WEB NOTES
Sixth Edition
The following are the web notes for the sixth edition of Law and Economics by Robert D.
Cooter and Thomas S. Ulen. Our intent in these notes is to extend the material in the text by describing some additional issues, articles, cases, and books. Because the fields of law, economics,
and law and economics are not standing still – because, that is, scholars are adding interesting
new material all the time, we may supplement, alter, and add to these notes from time to time.
Each note begins with a copy of the material from the text about the content of the web note
and the page on which that web note can be found. We will from time to time insert new material, update some of the entries, and add some additional material. You should be able to download pdf versions of each chapter’s web notes and of the entire set of web notes for all 13 chapters.
We have found that the very best students and their instructors from all over the world pay
close attention to these web notes. They often have good ideas about how to add to the entries
already here and suggestions about articles, cases, books, and topics that would be instructive to
add. We would be grateful for any comments or suggestions about any of the notes.
Chapter 5
Web Note 5.1 (p. 116)
We discuss the burgeoning law-and-economics literature on trade secrets on our website.
Trade secret rights are based on common law tort and the rights and obligations established
under contract law. Trade secrets are generally defined and governed by state common law, and
state regulation of trade secrets is not preempted by any federal law.1
The fundamental right of a trade secret owner is the right to restrict access to, and use and
disclosure of a trade secret. This is also essentially an obligation, since maintenance of secrecy or
confidentiality is a prerequisite to trade secret protection. The Restatement of Torts defines Trade
Secret as follows:
“[a] trade secret may consist of any formula, pattern, device or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an
advantage over competitors who do not know or use it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving materials, a pattern for
a machine or other device, or a list of customers.”2
Furthermore, the restatement requires that a substantial element of secrecy will exist, so that,
except by the use of improper means, there would be difficulty in acquiring the information.
1
2
See Kewanee Oil Co. v. Bicron Corp., 416, 470, 475 (1974).
American Law Institute, Restatement of Torts §757, comment b (1939). Restatement (Second) of Torts (1979)
declined to address trade secrets, however, the definition supplied by the first Restatement of Torts retains vitality.
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In an economic sense, an important issue in evaluating the potential of a firm is its competitive position in respect to other firm at the same market. One way a firm can protect its position
in the market is by developing brand-equity and manufacturing tools that other competitors could
not duplicate.
Trade secrecy is quite different from other forms of intellectual property protection. First,
trade secrecy provides stronger protection than patents. The span of trade secret protection is indefinite and is not limited to a set term as other forms of protection. While the registration of a
patent is a must, the trade secret cannot be discovered and hence cannot be registered. Second, In
contrast to other forms of intellectual property protection, trade secrets are only protected against
misappropriation. Thus, when the trade secret is discovered by a competitor independently or
through the disassembly of a product that contains the trade secret in order to discover how it
works, the trade secret owner does not have a ground to sue. Finally, while the other forms of
intellectual property protection are governed by federal law, trade secrets are protected by state
laws.3
Firms may choose to employ trade secrecy because it is more cost effective than patent protection (e.g., there is no disclosure of information to rivals), and because the expected duration of
trade secret protection may exceed the fixed length of a patent grant.
Sometimes a firm will choose not to patent an intermediate discovery, lest the information
disclosed allow its rival to make the ultimate innovation. The less established a firm is the more
likely is for it to employ trade secrecy because the costs of patenting are too large.
This Web Note will deal, through the following articles, with the different aspects of the law
and the economics of trade secrets.4
David D. Friedman, William M. Landes, and Richard A. Posner, “Some Economics of Trade Secret Law,” 5 J. Econ. Persp. 61-72 (1991).
In this Article, the authors sketch an approach to the economics of trade secret law that connects it more closely both to other areas of intellectual property and to broader issues in the economic theory of the common law.
A trade secret is an item of information, commonly a customer list, business plan, or manufacturing process that has commercial value and that the firm possessing the information wants
to conceal from its competitors in order to prevent them from duplicating it. A trade secret is not
property in the sense it bears in the law of real and personal property or in areas of intellectual
property law (for example, copyright), because it is not something that the possessor has the exclusive right to use or enjoy. If through accident the secret leaks out, or if a competitor unmasks
it by reverse engineering, the law gives no remedy. The law does give a remedy if the secret is
lost through a breach of contract, (for example, by a former employee who had promised not to
disclose what he learned on the job), however, the violation is not of a property right to the secret
but of a common law right defined without regard to trade secrets or to information in general.
Hence there is in a sense no law of trade secrets and violations of a trade secret are treated with
3
Josh Lerner, Introduction to the Economics of Trade Secrets, Harvard Business School, available at
http://www.people.hbs.edu/jlerner/TSintro.html.
4
Further discussion on the Law and Economics of Trade Secrets can be found in, Edmund W. Kitch, The Law and
Economics of Rights in Valuable Information, 9 J. of Legal Stud., 683-723 (1980); Steven N.S. Cheung, Property
Rights in Trade Secrets, 20 Econ. Inquiry, 40-53 (1982); Andrea Fosfuri & Thomas Ronde, High-Tech Clusters,
Technology Spillovers, and Trade Secret Laws, Discussion Papers Centre for Industrial Economics, Institute of Economics, University of Copenhagen, available at: http://www.econ.ku.dk/CIE/.
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other legal means, for example, breach of contract, or other conventional common law principles.
The common law of trade secrets raises three principal questions: (i) why the law does not
protect trade secrets as such, or, why it does not protect against the loss of trade secrets by accident or by reverse engineering; (ii) why anyone would choose not to patent his trade secret; and
(iii) why the law permits the election. The conclusion that emerges from the authors’ attempt to
answer these questions is that the common law approach to trade secrets appears to make good
(or even subtle) economic sense.
Regarding the second and third questions, the authors hold that Judges and lawyers’ view
that because trade secret law provides less protection to the inventor than patent law does, no rational person with a patentable invention would fail to seek a patent and therefore trade secret
law must protect a class of lesser inventions, is incorrect. The authors then demonstrate their
view by considering three cases. In the first, the inventor has a patentable invention that he believes will take as long or almost as long as the term of a patent for anyone else to invent, but the
invention has only modest economic value. In the second case, the inventor again has a patentable invention, but in this case one that he believes will take much longer than the term of a patent
for anyone else to invent. In the third case the investor has a non-patentable invention but believes that reinventing it would take so long that he can obtain a substantial return by keeping the
invention secret.
In the first case, the inventor’s decision may seem an obvious one, since the patent will yield
greater protection; however, it will probably do so at greater cost, which may not pay if as assumed the invention is not of great value. Obtaining patent protection involves significant fixed
costs of preparing the patent application; in contrast, protecting a trade secret avoids these costs,
but adds other expenditures to protect the secret from being disclosed. The latter cost should be
roughly proportional to the value of the secret to prospective appropriators, and hence should be
low when the secret is of modest value. In that situation, trade secret protection may well be
cheaper than patent protection, and the difference may exceed the benefits of a broader and longer lasting protection, embodied in a patent protection. Furthermore, the cost of obtaining a patent
must be incurred in every case, whereas the cost of establishing trade secret protection is incurred only if the secret turns out to be valuable enough to incite someone to try to steal it.
In the second case, the inventor’s choice is between patenting the invention and gaining
stronger protection and protecting it with a trade secret. The investor will choose protecting the
invention by a trade secret if he thinks that doing so will give him a greater return. The law of
trade secrets assists him in this demonstration by increasing the chance that if someone does duplicate the invention, he will do so by inventing rather than by stealing it.
The third case is analytically similar to the second. The case assumes that the government
thinks the invention obvious (i.e. that someone else will come up with it shortly), and therefore
that granting the inventor a patent would over-reward him and hence the invention is nonpatentable. The inventor offers to demonstrate the contrary, by keeping the invention secret. If he
is wrong and someone else invents the same thing the next year, this proves the government
right; so it is as if the inventor had been denied a patent and the patent laws were exclusive. But
if the inventor is right and there is no duplication, then he gets the approximate reward he would
have gotten if the invention were patentable, for he has shown that the government was mistaken. This third case merely reflects the fact that patent law cannot be tailored finely enough to
cover every case. To summarize, trade secret law supplements the patent system. Inventors
choose trade secret protection when they believe that patent protection is too costly relative to
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the value of their invention, or that it will give them a reward substantially less than the benefit
of their invention, either because the invention is not patentable or because the length of patent
protection is insufficient.
The authors’ analysis of trade secret law is congruent with the basic economic explanation
for patent protection – that it provides a means of internalizing the benefits of innovation. But it
may appear to clash with the complementary explanation which views a patent primarily as a
device for establishing property rights over regions of partially unexplored inventions.
This discussion in this article raises the broader question whether trade secrets should be
treated as property and comprehensively protected. The current structure of trade secret law may
be the best compromise among the competing economic considerations. No stronger conclusion
is possible. Yet, the analysis in this article does suggest that the law of trade secrets may have
surprising efficiency properties that would reward further research in this neglected but important field of common law.
Stanley M. Besen & Leo J. Raskind, “An Introduction to the Law and Economics of Intellectual
Property,” 5 J. Econ. Persp, 3-27.
In this article the authors discuss the law and economics of different intellectual properties.
For the purpose of this Web Note, we will deal only with the part of the article on trade secrets.
The authors describe the trade secret law as a law that covers specific business information
transmitted by persons, firms, and markets. A trade secret has been described as any formula,
pattern, device or compilation of information which is used in one’s business, and which gives
him an opportunity to obtain an advantage over competitors who do not know or use it. Additionally, the Uniform Trade Secret Act5 defines a trade secret as “information including a formula, pattern, compilation, program, device, method technique, or process, that: (i) derives independent economic value, actual or potential, from not being generally known to, and not being
readily ascertainable by proper means by, other persons who can obtain value from its disclosure
or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its
secrecy.”
The authors discuss the three respects in which trade secret law is different from patent law.
First, trade secret law is a state law, therefore – except for the uniformity prevailing in the 16
states that have enacted the Uniform Trade Secret Act – the scope of protection varies among the
states. According to the authors, a few states rest trade secret protection on a property theory,
while the majority of states invoke doctrines of tort, contracts, constructive trust, or unjust enrichment as a basis of trade secret protection. In addition, 25 states have made it a crime to steal
a trade secret. The Second aspect of difference between trade secret law and patent law is that
trade secret law is outside the disclosure framework of patent and copyright laws.
While protection is granted to a patent and copyright owner in return for the disclosure of the
subject matter to the public, trade secrets are not disclosed. Trade secrets are protected against
discovery by “improper means,” but not against discovery of the trade secret by independent
means or by reverse engineering. The authors argue that the incentive to create trade secrets,
such as customer lists or chemical formulae, and to incur costs of protecting them, is derived
from their value. A third difference presented in the article between trade secret law and patent
law is the subject matter and duration of protection. The authors present the difference in the
subject matter, as: “while protection is granted only for subject matter that represents some crea5
Uniform Trade Secrets Act, drafted by the National Conference of Commissioners on Uniform State Laws.
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tive efforts under the copyright and patent regimes, trade secret protection rests solely on the
commercial value of the matter to the claimant. Thus, trade secret law includes a wider subject
matter.”
Regarding the duration of trade secret protection, the authors argue that it is limited only in
the case of independent discovery or by improper disclosure. The potential for perpetual protection offered by the trade secret provides an incentive to avoid the disclosure requirements of the
patent regime. Furthermore, there is also a potential in trade secret protection if the subject matter of an expired patent were to be given further protection as a trade secret.
Injunctive relief and damages are the remedies offered in the case of using “improper means”
of discovery by a competitor, or a breached of the confidential condition under which a trade secret was disclosed, by an employee. According to the Uniform Trade Secret Act, it is illegal both
to use “improper means” to discover the trade secret and to misappropriate improperly discovered material. Under Section 1(1-2) of the Uniform Trade Secret Act, “improper means” include
“theft, bribery, misrepresentation, breach or inducement of a breach of duty to maintain secrecy,
or espionage through electronic or other means” while misappropriation is defined (in part) as
“acquisition of a trade secret of another by a person who knows or has reason to know that the
trade secret was acquired by improper means.” Thus, the authors argue that the focus of trade
secret law is “fair dealing” between competitors and between employer and employee with regard to the uses of specific business information.
Furthermore, the authors argue that “since trade secret law is enmeshed both with the competitive process and the internal decisions of the firm, economic analysis of the properties and
consequences of trade secret protection would illuminate important public policy interests. Economic analysis might also illuminate the judicial task of applying trade secret protection.” In the
authors’ view, judges presently are too concerned with “dirty trick” aspects of competition.
The authors believe that “optimal administration of the trade secret laws requires more emphasis on the private and social costs and benefits of trade secret protection, and on economic
efficiency, and correspondingly less concern with norms of fair commercial conduct.”
J. Zabojnik, “A Theory of Trade Secrets in Firms,” 43 Int’l Econ. Rev., 831 (2002).
The article provides a theoretical model of trade secrets in hierarchical firms. The author uses
an assumption that each manager has access to trade secrets pertaining to his own hierarchical
level as well as to all lower levels. The article offers some implications of this assumption for
optimal degree of trade secrets accumulation and protection as well as for the wage structure in
firms. The suggested model, developed by the author, implies that managers may have an incentive to overpay their subordinates and protect their firms’ trade secrets too much.
Many times when a firm wants to learn about the trade secrets if its competitor, the firm can
hire a former officer of the competitor who has the knowledge. An employee who has the
knowledge of the trade secret is usually a target for irresistible offers from the firm’s competitors.
Trade secret may include knowledge of the firm’s suppliers, prices, conditions of delivery,
etc., as well as the organizational capital of the firm (i.e., the organizational improvement the
firm performs in each hierarchical level). Additionally, trade secret may include the firm’s incentive system for management, the firm’s strategy for gaining a new market, or the firm’s R&D
plans.
Although the law is attempting to provide adequate protection for trade secrets, sometimes
the only way to protect a trade secret is to restrict a former employee from working for a compet5
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itor. Although this restriction of a former employee was used in the past as a protection for the
trade secret (under the ‘‘inevitable disclosure’’ doctrine), in some states (e.g., California), state
court judges tend to object such measures because they restrict employee mobility. Furthermore,
some states statues also address the issue of restricting employee mobility. For example, the California Business & Professions Code provides a protection for the employee from such restrictions, by stating that “every contract by which anyone is restrained from engaging in a lawful profession, trade, or business of any kind is to that extent void.” Hence, although the law provides some protection, it is not able to fully prevent loss of valuable trade secrets.
In order for a firm to prevent a leak of a trade secret to its competitors, it must pay high
enough wages to all managers who have access to the trade secret, in order to convince them not
to defect to the competitors. Another thing the firm might consider is to restrict the knowledge
each employee has regarding the trade secret.
The article provides a theory of trade secrets in hierarchical firms and builds a model that
yields a number of theoretical and empirical implications, such as the predictions that both capital rationing and managerial turnover should be observed more frequently at lower or middle
managerial levels or that turnover in R&D-intensive firms should involve more senior managers.
The model presented in the article yields interesting results regarding the incentives of managers
to choose the optimal (from the firm’s point of view) level of trade secrets accumulation and protection. “In the absence of contingent contracts, managers will almost never accumulate the level
of trade secrets that the firm considers as optimal. Some (or all) managers will accumulate too
much and some (or all) too little. Managers have a tendency to protect their firms’ trade secrets
too much and overpay their subordinates. This increase the subordinates’ own value to competition and drives their wages up.”
In summary, due to the restrictions preventing firms from contraction with their employees to
prevent the future employment of the employee at the firm’s competitors, and as a result of the
inability of the law to fully protect trade secrets; firms face a situation where their trade secrets
are at stake. One of the ways to protect the trade secrets under these circumstances is to make
sure that every employee obtains only an “optimal” amount of knowledge regarding the trade
secret. Additionally, firms can increase the salaries of their employees in order to create an incentive for the employees to stay with the firm and not to defect to the competitors.
T. Ronde, “Trade Secrets and Information Sharing,” 10 J. Econ. & Mgmt. Strategy, 391-417
(2001).
The main idea of the article is described by the author, as follows: “If trade secrets are weakly protected by law, firms risk losing their valuable information when employees are hired by
competitors. It may therefore be optimal to limit the number of employees who share the trade
secrets even if it reduces the firm’s productive efficiency. The benefits of limited information
sharing are greatest if the efficiency cost is low and the competition in the market is neither very
tough nor very weak. It is shown that it is more profitable to reduce the information sharing by
giving the employees different information than by giving some employees more information
than others.”
The importance of secrecy for firms is due to their wish to protect their valuable information.
Sometimes firms use trade secret in order to provide protection to their valuable information.
There are some types of information that, although have significant economic value to the firm,
cannot be patented (e.g., customer lists, market data, and efficient work procedures and routines).
In those cases, secrecy is the only way to protect the valuable information.
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Although the best way to keep a secret is not to tell it to anybody, this is not possible with
trade secrets. Usually, the firm has to disclose, to at least few employees, the trade secrets in order for them to use it in their day-to-day work. Furthermore, in order to obtain the current input
or advice from the firm’s suppliers or consultants, the firm has to allow them also to learn the
secret information.
In principle, the law of trade secrets prohibits anyone who has the secret information to reveal it to outsiders. However, firms are facing an obstacle of proving that a trade secret exists,
when alleging a misappropriation of a trade secret. Proving the existence of a trade secret is often
difficult, because the information constituting a trade secret is unknown to the public. The firm’s
position is particularly weak in cases concerning employees defecting to competitors. Because
courts are concerned about employees’ freedom to seek new job opportunities, they are reluctant
to prevent an employee from working for a competitor by granting injunctive relief or enforcing
a very restrictive noncompete covenant.
As a result, a basic rule regarding trade secret protection is to restrict the amount of
knowledge each employee accumulates. The firm might find it efficient to provide all the employees with all the information about the functioning of the firm. However, when the employees
share the firm’s valuable information they are a target for competitors who will try to seduce
them to defect.
The author provides the following model (regarding the protection of the trade secret through
the restriction on the information the firm will share with each employee): a firm hires two employees and has to decide how to organize the production. The firm can choose to let the employees work together on all the tasks in production (in that case, the employees share the information about the full production process), or can choose to divide the tasks between the employees (the employees then work separately and are given only the information necessary to perform
their particular tasks). The more efficient way is to let the employees work together. However,
the employees receive lower outside offers if they work separately, as they share fewer of the
firm’s trade secrets and that makes it cheaper to protect the firm’s valuable information.
The model shows that if the efficiency cost is the same, it is a less profitable to protect the
trade secret by providing some employees more information than others instead of giving the
employees different information, as is done when they are assigned separate tasks.
This article shows how firms might optimally limit the employees’ access to trade secrets in
order to reduce the outside offers that they receive. The idea of giving some employees more information than others can be interpreted as a theory of hierarchies. The employees who are informed about the firm’s trade secrets are then in the upper tier of the hierarchy, and the uninformed employees are in the lower tier. The employees in the upper tier take the decisions and
instruct the employees in the lower tier. The model can therefore explain why hierarchies may
exist even if they reduce the internal efficiency of the firm. This provides an interesting contrast
to most existing theories that explain why hierarchies increase the efficiency of the firm.
Web Note 5.2 (p. 119)
See our website for more on recent developments in patent laws in the United States and
other nations, including speculation on the causes of the tremendous upsurge in the number of patents in the 1990s and early 2000s.
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There has been a great deal of recent scholarship about different aspects of patent law – far
too much to summarize in a relatively short note. But the following articles give a flavor of
some of this literature, focusing on developments in the pharmaceutical laws in the United States
and in China and Japan. We also recommend that you look for the academic literature on the
Orphan Drug Act, which is one of the few attempts to tailor patent law to the needs of a particular industry (the pharmaceutical industry) in which innovation is particularly important.
The second part of this web note deals with the incredible upsurge in the number of patents
issued in the 1990s and early 2000s.
James C. Pistorino, Recent Developments in Patent Law, 6 Tex. Intell. Prop. L.J. 355 (1998).
Jones v. Cooper Industries Inc.
Contracts assigning or licensing patents are construed according to the usual and established
principles of contract law in the forum state, and the fact that the object of the contract is a patent
should present no special considerations.
This decision suggests that the patentee's interest in ensuring payment of royalties or possession of the patent could be protected by licensing the patent rather than assigning it. The effect of
a license transferring substantially all the attributes of title, but attempting to retain title to ensure
payment of royalties, is uncertain at best.
In this case, the reversionary interest clause should have been enforceable because there was
no improper subdivision or condition to the practice of the monopoly rights. The reversionary
interest clause only placed a condition on retention of ownership of the monopoly rights. While
clearly flawed, this decision serves as an important reminder that the interaction of patent law
and judicial interpretation of state contract law can surprise even the most careful practitioner.
Ethicon Inc. v. United States Surgical Corp.
In this case, the court reaffirmed the rule that a joint inventor/owner of a patent has the power
to unilaterally license the patent without accounting to the other inventor/owner. However, the
court clarified the relationship between joint inventorship claims and sole inventorship claims
contained in the same patent. The decision illustrates the need for firm agreements whenever
there is even the prospect of a joint invention and the important effects of a joint inventorship
finding.
