1. Agenda for 9th Class Admin stuff Handouts Slides Restrictive Covenants
Lunch sign up
Negotiation Exercise
Nuisance (con’t)
Calabresi & Melamed
Easements

2. Assignment for Next Class
Review any questions we did not discuss in class today
Read Restrictive Covenants Handout
Questions to think about / writing assignments
Do you think the court reached the right decision in Neponsit as a matter of law and/or policy? What is the best argument for the contrary result? (WG1&2)
How would Neponsit be resolved if the Restatement (Third) were followed by New York in 1938 (WG3)
Do you think the court reached the right decision in Fong as a matter of law and/or policy? What is the best argument for the contrary result? (WG4 & 5)
How would Fong be resolved if the Restatement (Third) were followed by Hawaii in 2000?(WG3)

3. Negotiation Results Two treatments (experimental conditions)
Sher is law (shading passive solar house is not nuisance)
Ambiguity as to nuisance w.r.t. solar panels, light, and privacy
Prah is law (shading solar panels is nuisance)
Sher treatment
3 no settlement
2 settlement in which Holly pays Sally compensation for loss of light and privacy -- 38K average payment from Holly to Sally
1 settlement in which Holly pays Sally 55K for access to pool and Jacuzzi
So house built at back of lot 100% of time
Prah treatment
2 no settlement. Unclear whether house will be built at back of lot
2 settlements allowing house to be built at back of lot. 76K avg. payment
1 settlement in which Sally pays 80K and gets covenant that Holly will not block light
So house built at back of lot 40-80% of time
Some who settled mentioned covenants/easements.

4. Negotiation Analysis
If Sher is law (nuisance action not likely to succeed)
No settlement. No litigation, b/c Sally has no plausible case.
House is built at back of lot
Max Sally would pay (60K) is less than Min Holly would accept (85K)
Maybe settlement and/or litigation, b/c Sher dealt with blocking passive solar - not solar panels, blocking light to swimming pool, privacy
If Prah is law (nuisance action likely to succeed)
If remedy is damages
No settlement is plausible outcome
Max Holly willing to pay 40K = 25K (comp.) + 15K litigation costs
Min Sally willing to accept: 45K = 60K (comp) – 15k litig. costs
But settlement is also possible
Holly might be convinced that damages>25K, so offer >40K
Sally might accept less (e.g. 40K), b/c doesn’t want to litigate
If remedy is injunction settlement is possible
Max Holly willing to pay 100K = 85K + 15K; Min Sally WTA=45K
Remedy uncertain. Settlement possible between 40K & 100K
Even if settlement possible, negotiations might break down

5. Negotiation Results II
Sher treatment
3 no settlement. Consistent with predictions
2 settlements in which Holly pays Sally compensation for loss of light and privacy -- 38K average payment from Holly to Sally
Not consistent with simple prediction. Why would Holly pay?
Perhaps explicable if plausible nuisance action for light and privacy
1 settlement in which Holly pays Sally 55K for access to pool and Jacuzzi. Very creative
Prah treatment
2 no settlement. Unclear whether house will be built at back of lot
Consistent with prediction, b/c negotiations can break down
2 settlements allowing house to be built at back of lot. 76K avg. payment
Consistent with predictions
1 settlement in which Sally pays 80K and gets covenant that Holly will not block light. Why????
Consistent with Coase Theorem?
Sher is law. House built at back of lot 100% of time
Prah is law. house built at back of law 40-80% of time
Are transactions costs zero?

6. Calabresi & Melamed (1972) Coase analysis is too simple
Because must analyze not just who gets rights
But how rights are protected
Ancient lights example
Implicitly assumed property rule
No violation of rights only with consent
But could also analyze using liability rule
Violation of right requires only compensation
Analysis is largely an application of Coase Theorem

7. Property Rules & Liability Rules
If A has an entitlement protected by a property rule, then A can prevent B from violating it without A’s consent
E.g. A can get a court order forbidding B from violating the right, and if B violates it he goes to jail
Owner of land can usually get order forbidding or evicting trespasser
Owner of patent can usually get order forbidding future infringement
Liability rule
If A has an entitlement protected by a liability rule, then if B violates it, B must pay A compensation
usually determined by a court
Contracting party ordinarily only has right to compensation, not to court order requiring performance
“Entitlement” = “Right” = “Property”

