you owned the mineral estate, you could mine coal from my land
So now suppose I build my house, you mine for coal, but the mine weakens the rock under my house and my hosue begins to sink
If I own both the surface and support estates, then you owe me damages
That is, by owning the support estate, I own the right to my house not falling in
On the other hand, if you owned both the mineral and support rights, you could mine the coal however you wanted
Since I own the surface, I can still build a house
But if the surface fell in as a result of your mining operation, I had no recourse, since I owned the surface but not the right to have it held up
In this case, the “support estate” wasn’t tangible property, and had no value on its own
But it made it completely clear who had the rights to do what with the property, and the three property estates could be bought and sold separately.
There’s an interesting case from the 1920s, Pennsylvania Coal vs Mahon, which is discussed on the textbook website – we’ll come back to that case later today, because it’s interesting for other reasons.

34. Unbundling 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
In general, neither the common law nor the civil law allow free unbundling and repackaging of property rights
The civil law tradition is the more restrictive of the two
In the civil law, the rights which come with property ownership are attached to the property itself, not to the owner
so they typically cannot be separated at all.
To illustrate unbundling, the book gives an example of two brothers, one of whom inherits a watch that’s a family heirloom
The other brother wants to be able to wear the watch at a family Christmas party every year
If unbundling of property rights were allowed, the brother could buy the “Christmas rights” to the watch, with the heir retaining all the other rights
Then if the heir sold the watch, he could only sell the non-Christmas rights to it, since he did not possess the Christmas rights, and the brother would have a legitimate claim against the new owner to wear the watch on Christmas.
If we were trying to design an efficient legal system, what would we say about unbundling?
Well, we generally want property rights to be as complete as possible, to eliminate “missing markets” and get to efficiency through Coase
(If the second brother values the “Christmas rights” more than the first brother, why shouldn’t he be allowed to buy them?)
If we allow unbundling, people will only choose to separate out individual property rights when that increases the total value of the property, which seems to suggest we should allow unbundling
The counterargument, though, is that allowing unbundling may increase transaction costs
More complete, complex property rights are always more expensive to administer
In addition, unbundling creates greater uncertainty
If I buy an apple, I know what I’m getting
But in a world with unbundled rights, I need to worry about whether I’m buying from the person who has the eating rights to the apple – the rights I want – and not just the “holding onto” rights, which are worthless to me
And once we unbundle rights, in order to sell the property, we may need to bundle them back together, which increases the number of people who have to be involved in future transactions
(Nobody may want to buy 364-day rights to the watch, so if the brother who inherited the watch wants to sell it later, the brother who bought the Christmas rights needs to be involved too)
If individual rights sold to lots of different owners, the transaction costs of rebundling might be overly high.

35. An example (sort of) of unbundling
Saw discussion of this on a Canadian law blog:
In Ontario, the Cemeteries Act prohibits the private resale of burial plots or crypts. When someone purchases a burial plot, they receive interment rights in perpetuity, not property rights. The property rights belong to the cemetery and if required, transfer to a third party requires the consent of the cemetery and the cemetery maintains the right to buy back the interment rights.   However,  in the United States many states do not have similar legislation and some suggest that the reselling of burial plots have increased in recent economic times
(source: )
source:

36. More on Remedies

37. Remedies (review)
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
We already saw the principle of maximum liberty:
I can do whatever I want with my property as long as that doesn’t interfere with anyone else’s property
When the use of my property does interfere with someone else’s use of theirs, we have an externality
In property law, harmful externalities are called nuisances.
When an externality is imposed on a small number of others, we say it’s a private externality, or in the language of public and private goods, a private bad
In these cases, transaction costs should generally be reasonably low, and the problem can be solved through negotiation.
(This might be the case with neighbors fighting over a tree that crosses the property line.)
In these cases, relief by injunction is generally attractive
the court does not need to go through the exercise of calculating damages
and the clear enumeration of property rights will hopefully encourage the neighbors to reach an efficient outcome by bargaining.
(We saw this with the example of the brewery whose smoke affected only one consumer – he and the brewery could agree to a Pareto-improving transaction to reduce pollution)
On the other hand, when an externality is imposed on a large number of people – as with a factory polluting air in an area of dense population – the transaction costs of private negotiation are often prohibitively high
This is a public externality, or public bad
In these cases, from an economic point of view, damages are ideal
Damages cause the factory to internalize the externality – that is, the cost to the neighbors becomes a private cost to the factory
But the factory can still choose to accept this cost and continue polluting when this is efficient
(With high transaction costs, an injunction would likely force the factory to stop polluting, which may not be efficient.)