While the interaction between joint inventorship and joint ownership continues to present difficult questions in the litigation context, a firm lesson from this court decision is the importance
of memorializing in contract the terms of a joint inventorship whenever the possibility of joint
inventorship exists. As a practical matter, once conception of the invention is complete, it may
prove impossible to secure an agreement that allows for effective licensing and management of
the patent rights. The case illustrates the devastating impact that the failure to secure agreement
from a joint inventor can have.
Gentry Gallery Inc. v. Berkline Corp.
In this case, the perils of listing the objects of an invention were made clear when the court
used a stated object of the invention to determine that the claims were invalid for failing to comply with the written description requirement. This decision illustrates the importance of careful
consideration of each aspect of the specification of a patent application, including the practice of
listing the so-called "objects of the invention."
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In order to comply with the requirement of a written description, the patent specification
must convey to those skilled in the art that the applicant invented the subject matter later
claimed. All the claimed limitations of the invention must be described in order to comply with
the written description requirement. Applying this standard, the court found that claims directed
to sofas having recliner controls other than on the console were invalid. The court looked to the
specification for any description of recliner controls on some place other than the console and
found none.
However, the court also considered the statement that an object of the invention was to provide a console that accommodates the controls for both the recliners. In the court's view, this
statement indicated that housing the controls was the very purpose of the console. Thus, recliner
controls located on any place other than the console did not accord with the object or purpose of
the invention. The court read the stated object of the invention as further evidence that the written description requirement was not satisfied as to claims directed to sofas incorporating controls
not located on the console.
The court's consideration of the "purpose" of the invention and its limiting effect in this case
should cause practitioners to further avoid the already suspect practice of listing "objects of the
invention" in the specification. While there is no statutory or regulatory requirement that the
specification include "objects of the invention," a listing of the "objects of the invention" has
been common practice in the past. In recent years, however, that practice has been largely discontinued because of concerns that defendants would seize upon this language either as a written
description defense or for claim construction purposes.
In re Zurko
The issue in this case is the standard of review to apply to Patent and Trademark Office
(PTO) fact findings. The long-standing practice of the Federal Circuit and its predecessor court
has been to apply the same standard of review used for district court fact findings - namely, the
clearly erroneous standard. The Zurko case could have an important effect on patent prosecution
by making challenges to PTO findings even more difficult.
Minh-Hien Nguyen, Recent Developments in Patent Law, 224 Texas Intellectual Property Law
Journal [Vol. 6:2].
Pfaff v. Wells Electronics Inc.
In this case, the court considered all of the circumstances surrounding a sale or offers to sell a
patent, including the stage of development of the invention, the nature of the invention, and the
manner in which the invention was sold. A commercially satisfactory stage of development for
the invention was not a requirement. The court had no difficulty in holding that neither a reduction to practice nor a physical embodiment of the invention is a prerequisite to the application of
the on-sale bar. Instead, the court emphasized that the only step not fully performed at the time
of sale was the invention’s customized tooling for production, but this step was routine in light of
the nature of the invention. Because the invention was substantially complete at the time of the
sale such that there was reason to expect that it would work for its intended purpose upon completion, the court found that the invention was on sale within the meaning of the law.
Evans Cooling Systems Inc. v. General Motors Corp.
This case also involves an interpretation of the on-sale bar. The issue was whether the defendant misappropriated an idea from the plaintiff. The court held that there is not a single word
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in the statute which would tend to put an inventor, whose disclosures have been pirated, in any
different position from one who has permitted the use of his process. He is master of the situation
and by prompt action can protect himself fully and render the defense of prior public use impossible. According to the court, when there is a specific and definite offer for sale of a successfully
tested device embodying every element of a later patented invention before the critical date, as
evidenced by a completed contract for a sale that is clearly for commercial purposes, the analysis
ends. There is no basis in the language of the statute on which to carve an exception to the bar
for those instances in which a third party misappropriates the invention and later places the invention on sale or causes an innocent third party to place the invention on sale. Thus, activities of
third parties trigger the statutory bar even if those activities are instigated by the one who allegedly misappropriated the invention.
Todd E. Garabedian, Recent Developments in Intellectual Property Law: Avoiding Traps in the
Pursuit of University Research, Research Management Review, Volume 14, Number 1 (2004).
U.S. patent laws have undergone many changes in recent years, both through Congress and
the courts. The patent law makes no distinctions between academic research and research done
for commercialization and profit. Therefore, those involved in research administration at not-forprofit organizations, colleges, or universities must not assume that they will be treated differently
or that certain provisions of the patent laws do or do not apply to them. Such assumptions can
have a severe impact on the ability to license the technologies developed at these institutions.
In 1980 Congress passed the Bayh-Dole Act, which for the first time permitted universities
and small businesses to own inventions made with federal funding and to become directly involved in the commercialization process of those inventions. The purpose of the new law was to
have the public benefit from the fruits of federally funded research through the transfer of new
technology from academia to the marketplace. After more than 20 years, it is readily apparent
that university technology transfer has helped to create new businesses and industries, and open
new markets.
Shortly after passage of Bayh-Dole, colleges and universities began to develop and strengthen their capabilities to effectively engage in the patenting and licensing of inventions. Although
university technology transfer offices today perform a wide variety of highly specialized functions related to the patenting and licensing of inventions, most utilize outside patent counsel to
develop and maintain patents that protect their intellectual property. Since enactment of BayhDole, and with the assistance of outside patent counsel, technology transfer offices at most colleges and universities have become quite sophisticated in playing the “patent game.”
The patent laws have undergone many changes and interpretations in recent years that add to
the already complex tasks of the technology transfer office, its staff, and those involved in research administration. This article summarizes several of the more important judicial decisions
and issues relating to intellectual property rights and what implications they have on university
research policies and procedures. While in no way a comprehensive study, the following analysis
can serve as a starting point for those involved in university research administration to enact or
change conventional procedures in view of the changing law.
New Railhead Mfg., LLC v. Vermeer Mfg. Co.:
The court held that New Railhead’s patent was in public use more than a year before patent
filing and therefore invalid. Although one issue in this case centers around “public use,” this case
is instructive for its discussion of the requirements of a provisional patent application. This case
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illustrates that a provisional application must fully disclose the invention claimed in any subsequent utility application in accordance with the written description requirement of the patent
laws, including a full description of how to make and use the invention, and the best way to practice the invention. To not do so can result in denial of any priority filing claim, or, as in this case,
invalidity of an issued patent.
University of West Virginia v. VanVoorhies:
The court held that a former graduate student must assign his patent rights to the University.
The court determined that one patent application must be assigned because an agreement executed by the graduate student covering an earlier patent required him to assign subsequent patent
applications. A second patent application must be assigned because the University’s patent policy statement requires assignment of all inventions made by graduate students. This case illustrates the importance of assignments and a comprehensive university patent policy. With respect
to assignments, in most cases it is desirable that the assignment broadly include language referring to all types of continuing applications (both foreign and domestic), such as divisional applications, continuation applications, renewal applications, reissue applications, and, as here, continuations-in-part.
Madey v. Duke University:
Universities can not infringe valid patents, claim the activities are protected under “experimental use,” and suffer no consequences. The court held that regardless of whether a particular
institution or entity is engaged in an endeavor for commercial gain, so long as the act is in furtherance of the alleged infringer’s legitimate business and is not solely for amusement, to satisfy
idle curiosity, or for strictly philosophical inquiry, the act does not qualify for the very narrow
and strictly limited experimental use defense. Moreover, the profit or non-profit status of the user
is not determinative. Previous case law had suggested the experimental use exception may exempt university researchers from patent infringement if the research had no commercial application. However, the court has now held that the real test is whether the research furthers legitimate
business objectives of the alleged infringer.
Integra Life Sciences v. Merck KgaA et al.:
The court found that early stage discovery research activities were not “solely for uses reasonably related to the development and submission of information under a Federal law” and thus
not protected by the safe harbor of the Patent law. In addition, holders of research tool patents
may now assert their patents against potential infringers, even if the infringing use is related to
drug development activities that may be used at some indeterminate time in the future for the development of data for regulatory approval.
William N. Hulsey III, Anthony E. Peterman, and Steven Sprinkle, Recent Developments in Patent Law, 4 Tex. Intell. Prop. L.J. 99 (1995)
This article provides an analysis of significant developments in patent law in the United
States. In the area of patent prosecution, the Court of Appeals for the Federal Circuit and the
U.S. Patent and Trademark Office (PTO) worked to solidify the law relating to patentable inventions. With both judicial decisions and new guidelines, the Federal Circuit and the PTO made
major advances in clarifying patentable subject matter, especially in the computer software and
biotechnology areas. Not only did the Federal Circuit work to remove uncertainty as to patentable subject matter, it also strove to resolve questions in the areas of best mode and inequitable
conduct. In dealing with the inequitable conduct question, the divided Federal Circuit panel high-
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lighted the tension that exists between the attorney's duty of disclosure to the Patent Office, on
the one hand, and the duty of maintaining the attorney-client privilege, on the other.
In the area of patent infringement litigation, the Federal Circuit attempted to eliminate uncertainty by issuing en banc decisions addressing claim interpretation, doctrine of equivalents, and
damages. Eliminating questions for jury review, thereby eliminating uncertainty, was apparently
on the agenda of the Federal Circuit. However, the U.S. Supreme Court reintroduced uncertainty
on the issue of the right to a jury trial concerning validity by vacating the Federal Circuit panel
opinion.
Recently, a milestone occurred in the harmonization of the U.S. patent laws with international intellectual property rights treaties and statutes, as the end of the General Agreement on Trade
and Tariffs (GATT) interim period drew to a close and the permanent GATT Trade Related Aspects of Intellectual Property Rights (TRIPS) provisions of U.S. patent law came into effect.
With numerous bills pending in Congress and a new report from a Presidential task force on intellectual property addressing the National Information Infrastructure, it is likely that additional
significant developments can be expected in the future.
John R. Allison and Lianlian Lin, The Evolution of Chinese Attitudes Toward Property Rights in
Invention and Discovery, 2 Patent Law of the People’s Republic of China (1992), reprinted in 2
China L. for Foreign Bus.
Modern China is as complex and imposing as ancient China was mysterious. With well over
one billion people, ample natural resources, a tradition of creative and inventive genius during
pre- and mid-dynastic periods, and an emerging market-based economy possessing the potential
to become one of the world’s largest economic engines in the twenty-first century, the longtortuous, but recently rapid evolution of China’s attitudes toward property rights in invention and
discovery commands attention. Encouraging technological research, development, and commercialization through effective government policies is a necessary, albeit insufficient, condition for
the advancement of China’s developing economy. Thus, the new Chinese patent system and its
practical implementation provide an illuminating partial portrait of attitudinal change.
Although knowledgeable observers have had their differences about whether the role of patents
in encouraging technological advancement and commercialization outweighs their arguably anticompetitive exclusionary effects, today’s consensus is that the benefits of an appropriately tailored patent system more than counterbalance its costs. The point is essentially moot except in
debates over how to fine-tune patent systems to seek a more nearly optimal balance of competing
public interests. From the perspective of a developing country such as China, it is an inescapable
fact that all developed nations have correspondingly well-developed patent systems, and that the
increasing interdependence of virtually all economies means that China must act likewise to be a
true participant in the global economy.
In the Chinese attitudes toward invention and discovery, one can see that a culture deeply
embedded with traditions completely antithetical to the patenting of inventions and to the granting of property rights in other forms of intellectual products has recently moved toward recognition of the necessity of a modern patent system.
Perhaps the most important aspect of the current movement toward true recognition and enforcement of patent rights is its emphasis on long-term goals, such as the construction of the educational, legal, and administrative infrastructures demanded for patent law to possess meaning
and substance. Moreover, Western nations should be sensitive to Chinese cultural and social
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conventions, and seek creative solutions to patent controversies rather than force solutions on the
Chinese that do not fit China’s cultural context. An effective system for protecting patents and
other intellectual property rights can exist in a sociopolitical context other than that of liberal
democratic societies, albeit in a somewhat different form. Assuming that China continues on its
current course, and with the proper cooperation from the West, China can successfully complete
its transition to a patent assisted system of technological advancement and corresponding economic growth.
Latest Developments of Patent System in Mainland China, by Ms. Wen Xikai, Deputy Director
General, Legal Affairs Department, State Intellectual Property Office of the People's Republic of
China, available at: http://www.sipo.gov.cn (2004).
The first Chinese Patent Law was published in 1984 and formally entered into enforcement
on April 1, 1985. The purpose of its formulation is to adapt to the government policy of promoting economy and opening-up. This law has absorbed the advantages of various patent systems
while taken into consideration of Chinese practices. It follows the basic rules of Paris Convention and creates a sound basis for establishing and promoting the development of Chinese patent
system.
In 1992, TRIPS agreement has reached its framework and been signed in draft. In order to
enhance our protection level and be harmonized with TRIPS, China made important revision to
its Patent Law. The revised patent law entered into force on January 1, 1993. This revision has
greatly enhanced the protection level and as a developing country China provides the complete
protection in the leading roll. Patentee has the right of importation and there is strict limitation on
granting compulsory license. The granted patent should have novelty, creativity, industrial applicability and the term of protection is 20 years. The terms of protection for utility model and
design are 10 years from the date of filing. Patent description should make full disclosure to the
technology solution and the burden of proof is on the defendant if an infringe case of process patent is filed against him.
In November 2001, China has formally acceded to WTO. At the same time, it also raised
new requirements for the development of domestic economy market and the harmonization of
Chinese law system to the international standard. For the purpose of further harmonizing with
basic rules of WTO and implementing the promises of Chinese government, Chinese Patent Law
made its second revision. It increases the intellectual property awareness especially patent protection awareness and creates a sound social environment for the generation and promotion of
inventions. In the aspect of effective enforcement, this revision has further strengthened the judicial and administrative channel for dealing with patent disputes. Besides that, it prescribes even
stricter sanctions on patent infringement, counterfeiting or passing-off. Activities infringing patent and composing of crimes will be subject to criminal sanctions. This helps to improve the judicial and administrative enforcement from various aspects and enhances the protection level.
Since the second revision of Chinese Patent Law, Chinese patent system has made great progress. According to the latest statistics of SIPO, within the first 9 months of the year 2003, the
patent office has received totally 219,002 patent applications, which is 45% increase comparing
with the same period of the previous year. It is estimated that the total patent applications in 2003
will reach 300,000. Since April 1, 1985, China spent 14 years and 9 months to reach its first one
million cases while the second million only cost a little bit more than 4 years. In 2002, the applications for patent invention was over 80,000, among which over 40,000 are foreign applications
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and 22,590 were via PCT. We can expect that in the near future, the examination capacity of the
office will be greatly enhanced and the quality will also keep improving. By the year 2010, the
annual examination and granting capacity of the office for 3 kinds of patents will be over 50,000,
among them the capacity for invention patent will be over 20,000. The substantive examination
period for invention patent will shrink into 18 months while 6 months for utility model and design.
Toshiko Takenaka, Patent Law and Policy Symposium: Re-Engineering Patent Law: The Challenge of New Technologies: Part III: International and Comparative Law Issues: Patent Infringement Damages in Japan and the United States: Will Increased Patent Infringement Damage
Awards Revive the Japanese Economy?, 2 Wash. U. J.L. & Pol'y 309 (2000)
Since the Japanese economy plunged into its current, deep recession, the Japanese government has been looking for measures to revive its economy. Reviewing United States legislation
in the 1980s and early 1990s, Japan's Ministry of International Trade and Industry (MITI) and its
agency, the Japanese Patent Office (JPO), were convinced that the pro-patent policy and other
legislation that encouraged technology transfer were the primary reasons for the United States'
recovery from its recession. To follow the United States example, the government organized the
Commission on Intellectual Property Rights in the Twenty-First Century. In its report, published
in April 1997, the Commission emphasized the need to strengthen intellectual property rights in
order to promote the development of breakthrough technologies.
Since then, MITI and the JPO have changed their intellectual property policies in order to
make them more IP owner-friendly. Japanese patent law traditionally gave more weight to public
interests, particularly competitors' rights to design around existing patents, than to patent owners'
interests. The Commission on Intellectual Property Right proposed to shift this traditional balance between the two competing interests toward more protection of patent owners' interests, and
wants patent law to give more incentives for developing pioneer inventions rather than improvements and manufacturing technologies. This new policy is not only in response to criticisms by United States patent owners, but if also reflects the needs of domestic industries facing
competition from Asia.
To increase incentives for innovation, the JPO emphasizes the need to give quick and strong
patent protection. To meet this need, the JPO reconsidered the time period allowed to request
examination and opposition or invalidation proceedings, and revised the patent statute to shorten
the time required for examining applications. With respect to the policy of giving strong patent
protection, the JPO organized a committee to review claim interpretation and encouraged debates
among patent professionals on the appropriateness of the scope of protection given by Japanese
courts. Responding to concerns expressed by patent professionals, recent decisions by lower
courts have broadly interpreted claims and adopted the doctrine of equivalents. The Japanese Supreme Court recently endorsed these lower court decisions.
After finishing its review of the patent-granting procedure and the liability phase of the patent enforcement procedure, the JPO entered the final stage of its review of the Japanese patent
system in light of its new pro-patent policy. This final stage was a review of patentees' remedies
for patent infringement and culminated, in late 1998, with a revision of the patent law provisions
relating to calculation of damages, and in 1999, with a revision of the patent enforcement proceeding. This legislation is intended to increase damages awarded by Japanese courts, which
have been criticized by United States patent owners for their much smaller damage awards than
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those awarded by United States courts. The JPO's attempt to increase damages was successful
because courts reacted very quickly and started to award larger damages more frequently. However, whether such increased damages attain the goal of providing incentive for research and innovation is questionable.
The JPO's call for changes in Japanese patent infringement damages was successful in triggering debate in the patent community and in drawing the courts' attention to the new direction
in patent policy. The revision of the patent statute signifies the new direction that the Japanese
courts are very likely to follow and create an overcompensation scheme to deter future infringement. To maintain the traditional role of damages under the Japanese tort system and to prevent
overcompensation, Japanese courts will need measures to reduce the infringer's burden to establish the amount that would not have sold even without infringement. However, such measurement will not be readily developed and may take some time, as they will be developed in the orderly course of case-by-case determinations.
Increased damages resulting from the overcompensation scheme may chill the competition
from unpatented products or discourage the actual exploitation of patented inventions. At the
same time, if the expectation of the JPO and MITI is correct, the increased damage awards will
contribute to the recovery of the Japanese economy. In any event, both the JPO and MITI have
taken all possible measures in the field of technology and industry policy, there is nothing we
can do at this moment other than to leave the result to chance.
The following articles offer some speculation on the causes of the tremendous upsurge in the
number of patents in the 1990s and early 2000s.
The total number of patents in 1989 was 102,712 while in the year 2000 the number was
182,223, and increase of 77.4%. (Source: United States Patent and Trademark Office, Performance and Accountability Report: Fiscal Year 2001). This increase has many explanations and
some of them are brought here.
Mark A. Lemley, Reconceiving Patents in the Age of Venture Capital, 4 J. Small & Emerging
Bus. L. 137
Patents are a growth industry. The U.S. Patent and Trademark Office (PTO) issued more than
150,000 patents in 1998, about twice as many as were issued in 1986. The rate of increase shows
no sign of slowing, and it is a radical break from the kind of gradual increase that had preceded
it.
What this means if you multiply it out is that more than two million patents are now in force
in the United States. If you do a little math and you know how much it actually costs to get a patent through the entire system, it's pretty easy to see that in the United States alone, the prosecution costs - what we're paying patent prosecutors and the PTO - exceed $5 billion a year, to say
nothing of the costs in the rest of the world, the costs of litigation, or any of the costs of licensing.
There are a number of reasons to question the classic incentive story. It may be that as we
move away from the model of patents that existed in 1790 - that is, of the individual innovator
working in the garage - toward large corporate entities, the link between innovation and patent
reward might be broken. Individuals who work for large corporations no longer see the particular
incentive or reward coming out of their particular innovation. The reward goes to a corporation
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and is a somewhat more diffuse incentive. Corporations get revenues from patents, but the revenues don't necessarily go to the departments or the individuals who engage in innovation, and
therefore the incentive effect is less.
Another objection to patents notes that big company's patent, but small companies innovate.
This is something that's true in some industries but not others. In particular, in the software industry, a number of people have argued that the companies that get patents are not the ones at the
forefront of technological innovation. Rather, the people at the forefront of technological innovation are the ones working in garages who doesn't know any patent lawyers and therefore doesn't
patent anything.
We've also seen the development of what I call "licensing shops," that is, significant corporate entities with little or no business purpose other than to accumulate and license patents. These
companies are not engaged in the business of building products. They might be engaged in the
business of thinking of ideas, but what they mostly seem to "produce" are patents and patent licenses.
Sheldon Krimsky, The Profit of Scientific Discovery and its Normative Implications, 75 Chi.Kent. L. Rev. 15 (1999).
