Econ 522
Economics of Law
Dan Quint
Fall 2012
Lecture 8
Logistics
 Second homework due this Thursday
 First midterm next Wednesday (Oct 17)
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Intellectual Property
2
Intellectual Property
patents
copyrights
trademarks
trade secrets
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Patents: a bit of history
 First U.S. patent law passed in 1790
 Patents currently last 20 years from date of application
 For a patent application to be approved, invention must be:



novel (new)
non-obvious
have practical utility (basically, be commercializable)
 Patentholder whose patent has been infringed can sue for
both damages and an injunction against future violations
 Patents are property – can be sold or licensed to others
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Patent breadth
 Narrow patents might allow us each to patent own invention
 Broad patents might not

“Winner-take-all” race to be first
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Patent breadth
 Does a patent on the “pioneering invention” cover the
application as well?
 Can you patent an improvement to an existing product?
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Patent length
 Patent length




Need to last long enough for firms to recover up-front investment…
…But the longer patents last, the longer we have DWL from
monopoly
(Example from textbook: drug price drops from $15 to $1 per pill
when patent expires)
Tradeoff between ex-post inefficiency and ex-ante incentive provision
 U.S.: all patents last 20 years


Jeff Bezos (founder of Amazon) once suggested software patents
should last just 3 years
Germany: full-term patents for major inventions, 3 year “petty
patents” for minor ones, annual renewal fees
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Marginal Revolution (blog):
“Patent Policy on the Back of a Napkin”
“Patent Policy on the Back of a Napkin”
(Marginal Revolution)
Yesterday’s New York Times
 “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)
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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
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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
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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
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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
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patents
copyrights
trademarks
trade secrets
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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
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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
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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?
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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?
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patents
copyrights
trademarks
trade secrets
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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
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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 topgrossing 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”
http://online.wsj.com/article/SB10001424052748704285104575492650336813506.html
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Trademark dilution
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patents
copyrights
trademarks
trade secrets
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Trade Secrets
 Protection against misappropriation
 But plaintiff must show…



Valid trade secret
Acquired illegally
Reasonable steps taken to protect it
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patents
copyrights
trademarks
trade secrets
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How do you establish, verify,
or give up property rights?
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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.
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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)
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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
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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
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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
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Limitations and Exceptions to
Property Rights
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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 32
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 33
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…
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Example of unbundling: Pennsylvania and
coal
 Land ownership consisted of
three separable pieces
(“estates”)

Surface estate

Support estate

Mineral estate
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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
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An example (sort of) of unbundling
source: http://articles.nydailynews.com/2009-08-24/news/17934480_1_ebay-auction-crypt-marilyn-monroe
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Two other ways in which property rights are
limited
 The government can take your property

“Eminent domain”
 And the government can tell you what to do with it

Regulation
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Eminent Domain
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Takings
 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
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Takings
 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
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Takings
 Why allow takings?
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Takings
 Why allow takings?
 Why these limitations?

why require compensation?
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Takings
 Why allow takings?
 Why these limitations?

why require compensation?
$10 MM
$9 MM
$3 MM
$1 MM
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Takings
 Why allow takings?
 Why these limitations?


why require compensation?
why only for public use?
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Takings
 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
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Poletown Neighborhood Council v Detroit
 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)
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More recent case: Kelo v. City of New London
(2005 US Supreme Court)
 Posner (Economic Analysis of Law) describes:

…Pfizer had decided to build a large research facility next to a 90acre 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.”
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Recent example
of eminent domain
 Bruce Ratner owned the Nets from 2004-2011


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
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