38. Types of damages Compensatory Damages Can be…
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
Compensatory damages is the term for damages intended to “make the victim whole,” that is, to return the victim to being as well off as he or she was before the harm occurred
(We’ll come back to other types of damages later on, in contract and tort law)
Compensatory damages can be either temporary or permanent
Temporary damages compensate for harms that have already occurred.
Permanent damages compensate in addition for the present discounted value of harm that is expected to be done in the future
By paying temporary damages, a factory compensates the neighbors for whatever pollution has already occurred
By paying permanent damages, the factory is effectively pre-paying the neighbors for the right to pollute in the future

39. Temporary versus permanent damages
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
There are pros and cons to both types of damages
Temporary damages require the victim to keep returning to court if the harm continues, and require the court to keep calculating the amount of damages each time, so they impose a high transaction cost
However, under temporary damages, reductions in the harm itself lead to reductions in the damages owed, so the factory has an incentive to take steps to reduce pollution, or to pay the neighbors to take steps that reduce the harm on their end if this is more efficient.
On the other hand, permanent damages are a one-time, permanent fix, and therefore less costly to implement
But once permanent damages have been paid, the factory is not penalized for any additional harm they do (they’ve already paid for it); so there is no incentive to reduce the harm as technology makes this easier
In addition, since permanent damages are based on the expected discounted value of future harm, it depends both on future technology and future prices, which cannot be predicted with accuracy
So permanent damages suffer from higher error costs, that is, inefficiencies that are introduced when the amount of the compensation is incorrect.

40. Efficient nuisance remedies
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…
So Cooter and Ulen offer the following proscription for appropriate nuisance remedies:
if a nuisance affects a small number of people (private nuisance), award an injunction, and count on the parties involved to negotiate an efficient solution
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 (or costly) to measure and innovation occurs slowly, permanent damages are more efficient
However, this is not what is typically done in practice
With public nuisances, the remedy tends to be temporary damages (for harm already incurred) and an injunction against future harm
However, there’s an interesting case that shows the court becoming more receptive to damage remedies for public nuisances, in spite of all the precedent in favor on injunctions.

41. Boomer v Atlantic Cement Co (NY Ct of Appeals, 1970)
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”
However, there’s an interesting case that shows the court becoming more receptive to damage remedies for public nuisances, in spite of all the precedent in favor on injunctions.
The case is Boomer v Atlantic Cement Co, decided in 1970 by the NY Court of Appeals
Defendant owns large cement plant near Albany; along with cement, produces dirt, smoke and vibration
The neighbors sued, the plant was found to be a nuisance
They were awarded temporary damages, but denied an injunction against future harms
Plaintiffs appealed, requesting an injunction; appeals court ruling was very interesting
They agreed that yes, this was a valid nuisance
And yes, nuisances are generally remedied with injunctions
But in this case, the harm of forcing the plant to close so greatly outweighed the level of the damage being done that they refused to issue an injunction, and instead ordered permanent damages to be paid

42. Boomer v Atlantic Cement Co (NY Ct of Appeals, 1970)
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”
They pointed out that the two sides could settle the issue instead through voluntary negotiations, but that “the imminent threat of closing the plant would build up the pressure on defendant…”
They also pointed out that techniques to reduce dirt and vibration from the cement production process would be developed by the industry as a whole, not just by this one plant, and that these were therefore outside the defendant’s control and unlikely to occur within a short time
The court had estimated the total of permanent damages to all plaintiffs to be $185,000
And the company had invested $45,000,000 in the plant and it employed 300 people
So the court refused to issue the injunction.
(Technically, they issued an injunction that would automatically be vacated once permanent damages to the plaintiffs were paid.)
They also noted that the damages were paid as “a servitude to the land,” that is, the fact that damages had been paid attached itself to the land, not the individual plaintiffs
So if these plaintiffs, having already received permanent damages, sold their property, the new owners could not sue for damages
Instead, the ongoing nuisance caused by the cement company would simply be a feature of the land, and would presumably be figured into the price that they could sell it for.
Permanent damages typically compensate for “all reasonably anticipated future harms.”
Presumably, if Atlantic Cement in the future were to expand greatly, or adopt a much noisier or dustier process of production, these new harms would still be liable for damages; but the established level of harm had already been compensated.

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