Several pieces of legislation were enacted in 1980 to create more cooperation between industries and universities. The Stevenson-Wydler Technology Transfer Act of 1980 encouraged interaction and cooperation among government laboratories, universities, big industries and small
businesses. In the same year, Congress passed the Bayh-Dole Patent and Trademark Laws
Amendment, which gave intellectual property rights to research findings to institutions that had
received federal grants. Discoveries and inventions from public funds could be patented and licensed, initially to small businesses, with exclusive rights of royalties given to the grantee. The
Economic Recovery Tax Act of 1981 gave companies a twenty-five percent tax credit for sixtyfive percent of their direct funding to universities for basic research. In 1983, by executive order,
President Reagan extended the Bayh-Dole Act to all industry. To close the circle of research
partnerships among industry, universities and government, Congress passed the Federal Technology Transfer Act of 1986, which expanded science-industry collaboration to laboratories run
by the federal government. Governmental standards for keeping an arm's length from industry
were being turned on their head.
The new federal initiatives on technology transfer and academic-industry-government collaborations were responsible for a marked rise in university patents. In 1980, American university patents represented one percent of all U.S. origin patents. By 1990, the figure rose to 2.4%.
Within that decade, the number of applications for patents on NIH-supported inventions increased by nearly 300%.
David Hricik, Remedies of the Infringer: The Use by the Infringer of Implied and Common Law
Federal Rights, State Law Claims, and Contract to Shift Liability for Infringement of Patents,
Copyrights, and Trademarks, 28 Tex. Tech L. Rev. 1027 (1997)
The 1980s saw the law turn full force in favor of federal intellectual property rights, particularly patent rights, which had been long-ignored by Congress and disfavored by the courts. In a
remarkable about-face, the scope of subject matter protectable under patent law dramatically ex-
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panded in the 1980s, and the available defenses were narrowed. As a result, the number of applications for patents and trademarks are at all-time highs, and damage awards are at record levels.
Not surprisingly, this has led accused infringers to seek a reduction in their own liability by
spreading it, in whole or in part, to third parties through the use of actions for contribution and
indemnity against those parties who caused the infringement.
Specifically, in the early 1980s, several important judicial decisions broadened the subject
matter protectable under federal law, particularly under the patent laws. Similarly, Congress has
afforded broader protection to intellectual property. For example, in 1984 Congress broadened
the patent laws by making it unlawful to ship the unassembled parts of a patented invention to a
foreign country for final assembly. The patent laws were again expanded in 1988 to protect process patent rights by making the sale or use of a product made by a patented process an infringement of the process patent. Prior to 1988, a process patent holder only had the right to exclude others from practicing the process in the United States.
The increased scope of intellectual property rights and the greater judicial protection afforded
to them probably explains the exponential increase in the number of patent and trademark applications. The number of applications for plant patents increased from 147 in 1981 to 414 in 1991.
Patent applications increased dramatically during the 1980s and are now at record levels. Likewise, trademark applications nearly doubled between 1986 and1992. The ever-increasing scope
of intellectual property rights, the increased protection the courts give those rights, and the increasing amounts of damages underscore the need for parties to seek a reduction in the scope of
their own direct infringement liability, by looking for contribution or indemnity from those who
contributed to or induced the infringement-by contract when practical, and by third-party action
or cross-claim when necessary in litigation.
Web Note 5.3 (p. 128)
See our website for additional law-and-economics literature on patent issues.
This Webnote discusses the treatment of the vexing issue of pharmaceutical prices and the
Orphan Drug Act. The issue of patent protection raises a debate between developing countries
and patients who cannot afford the prices of drugs and, as a result, suffer from the spread of disease, and pharmaceuticals corporations that bear high costs in researching and developing drugs
and wish to have a return on their investment. This debate is the subject of international agreements and numerous literatures. The followings are excerpts and discussion of some of the literature on patent issues.
Peng Jiang, Fighting the Aids Epidemic: China's Options Under the WTO TRIPS Agreement,
Alb. L.J. Sci. & Tech. 223
The number of Chinese people infected with AIDS is estimated as one million. According to
experts, China could have 10 million people infected with HIV by 2010. Chinese patients are in a
desperate situation because the "AIDS cocktail" - the triple drug therapy credited for dramatically reducing AIDS-related death rates in developed countries that now use the cocktail as a standard treatment - still costs more than $ 10,000 a year in China, which is far beyond the budget of
virtually all AIDS patients in China.
On November 10, 2001, after fifteen years of difficult negotiations, China won formal approval to join the World Trade Organization ("WTO"). In return for a host of membership bene17
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fits, China will abide by the various WTO agreements, including the Agreement on TradeRelated Aspects of Intellectual Property Rights ("TRIPS"). Under the TRIPS Agreement, China
is required to provide strict patent protection to pharmaceuticals.
China's increasing AIDS infection rate and its entry into the WTO seem to pose a dilemma
for the country. On one hand, there will be an increasing demand for affordable AIDS medicines
among its growing AIDS population in the near future. On the other hand, it will have to comply
with the TRIPS Agreement and protect patents of AIDS medicines, most of which are held by
pharmaceutical companies in developed countries. The high prices of these patented drugs are a
major reason for their inaccessibility in developing countries.
The author explores China's options under the TRIPS Agreement in its effort to obtain affordable medication for its growing AIDS population. He holds that while the Chinese government's commitment to international trade agreements is commendable, when human lives are at
stake, the protection of intellectual property should not take precedence. The granting of compulsory licenses is legally permissible under the TRIPS Agreement, morally supported by the international public opinions, and practically effective in bringing down exorbitant pharmaceutical
prices.
Robert Weissman, A Long, Strange TRIPS: The Pharmaceutical Industry Drive to Harmonize
Global Intellectual Property Rules, and the Remaining WTO Legal Alternatives Available to
Third World Countries, 17 U. Pa. J. Int'l Econ. L. 1069 (1996)
One of the great ironies of the recent drive to global free trade is the inclusion of intellectual
property on the free trade bandwagon. By definition, protecting intellectual property is about restricting trade in certain goods. The pharmaceutical industry in the United States has played a
critical role in placing intellectual property protection on the free trade agenda.
Yet, intellectual property protection has become a central part of the free trade agenda, as
well as the major global trade agreements. This Article considers how this state of affairs came
about, and what it means for the Third World. Its crucial concern is the range of pharmaceutical
patent policy options that remain open to Third World nations.
The primary concerns of a rational drug policy for Third World nations should be disseminating useful drugs as widely and cheaply as possible and encouraging research and development of
products to address local illnesses. Within the realm of patent policy, the best means to achieve
the goal of providing drugs widely and cheaply is to promote generic production. The author believes that "compulsory licensing is the most feasible means to promote generics. Compulsory
licensing is a decentralized, anti-bureaucratic means to ensure the rapid development of generics
once the system is legislated into place or otherwise adopted."
The development of the domestic industry as an outgrowth of a compulsory licensing system
may aid in the creation of an indigenous research capacity and in promoting research on local
illnesses. Historical experience shows, however, that developing a domestic industry will not accomplish these goals by itself. To achieve these ends, Third World nations should look to the example of the biomedical infrastructure in the U.S., which is crucially dependent on government
funding. Collective action problems and other factors affecting corporate incentive, structure,
and organization preclude private industry by itself from accomplishing what government funding can (e.g. development of an indigenous capacity in basic and early-phase applied research
which creates break-through advances and spins off into commercial applications.) With very
few exceptions, however, Third World nations do not have available funds easily diverted into
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biomedical research programs in national universities or laboratories. There are, however, at
least two attractive options to generate these monies: (i) a percentage of royalty payments to patent licensors could go to a national biomedical fund; and (ii) a national tax could be placed on
all drug sales, or on all non-essential drug sales, with the resulting revenue also directed to the
national biomedical fund.
The key to implementing reforms of this sort is conceptualizing and promoting them as legitimate and valid policy choices. Once they have crossed the threshold of legitimacy in practical,
political, economic, legal, and metaphoric terms, they can be considered on their merits.
Judy Rein, International Governance through Trade Agreements: Patent Protection for Essential
Medicines, 21 NW. J. Int'l L. & Bus. 379 (2001).
This article examines the current conflicts surrounding the implementation of patent protection for pharmaceuticals. Medical research has yielded significant improvements in treating diseases that only recently were incurable. This is most stunning in the area of AIDS treatments.
Simultaneously, an explosion in the infection rate in poor countries has made AIDS a largely developing world disease. As a result, the high-priced lifesaving drugs is largely unavailable about
90% of the infected population.
The devastation of the AIDS pandemic and the management of a public health solution present a challenge to global governance. A critical source of conflict arose from the tension between forces favoring preservation of commercial interest in patent rights and the compelling
need for poorer countries to get access to safe medicines at an affordable price. A combination of
the market, state regulation of patent monopolies, and intergovernmental trade regimes manages
distributional outcomes. However, this governance structure poorly responds to this particular
instance of market failure.
The signing of the NAFTA Agreement and the TRIPS Agreement represented a significant
departure from traditional multilateral trade diplomacy. From its creation in 1947, the General
Agreement on Tariffs and Trade (GATT) operated through a process of negotiating tariff reductions on goods. In the 1990s, this gradual reduction of tariff barriers to the free flow of commodities was supplemented with the establishment of enforceable global standards governing intellectual property.
The inclusion of intellectual property rights as a critical aspect of trade negotiations flowed
logically from the explosive growth of value generated by intellectual property in industries such
as software and biotechnology. Strong intellectual property protections in an otherwise unregulated market are rationalized as necessary interventions to encourage innovation by guaranteeing
sufficient return on investment in the development of intellectual property. Rights holders are
then able to enjoy monopoly rents on their inventions, a policy which must be balanced with opposing social goals of promoting competition and affordability of consumer goods. By establishing protection of rights for investors in innovation, the global trade regime governs the complex
balance of interests between intellectual property owners, second-comers in the market, and consumers.
Managing this balance is particularly tricky in the case of pharmaceuticals. Unlike most other
consumer goods, access to essential medicines is a basic human need, and an important aspect of
many national health policies. One of the types of access is the financial access which is greatly
affected by the ability of pharmaceutical companies to exercise monopoly control of pricing
through exclusive patent rights. Where comparative advantage depends on monopoly of intellectual property, developing countries are at a distinct disadvantage. Through active lobbying, in19
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ternational pharmaceutical companies succeeded in obtaining a high level of pharmaceutical patent protections in the trade agreements. Increasingly, poor countries affected by the AIDS pandemic and international health organizations actively have sought to preserve state regulatory
powers within the confines of the TRIPS Agreement. However, these efforts have been met with
considerable resistance, particularly from the United States, which has engaged in aggressive
unilateral action to extend patent protection beyond the international agreements.
Resolutions to the affordability issue are only part of a larger public health challenge to the
infectious disease crisis in the developing world, or even the cancer and heart disease complaints
of developed world. However, the mechanisms for intellectual property protection established
through the trade agreements are ill-suited to overcome this dilemma. Not only do they operate
in an incongruous context, they also are not reflective of the actual nature of the transnational
interests affected by policy outcomes.
Bess-Carolina Dolmo, Examining Global Access to Essential Pharmaceuticals in the Face of
Patent Protection Rights: The South African Example, 7 Buff. Hum. Rts. L. Rev. 137(2001)
The divide between world income and access to life saving medicines is great. Many poor
countries try to implement policies to help their citizens acquire affordable medicines in order to
close the economic gap. The AIDS pandemic creates an enormous demand for essential drugs.
The magnitude of the AIDS crisis in South Africa coupled by the difficulty of obtaining affordable and essential drugs, forced the government in 1997 to enact Section 15(c) of the South African Medicines and Medical Devices Regulatory Act (SAMMDRA) that intended to address this
critical public health crisis. Section 15 (c) authorize parallel imports and compulsory licensing
with the objective of allowing easier access to affordable drugs.
Countries practice parallel importing when they globally seek lower priced medicines and
permit the drugs' import, rather than restrict purchases at higher priced versions of the same
drugs from local distributors. Parallel imports are an effective means for poor and developing
countries to achieve lower priced drugs. In addition, parallel imports benefit many European
Community countries, where the government is the chief payer for health care services, including pharmaceuticals.
Compulsory licensing allows regular licensure grants to a third party that will manufacture a
drug still under patent. The third-party licensee is able to use the patented product or process. In
return, the patentee has a right to adequate royalty payments, at a rate set by the host legislature.
Forty major drug companies sued as a response to South Africa's initiative, in an attempt to
protect pharmaceutical patent rights and corporate profits, and the United States waged an aggressive campaign to reverse the South African law. During the fierce, two-year campaign
against the Act, members of the global public health community and consumer interest groups
joined forces to protest the pharmaceutical industry's efforts. As a result of the sustained pressure, the United States eventually withdrew the suit. For its part, South Africa agreed to abide by
the GATT and the TRIPS provisions in implementing subsequent drug initiatives.
However, the apparent change in the U.S. posture toward the Act did not eliminate the ongoing broader dilemma of balancing public health concerns and pharmaceutical patent rights. This
article explores how that dilemma was manifest within the South African context. It examines
how changes in political posture should further manifest into concrete policies. It posits that the
United States Trade Commission must adopt less restrictive trade standards to other countries
concerned.
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Since the policy shift of the United States, South Africa has been reevaluating its own public
health strategy in a seemingly quixotic manner. However, it at least seems it is free to do so
without outside pressure. Moreover, South Africa has also sought to deliver Diflucan; an AIDS
related treatment, free of charge to AIDS patients. Given that South Africa prevailed in preserving its compulsory licensing and parallel imports, the same case could be made with other countries in desiring access to cheaper drugs.
The author believes that "parallel imports and compulsory licenses in the developing world
do not affect companies' revenues significantly. However, public health benefits are enormous.
For the protection of fundamental human rights, the U.S. should reconsider its global trade polices of essential pharmaceuticals and implement strategies that place public health concerns "paramount" to intellectual property issues."
Keith E. Maskus, Intellectual Property Rights and Economic Development, 32 Case W. Res. J.
Int'l L. 471 (2000).
This article provides an analytical overview of how economic development may be promoted
or hindered by an effective system of intellectual property rights. Intellectual property rights can
play a positive role in encouraging new business development, rationalization of inefficient industry, and inducing technology acquisition and creation. They may harm development prospects
by raising the costs of imitation and permitting monopolistic behavior by the owners of the
rights. The evidence provided in this article supports the view that product innovation is sensitive
to intellectual property rights in developing countries.
As the global protection regime strengthens due to implementation of the TRIPS Agreement
numerous questions arise about impacts on prospects for economic growth. For many reasons, it
is impossible to claim confidently that the new regime will raise growth and improve economic
development processes. First, many other variables affect growth in ways that could dominate
the impacts of intellectual property rights. Such elements include macroeconomic stability, market openness, policies for improving the economy's technological infrastructure, and the acquisition of human capital. Second, economic theory points out that intellectual property rights could
have many effects on growth, some positive and some negative. Further, the significance of these
effects would be dependent on circumstances in each country. However, in a broad setting of appropriate complementary policies and transparent regulation, intellectual property rights could
play an important and positive role in promoting economic growth. Indeed, the system of intellectual property rights itself may be structured in particular ways to favor dynamic competition
within a system of rights and obligations.
Economic theory demonstrates that intellectual property rights could play either a positive or
negative role in fostering growth and development. Intellectual property rights could be effective
and market-based mechanisms for overcoming problems that exist in markets for information
creation and dissemination. However, their existence could pose problems in terms of their potential for costs and anticompetitive abuse.
The author argues that modern intellectual property rights systems are not sufficient by themselves to encourage effective technology transition. Intellectual property right must form part of
a coherent and broad set of complementary policies that maximize the potential for intellectual
property rights to raise dynamic competition. The complementary policies which the author suggests to be adopted should include strengthening human capital and skill acquisition, promote
flexibility in enterprise organization, and ensure a strong degree of competition on domestic
markets, and developing a transparent, nondiscriminatory, and effective competition regime.
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Christopher K. Eppich, Patenting Dilemma: Drugs for Profit Versus Drugs for Health, 43 Santa
Clara L. Rev. 289 (2002).
The use of anthrax by bioterrorists in attacks against the United States beginning in 2001 has
resulted in a high demand for the leading antibiotic ciprofloxacin ("Cipro"). The production of
Cipro was limited to the manufacturing capabilities of the Bayer Corporation who owns the patent for the Cipro. Bayer could not meet the increased production demands for Cipro, and thus
shortages have resulted. In response to this short supply and high cost, United States Health and
Human Services Secretary has threatened to override Bayer's patent rights to Cipro unless the
company reduces prices and increases supply.
The invention and production of drugs creates a dilemma. On one hand, the profit opportunities motivate companies to extensively research and develop critical new pharmaceuticals. On
the other hand, the public needs access to affordable medication in times of crisis. Although patent protection is a necessary incentive to drive expensive research and development, health
emergencies beyond the short-term need require a reopening of this debate. The controversy rests
largely upon the use of compulsory licensing as a means of lowering pharmaceutical prices by
removing patent rights and increasing drug availability in poor countries. The World Trade Organization met recently to solve the problem of making effective use of compulsory licensing
under the TRIPS Agreement.
This article analyzes some of the problems created by compulsory licensing and proposed a
method to ensure successful use of compulsory licensing in developing countries. This article
encourages cooperation among developing nations, resource-rich developed countries, and
pharmaceutical companies to create a system of effective use of compulsory licensing while
providing patent owners adequate compensation. The author's suggested model "is a feasible
means of balancing human health and patent-owner rights."
Robert A. Bohrer and John T. Prince, A Tale of Two Proteins: The FDA's Uncertain Interpretation of the Orphan Drug Act, Harvard Journal of Law and Technology, Vol. 12, P. 365 (1999).
In this article the authors examine the Orphan Drug Act and one of the most important incentives it provides for the development of new drugs for rare diseases. Since its enactment there are
continuing uncertainties about the scope of protection that the Act provides for innovative products threaten the basic purposes of the Act.
The article provides a brief overview of the Orphan Drug Act and its incentives for pharmaceutical research in general and the biotechnology industry in particular. The article also provides an introduction to the general scientific context of the problem of determining when two
drugs are the same or different and the history of such Orphan Drug Act controversies. The article then uses the most recent major controversy under the Act, the approval of two variant forms
of interferon-alpha (and the rejection of a third form) to examine several approaches to the problem of distinguishing similar biotechnology drugs. The authors suggest that rules similar to the
FDA's policies concerning generic drugs and the comparability of biological molecules from different manufacturing sources should be used to provide guidance under the Act. They also conclude that guidelines for "non-comparability" testing, particularly focused on bioavailability and
bioequivalence, could significantly reduce the uncertainties which have continually plagued the
FDA's administration of the Orphan Drug Act and would bolster the Act's incentives for innovative medical treatments for rare diseases.
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Gabby Ashton, Growing pains for biopharmaceuticals, Nature Biotechnology 19, 307 - 311
(2001).
Industry observers have credited the Orphan Drug Act with helping to establish the US biotechnology industry. The Act was designed to encourage companies to develop treatments for
rare diseases that larger pharmaceutical companies had traditionally not "adopted" because of
their small market potential.
The Orphan Drug Act encourages companies to invest in the research and development of
orphan drugs by granting the developer seven years of exclusive marketing rights for the product, whether or not the product has patent protection. When the act was passed, patent laws for
biotech products were unclear, and the legislation offered protection against competitors launching equivalent products on the market. The US government provided additional incentives for
companies including research grants to assist companies searching for orphan-designated products. Sponsors engaged in clinical trials on the safety and effectiveness of orphan products can
receive up to $200,000 a year for a maximum of three years. Companies can also receive a tax
credit for up to 50% of the cost of clinical trials, and the FDA will help companies design research protocols.
There are more than 6,000 known orphan diseases among the US population, some affecting
just a handful of individuals. Today, more than 200 orphan drugs have been approved, and an
additional 900 have been designated orphan drug status. Orphan drug legislation was also initiated in Japan in 1993, and by Singapore and the European Parliament in 1999.
Web Note 5.4 (p. 131)
Our website considers much more on the economics of copyrights, such as the recent legal controversy regarding downloading copyrightable material from the Internet, constitutional objections to the copyright extensions of the late 1990s, further proposals for
copyright reform, and a recent proposal by Judge Richard Posner and Professor William
Landes for an indefinitely renewable copyright.
Alfred Chueh-Chin Yen, A Preliminary Economic Analysis of Napster: Internet Technology,
Copyright Liability, and the Possibility of Coasean Bargaining, Boston College Law School,
Public Law and Legal Theory Research Paper No. 2001-01 (2001).
This Article offers a preliminary economic analysis of whether it is desirable to hold Napster
liable for copyright infringement committed by its website users. The article was written prior to
the decision in the recording industry’s lawsuit against Napster.
Using the Internet, users can share copyright materials without needing to purchase it from
the copyright holders. This modern technology allows the inexpensive digitization of almost any
form of copyrighted material. That technology raised a debate between the copyright holders and
Internet users, Internet providers and makers of electronic and computer equipment.
The copyright holders see the Internet as both a threat to their profits and an opportunity to
control practically every use of copyrighted material. The Internet threatens copyright holders
because the widespread, unauthorized availability of copyrighted work may interfere with copyright holders’ ability to get paid for use of their works. At the same time, however, Internet technology offers copyright holders the tantalizing prospect of achieving complete, or nearly complete, control over their works. It is now becoming possible to place reasonably secure “digital
locks” around any sort of Internet content. The ability of computers to monitor and charge for
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such transactions means that copyright holders could raise revenue from practically every use of
copyrighted material.