8. Same Entitlement / Different Protection I
Real property
Usually protected by property rule
But liability rule protection in some circumstances
In emergencies
Individuals have a right to go on another’s land without permission and only to pay damages
E.g. ship in storm has right to dock without permission of owner, paying only fair rental value and damage to dock
“liability rule” protection
Under “eminent domain power”
Government can take property for public purposes, without consent, and only pay fair market value’
Liabilty Rule protection

9. Same Entitlement / Different Rules II
Intellectual property
Usually protected by property rule
Patent owner can get injunction against infringement
Can bar sale of infringing product
Sometimes protected by liability rule
Patent owner can only get damages
“reasonable royalty” remedy if infringer had innocently incorporated technology into its own product and removal would be extremely costly and disruptive
Ebay v Merck, US Supreme Court (2006)

10. How Choose Property or Liability Rule?
If transactions costs are low
Efficiency will result either way
Other considerations may be paramount
Distributional concerns, justice
If transactions costs are high
If court can determine efficient outcome
Give right to party that values it most
b/c can’t be sure that negotiation will reassign right
Doesn’t much matter if protected by property or liability rule
Compensation required by liability rule may be more just
If court cannot determine efficient outcome
Use liability rule
Internalizes costs of violation, leads to efficient action
Assign right to minimize collective action problems
Neighbors have right protect by liability rule. Neighbors can easily bring class action
Polluter has right protected liability rule. Hard to organize neighbors to pay

11. Last Question on Boomer
6. Suppose that, when Atlantic built its factory, the surrounding land was completely undeveloped. Over time, however, the nearby city grew and very expensive homes were built closer and closer to the factory. The value of these homes was dramatically reduced by the pollution, and the total diminution in property values far outweighed the factory’s profits. Would that change the legal analysis in Boomer? Does it change your view of the fair and just outcome? In analyzing possible legal or equitable solutions to the dispute, consider the four rules set out by Calabresi and Melamed and discussed in the last three pages of this handout.

12. Easements
Easement is right to use property of another for specific purpose
Rights of way (e.g. driveway)
Utilities (water, sewer, electricity)
Negative easements
View easements (not to block view)
Solar easement (not to block solar panels)
Conservation easements (to prevent development)
Lateral easement (not to remove support for house on neighboring property)
Creation
By grant or reservation in deed
By necessity
Right of way for landlocked parcel
By prescription
Actual, open & notorious, hostile & adverse, continuous & uninterrupted use for prescriptive period (usually same as statute of limitations for adverse possession)
Easement appurtenant
Runs with land. Binds/benefits later holders of property
Easement in gross does not run with land. Disfavored. Must be clear.

13. Thomas
Martha Thomas subdivided land and conveyed landlocked parcel to Arthur Primus
Thomas and Primus agreed that access would be through passway across Thomas’s land
Defendant took possession from Arthur Primus (by inheritance?)
Plaintiffs took possession from Martha Thomas (by inheritance?)
Plaintiffs wanted to sell, but deal fell through because of passway
Plaintiffs brought quiet title action
To prove that no easement
Court of appeals
Defendants had easement by necessity
Even though
Arthur Primus could have purchased access through another property
No evidence of intent to create easement

14. Questions on Thomas
Do you think the court reached the right decision in Thomas? What is the best argument for the contrary result?
How would the Coase Theorem apply to Thomas? What is the efficient result? Would/could the parties have bargained to it even if the court had ruled there was no easement? If the parties could/would have bargained to the efficient solution, why does it matter which way the court ruled?

15. Felgenhauer 1971 Felgenhauers purchased lot
In Felgenhauers operated restaurant
Deliveries made through back over lot owned by bank
1982. Felgenhauers reopened restaurant
Deliveries through back lot resumed
1984. Restaurant leased to Enloes (who sold to others)
Deliveries through back lot continued, even though Enloes did not think had right to do so
1988. Bank constructs fence with gate for Enloes’ access
1998. Sonis purchased bank property
1999. Sonis told Felgenauer tenant that planned to cut off acces
Felgenauer sues to quiet title
Court holds that Felgenauer had acquired easement by prescription
Even though Enloes never claimed right to use bank property
“claim of right” means “without permission” e.g. without license or lease (same as “hostile”)
Construction of gate in 1988 does not show permission
B/c after prescriptive period

16. Felgenhauer
Do you think the court reached the right decision in Felgenhauer? What is the best argument for the contrary result?
How would the Coase Theorem apply to Felgenhauer? What is the efficient result? Would/could the parties have bargained to it even if the court had ruled there was no easement? If the parties could/would have bargained to the efficient solution, why does it matter which way the court ruled?