On the other side there are various consumer and Internet user groups, as well as makers of
electronic and computer equipment. Consumers and users have argued that the Internet provides
no excuse for altering a fundamental balance between copyright holders and consumers. The
mere fact that technology makes it easy to charge for uses that previously had been enjoyed for
free does not mean that copyright law should be amended or interpreted to so provide. Instead,
copyright should allow users to use files on the Internet in ways analogous to free uses in real
space. Copyright holders have responded with organized efforts to protect their interests.
In this Article, the author claims to cast doubt upon the claim that the efficient production of
recorded music requires an injunction against Napster. The stakes in the Napster litigation are
not whether recorded music will be efficiently produced and distributed, but who will control
technology that disseminates recorded music. Ordinarily, a market economy relies on competition and negotiation to answer questions like this. However, Napster is nothing more than a resource to use in the production and distribution of recorded music. Since the object of a market
economy is to identify the firm that can make the most efficient use of a given resource, the market should be allowed to identify the proper owner of Napster. This means letting firms negotiate
with each other for control of Napster, with the firm willing to pay the highest price gaining the
associated competitive advantages. Assigning control of Napster to the recording industry
through an injunction therefore makes little economic sense unless it is necessary to create a
meaningful likelihood of bargaining.
The Article also holds that Courts should therefore approach copyright claims against Internet technology providers with great caution. The author also holds that the Courts should particularly refrain from imposing copyright liability against Napster.
Cynthia M. Ho, Attacking the Copyright Evildoers in Cyberspace, 55 SMU L. Rev. 1561 (2002).
The author argues that Evildoers are responsible for the debate between copyright owners
and Internet users. Evildoers are threatening the existence of the Internet, either by suppressing
free speech or by usurping the technology for freewheeling copying.
In the context of copyrights on the Internet each group identifies different evildoers. To most
consumers, the evildoers in cyberspace are the copyright owners that have stripped the Internet
of its freewheeling nature by removing things such as the file-sharing tool Napster. On the other
hand, major copyright owners claim that consumers are making copies of copyrighted material
with little regard for whether the consumers own original copies.
The author exposes important myths that underlie competing concerns about copyrights on
the Internet. In her Article the author suggests that “much of the current clash between consumers and copyright owners can be attributed to the existence of powerful and persistent myths
about copyright law that have continued vitality in the Internet world.” In this Article, the author
begins to close the gap between content owners and copyright users. In so doing, the author
hopes to help pave the way towards a world where evil is eliminated from discussions concerning copyright issues on the Internet.
The Article deals principally with three major myths that impact the operation of copyrights
on the Internet. First, the Article explores the myth that everything on the Internet is free from
copyright restrictions. Second, the Article discusses the myth that copyrights need not be respected because they are primarily owned by greedy content-owners who have failed to adequately serve consumers, such that consumers are entitled to engage in a type of vigilante redis24
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tributive justice. Third, the Article explains the important myth that consumer copying does not
constitute a copyright violation. And finally, it provides a recap of the myths and underscores the
dynamic interaction between myths and the development of copyright law.
The author holds that the themes of this Article “should resonate with consumers and copyright owners alike and help foster greater consideration of the importance of myths, and the role
they play in the creation of copyright laws.” The discussion in this Article should “underscore
the inevitable interplay between myths and reactionary copyright laws; the more power that
myths hold, the more copyright owners are likely to push for increasingly stringent laws. However, this power struggle is unlikely to end with a final determination of who is the ultimate evildoer.”
The author aims to stop the “blame game” between copyright owners and consumers and instead, move toward consensus building that will enable a productive inquiry into the source of
the problems that both copyrights owners and Internet users face.
Aaron M. Bailey, “A Nation of Felons?: Napster, The Net Act, and the Criminal Prosecution of
File-Sharing,” 50 Am. U.L. Rev. 473 (2000).
The Internet is, on the one hand, changing the way we live, work, and entertain ourselves,
and on the other hand, changes the way laws are broken.
Internet-related technologies, namely the distribution of copyrighted music via the Internet
using a digital format known as “MP3″, have recently become the focus of criticism. Some critics argue that the monetary survival of artists is at stake because of “file-sharing” companies like
Napster. Nevertheless, criminal charges have not yet filed.
The author argues that “although lawsuits may put MP3-trading Web sites out of business,
the problem of file-trading will not end with Napster and its clones. Napster, which relies on an
index available on a central server, is a vulnerable target because it is susceptible to a legal attack
that can possibly shut down its server, which in turn, shuts down its entire system. However, this
weakness does not apply to “peer-to-peer” (P2P) technology because P2P does not require a central server.” Therefore, in the peer-to-peer universe, copyright holders will have to chase individuals. The author holds that filing suits against millions of Internet users would be ineffective and
hence the problem with “peer-to-peer cannot be solved by simply filing law suits.
One potential solution, offered by commentators, is to make the criminal penalties for copyright infringement more severe. This may provide an effective deterrent and prosecuting a select
few infringers to set an “example” may discourage other potential infringers. However, the author argues that identifying individual targets for prosecution will present considerable difficulties because “determining who is a criminal infringer in cyberspace, or even developing the
probable cause necessary to search for infringing material, may be impossible in most cases,”
and because even if prosecutors can successfully identify targets, P2P technology, Fourth
Amendment search and seizure jurisprudence, and the copyright doctrine of “fair use” may combine to prevent the successful criminal prosecution of most infringers.”
Chief among the constraints of prosecuting copyright infringements will be questions about
the constitutionality of evidence-gathering techniques on the Internet and computer users’ reasonable expectations of privacy. The author holds that “Congress, the courts, and society must
decide what price we are willing to pay to protect the rights of intellectual property producers
and owners, and whether sacrificing a significant amount of privacy for this objective is worth
the cost.” However, even deciding to forego some privacy may not be enough to allow for suc-
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cessful prosecutions. The lack of international consensus on this issue promises many criminal
infringers shelter beyond the U.S.
Timothy James Ryan, “Infringement.com: RIAA v. Napster and the War Against Online Music
Piracy,” 44 Ariz. L. Rev. 495 (2002).
As the Internet spreads into an increasing number of homes around the country, and broadband internet access facilitates higher transmission speeds, copyright holders are faced with a
growing dilemma: how to protect their copyrighted works but still expose them, and even deliver
them, to the consuming public via the Internet. One industry already suffering with this quandary
is the music and recording industry.”
Napster, a small California-based Internet company developed a free file-sharing software
which allows individual users to search and download compressed music files stored on other
computers logged into the Napster network. In 1999, the Recording Industry Association of
America filed a suit in Federal District Court in San Francisco for copyright infringement, specifically charging Napster with contributory and vicarious liability. Additionally, musical artists
asked Napster to remove users who have copied their songs.
The Napster model has created a new paradigm – the peer-to-peer networking. In the peer-topeer networking each computer’s resources could be freely accessed at any time by any other
computer connected to the network. Because digital music files taken from CDs require massive
amounts of storage space the MP3 audio compression standard was developed. Since music files
can now be condensed to a fraction of their original size and freely transmitted or stored on the
Internet, musicians and recording labels are faced with an ever-growing library of their copyrighted works freely available on the Internet.
This Article discusses the legal debate between the Recording Industry Association of America and Napster. In this Article the author outlines the arguments for both sides, evaluates the
outcome and assesses the future of file sharing on the Internet.
In the case of Recording Industry Association of America v. Napster, Judge Marilyn Patel
decided that Napster had violated the rights of the copyright holders. The court therefore granted
the injunction which led to the shutdown of Napster. Prior to the decision granting the recording
companies injunctive relief, some critics opined that even if the Recording Industry Association
of America was successful in removing Napster from the file-sharing scene, they would still be
faced with open-source programs that perform the same function as Napster, but are virtually
impossible to shut down due to lack of centralized servers and independent incorporation (e.g.
peer-to-peer).
The author argues that people became accustomed to the convenience of free music available
via the Internet. Furthermore, the history of the struggle indicates that as soon as the recording
companies find a way to eliminate one tool of file sharing, programmers quickly create a different vehicle. The conclusion of the Article is that “the Recording Industry Association of America
may have won the battle against Napster, but the war against online music piracy is far from finished.”
Malla Pollack, “The Right to Know?: Delimiting Database Protection at the Juncture of the
Commerce Clause, The Intellectual Property Clause and the First Amendment,” 17 Cardozo Arts
& Ent LJ. 47 (1999).
Under the first Amendment, there is a constitutional right to know and therefore the government has a duty not to block access to information. The Article argues that “Congress cannot
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create a quasi-property right to exclude others from information without clearly demonstrating
market failure.” In 1998, Congress drafted three versions of the Collections of Information Antipiracy Act. The Act provides strong remedies against: “any person who extracts, or uses in
commerce, all or a substantial part, measured either quantitatively or qualitatively, of a collection
of information gathered, organized, or maintained by another person through the investment of
substantial monetary or other resources, so as to cause harm to the actual or potential market of
that other person …”
The author argues that the Act is both unconstitutional and ill-considered. The Act’s supporters admit that they cannot demonstrate market failure. This article is a rapid response in time for
consideration by the Congress.
The United States Constitution states that” The Congress shall have power … To promote the
Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the
exclusive Right to their respective Writings and Discoveries …” The Article discusses the constitutional constraints on the power of Congress to limit the access to information.
Although the public have the right to know, the Supreme Court has never held an intellectual
property right unconstitutional on the ground that the First Amendment requires a fair use defense or an idea dichotomy.
The conclusion of the Article is, therefore, that “all parts of the Constitution should be taken
seriously by the Congress as well as by the courts. The Act is not only unnecessary and unconstitutional; it is a daunting example of Congresspersons ignoring the obvious negative impact on
the many in a stampede to curry favor with the few.”
Matthew Amedeo, “Shifting the Burden: The Unconstitutionality of Section 512(h) of the Digital
Millennium Copyright Act and its Impact on Internet Service Providers,” 11 CommLaw Conspectus 311 (2003).
The Internet has become ubiquitous to modern life, allowing anyone with online access to
share information. With the Internet’s evolution, problems have arisen in regulating and policing
content transferred between users. In response, Congress has enacted several pieces of legislation
designed to address these issues. This Article explores how sharing information over the Internet,
namely through peer-to-peer network, has facilitated the illegal distribution of copyrighted materials, and the response to the peer-to-peer network by the Recording Industry Association of
America and Congress.
The Article focuses on the unconstitutionality of the Recording Industry Association of
America’s interpretation of Section 512(h) of Digital Millennium Copyright Act of 1998
(”DMCA”) and its impact on Internet Service Providers.
The author argues that Section 512(h) of the DMCA represents a substantial departure from
traditional subpoena authority and is unconstitutional on three grounds. First, it violates the Due
Process Clause of the Fifth Amendment because it provides the subpoenaed party no opportunity
to object; it allows a pre-judgment seizure of the Internet Service Provider’s confidential business property, placing at risk the business relationship between the Internet Service Provider and
its subscribers; and it places an undue burden upon the subpoenaed party. Second, the Section
violates the Fourth Amendment to the Constitution because it allows a private party, without any
substantial and particular evidentiary support, to conduct a search and seizure of the subpoenaed
party’s information, thus violating Internet users’ right to privacy. Third, the Section violates Internet users’ right to free speech by forcing users to lose their online anonymity, which has been
declared unconstitutional by the Supreme Court.
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For these reasons, copyright holders must not be allowed to subpoena Internet Service Providers under Section 512(h) of the DMCA. A copyright owner could achieve the same purpose
by filing a John Doe suit against the unknown infringer and then serving a third-party subpoena
on the Internet Service Provider to obtain the infringer’s personal information. This method allows the subpoenaed Internet Service Provider an opportunity to object or file a motion to quash
on the ground that the subpoena requires disclosure of confidential business information.
Sue Ann Mota, “Eldred v. Reno – Is the Copyright Term Extension Act Constitutional?,” 12 Alb.
L.J. Sci. & Tech. 167 (2001).
Under the Copyright Clause of the Constitution, the Congress has the “Power … To promote
the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors
the exclusive Right to their respective Writings and Discoveries…” Under the First Amendment,
the Congress “shall make no law respecting an establishment of religion, or prohibiting the free
exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people
peaceably to assemble, and to petition the Government for a redress of grievances.”
The question raised in Eldred v. Reno was whether the provisions of the Copyright Clause or
the First Amendment of the United States Constitution constrain Congress from enacting the
Copyright Term Extension Act to extend the copyright term twenty years? The court held that
neither the Copyright Clause nor the First Amendment constrain Congress from extending the
copyright term. This Article examines the Copyright Term Extension Act of 1998 and its legislative history, and analyzes the Eldred case.
The plaintiffs in Eldred who allege that they copy, use, reprint, perform, or enhance works in
the public domain, filed suit against the Attorney General of the United States to have the Copyright Term Extension Act declared unconstitutional. The district court in 1999 dismissed the case
in its entirety, holding that there are no First Amendment rights to use the copyrighted works of
others. The plaintiffs appealed, claiming that the Copyright Term Extension Act is unconstitutional for three reasons. First, the Copyright Term Extension Act violates the First Amendment’s
intermediate scrutiny standard because it applies both prospectively and retroactively. Second,
the Copyright Term Extension Act violates the Copyright Clause’s originality requirement for its
application to already existing works. Finally, the Copyright Term Extension Act violates the
Copyright Clause’s limited times requirement extending the terms of subsisting works. The
Court of Appeals rejected the plaintiff’s arguments and affirmed the district court’s ruling, concluding that the Copyright Term Extension Act is a proper exercise of Congress’s power under
the Copyright Clause.
On the issue of the Copyright Term Extension Act, the court recognized that while permanent copyright protection would violate the constitution, increasing the number of years of copyright protection would not. The court has, however, opened the door to allowing a party to argue
the issue before the court sitting en banc.
William M. Landes and Richard A. Posner, “Indefinitely Renewable Copyright,” 70 U. Chi. L.
Rev. 471 (2003).
In their Article, the authors raise questions concerning the widely accepted proposition that
economic efficiency requires that copyright protection should be limited in its duration. The
Constitution authorizes Congress to create copyright and patent protection “for limited Times.”
The legal significance of the Constitution’s phrase “limited Times” is unclear. Any time short of
infinity, which is to say any fixed period of years, is “limited” in the literal sense of the word.
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In this Article, the authors use the term “indefinite renewal” rather than “perpetual” copyright
because there is an important economic difference between granting perpetual copyrights and
granting copyrights for a limited time with, however, a right to renew the copyright as many
times as the owner wants.
The data presented in this Article suggests that most copyrights depreciate rapidly and therefore that few would be renewed if even a slight fee were required; the sheer bother of applying
for renewal appears to be a significant deterrent. The authors argue that it is apparent that even
with an unlimited right of renewal the public domain would remain a vast repository of intellectual “property” available for use without charge and also usable as free inputs into the creation of
new intellectual property. Paradoxically, a system of unlimited renewals might, depending on the
length of the initial term and on the fee structure, expand the number of works in the public domain, although the average value of the works in the public domain might fall since copyright in
the most valuable works would probably be renewed many times.
Furthermore, it is a mistake to treat the public domain as some fixed supply of works from
which any enlargement of copyright protection subtracts. The size of the public domain is in part
a positive function of the extent of copyright protection, since, as a first approximation anyway,
the more extensive that protection is, the greater the incentive to create intellectual property
some fraction of which will become a part of the public domain when the copyright expires or is
not renewed.
The results of the empirical study of this Article are evidence that copyright registration and
renewals are indeed highly responsive to economic incentives. Based on the results, the authors
argue that the shorter the expected life of a copyright and the higher the registration and renewal
fees, the less likely are both registration and renewal. This in turn suggests that a system of modestly higher registration and renewal fees than at present, a relatively short initial term, and a
right of indefinite renewal would cause a large number of copyrighted works to be returned to
the public domain quite soon after they were created. Of course, those would tend to be works of
low average commercial value; otherwise the owner would have renewed. And requiring registration and renewal for copyright protection, rather than, as at present, making these steps optional, would increase the incentive to take them. Nevertheless, a system of indefinite renewals
(or one that combines renewals with a maximum duration) may enable more works to be in the
public domain, thus minimizing access, transaction, and administrative costs, while those few
copyrights that retain their value will remain in copyright protection indefinitely, with the economic advantages, involving investments in maintenance.
Web Note 5.5 (p. 136)
What are the appropriate remedies for unlawful use of a patent, copyright, or a trademark? See our website for a discussion of the economics of those issues.
The place to begin an economic analysis of remedies for infringement of IP rights is the article by Blair and Cotter discussed above (in our discussion of the Calabresi-Melamed article in
Web Note 4.2). The articles that we discuss further in this web note expand on the insights of
the Blair & Cotter article.
David J. Goldstone & Peter J. Toren, “The Criminalization of Trademark Counterfeiting,” 31
Conn. L. Rev. 1 (1998).
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Trademarks and service marks play a prominent role in modern society. For manufacturers,
trademarks crystallize the good will sometimes called “brand equity,” they have built up over
time and ensure that customers will continue to purchase their products.
Selling items bearing counterfeit marks defrauds customers who pay for brand-name merchandise but in fact buy low quality fakes. It cheats trademark owners out of legitimate sales and
tarnishes their reputation when they are blamed for the poor quality of the counterfeit merchandise. Retailers are also injured when they must provide refunds to customers who discover that
their brand-name goods are in fact counterfeit.
Traditionally, violations of intellectual property rights such as trademarks have been litigated
through civil process. Congress eventually came to realize that trademark counterfeiters often
considered civil liability as merely a cost of doing business, and recognized the need for increased deterrence of counterfeiting. Therefore, in 1984, it enacted the Trademark Counterfeiting
Act to criminalize trafficking in goods and services bearing a counterfeit mark. Since then, Congress has broadened the scope of coverage and increased the severity of the penalties for criminal
violations of trademark rights.
Further, the Department of Justice has demonstrated its willingness to enforce these laws aggressively. In October of 1996, the Department of Justice created the Computer Crime and Intellectual Property Section. This is the first section within the Criminal Division expressly devoted
to overseeing the criminal prosecution of violations of intellectual property rights, including trafficking in counterfeit goods or services.
The author argues that the determination to impose a new criminal sanction for any activityeven one previously subject to civil liability is never one that should be made lightly, particularly
given what some regard as the over-criminalization of American law. Still, Congress’s decision
in 1984 to criminalize trademark counterfeiting created an appropriate means of deterring trademark infringement, grounded in both traditional and modern justifications for imposing criminal
liability: preventing fraud, enforcing commercial honesty, punishing theft of property, and enhancing market reliability.
In enacting the Trademark Counterfeiting Act, Congress recognized that counterfeiting is
tantamount to fraud, particularly with regard to innocent purchasers. The decision to treat the
misuse of trademarks as a criminal matter is consistent with Congress’ recognition of the everincreasing value of intellectual property to this nation’s economic well-being, and of the damage
to the public caused by counterfeiting goods and services.
Geraldine Scott Moohr, “The Crime of Copyright Infringement: An Inquiry Based on Morality,
Harm, and Criminal Theory,” 83 B.U.L. Rev. 731 (2003).
Changing technology impels copyright holders to seek more protection from the law for their
increasingly valuable products. Consumers, who want to exercise their traditional rights under
copyright law and to utilize the new technology, exert an opposing pressure on lawmakers, as do
the manufacturers of devices that deliver information and knowledge. Although it is unclear what
form a new order will take, the potent combination of technological development and economic
incentives is difficult to resist. The author holds that the law will play a significant role in balancing conflicting interests and in deciding the parameters of the new order.
Since the early 1980s, Congress has strengthened existing rights in copyright and enacted
two new laws in order to expand criminal liability for infringing copyrights. The No Electronic
Theft Act of 1997 reaches infringement of copyrighted material for personal and commercial
use. The Digital Millennium Copyright Act of 1998 takes a more proactive stance by providing
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criminal penalties for acts that may lead to infringement. Treating purposeful infringement of
copyrighted material as a crime seems, at first, like an easy case.
However, a lingering doubt creates uneasiness when unauthorized use of knowledge, ideas,
and information is treated as common theft. This article explores those lingering doubts by
measuring the new laws against the doctrines that generally justify criminal law.
Criminal theory suggests it is appropriate to punish conduct that imposes a community harm
or that breaches a moral standard. The author argues that the new criminal statutes are not consistent with the legal frameworks that authorized them. There is tension between the new laws
and the rationale of copyright law, and the justifications from criminal law provide only weak
support for criminalizing copyright infringement. At a minimum, treating personal use infringement as a criminal act may not be an effective way to protect the interests of copyright holders or
to achieve the goals of copyright policy. Although the principles of harm and morality may not
provide a dispositive answer to the question of what conduct should be termed criminal, each
provides a boundary that, when crossed, signals that criminalization may be inappropriate. The
indeterminacy and elasticity of the harm justification can be mitigated if the effects of a new
criminal law are considered; that is, an analysis of harm should consider the harm caused by
criminalization itself. The morality rationale should also be utilized cautiously, especially when
the community does not share the norm embodied by the law. Oddly, relying only on the immediate harm to present interests of copyright holders, lawmakers harnessed the power of the criminal law with little regard for the moral force that makes criminal law effective in the first place.
James Thompson, “Permanent Injunctions in Copyright Infringement: Moral and Economic Justifications for Balancing Individual Rights Instead of Following Harsh Rules,” 7 S. Cal. Interdisciplinary L.J. 477.
The economic and moral justifications for providing a permanent injunction in copyright infringement cases have much less weight when massive inequities result from punishing a “good
faith” or “innocent” infringer who stands to lose a disproportionately large amount of money
compared to a small financial cost to the plaintiff. The granting of a permanent injunction can
sometimes translate into the complete loss of a major investment or the destruction of the business itself, as is often illustrated in the entertainment industry.
Permanent injunctions are designed to punish the “willful infringer” while also protecting the
subjective value of the work to the artist/owner. However, these policies have much less of a deterrent effect when applied to an innocent/good faith infringer; instead, these justifications will
allow an artist to take the law into her own hands and severely punish the infringer by choosing
the easily obtainable relief of a permanent injunction. Furthermore, the subjective value that the
artist places in her work should command less attention when the innocent infringer stands to
lose millions of dollars and will possibly face bankruptcy if a permanent injunction is allowed,
although other substantial remedies exist for the injured artist.
The author proposes that federal courts should evaluate copyright infringement cases on an
ad hoc basis and follow the evolution of real property law, balancing the interests of the parties,
rather than blindly granting permanent injunctive relief whenever the plaintiff proves infringement.
Advocates of a copyright law that sternly protects the rights of artists and creators foremost,
rely on three main rationales for allowing injunctive relief in almost all proven infringement cases: first, permanent injunctions remain the only remedy that allows an infringed party to recoup
full and fair compensation; second, the interests of creativity and innovation require federal and
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states courts to strongly protect copyrights by the best deterrent available – the injunction; and
third, fairness to the innocent copyright owner who took adequate steps to protect its expression
through outlined governmental procedures should trump other considerations. However, the author argues, each explanation for the underlying rationales of allowing permanent injunctions in
proven infringements cases is effectively rebutted by real property law’s superior rationales for
denying injunctions in proven encroachment cases involving an innocent or good faith encroacher.
The author proposes that courts deciding copyright infringement cases should deny permanent injunctive relief where: (1) the defendant had good reason to think that the infringing material was non-infringing, e.g., by evidence of a good faith, reasonable rights clearance check; (2)
the infringing material cannot be possibly expunged from the greater independently created work
without destroying the latter work; (3) the economic costs to the innocent infringer resulting
from an award of permanent injunctive relief would grossly outweigh the plaintiff’s financial
injury from the initial infringement; and (4) other substantial sources of relief are available to the
injured copyright owner.
Courts should recognize that infringers often have socially beneficial reasons for their actions. Where a permanent injunction threatens the business of an innocent infringer, the court
should take more than a cursory look at the art value of the infringing work to society. Moreover,
the court may desire to see what other third parties may be punished by the injunctive relief such
as producers, actors, or writers whose salary may substantially depend on a back-end deal connected to a motion picture which will never come to fruition because a permanent injunction has
prevented the continuing release of the picture. As a result, a permanent injunction can unjustly
thwart the ability of the film to make a profit, on which the producer’s, actor’s, and writer’s livelihood depends.
Having recognized that innocence may be a defense to permanent injunctions, courts will
continue to face problems of extortion in post-negotiations and valuation dilemmas. However,
these problems are manageable and not totally disruptive to a court system that often oversees
negotiation of damages between parties and that already designates dollar amounts for difficultto-value subjects of litigation.
Maureen A. O’Rourke, “Rethinking Remedies at the Intersection of Intellectual Property and
Contract: Toward a Unified Body of Law,” 82 Iowa L. Rev. 1137.
The exploitation of intellectual property rights increasingly involves the rightholder’s entering into transactions involving commercial law. Yet there is neither a contract nor coherent
commercial law of intellectual property – only state common law and the Uniform Commercial
Code (UCC) – neither of which has considerations of federal intellectual property law policy at
its center. Thus, while the efforts of Congress and the courts to deal with new technologies under
the intellectual property statutes are both necessary and desirable, those efforts divert attention
from the question “How do intellectual property and contract laws fit together?” The answer to
this question will undoubtedly influence the development of an information-based economy.
Any attempt to provide a theoretical framework for integrating intellectual property and contract law must take into account the fact that the two systems of law proceed from different philosophical frameworks. The analysis should begin by identifying what those frameworks are and
the goals which they seek to implement. The analysis should then proceed by trying to fit the two
sets of law together in a manner which, to the extent possible, furthers both sets of objectives.
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The aim of this article is to use such an analysis to address an important problem at the intersection of intellectual property and the UCC.
The author acknowledges that because intellectual property licenses often grant the licensee
the right to manufacture a good covered by Article 2 (”Sales”) of the UCC, collisions between
intellectual property law and the UCC are likely to become more frequent as the sheer volume of
transactions traditionally viewed as sales, but also containing an intellectual property component,
increases over time. One area of potential conflict is between the remedial provisions of intellectual property law and those of the UCC. Under the UCC, an aggrieved seller has a statutory right
to set its damages by entering the market and reselling the contract goods. Likewise, an aggrieved buyer may set its damages by entering the market and making a substitute purchase.
However, when the aggrieved seller or buyer is also an intellectual property licensee, the aggrieved party’s exercise of these UCC remedies may be considered infringement under one or
more of the intellectual property statutes.
An intuitive legal response would be to say that a finding of infringement under such circumstances is the correct result. Basic preemption rules require that in the event of a clash, the remedial provisions of the state-law UCC may not displace remedies under the federal intellectual
property scheme. However, this intuitive response may be neither legally correct nor otherwise
desirable; yet resolution of this issue is important to maintaining a viable licensing market. If intellectual property law is used effectively to remove one or more UCC remedies from aggrieved
parties, the entire bargaining structure of transactions changes, and the goals of the UCC, which
include encouraging efficient contracting, are threatened. This result might be desirable if allowing a party to exercise a particular UCC remedy would adversely affect the goals of the intellectual property system. However, if those goals are not threatened, removing UCC remedies may
result in parties foregoing otherwise socially beneficial transactions without a concomitant increase in the types of activities that the intellectual property statutes were meant to foster.
Congress, the courts, and scholars often cite an economic basis as the rationale for both federal intellectual property law and the UCC. However, the nuances of that rationale differ substantially in the two contexts. Federal intellectual property law is primarily a response to market imperfections caused by the “public goods” nature of information. The UCC, on the other hand, is
grounded in economic considerations of minimizing the costs to contract and maximizing the
gains from contracting. Intellectual property law places more emphasis on the equitable remedy
of the injunction than the UCC, which emphasizes fixing damages by resorting to market transactions or market indicators. Moreover, the intellectual property damages scheme might be
termed “expectation-plus” while the UCC embodies an “expectation” based damages system. In
the more broadly theoretical terms of Calabresi and Melamed, in achieving statutory goals, intellectual property law relies more on property rules and the UCC more on liability rules. It is important to discuss not merely the different policy goals of the laws generally, but also how their
remedial provisions help to implement those goals. This understanding helps to clarify the issues
involved when federal intellectual property law and UCC remedies collide.
The article seeks to prove useful in helping to develop a comprehensive contractual law of
intellectual property. The methodology suggested in the article is first to identify the underlying
policies of intellectual property law and contract. Particular intellectual property or contractual
rules may then be better understood in terms of the overall theoretical framework which supports
the statutory or common law implementation of those rules. Where those rules seemingly collide,
a compromise may be appropriate to effect the goals of both sets of laws. If that compromise is
not feasible then at least, the author argues, the issue has been sharpened in such a manner that
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policymakers may make reasoned choices about what goals should be given precedence. This
method of decision-making is preferable to ad hoc judicial review which may serve neither to
enhance the intellectual property system nor to further the goal of coherent contract law.
Dane S. Ciolino, “Reconsidering Restitution in Copyright,” 48 Emory L.J. 1 (1999).
Federal copyright law provides a wide range of remedial options to the prevailing copyright
owner in an infringement action. Among other remedies, the owner may seek an order enjoining
the defendant from prospective copyright infringement and an award of damages to compensate
him for any losses caused by the defendant’s infringement. In addition, the Copyright Act includes remedies less traditional than injunctive and compensatory relief. First, the Act permits
courts to order the infringer to destroy not only all copies of the infringing work, but also all
“other articles by means of which such copies…may be reproduced.” Second, the Act permits
courts to order the infringer to disgorge all net profits that are attributable to the infringement.
These remedies – disgorgement and destruction – differ from more traditional compensatory
remedies in that their focus is on the defendant’s gain rather than on the plaintiff’s loss. As a result of this focus on gains, the disgorgement remedy is as favored among copyright plaintiffs as
it is feared among defendants. Copyright’s gain-based disgorgement and destruction remedies
exist for the principal purpose of dispossessing the infringer of his ill-gotten gains. In so doing,
these remedies aim to prevent the infringer from being unjustly enriched at the copyright owner’s
expense. Considering this aim, these remedies are distinctly restitutionary in nature.
Although the avoidance of unjust enrichment is perhaps a laudable goal, the Copyright Act’s
current restitutionary means to that end are troublesome. First, the disgorgement remedy is nettlesome to apply in practice. Because the Act requires disgorgement of only the net profits of the
infringer that are directly attributable to the infringed work, courts in infringement cases must
grapple with the formidable task of deriving net profits from gross revenues and then apportioning those profits among a myriad of revenue-generating factors. Second, the disgorgement and
destruction remedies are conceptually problematic. Both remedies appear to be unnecessary to
further copyright’s principal goal of creating market-based incentives for artistic creation. Worse
still, both remedies appear to work against that goal by reducing the demand for copyrighted
works and by encouraging bypass of the very market that copyright strives to create.
These practical and conceptual problems stem from confusion surrounding the theoretical underpinnings of the disgorgement and destruction remedies. First, these remedies reflect a fundamental misunderstanding of the law of restitution. Particularly, these remedies emanate from a
branch of restitution law – restitution-for-subtraction – that exists to rectify losses and nullify
gains “achieved by depriving another.” Nevertheless, the Copyright Act maintains the disgorgement and destruction remedies with ill-suited doctrine drawn from a distinct branch of restitution
law – restitution-for-wrongs – that exists to assure that “no man shall profit from his wrong.”
Second, these remedies reflect a misunderstanding of the nature of copyright. Restitution in
copyright is often justified with the following analogy to traditional property law: because property law permits restitution for many proprietary torts, copyright law should permit restitution for
infringement. The author argues that this analogy is flawed. Copyright law, the entitlement that it
creates, and the subject matter that it protects differ materially from traditional property law, the
entitlement that it creates, and the subject matter that it protects.
The author concludes that copyright’s restitutionary remedies must be reformed. Granted,
super-compensatory remedies have an important role to play in copyright law. Such remedies are
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actions into the incentive-generating market that copyright strives to create. But to the extent that
copyright’s current super-compensatory restitutionary remedies serve this end, they do so clumsily, insufficiently, and at the risk of harming the very market that copyright law establishes.
The author further argues that many of the problems associated with restitution in copyright
law could be addressed judicially. Through the exercise of their inherent equitable discretion,
courts could more precisely tailor restitutionary awards to the circumstances and thereby ameliorate some of the harmful effects these remedies have on copyright’s market.
Paul Edward Geller, “Hiroshige vs. Van Gogh: Resolving the Dilemma of Copyright Scope in
Remedying Infringement, “ 46 J. Copyright Soc. USA 39 (1998).
This Article addresses the question: What should be the scope of copyright protection?
The field of copyright has distinct dimensions. On one dimension, authors create works. Here
a court has to ask: Is copyright in one work infringed by another work? On the other dimension,
works are disseminated to the public. Here the question becomes: What remedies should the
court grant against the dissemination of an infringing work?
The article discusses a case that presents the dilemma created where prior works form bases
for later works. On the one hand, denying relief would ignore copyright rationales altogether; on
the other, overly stringent remedies could betray these rationales. This dilemma has become all
the more critical as copyright has been expanded, for example, with rights to control derivative
works and with ever-longer terms.
The author proposes the following guidelines to tighten up present copyright law, with due
regard for equitable considerations present in any given case:
1. No injunction or other coercive remedies should be issued against whoever makes a solitary copy exclusively for private enjoyment or study.
2. Courts should (a) always be ready to enjoin and otherwise provide coercive relief against
rote copying for the public, (b) exercise discretion in granting injunctions and other coercive
remedies concerning works generated by mid-range processes such as knowledgeable reworking,
and (c) refrain from enjoining innovative recasting, as well as the dissemination of the new
works thus generated, absent strong equitable reasons for stopping them.
3. Courts may (a) impose the full range of monetary awards, including statutory or other special damages used for punitive or deterrent purposes, in cases of rote copies, especially when
these are marketed with scienter, but (b) adjust actual or statutory damages, or reasonable royalties or profit shares, to the market interests at stake in any other case.
The author concludes that on the level of theory, courts need better analytic tools than shifting sets of vague and disparate tests and criteria of protectability and infringement. The attempt
to bring underlying doctrines together into some coherent framework of analysis at least helps to
debug corresponding tests and criteria and to optimize infringement findings and remedies in the
cases. On the level of practice, courts ought not content themselves with simply finding infringement but, in hard cases, would do well to discern more finely how plaintiffs’ works are reworked or recast into defendants’ works. In that light, they could grant remedies more consistently with copyright rationales.
Here’s a brief summary of another interesting article about copyright, one that addresses some of
the concerns that might be raised in class discussion – namely, do expressive artists and others
whose work is meant to be encouraged copyright protection really respond to lengthening copy35
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right protection? The article summarizes work by Shyamkrishna Balganesh, “Foreseeability and
Copyright Incentives,” 122 Harv. L. Rev. 1569 (2009).
Foreseeability and Copyright Incentives
Copyright law represents an attempt to balance two competing goals. One the one hand, it
seeks to encourage innovation by giving creators the exclusive right to benefit financially from
their creations. On the other hand, it seeks to enrich the public domain, giving society at large
access to important literary, musical, and visual works.
Like all laws, copyright involves a number of tradeoffs. Where copyright protections are
broad, the public domain suffers at the expense of creators. If they are too narrow, the reverse
may be true. In an effort to find a happy medium, copyright law imposes various limits on a creator’s otherwise exclusive right. These include limits in duration (although often lasting a century or more, the value of time limits is debated) and fair use allowances.
But copyright protections are unlimited in one important area: media of transmission. As
long as a copyright is valid, the owner retains exclusive rights, no matter the medium of presentation. If, for example, a book written in 1920 is later published online, the copyright holder has
rights to that as well. A song recorded in 1950 on an LP remains property of its owner whether
the song is released via cassette, CD, MP3, or some as-yet unknown technology.
In his paper, Professor Balganesh argues that it is inefficient to promote this infinite breadth.
He suggests that copyright breadth should be based instead upon the doctrine of foreseeability.
That is, unless a future use for the innovation was foreseeable at the moment of creation, copyright protections should not be extended to cover that use.
Like so many others in law and economics, Balganesh’s argument hinges upon the doctrine
of expectations. Creators innovate based on the expected benefits of their creation. If a given
benefit cannot be foreseen, it necessarily cannot form part of his decision to innovate. If the goal
of copyright law is to foster innovation, unforeseen benefits are a non-factor.
On the other hand, the costs of unforeseen use remain high. The public at large is still broadly prohibited from reproducing a copyrighted work, no matter the medium. The copyright holder, which benefits from windfall profits, is enriched at the expense of the public.
Because broad copyright protection imposes significant costs on the public without influencing the creative process, Balganesh argues that it is an inefficient way to foster creativity.
Under his proposed regime, the breadth of a particular copyright would be determined based
on the rational expectations of the creator, at the moment of creation. Copyright protection
would extend to cover a particular medium only if that medium was available or foreseeable at
the time the innovation was made.
Balganesh admits that the doctrine of foreseeability would be more difficult to apply than the
current bright-line rule. However, he points out that the doctrine of foreseeability is already applied in torts, contracts, and other areas of the law. If it’s feasible in those disciplines, why not in
copyright?
Even if it would be more efficient, Balganesh’s proposed regime might be unworkable. The
boundaries between media are often blurry; is a digital MP3 a logical extension of an analog cassette tape? Is an e-reader a foreseeable descendent of a softcover novel? Given the seemingly
limitless ability of lawyers to argue about such ambiguities, this might cause more problems than
it solves.
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Web Note 5.6 (p. 135)
This section has only skimmed the surface of the remarkable developments in intellectual
property of the last 10 years. See our website for more on the issues of this area of the
law, such as private ownership versus “open source” software, how the fashion industry
uses IP, and how magicians, cooks, and comedians protect their intellectual property.
One of the principal arguments in favor of a strong intellectual (“IP”) regime is that it encourages creativity and discourages the stealing of ideas, inventions, and expressions. In the absence of strong IP protections, individuals would be unable to adequately commercialize their
creations and would therefore not create.
In Web Note 5.1 we described the extensive recent literature on trade secrets. As we saw,
trade secrets are an alternative to the system of patents and copyrights for protecting innovative
processes, products, and methods of doing business. Some – perhaps, many – businesses prefer
to try to protect those innovations by means of the contractual mechanisms of trade secrets rather
than to go through the revelation of their innovation and the time-limited protection that the formalities of the IP system require. One of the most famous of the products and processes protected in this manner is Coca-Cola.
This note explores some fascinating examples of industries that use a different method (different from both trade secrets and the formalities of IP law) of protecting innovation – industryspecific norms of good behavior.
Keeping a Secret
This portion of the note is based on Jacob Loshin, “Secrets Revealed: How Magicians Protect
Intellectual Property without Law.” The article appears in a collection entitled Law and Magic:
A Collection of Essays (2008), ed. by Christine A. Corcos.
In some industries and professions that are largely unprotected by IP law, creativity abounds.
In fact, several authors posit that industry-specific norms might actually provide better safeguards of creative output.
The magic community is one such example. As it relates to illusions and live performances,
IP law gives magicians essentially no protections against copying and theft. Copyright laws do
not apply to live performances at all. Patents, which are accessible to the general public, are
hardly conducive to protecting magical secrets. And trade secret law is rarely applied, due to the
communal sharing that happens so often within the profession.
In the absence of strong IP protection, the magic community enforces a set of norms that
both encourage sharing and discourage stealing. The community carefully controls access to its
secrets; anything more complicated than parlor tricks is not shared at all with the lay public.
When a magician invents or improves on a trick, others may not use it until the inventor/innovator begins to disseminate it widely.
Perhaps most importantly, when a member runs afoul of any established norm, he is shunned
by the community at large. Because this is such a tight-knit group, such blackballing can effectively be career-ending.
In one highly-publicized incident, a “Masked Magician” revealed a number of secrets during
a four-part primetime TV series. When his identity was discovered, he was ostracized by his
American peers to such an extent that he had to move to Brazil in order to find work.
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Creativity in Stand-Up Comedy
This portion of the note summarizes articles by Dotan Oliar & Christopher Sprigman,
“There’s No Free Laugh (Anymore): The Emergence of Intellectual Property Norms and the
Transformation of Stand-Up Comedy,” 94 Va. L. Rev. 1789 (2008).
Similar alternatives to IP law are found in the world of stand-up comedy. Because a joke is
only really funny the first time you hear it, the misappropriation of new material is a serious matter. Although comedians, like magicians, find very little recourse in traditional IP law, creativity
does not seem to suffer.
Comedians employ several unique norms to determine “ownership” of jokes. Unlike most
areas of property law, a joke cannot be owned by multiple individuals. This makes sense; once a
joke is used by one owner, it cannot be effectively used by any other. In cases where two people
collaborate to create a joke, ownership defaults to the comedian that came up with the premise,
not to the one that created the punch line. If two people independently come up with similar
jokes, ownership is locked-in by using it first in public, especially on television.
There are also several sliding-scale norms, most of which deal with infringement of ownership rights. Ubiquitous, adaptable premises such as “priest and rabbi” jokes, or those which deal
with well-known current events, are considered fair game for any and all comedians. The more
specific the joke, the less copying is allowed. Further, less experienced performers are often
chided less sternly when they borrow material, on the assumption that everyone has to start
somewhere. But those acolytes that continue to steal face ever-increasing pressures to stop.
As comedy evolves, so do comedic norms. In decades past, most comedians told variations
of the same jokes, which increased the risks of misappropriation. These risks were managed by a
constant influx of new material, supplied by teams of writers, and a coordinated geographic and
temporal separation of comedians whose acts were similar.
Nowadays, however, most successful stand-up comedians rely on self-created “point-ofview” humor, which is influenced heavily by one’s race, ethnicity, hometown, gender, and socioeconomic status. The resulting styles vary greatly, making it easier to both spot theft and to
come up with material that is clearly one’s own.
Like magicians, comedians take a very dim view of theft. Most professional comedians and
club owners will not work with joke thieves. Public spats are common, and sometimes result in
physical violence. Even famous comedians can’t always escape extrajudicial punishment. In
one instance, a famous comedian [George Lopez] punched out another [Carlos Mencia] backstage at an awards show as payback for stealing some of his jokes. The proliferation of stand-up
on television and the internet has improved comedians’ ability to spot copy-cats. Further, an increasing number of audience members and fans have shown the willingness to speak out against
comedians they perceive to be joke thieves.
The Piracy Paradox: Innovation and Intellectual Property in Fashion Design
This portion of the note summarizes an article by Jonathan Barnett, Giles Groileau, & Sana
El-Habri, “The Fashion Lottery: Cooperative: Innovation and in Stochastic Markets,” Journal of
Legal Studies (forthcoming, 2010).
The fashion industry operates in another “Low IP” environment. Although fashion is relatively easy to copy, and designers are largely unprotected by traditional IP law, creativity
abounds. Further, even though European IP law provides far more protection than that found in
the United States, few companies in either jurisdiction have shown much interest in taking advantage of these protections or reforming the law.
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All of this flies in the face of traditional theories of IP, which hold that strong IP protections
lead to more creativity. To resolve these paradoxes, the authors of this paper posit that purveyors
of “high fashion” are actually helped, not harmed, by operating in a Low IP environment. As
such, they have no reason to demand change or protect most of their IP.
To understand this explanation, one must understand fashion (or at least make an attempt).
High fashion is the ultimate “status good”. Status goods are those that provide the same actual
utility as a generic substitute, but which signal the owner’s financial or social superiority to others. For example, a Chanel jacket is no better at providing warmth than one from Wal-Mart, but
the well-dressed and well-heeled invariably choose the former.
An important characteristic of status goods is that widespread adoption invariably diminishes
their value. Nothing inspires a woman to change her wardrobe faster than seeing a copy of her
favorite dress being worn by someone else.
The authors suggest that “Induced obsolescence” plays a big role in perpetuating a Low IP
marketplace. Induced obsolescence describes the tendency of certain status goods to be out-ofstyle or behind the curve almost as soon as they are created. Fashion is the consummate example. Designers release at least four completely new lines of clothing each year, and the trendy
won’t be caught dead wearing last season’s “in” item.
Copying may speed up the process of obsolescence. The sooner a firm replicates a new design from the big fashion houses, the sooner that item ceases to be a status symbol, and the sooner the fashionista must buy something new.
The authors also describe the phenomenon of “anchoring”, whereby all of the major designers seem to focus on the same discernable trends at the same time. In order for trends to exist,
they note, such trends must be communicated to the market. The result is seasonal evolution,
guided by the top design houses and based on consumer feedback.
This focus on fast-changing trends leads to a lot of copying. Because the best fashion might
come from a different house each season, designers are as likely to copy existing trends as they
are to start new ones. In such an environment where the innovator regularly becomes the copyist, there is little incentive to enforce IP laws.
An interesting natural experiment supports the claim that designers actually prefer a Low IP
environment. European law protects registered “industrial designs”, including fashion designs,
while in America such “practical objects” as clothing are rarely afforded protection beyond the
trademarking of logos. In theory at least, an industry that prefers rigid IP protection would be
expected to take advantage of the protections available to them in Europe.
Yet that is not what the authors found. Their survey of European registrations in several
countries uncovered almost none made by top international designers. The majority of registrations were made by a few mid-level firms and concerned designs that were eligible for trademark
as well.
All of these factors lead the authors to the conclusion that participants in the fashion industry
know that they operate in a Low IP environment, and are perfectly content to keep doing so.
May I Have a Copy of that Delicious Recipe?
This portion of the note summarizes an article by Christopher J. Buccafusco of the ChicagoKent College of Law: “On the Legal Consequences of Sauces: Should Thomas Keller’s Recipes
Be Per Se Copyrightable?,” 24 Cardozo Arts & Entertainment Law J. 1121 (2007).
Although recipes and the culinary arts have long been presumed to occupy a “low IP area” as
well, perhaps this need not be the case. Industry norms provide extra-legal protection of culinary
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IP. But Prof. Buccafusco argues that traditional copyright law should be applicable to recipes.
He makes this case by highlighting the expressive nature of the culinary arts and comparing them
to other protected media.
Copyright law focuses on the protection of expressive creations, not utilitarian products. On
these grounds, the Anglo-American legal tradition has rarely afforded copyright protection to
recipes. In cases where rights were upheld, these were based on the literary expression that is
often found in cook books, not the recipe itself.
In other words, absent some clever narrative, courts have usually found recipes to be noncreative “lists of facts,” which fall outside the realm of copyright law. Further, because food is
so central to human survival, cooking is often seen as an exercise in pragmatism rather than creativity.
Buccafusco argues that recipes are not mere facts, and that the culinary arts are inherently
creative. Facts, he points out, are discovered and not created. Yet no dish is simply discovered;
all are at one time created by combining some collection of ingredients in a hitherto-unknown
way. He notes that although most dishes can no longer be considered original, some undoubtedly can be.
He highlights a number of ways in which leading chefs create entirely unique dishes, transform old recipe ideas, and even engineer food to inspire certain responses. For example, Buccafusco shares one chef’s take on the hamburger; pickled beef tongue, deep-fried mayo, and molasses ketchup. He tells of another chef, who describes ways to make wheatgrass taste like cotton
candy. In such instances, it does seem that something new has been created. The paper contains
many other narratives which show the cerebral nature of cooking, and the various processes used
by chefs to determine whether something will taste good or not.
In what is perhaps his most compelling argument, Buccafusco focuses on the distinction between the nutritional value of food and the creative effort that goes into many dishes. Although
humans can survive on little more than bread and water, culinary professionals go to great
lengths to innovate. To Buccafusco, this indicates that a novel dish is much more than the sum
of its calories; it’s an expression of an idea.
This distinction is very important. Purely utilitarian products are not copyrightable; but creative products might be, even where a secondary utilitarian use exists. The classic example is
found in novelty belt buckles (Kieselstein Cord v. Accessories by Pearl, Inc., 632 F.2d 989, 993
(2d Cir. 1980)). Although any belt buckle offers some value in keeping one’s pants up, the 2nd
Circuit found that novelty buckles exist primarily as a fashion statement. As such, they are subject to copyright.
Although Buccafusco ultimately concludes that copyright law can and should applied to recipes, he expresses some doubt that this standard will ever be adopted.
His interviews with a number of top chefs revealed a preference for free sharing, and a disdain for the time and effort required to comply with copyright law. Charlie Trotter, one of the
most famous chefs in Chicago, put it simply: “I can’t get caught up about who might copy what
we do because we’re already on to the next thing.”
Web Note 5.7 (p. 162)
As the technology for making use of transplantable human organs improves, the demand
for those organs has far outstripped the supply available under the inalienability rules.
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See our website (and the box on “Inalienable Bodily Organs”) for a discussion of how a
regulated market in human organs might significantly increase the supply.
Advances in medical science – particularly in dealing with the body’s natural rejection of invading bodies – has greatly expanded the possibilities of transplanting someone else’s organ or
organs into an unhealthy person so as to allow that person to return to health. The ability to do
this is just over 100 years old (the first cornea transplant occurred in 1905), and its promise is
expanding greatly. In the recent past, for example, artificial organs, xenotransplantation (that is,
transplants from one species to another), and partial transplants (as when a portion of a healthy
liver is taken from a donor and placed in a done) have all been possible.
The central economic problem with transplantable organs is that the demand far exceeds the
available supply. Much of the discussion in the legal literature has had to do with how to deal
with this excess demand, and, particularly, with whether a regulated market in human organs –
some people have attempted to sell organs on on-line marketplaces – is feasible and legal.
The notes that follow are from some excellent articles on these matters. Please note that the
article by Fred Cate that we describe below came from a symposium issue of the Journal of Corporation Law on organ transplantation.
Laurel R. Siegel, “Re-Engineering the Laws of Organ Transplantation,” 49 Emory L.J. 917
(2000).
The drastic disparity between the supply and demand for organ transplant is grim. The author
argues that, in great part, the altruistic nature of the system in the United States can be blamed
for this shortage. By amending laws and advancing organ transplantation technology, the modified system could alleviate the shortage.
This article proposes that Congress amend the National Organ Transplantation Act to include
pilot programs, which the Department of Health and Human Services would administer. These
programs could be modeled after Pennsylvania's recent creation of an incentive program through
which the family of a deceased organ donor will receive funeral expenses. These new pilot programs would enable more states to offer incentives to the family of the decedent in exchange for
organ donations. Ideally, the implementation of these pilot programs should increase the organ
supply.
Adopting an incentive system provides a bridge between the current altruistic system and a
full-fledged market. Currently, a market for live organs would be inappropriate, unethical, and
illegal. On the one hand, a market takes advantage of the vulnerable poor who may not otherwise
choose to donate organs. On the other hand, providing small incentives rather than monetary
compensation to families who donate a deceased relative's organs does not violate ethical norms.
In the not-so-distant future, when technology facilitates the bioengineering of organs by combining actual human cells with scaffolding devices on which the cells grow and expand, the existing
wealth of organ transplantation laws preventing sales of organs may become obsolete. The engineered organ supply could meet the demand, and an ordinary marketplace would ensue for organs derived from the cells of live humans.
The techniques of organ transplantation have evolved through the centuries. Now technology
has the potential to radically change the science of organ transplantation. The law will be forced
to respond. Essentially, technology exacerbates the problem because it enables surgeons to transplant almost any organ, but they don't have the organs to do so. Theoretically, society will boast
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an almost unlimited supply of organs, a life enhancing improvement to the current situation of
severe and worsening shortage.
The existing body of laws pertains only to the organ transplantation donor system. The laws
have begun to evolve to accommodate the emerging technology. Congress has passed laws regarding fetal tissue regulation, courts have addressed litigation involving the property rights of
human tissue, and states have passed legislation providing incentives to donors.
Ethical concerns are inherent in organ transplantation. As long as organ transplantation involves the direct donation of human parts, it is not sound public policy to allow commerce in organs. Incorporating incentives into the system, as Pennsylvania has done, is a smart step toward a
successful future system. When most organs are engineered and are no longer solely human donor organs, the laws including the prohibition of sales will no longer apply. With ethical issues
substantially eliminated, these new organs can properly be part of the market.
David E. Jefferies, “The Body as Commodity: The Use of Markets to Cure the Organ Deficit,” 5
Ind. J. Global Leg. Stud. 621 (1998).
In current transplantation practice, an ever-widening gap exists between the number of organs needed for transplantations and the number of organs donated. Various systems have been
proposed to increase the supply of organs and solve this shortage. All systems implemented thus
far have a common element: they have all failed. In response, commentators have suggested that
creating an open market in organs would solve the supply problem. This proposal has met a
heated reaction on many levels. Admittedly, market systems bring the benefit of increased supply through financial incentives. However, this is only half of the equation. If a market system
were to be used, safeguards would be needed to avoid pitfalls.
Not everyone who needs a transplant receives one, and there remains a surplus of patients
waiting to receive an organ. Every year this number increases. Physicians, knowing that organ
supplies are limited, have kept the waiting lists artificially low by referring only the best candidates for transplant.
The needless death of those on waiting lists is not the only problem attributable to the organ
deficit. Another problem is the existence of a black market. Physicians must choose between patients when allocating organs-some get organs and some are refused. As a result, patients who
feel they can no longer wait for an organ, and can afford the increased cost, may turn to the black
market for organs. The problems caused by this black market are increasingly international as
people with funds travel between countries to search for needed organs. Countries that provide a
surplus of organs invariably are the ones with the least restrictions on trade in organs, thereby
producing an international market that generates human rights violations and organ sales by the
poor. Additionally, organs procured in these markets often do not meet the quality standards
found in the patient's home country. Increasing the supply of available organs in other nations is
crucial to ameliorating the problems of the international black market and its human rights abuses, as well as providing organs for all who may need them. This can be easily seen if one considers a situation where domestic supply meets domestic demand. In such a situation, people would
not travel abroad to a risky market to purchase an illegally obtained organ at an increased price.
Unfortunately, due to the shortage of organs, two or more people are often medically ready
and capable of a transplant, but there is only one organ to give. As a result, physicians and other
medical personnel make the choice by weighing the patients' social worth. Criteria include some
family-related considerations such as marital status and number of dependents; other criteria are
income, educational background, employment record, relationship to authority figures, past irre42
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sponsible behavior, and intelligence. A system that decides who lives and dies based on considerations such as income and education is unfortunate and may lead to inequitable results. A significant increase in the supply of organs would cure the shortage in organs, thereby eliminating
the necessity for a system of criteria to decide who receives organs and who does not. Several
different methods have been proposed to eliminate the organ shortage. These include systems of
encouraged voluntarism and presumed consent, among others to be discussed later. One suggested method allows people to sell their organs.
The system of organ procurement in the United States is set out in various legislative acts. In
this legislation, the United States recognizes a shortage of organs for transplantation and attempts
to correct the deficit. The author argues that having a Market System is a better way to deal with
the shortage.
The benefit of market systems lies in their ability to produce a sufficient supply of a commodity that is in demand. A free-market system uses the financial incentive of payment to encourage a sufficient number of individuals to sell their body parts. In the market, the supply
would be self-regulating because rising demand would raise the price of tissues in short supply
and produce incentives for individuals to sell their organs; these prices would ensure that enough
organs would be available to meet demand. A major problem with current organ procurement
systems is their anathema to price incentives which could be used to increase organ supply. The
use of a market system in human organs would operate on the same principles as many other
markets. As such, it would increase the amount of organs available for transplant. This approach
also places a very high premium on individual rights.
The biggest advantage of the free market is its ability to increase the supply of organs available for transplantation. This free market system enjoys its greatest popularity in the United
States. Americans accept the market as an alternative to altruistic systems and the coercive power of the state.
In practice, offering payment for organs will increase supply. Not only will some form of
payment entice people to override their discomfort at the idea of organ donation but it will also
transform the donor card into a legally binding contract, resulting in an increased physician sense
of comfort with following the wishes of the deceased rather than seeking the family's permission.
Markets are efficient mechanisms for transferring and allocating any good or resource; here, that
good happens to be human organs. This method of obtaining organs not only works on a theoretical level, but has worked demonstrably in practice as well. Today, nations which permit the sale
of organs also procure the greatest number of organs.
The market system would ameliorate many of the problems inherent in current systems implemented in various nations. One advantage of the market system is that everyone in the equation benefits from the trade.
The market harbors a tremendous ability to increase the supply of organs by offering financial incentives to the individual. Since the individual is only allowed to sell to the middleman,
and since recipients are only allowed to receive organs from the middleman based on altruistic
criteria, the system artfully uses the incentives of the market to procure organs while eliminating
arbitrary criteria in organ distribution. This system satisfies both goals of an organ procurement
system (eliminate organ shortage and avoid rights encroachments). Moreover, this result can be
accomplished in an efficient and fair manner. Finally, a limited commercial system could be successfully implemented today. Markets in the United States for the sale of blood provide strong
empirical evidence that a commercialization approach for organ transplants would work well.
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The author concludes that a new system for commercializing organs in a global network is
needed. By allowing people to contract for the exchange of organs for monetary consideration,
the market opens up financial incentives that increase the available supply of organs. At the same
time, the use of a "middleman" agency will prevent individual bartering for organs and ensure
that altruistic criteria are used to distribute the organ supply during an organ shortage.
Fred H. Cate, “Human Organ Transplantation: The Role of Law,” 20 J. Corp. L. 69 (1994).
Despite impressive successes, transplantation is sharply curtailed by a shortage of donated
organs and tissues. The number of people who either die of conditions for which transplantation
is indicated or are maintained on suboptimal therapies in the absence of a transplant far exceeds
the number of transplants performed.
Not all people who would benefit from a transplant actually are listed on the waiting list.
Nonetheless, the number of registrations on the national list far exceeds the current supply and is
increasing. The demand for organs is far outstripping the supply, and the gap is widening. In the
case of lifesaving organs such as hearts, this means that one-third or more of those people waiting will die before an organ is found. Every four hours a person dies while waiting.
Law and lawyers have proven to be a mixed blessing in human organ transplantation. Although law is in many ways responsible for the success of transplantation, most notably through
the Uniform Determination of Death and Uniform Anatomical Gift Acts, law is also one of
transplantation's greatest impediments. This Article examines the primary laws applicable to organ donation and transplantation and recommends renewed attention to three roles for law and
lawyers in the future.
The expanding legal regime governing transplantation is almost wholly at odds with the legal
principles that are emerging in the larger health policy context. The government's organ transplant policy runs directly counter to these trends, emphasizing instead altruism, centralization,
and a weighing of competing interests that focuses on the needs of donor and donor families to
the virtual exclusion of the interests of would be recipients whose lives hang in the balance and
of society as a whole. Perhaps because it is so out of synch, that policy has proven to be illconceived, poorly implemented, under-funded, and rarely enforced.
In the case of organ donation, transplant law offers no incentives for individuals to donate or
for health professionals and institutions to facilitate donation. On the contrary, the law largely
impedes donation. The law provides two avenues around this presumption. First, an individual
may sign a donor card or otherwise indicate a willingness to donate. But many impediments prevent a donor card from having any effect. While every state and the District of Columbia mention organ donation in connection with drivers' licenses, only ten have a donor card as part of the
license.
Despite laws in most states placing an obligation on law enforcement officials to search for a
donor card on accident victims, no state has a comprehensive procedure for determining if a potential donor is carrying a card. On the contrary, procedures for emergency fire and hospital personnel quickly separate injured people from their wallets and purses.
Even if a valid donor card is found and presented to the physician in charge of the patient's
care, doctors and hospitals fear professional criticism and legal liability if they procure organs
against the wishes of the next-of-kin. Donor cards are legally binding in forty-eight states and
health professionals who act on them are immune from liability under the Uniform Anatomical
Gift Act in every state, but the cards have proven to be useless unless next-of-kin approve the
donation.
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The second, and by far more important, means to obtain consent is from the next-of-kin. But
federal and state routine inquiry and required request laws have proven to be ineffective. The
reasons for the increase in refusals are unclear, but certainly include both inappropriate, ill-timed,
and insensitive requests and declining public confidence in the fundamental fairness of transplantation. It comes as no surprise that if the government requires overworked health professionals to
make a request that is difficult and unpleasant, for which neither training nor reimbursement is
offered, those requests are not likely to succeed. And to date, there is no reported case of a government agency seeking to enforce routine inquiry or required request laws.
The law thus presumes that a person does not want to donate and then minimizes the likelihood that a donor's legally expressed desire to donate will be respected. Those laws that encourage transplantation, such as required request statutes, frequently receive inadequate resources to
assure their implementation and little if any enforcement. In short, the legal framework is stacked
against donation.
Transplantation today is confronted with significant issues that require, at least in part, a regulatory response. Administering the transplant system fairly and efficiently, allocating scarce organs, and increasing the supply of organs for transplantation all urgently demand the attention of
lawmakers and regulators. In a very real sense, transplantation today is constrained not by medical issues, but by legal ones, and their resolution is essential to save lives and reduce human suffering. Lawyers alone will not find right answers, but-as people well-placed in society-they must
be part of asking the right questions.
S. Gregory Boyd, M.D., “Considering a Market in Human Organs,” 4 N.C. J. L. & Tech. 417
(2003).
This article discusses the possibility of creating an organ market that respects individual autonomy, prevents exploitation, acknowledges the sanctity of human life, and increases the supply
of human organs.
Current altruistic methods for organ donation have failed to meet organ demand for more
than thirty years. As a result of these failed organ procurement methods, along with moral and
legal barriers to other procurement methods, thousands of people die each year from the organ
supply failure. The lost lives and recent technological advances surrounding organ transplantation are leading to a reconsideration of alternatives to altruistic donation as the most effective
means of organ procurement.
Advancing medical technology is a central consideration in the discussion because human
ingenuity has created immeasurable lifesaving value in organs that was not previously possible.
This technology-driven value increase has contributed to a developing tension between societal
and individual rights over human organs and other valuable bodily derivatives. At the center of
this tension is the battle to create some form of market for human organs. Creating or not creating such a market will necessarily involve judgments about what weight should be given to the
claims of society and those of the individual over organs as property.
There are valid concerns about using a market approach to increase the supply of organs. One
primary worry is that the altruistic system will die if a compensated organ market is implemented. Another concern is that a market system will exploit and coerce the poor. Critics are especially worried about how organ sales have gone particularly badly overseas and on the black market.
The wealthy may gain an inequitable access to organs in an organ market. There may be an increase in diseased organs if compensation is offered. Many of these concerns are difficult to deal
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with, and all are worthy of discussion, but some may be worries that are disproportionate to the
real consequences, or concerns that are based on a misunderstanding of market possibilities.
An advantage created by a market system would be an increased supply of organs. An increased supply would almost certainly mean lowered costs, which would benefit all groups, especially the poor. One could view continuation of the current system as an infringement on autonomy and a form of oppression of the poor. Not only would current difficulties continue and
prices remain high under the current system, but removing an avenue of organ sale or compensation removes an alternative method of income for people who may believe that the possible benefit received from donating an organ is worth the cost. Prohibiting organ markets removes an opportunity for economic advancement that could be present under a market system.
Society should also ponder current black market pricing and the terrible consequences resulting from these illegal organ sales, including the use of diseased organs. The price paid on the
black market for a good can generally be said to be one of the highest prices possible for that
good. Current stories of inflated organ prices, if they can be trusted at all, are not representative
of what organ prices would be in a legal market. Consider that in a black market there is a diminished supply of goods and additional risks because of illegality. Both of these factors increase the
market price of the goods. In a legal market, supply is increased, and there are only ordinary
risks associated with selling the good. Both of these factors would push the price for organs
down.
There are reports that the black market in human organs has resulted in the exploitation of the
poor, including many terrible and dishonest acts, and disease transmission. It is important to note
that many of these ills, like black market pricing, should not be extrapolated on to what would
occur in a legal regulated market. To illustrate this point, consider the United States during prohibition or during the period in which abortion was generally illegal.
Many people greatly underestimate the variety of forms a market in human organs could take
and still be able to increase the organ supply. The first important choice that could be made is
between some form of living donor market and cadaveric donor market. Generally speaking,
people are more comfortable with a cadaveric market in organs because it removes the possibility of people selling an organ they may need later or the disability that might result from such a
sale.
A second important variable in the organ market is to separate markets for procurement from
markets for distribution. A market for distribution where donees bid on organs to be distributed
in an auction system is bothersome to many people because of the possibility that rich donees
would receive a disproportionate share of organs. It seems less worrisome to imagine hospitals,
insurance companies, or OPOs bidding in a well-regulated or price-fixed system for organs.
A third important market consideration would be to whom, when, and in what form payment
would be made for the organ. Scholars have considered many alternatives to a cash-up-front
method that are more palatable. The alternatives include discounted insurance premiums, estate
tax credits, payments to charities or religious groups, lost wage recovery, payments of funeral
expenses, and associated family expenses directly related to the donation. A related idea implicit
in the above discussion is who pays for organs. It is possible to include the cost of the organ in
the standard hospital bill, so that the donee is not directly responsible for the payment. Insurance
premium discounts and estate tax relief do not cause direct cost; they are merely income not received by the purchasing organization.
Finally, a market could help overcome what has been referred to as the "tyranny of the gift."
This is guilt that some transplant recipients feel after receiving this gift that is inherently one46
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sided. The recipient is given a priceless second chance at life, and often wants to be able to give
something back to the donor or the donor's family. A market may begin to allow for some sense
of repayment between the donor and recipient.
One could argue that property rights in body parts are being established, that organs have
value, and that a market for these organs does exist in the United States. The altruistic market is a
procurement side market with the United States government as the only allowable bidder. The
bidder has set the price in the legal market to zero. This is the lowest possible monetary incentive
to compensate suppliers in the current market. The unregulated black market thrives in the background while the legal, price fixed, and under-priced market fails to provide for legitimate market needs, resulting in the deaths of thousands and the suffering of tens of thousands.
Susan Hankin Denise, “Note: Regulating the Sale of Human Organs,” 71 Va. L. Rev. 1015
(1985).
In September 1983, H. Barry Jacobs, established a Virginia company to broker human kidneys. Jacobs intended to solicit healthy individuals to sell one of their kidneys at their chosen
price. Jacobs' proposal to broker kidneys from live donors was legal when originally announced.
Within six months, however, Virginia passed legislation specifically prohibiting the sale of
human organs. Several states have followed with similar legislation, and Congress recently
passed a federal law prohibiting organ sales. Whereas the state statutes simply prohibit organ
sales, the comprehensive federal statute is designed to alleviate the shortage of transplantable
organs. The statutory prohibitions of organ sales suffer from two important failings. First, the
state statutes contain various ambiguities that make the scope of the prohibitions uncertain. Second, both the federal and state statutes may be inappropriate. Instead of banning all organ sales,
the legislatures could have permitted a regulated organ market as a potential solution to the problem of organ scarcity.
Donations made at the donor's death, consented to either by the donor or posthumously by
the donor's family, are the major source of transplantable organs. The Uniform Anatomical Gift
Act (the Uniform Act) regulates these donations. The Uniform Act is silent on whether payment
is appropriate for a donation or an agreement to donate.
Under the Uniform Act, any adult of sound mind can either permit or forbid the posthumous
use of his organs for the purposes of transplantation, research, or teaching. An individual may
donate all or part of his body by will or by a non-testamentary document such as a donor card
carried on the person. If an individual fails to express a preference, his next of kin can donate his
organs posthumously under the Uniform Act.
Although the Uniform Act regulates organ donations, the donations are coordinated by various nonprofit organ procurement agencies. These agencies perform a variety of tasks, including
locating potential donors, collecting and preserving donated organs, and matching organs with
potential transplant recipients.
The effectiveness of this procurement system is questionable. Despite the present organ procurement system, the supply of donated organs has been inadequate for years. The demand in
recent years has risen significantly because improvements in tissue typing, surgical techniques,
and transplant patient care have made transplantation an increasingly successful procedure. Unfortunately, the supply of donor organs has not kept pace with the increased demand, resulting in
greater shortages than ever before.
Obviously, the problem of scarcity is acute for the individuals who require organ transplants.
Scarcity means long waiting lists, often measured in years rather than months. Unlike kidney di47
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alysis, practical technology is not available to keep patients requiring liver, heart, or heart-lung
transplants alive. As a result, many patients die awaiting transplants.
Scarcity does more than limit the number of people who can receive transplants. Without an
extremely large pool of donors, finding a perfectly matched replacement organ for a recipient is
very difficult. Consequently, the recipient must settle for an imperfect organ match. This results
in fewer successful transplants because rejection is more likely when the match is imperfect.
Another problem caused by scarcity is the need for family members to seek organs by appealing to the media. As a result, patients' private medical problems become public news events,
and the publicity may interfere with important treatment decisions that the patients and their families must make.
In addition to these medical and privacy problems, the scarcity of organs raises ethical concerns. As the demand for transplantable organs increases, the question of how to allocate a limited organ supply becomes acute. Underlying any allocation decision is the stark reality that nonrecipients may die. Ironically, this scarcity exists despite an adequate number of potential donors.
The problem of scarcity has engendered widespread debate on methods of increasing organ
supply. Several commentators have argued that the most effective solution is to create a commercial market in transplantable organs. The argument that permitting sales will encourage organ
donations is plausible considering that various individuals have actually attempted to sell their
organs.
Jacobs formulated the first serious proposal to buy and sell human organs, and his plan generated a great deal of publicity. According to initial reports, Jacobs established a company to
broker human kidneys. In reaction to Jacobs' proposal, the various legislatures prohibited all organ sales. This broad prohibition may have been a hasty and inappropriate response. The legislatures could have responded by regulating the market in human organs to eliminate the most undesirable elements of Jacobs' proposal. Many observers believed that this approach would have
increased the availability of organs while minimizing the problems associated with organ sales.
The author brings several alternatives for the ban on all organ sales:
The first alternative to the wholesale prohibition of organ sales is to allow sales between the
donor and recipient but to forbid organ "brokering" by third parties. The limited prohibition
eliminates the major problems of a commercial organ market, while allowing individuals to buy
or to sell organs legally.
A second regulatory alternative is to allow only the sale of cadaveric organs. If this solution
substantially increased the supply of organs, it might eliminate the need for live donations. A cadaveric organ market would thus have several advantages. It would eliminate the risk, however
slight, that accompanies the removal of kidneys from live donors. Moreover, the market would
avoid the coercion caused by family members and monetary inducement.
A third possible regulation would limit the compensation for an organ donation to specific
non-cash options. This regulation may be appropriate because non-pecuniary payment for an organ might be ethically justifiable even though a direct cash payment might not. A good example
of a non-cash payment is an un-enacted congressional tax bill that would have provided income
and estate tax deductions for decedents who donated organs for transplantation. Other alternatives to a direct cash payment include providing the donor with free life insurance or medical
care, giving his relatives transplant priority, or canceling or reducing his hospital bill if the donation is made after a long hospital stay.
A fourth alternative to a complete prohibition of sales is to allow the recipient to purchase an
organ from a family member. A wealthy individual in need of a kidney might prefer to pay a rel48
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ative for donating the needed organ. A donee should be allowed to express his appreciation by a
monetary gift; those not wanting to buy or sell an organ can engage in a purely donative transaction.
In sum, the author argues that regulating an organ market would help alleviate organ scarcity
without presenting the ethical problems raised by Jacobs' proposal to solicit donations from live
donors.
Lloyd R. Cohen, “Increasing the Supply of Transplant Organs: The Virtues of a Futures Market,”
58 Geo. Wash. L. Rev. 1 (1990).
There is no mere scarcity of transplant organs, but a severe and tragic shortage. Because
price is not used to bring more organs to the market, and to ration those organs among the potential recipients, the quantity demanded at a zero price far exceeds the quantity supplied. The author calls for the creation of a market in transplantable organs.
The proposed solution is a futures market in which healthy individuals would be given the
opportunity to contract for the sale of their body tissue for delivery after their death. If the vendor's organs are harvested and transplanted, a payment in the range of $5000 for each major organ and lesser amounts for minor tissue would be made to his estate or designee. The hospital in
which the vendor dies, as any bailee entrusted with valuable property, would have the legal duty
to preserve his cadaver in a manner suitable for organ harvesting and to notify the purchasing
agency of the decedent's condition so that it may harvest his organs. The proposal speaks only to
increasing the supply of organs, not to allocating them. Consistent with this proposal, the harvested organs may be purchased by a state agency, an unregulated private entrepreneur, or something in-between, and may be allocated by the market, doctors, a lottery, or any other conceivable means.
A proposed market must garner legislative approval and popular support, and to do that it
must be ethically acceptable. The futures market proposed by the author avoids three potential
ethical and political pitfalls. First, because there will be no acquisition of organs from live donors, it does not raise the specter of exploiting the poor. Second, because the market need not be
used to allocate the harvested organs, the rich need have no greater access than the poor. Finally,
because people will be selling their own organs, their next of kin will not be required to traffic in
the decedents' remains.
In addition to being ethically acceptable, a futures market is a robust solution. Unlike other
proposed reforms, it will successfully respond to a wide variety of potential causes of the organ
shortage. It provides powerful incentives to donors, doctors, and hospitals to participate in and to
next of kin to acquiesce in the process of organ retrieval. Beyond that, a market solution is efficient in two senses. First, it imposes fewer additional costs on society or the particular individuals concerned than on its rivals. Second, much like the difference between regulating water pollution with effluent taxes rather than by rules and prohibitions, a cash incentive to deliver organs
to the market is more subtle, balanced, and sensitive when compared with the alternatives.
A cash market in transplantable organs would prevent much needless death and suffering.
Yet the law does not permit such a market. There are many public policy questions on which the
law is opposed to the social interest. In most of those cases one can point to an entrenched and
politically potent special interest that is well served by the current law. While restricting the
market for transplantable organs is in principle no different, the author does not believe that a
special interest is the ultimate source of the opposition to a market in transplant organs. Rather, it
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is a widely felt repugnance to the notion of trafficking in human flesh that is at the root of this
pernicious policy.
To an economist, the problem of valuable organs going to waste cries out for a market solution. When goods are worth more to one person than another, and there are no substantial externalities, the market is a wonderfully efficient mechanism to induce transfer from the latter to the
former. The problem in the instant case is that the legal institutions that prevent the operation of
the market are not the creation of some bizarre sovereign with an obscure view of the proper role
of markets. Rather, they are a reflection of a deeply felt antipathy to the sale of human body
parts.
Although it is possible to conceive of the occasional severely injured person moments before
his death prospectively and conditionally selling his liver, kidneys, etc., this is hardly a satisfactory solution in the general case. Given the emotional and physical agony of the vendor, discussing such matters would be unseemly and in most cases the soon to be deceased will be incapable
of expressing his desire. The major organs of those who die of disease are usually unsuitable for
transplantation. The best organs come from victims of traumatic head injuries and cerebral hemorrhage. By the time these people arrive at the hospital they are usually in a state of permanent
unconsciousness. The futures market therefore requires that the decedent make a prospective
contingent sale of his own organs at a time when he is in good health.
In its appearance, the proposed market would be but a slight variation on the current system
of contingent organ donation. People could be offered the opportunity to sign organ sales contracts when they receive their driver's licenses, buy insurance, stand on street corners, or are solicited through the mail. The only substantial difference from the current system is that the vendor will be promised remuneration in return.
Theoretically the remuneration could take three different forms. First, the seller could be paid
a fee at the time of signing an organ sales contract for any or all of his organs in the event of his
death. Second, the contract between the purchaser and the vendor could be executory for both
parties, and the estate or designee of the seller could be paid a fixed fee for his cadaver whether
or not any usable organs were harvested. Third, the estate or designee could be paid a fee only
for those organs that are actually harvested from the decedent's body.
The law should treat the decedent's body like any other valuable piece of property that belonged to him and was devised or transferred in a will or other instrument. A futures market is a
robust solution to the organ shortage problem. Not only does it directly attack the problem of insufficient incentives for people to donate and for their next of kin to acquiesce, it also indirectly
and powerfully attacks the more pressing problem of providing incentives for hospitals and medical professionals to facilitate the process. It is like clearing a clogged pipe with a constant high
pressure blast of water rather than replacing the suspected clogged section.
Gregory S. Crespi, “Overcoming the Legal Obstacles to the Creation of a Futures Market in Bodily Organs,” 55 Ohio St. L.J. 1 (1994).
Due to a "scandalously ineffective legal and institutional framework" governing the transplantation of human bodily organs, thousands of Americans die every year for want of a kidney,
a heart, a liver, or a pancreas, while the organs that could prolong their lives are fed to worms. It
does not have to be this way. Armed with modern medical technology, with its sophisticated surgical equipment, procedures, and arsenal of highly effective immuno-suppressant drugs, our doctors are capable of carrying out the needed organ harvesting and transplantation surgeries at a
substantial but acceptable cost and with excellent survival rates. Just as importantly, the neces50
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sary organs are physically available from cadavers alone in sufficient quantities to meet existing
and projected needs.
These many deaths from organ failure are no longer the result of an inexorable fate that we
must accept, but occur in the modern world only as the unintended consequence of a flawed legal
regime that can be changed. The existing state and federal laws that govern the transplantation of
organs prohibit the commercial sale of organs by donors to recipients or brokering intermediaries. We have institutionalized a transplantation system that relies totally upon donor altruism for
its supply of organs. Not surprisingly, the number of organs supplied falls well short of meeting
the needs, and many potential transplant recipients who could live productive and satisfying lives
instead linger painfully and fruitlessly on long waiting lists and then die of organ failure.
Wise legislators design laws to govern people as they are, not as we would wish them to be.
We cannot rely solely upon the altruistic feelings of producers to provide society with the needed
goods and services. We must also harness the powerful motivation of economic self-interest to
ensure that those dangerous, difficult or unpleasant tasks that need to be done are done. While
most people sincerely profess to draw some intrinsic satisfaction from their work, relatively few
would continue to labor with the same dedication and intensity they now exhibit were they not
financially compensated for their efforts.
So it is with organ donations. While most persons are generally inclined to help their fellow
man when the opportunity arises, they are also inclined to avoid confronting the unpleasant fact
of their own mortality. There is a powerful psychological resistance to turning to look at the angel of death always perched on one's shoulder; something one cannot really avoid when seriously
contemplating the possibility of posthumously donating one's organs. Enough organs will be
voluntarily supplied to meet the substantial and rapidly expanding transplantation needs only if
and when we allow potential organ recipients or their agents to augment the noble altruistic feelings of potential donors or their bereaved kin with the promise of more tangible compensation.
There are a number of arguments that have been offered in opposition to the creation of a
commercial market in bodily organs. Some of these arguments are specious, but others have
some merit and are grounded in fundamental and widely shared beliefs concerning the dignity of
individuals and the importance to personhood of bodily integrity. It has been rather convincingly
argued, however, that it is not necessary to impose a blanket prohibition banning all commercial
organ transactions - thereby creating a severe organ shortage and effectively sentencing thousands of persons a year to needless suffering and death - to adequately address these concerns.
The critical needs of persons who require organ transplants to survive and the concerns of defenders of principles of personhood and individual dignity can both be met through the imposition of a regulatory structure that allows the commercial sale of organs to take place, but only
within the confines of a "futures" market.
A futures market would be entirely contractual and consensual in its operation, fully respecting the rights of persons to dispose of their organs as they see fit. It would enable us to satisfy all
transplant organ needs from cadavers alone rather than requiring the removal of paired organ
(such as a kidney) from live donors. The increased availability of organs would probably relieve
society altogether from the current burden of having to make (and disguise) the "tragic choices"
as to which persons will be denied organs and left to die. Moreover, such a market could be designed so that no one would be put into the position where he would be tempted to sell a bodily
organ to meet a pressing financial exigency.
The merits of the futures market approach are becoming more widely recognized. Even the
medical community, which has historically expressed strong opposition to the introduction of
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financial incentives into the organ supply system, is finally beginning to recognize that a futures
market would likely increase organ availability while adequately addressing the concerns of
those who hold reservations about commercialization. For example, the House of Delegates of
the American Medical Association (AMA) recently adopted the recommendations of a report
provided to it by the AMA Council on Ethical and Judicial Affairs that strongly endorsed the futures market concept, and that called for the implementation of a pilot futures market program
that would utilize financial incentives to encourage organ donation.
The defining characteristic of a futures market for bodily organs is that transactions would
take the form of a contractual commitment entered into by the person in whose body the organs
are located (the "organ bearer") to make those organs available to the other contracting party (the
"organ buyer") for transplantation or other purposes upon the death of the organ bearer. If organ
sales are permitted to take place only if they conform to this pattern, the sale of a decedent's organs by his surviving kin would be prohibited, as would the sale by an organ bearer of a paired
organ to be removed while the bearer is still alive. The organ buyer under a futures contract
would be under no obligation to harvest those organs upon the bearer's death or otherwise dispose of the cadaver, but would merely have an option right to harvest those organs should he
choose to do so.
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Web Note 5.8 (p. 172)
See our website for an additional case and some additional questions on using nuisance
law to correct externalities. We also summarize there some new literature on the choice
between property and liability rules as remedies.
We will turn to the new case – Spur Industries v. Del Webb – shortly. But first some review
and a summary of an important article on Boomer.
A nuisance is an unreasonable interference with another person’s use and enjoyment of his or
her property. A nuisance can be private or public. A private nuisance is a civil wrong that affects
a single individual or a definitive small number of persons in the enjoyment of private rights not
common to the public. A public nuisance involves an activity that interferes with the rights of the
community at large. (Noxious odor from a dairy farm affecting a neighbor’s property is a private
nuisance. If, however, those same odors affect campers in a nearby state park, the nuisance is
public because it interferes with public health, safety, or comfort.) A private nuisance suit is
most likely to be brought by an individual landowner while public nuisance suits are typically
brought by the government officials to vindicate the interests of the local community as a whole.
Professor Daniel A. Farber of the University of California at Berkeley has written an essay
about Boomer. Here is the summary of his article -- “The Story of Boomer: Pollution and the
Common Law,” 32 Ecology L.Q. 113 (2005).
Farber argues that Boomer has become, over the years, an important case, not only in environmental law, but also in property, remedies, and torts. (2005 was Boomer’s thirty-fifth birthday.) He examines Boomer from three different perspectives. First, Farber considers the issue of
damages versus injunctive relief through the lens of economic analysis. Second, he examines the
extent of judicial discretion in remedying environmental harms. Finally, he questions the continuing vitality of the common law in an age of statutes, and probes the complex relationship between these two sources of law.
Atlantic Cement assembled a large tract of land near Albany, New York: A later tax appraisal
list it as 3,260 acres. Once in operation, the plant employed approximately 400 people, and its
assessed value was about half of the total assessed value of the entire township. When construction of the Atlantic Cement plant began in 1961, the area was unzoned. Regarding pollution control, the record shows that Atlantic invested more than $40 million in the plant, which incorporated what were then state-of-the-art pollution controls. The record also shows that Atlantic did
what it could to mitigate the environmental impact of its operations. The company spent $2 million in dust collection equipment. another $1.6 million installing a spray system, purchasing a
fiberglass bag collector, and converting the energy supply from coal to oil. Despite these mitigation efforts, Atlantic Cement had drastic effects on its neighbors, partly due to its quarrying operation rather than the cement manufacturing operation itself. The neighboring landowners were
seriously affected by severe vibration for extended intervals, air pollution (cement dust), and
noise.
The key issue in the Boomer litigation was whether the factor of the economic interest of the
defendant – a major corporation, whose market value was clearly much greater than the collective value of the plaintiffs’ land, should enter into a determination of liability or remedy.
Regarding the liability analysis, the trial court argued that the plaintiffs had established the
existence of a nuisance; so, focus on the plant’s impact on its neighbors, rather than whether the
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social utility of the plant justified the impact. However, in the remedy analysis, the trial judge
refused to enter an injunction and merely awarded damages. Here, the social utility of the plant
loomed large.
The plaintiffs appealed the trial court’s denial of injunctive relief, but the appellate division
affirmed in a brief opinion. Remaining dissatisfied, the plaintiffs appealed again before the
Court of Appeals. And, as we have seen, the New York Court of Appeals ruled against the
plaintiffs because their damages were so small compared with the cost of shutting down the plant
(which they thought would be the result of issuing an injunction).
Boomer attracted attention in part because of its relationship to broader social and environmental trends during the time period, but the court made every effort to disassociate the case
from those trends. The court remained focused on the specific facts and issues raised in this
case.
Judge Bergan’s majority opinion considered whether the case should be resolved between the
parties as fairly as possible or whether it should be used as a vehicle to achieve broader public
policies. He concluded that the dispute should be viewed as a purely private dispute. Judge
Bergan set aside the public’s interest in environment quality; he characterized the litigation as
involving individual property owners challenging the operation of a single plant. The court considered the larger problem of pollution to be well beyond judicial competence to address; thus,
the court eliminated the public interest aspect of the case and resolved the case as a dispute between neighbors. Also, the court considered the issue of how to remedy the plaintiffs’ private
injury.
Judge Matthew Jasen in dissent argued about the importance of the air pollution problem and
the contribution of dust from cement plants to that problem. He also argued that the majority
was licensing a continuing wrong: “It is the same as saying to the cement company, you may
continue to do harm to your neighbors so long as you pay a fee for it.” In addition, Judge Jasen
asserted that giving the Atlantic cement servitude was essentially allowing it to exercise the
power of eminent domain, but for its own private benefits rather than for public use. He also affirmed that the cement company should have the burden to coming up with a technological solution within eighteen months, or else be subject to an injunction.
The court cited the Whalen case as authority for the rule that courts must grant an injunction
whenever the damage resulting from a nuisance is substantial – namely, $100 a year. However,
in Whalen, the court said that “it is not safe to attempt to lay down any hard and fast rule for the
guidance of courts of equity in determining when an injunction will issue.” Also, the court cited
three other cases that stand for the proposition that the default remedy in a nuisance case is injunctive relief. These cases make clear that an injunction may be appropriate even if the monetary benefit to the plaintiff is smaller than the monetary cost to the defendant. But they do not
seem to foreclose the possibility that, in extreme cases, hardship to the defendant or the public
might justify denial of an injunction in a nuisance case. Thus, the Boomer court should not have
leapt to the conclusion that these cases mandated an injunction in the case before it.
According to Farber, Boomer merely placed a gloss on the Whalen rule: The plaintiff is always prima facie entitled to an injunction, but in the case of highly disproportionate harm to the
defendant or the public, the injunction can be made conditional on a damage payment.
Farber said that Boomer raises doctrinal and theoretical issues. The first issue relates to remedies for environmental violations. Boomer is a notable affirmation of the discretionary nature
of equitable remedies and the judge’s power to balance the equities in crafting a remedy.
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Boomer further raises the question whether balancing the equities is limited to common law
cases or also applies to all environmental injunctions. Also, we can ask whether courts can use
their equitable discretion to postpone or exempt polluters from statutory requirements; or whether environmental concerns trump economic interests in framing remedies against polluters.
Farber argued that injunctions remain the default remedy for environmental violations, and
Boomer is probably limited to common law cases. However, Boomer may have ripple effects in
statutory cases.
The second issue involves the economics of the decision, whether the Boomer court was right
to favor damages over an injunction on economic grounds. Legal scholars have devoted great
attention to the economic implications of remedies, and Boomer has figured prominently as an
example.
Finally, the third issue is whether the common law continues to have any relevance in today’s
environmental law, given the predominance of environmental statutes. Nowadays, environmental
law focuses almost exclusively on statutory regulation, with the common law receiving much
less attention. So, we can wonder how much room is left for the common law today. The courts
have shown that the common law has continued to play a role in environmental law, even in this
statutory era. To the extent that Boomer might be thought to signal the irrelevance of the common law to the larger social issues raised by environmental law, that signal has turned out to be
misleading.
The case that followed Boomer but that seemed to present similar issues is Spur Industries v.
Del Webb. Here is an excerpt from that important case.
Spur Industries, Inc. v. Del E. Webb Development Co., 108 Ariz. 178, 494 P.2d 700 (1972).
Del Webb, the plaintiff is developer of a residential area, Sun City, and Spur is a cattle feedlot near Phoenix, Arizona. In 1956, Spur’s predecessors began a feedlot near the present location.
In 1959, the plaintiff started the development of an urban area known as Sun City. In 1960, each
of the parties began an expansion projects. By 2 May 1960, there were 450 to 500 houses completed or under construction. By 1962, the defendant completed its expansion from 35 to 114
acres. By December 1967, each of the expansion projects had brought the parties within 100 feet
of each other. Del Webb filed its original complaint alleging the in excess of 1,300 lots in the
southwest portion were unfit for development for sale as residential lots because of the operation
of the Spur feedlot.
The main issues in this case are whether the operation of a business lawfully, but then becomes a nuisance by the growth of a residential area, can be enjoined, and whether if enjoined
the developer can be required to indemnify the operator of the business.
The court discusses the difference between a private and a public nuisance. A private nuisance is one affecting a single individual or a definite small number of persons in the enjoyment
of private rights not common to the public. A public nuisance affects the rights enjoyed by citizens as a part of the public and must affect a considerable number of people or an entire community or neighborhood. The court asserts that private nuisance can be adequately dealt with
through the payment of money damages, but that a public nuisance, for which the total harm is
much greater, is subject to an injunction.
The trial court had held that Spur’s feedlot had become a public nuisance, and the Arizona
Supreme Court agreed. Then, the court discusses whether Spur should be exonerated from being
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sance” cases, the courts have held that the residential landowner may not have relief if he knowingly came into a neighborhood reserved for industrial or agricultural endeavors and has been
damaged thereby.
Were Del Webb the only party injured, we would feel justified in holding that the doctrine of
“coming the nuisance” would have been a bar to the relief asked by Webb, and, on the other
hand, had Spur located the feedlot near the outskirts of a city and had the city grown toward the
feedlot, Spur would have to suffer the cost of abating the nuisance as to those people locating
within the growth pattern of the expanding city. …
There was no indication in the instant case at the time Spur and its predecessors located in
western Maricopa County that a new city would spring up, full-blown, alongside the feeding operation and that the developer of that city would ask the court to order Spur to move because of
the new city. Spur is required to move not because of any wrongdoing on the part of Spur, but
because of a proper and legitimate regard of the courts for the rights and interests of the public.
Del Webb, on the other hand, is entitled to the relief prayed for (a permanent injunction), not
because Webb is blameless, but because of the damage to the people who have been encouraged
to purchase houses in Sun City. It does not equitably or logically follow, however, that Webb,
being entitled to the injunction, is then free of any liability to Spur if Webb has in fact been the
cause of the damage Spur has sustained. It does not seem harsh to require a developer, who has
taken advantage of the lower land values in a rural area as well as the availability of large tracts
of land on which to build and develop a new town or city in the area, to indemnify those who are
forced to leave as a result.
Having brought people to the nuisance to the foreseeable detriment of Spur, Webb must indemnify Spur for a reasonable amount of the cost of moving or shutting down….
It is therefore the decision of this court that the matter be remanded to the trial court for a
hearing upon the damages sustained by the defendant Spur as a reasonably foreseeable and direct
result of the granting of the permanent injunction.
In conclusion, the court granted the injunction against the feedlot but also awarded damages
against the plaintiff in favor of the feedlot.
Do you think that this case was decided correctly? Was it decided consistently with the Calabresi-Melamed criteria?
Web Note 5.9 (p. 181)
There have been some fascinating recent U.S. cases regarding noncompensable regulations and compensable takings. We review some of those cases and some of the recent
literature on these issues on our website.
The following are summaries and excerpts from some of the most important recent cases
having to do with the governmental taking of private property. In addition to the books and articles recommended at the end of the Chapter 5, we would also like to recommend a book forthcoming in 2011 – Thomas J. Miceli, Private Property, Public Use: The Economic Theory of Eminent Domain. The book is an extremely readable but rigorous summary of the academic literature on takings and regulatory takings with many original contributions to that literature.
Hawaii Housing Authority et al. v. Midkiff et al., 467 U.S. 229 (1984).
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The Fifth Amendment of the United States Constitution provides, in pertinent part, that "private property [shall not] be taken for public use, without just compensation." This case present
the question whether the Public Use Clause of the Fifth Amendment, made applicable to the
States through the Fourteenth Amendment, prohibits the State of Hawaii from taking, with just
compensation, title in real property from lessors and transferring it to lessees in order to reduce
the concentration of ownership of fees simple in the State.
The Hawaii Housing Authority had enacted the Hawaii Land Reform Act, providing for condemnation of residential tracts and resale to lessees after the Hawaiian legislature discovered that
only a small number of landholders owned the state's land. The legislature concluded that concentrated land ownership was responsible for skewing the state's residential fee simple market,
inflating land prices, and injuring the public tranquility and welfare. The HHA held a public
hearing concerning the acquisition of the landowner's property and made the statutory finding
that the acquisition of the property effectuated a public purpose under the Act. The HHA then
ordered the landowners to submit to compulsory arbitration, to which the landowners responded
with the lawsuit.
The Court found the Act constitutional by limiting the number of lots any one tenant could
purchase and authorized the use public funds to ensure that the market dilution goals were
achieved. The Court held that the HHA enacted the Act not to benefit a particular class of individuals but to attack certain perceived evils of concentrated property ownership in Hawaii, which
was a legitimate public purpose, and that condemnation was not an irrational power to achieve
that purpose. Additionally, the public use clause of the Fifth Amendment, made applicable to the
states through the Fourteenth Amendment, did not prohibit the state from taking residential property from lessors and transferring it to lessees in order to reduce the land oligopoly in Hawaii.
The mere fact that property taken outright by eminent domain is transferred in the first instance to private beneficiaries does not condemn that taking as having only a private purpose (it
is only the takings purpose, and not its mechanics, that must pass scrutiny under the Public Use
Clause). Therefore, the Hawaii Land Reform Act, providing for condemnation of residential
tracts and resale to lessees, was held constitutional.
Kelo v. City of New London, 545 U.S. 469 (2005).
The principal issue in this appeal is whether the public use clauses of the federal and state
constitutions authorize the exercise of the eminent domain power in furtherance of a significant
economic development plan that is projected to create in excess of 1000 jobs, to increase tax and
other revenues, and to revitalize an economically distressed city, including its downtown and waterfront areas.
The plaintiffs, owners of certain real property in the city of New London, appeal from the
judgment of the trial court denying their request for permanent injunctive relief to prevent the
defendants, the city of New London, a municipal corporation, and the New London Development
Corporation (development corporation), from exercising eminent domain authority to condemn
the plaintiffs' properties located on the land that is part of the development plan. The defendants
cross appeal from the judgment of the trial court granting the plaintiffs' request for permanent
injunctive relief with respect to other properties also located on the land that is part of the development plan.
A municipal development plan area was approximately 90 acres in size. It included residential and commercial areas, and was comprised of approximately 115 land parcels. The development plan itself was divided into seven parcels of land. The development company voted to use
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the power of eminent domain to acquire properties within the development area whose owners
had not been willing to sell them.
The plaintiffs claim was that the trial court improperly determined that the development corporation has the authority to condemn the plaintiffs' property under chapter the Connecticut statute. The plaintiffs argued that the relevant statue applies only to "unified land and water areas"
and "vacated commercial plants," and that their homes fit neither of those categories, because
under the language and legislative history of the statute, the term "unified land and water areas"
refers only to undeveloped land. The defendants' claim, in response, that the term "unified land
and water areas" includes developed land, and that concluding otherwise would frustrate the declared legislative purpose of restoring the state's economic health.
The appellate court construed the ambiguous term "unified land and water areas" in the Connecticut statute (Conn. Gen. Stat. § 8-186)6 as not being impermissibly broad. The owners
claimed that the condemnation of property for economic development by private parties was inconsistent with prior public use decisions. However, municipal economic development was, in
and of itself, a constitutionally valid public use under the well-established broad, purposive approach. Accordingly, any private benefit from such economic development was secondary to the
public benefit resulting from significant economic growth in a community. Therefore, the court
held that the owners did not prove that the use of eminent domain was facially unconstitutional
when used in furtherance of an economic development plan.
Poletown Neighborhood Council v. City of Detroit, 410 Mich. 616, 304 N.W.2d 455 (1981).
Note that this is not a case before the U.S. Supreme court, but rather before the Michigan Supreme court. Note also that this case – fascinating though it is – has been overturned by a later
decision of the Michigan Supreme Court, Wayne v. Hathcock, 684 N.W.2d 765 (Mich 2004),
which we excerpt very briefly below. There is an excellent article on these two cases by Adam
Mossoff “The Death of Poletown: The Future of Eminent Domain After Country of Wayne v.
Hathcock,” 2004 Mich. St. L. Rev. 837.
The Poletown Neighborhood Council, an unincorporated association, and ten residents of the
Poletown area of Detroit brought an action against the City of Detroit and its Economic Development Corporation for declaratory and injunctive relief to prevent the condemnation of land in
Poletown to be conveyed by the economic development corporation to General Motors Corporation for the construction of new Fisher Body and Cadillac assembly plants.
Plaintiffs filed an action to challenge the project and argued that, among other things, the
condemnation of land in this case is a taking of private property for a private use in violation of
the state Constitution. The trial court found that the city did not abuse its discretion in determining that the property was necessary for the project and dismissed the complaint.
On appeal, the question before the court was "a question of paramount importance to the future welfare of this state and its residents: Can a municipality use the power of eminent domain
granted to it by the Economic Development Corporations Act, to condemn property for transfer
to a private corporation to build a plant to promote industry and commerce, thereby adding jobs
and taxes to the economic base of the municipality and state?"
6
The law provides that permitting and assisting municipalities to acquire and improve unified land and water areas
and to acquire and improve or demolish vacated commercial plants for industrial and business purposes are public
uses and purposes for which public moneys may be expended; and that the necessity in the public interest for the
provisions of this chapter is hereby declared as a matter of legislative determination.
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The appeal court affirmed the trail court's ruling and held that under Mich. Comp. Laws
§125.1622 the legislature authorized cities to acquire property by condemnation in order to provide industrial and commercial sites and the means of transfer from the cities to private users.
The project was developed to promote the public health and welfare, which was authorized by
Mich. Constitution (Article 4, §51). The primary focus of the project was the creation of jobs and
the promotion of the public welfare, and the benefit created for the private corporation was incidental.
The court also added that "Our determination that this project falls within the public purpose,
as stated by the Legislature, does not mean that every condemnation proposed by an economic
development corporation will meet with similar acceptance simply because it may provide some
jobs or add to the industrial or commercial base. If the public benefit was not so clear and significant, we would hesitate to sanction approval of such a project. The power of eminent domain is
restricted to furthering public uses and purposes and is not to be exercised without substantial
proof that the public is primarily to be benefited. Where, as here, the condemnation power is exercised in a way that benefits specific and identifiable private interests, a court inspects with
heightened scrutiny the claim that the public interest is the predominant interest being advanced.
Such public benefit cannot be speculative or marginal but must be clear and significant if it is to
be within the legitimate purpose as stated by the Legislature."
County of Wayne v. Hathcock, 471 Mich. 445; 684 N.W.2d 765 (2004).
In April 2001, the county initiated actions to condemn nineteen parcels of land for the construction of a large business and technology park. The county argued that the condemnation is
needed for the following purposes: "(1) the creation of jobs for its citizens, (2) the stimulation of
private investment and redevelopment in the county to insure a healthy and growing tax base so
that the county can fund and deliver critical public services, (3) stemming the tide of disinvestment and population loss, and (4) supporting development opportunities which would otherwise
remain unrealized." The owners of those parcels maintain that these condemnations lack statutory authorization and exceed constitutional bounds.
The court found that the county was authorized to condemn property under the Michigan
laws and that the creation of jobs was a public purpose within its authority and that the lack of an
identified purchaser did not defeat a finding of necessity.
The court concluded, however, that the proposed condemnation did not pass constitutional
muster because the taking was not for public use within the meaning of the Michigan Constitution (Article 10, §2). The park was not an enterprise dependent on the use of land that could be
assembled only by government action. The park would not be subject to public oversight after
being sold to private entities. There were no facts of independent public significance, such as
health and safety issues, that might justify the condemnation. In so holding, the court overruled
Poletown Neighborhood Council v. Detroit.
United Nuclear Corporation v. The United States, 912 F.2d 1432 (1990).
The corporation's lease agreements with the Navajo Tribal Council (council) authorized the
corporation to conduct uranium mining in the Navajo Reservation. Although the mining plan satisfied all the pertinent regulations, the United States refused to approve it without council approval. The council refused to approve the plan without an increase of payment by the corporation. As a result, the leases expired and the corporation filed suit alleging that the actions of the
United States constituted a taking of property under the Fifth Amendment.
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The trial court dismissed the complaint holding that the corporation had no "legally protected
property right to approval of its mine plan" that was "the subject of a Fifth Amendment taking."
On appeal, the court reversed the trial court's order and held that there was a "taking" of
property. The court held that "the determination whether government action constitutes a taking
of property under the fifth amendment rather than a mere exercise of the government's regulatory
authority frequently is a close, difficult, and complex process." And that "In Connolly v. Pension
Benefit Guaranty Corp. the Supreme Court noted that while its cases "have eschewed the development of any set formula for identifying a 'taking' forbidden by the Fifth Amendment, and have
relied instead on ad hoc, factual inquiries into the circumstances of each particular case, “there
are "three factors which have 'particular significance'" "to aid in this determination": (1) "the
economic impact of the regulation on the claimant"; (2) "the extent to which the regulation has
interfered with distinct investment-backed expectations"; and (3) "the character of the governmental action."
The court determined that the economic impact on the corporation as a result of the refusal to
approve the mining plan was severe, that the regulation interfered with investment-backed expectations, and the property interest at issue consisted of the corporation's leasehold interest in
the minerals and not merely an expectation.
The court further noted that the government's requirement of counsel's consent reflects not
concern over national safety, but an attempt to enable the council to exact additional money from
a company with whom it had a valid contract, which the government euphemistically describes
as an attempt to encourage and promote Indian self-determination.
Therefore, the court concluded that this was not a case where governmental regulation supported a taking of property for the purpose of protecting the safety of the general public.
Tahoe-Sierra Preservation Council, Inc., et al. v. Tahoe Regional Planning Agency et al., 535
U.S. 302 (2002).
Lake Tahoe's exceptional clarity is attributed to the absence of algae that obscures the waters
of most other lakes. Historically, the lack of nitrogen and phosphorous, which nourish the growth
of algae, has ensured the transparency of its waters. Unfortunately, the lake's pristine state has
deteriorated rapidly over the past 40 years; increased land development in the Lake Tahoe Basin
has threatened the "'noble sheet of blue water'" beloved by Twain and countless others. As the
District Court found, "dramatic decreases in clarity first began to be noted in the 1950's/early
1960's, shortly after development at the lake began in earnest." The upsurge of development in
the area has caused "increased nutrient loading of the lake largely because of the increase in impervious coverage of land in the Basin resulting from that development." Therefore, unless the
process is stopped, the lake will lose its clarity and its trademark blue color, becoming green and
opaque for eternity.
In order to study the impact of development near a popular resort lake and to design an environmentally sound growth strategy, the defendant imposed temporary moratoria to maintain the
status quo. The landowners contended that the moratoria against all viable economic use of their
properties imposed a constitutional obligation on the defendant to compensate the landowners for
the value of its use during the moratoria.
The United State Supreme Court held, however, that the mere enactment of the regulations
implementing the moratoria did not constitute a per se taking of the landowners' property. Rather, whether a taking occurred depended upon consideration of the landowners' investment60
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backed expectations, the actual impact of the regulation on the landowners, the importance of the
public interest involved, and the reasons for imposing the temporary restriction.
Adoption of a categorical rule that any deprivation of all economic use, no matter how brief,
constituted a compensable taking would impose unreasonable financial obligations upon governments for the normal delays involved in processing land use applications and would improperly encourage hasty decisionmaking.
Anthony Palazzolo v. Rhode Island, et al., 533 U.S. 606 (2001).
The landowner was a shareholder in a corporation that invested in the subject property. The
resource management council promulgated regulations designating salt marshes such as those on
the property as protected coastal wetlands. The landowner subsequently became the corporation's
sole owner. When the corporate charter was revoked, title passed to the landowner. The council
denied the landowner's application to fill the property. The landowner filed a takings action,
which was rejected in state court.
The Supreme Court affirmed in part and reversed in part. The state court erred in finding that
the claims were unripe, because the landowner obtained a final decision from the council determining the permitted use for the land. The state court also erred in ruling that acquisition of title
after the effective date of the regulations barred the claims. However, the state court did not err
in finding that the landowner failed to establish a deprivation of all economic value, because it
was undisputed that the upland portion of the parcel retained significant worth for construction of
a residence. The case was remanded so the claims could be examined under the Penn Central
case analysis.
In 1959, an individual and his associates formed a corporation to purchase some parcels of
land on the Rhode Island coast, which parcels consisted mostly of salt marsh but included some
upland property. After the individual had bought out his associates and become the corporation's
sole shareholder, the corporation applied to the state's division of harbors and rivers for permission to dredge an adjoining pond, fill the marsh, and develop the resulting land as a beach club.
However, these applications were ultimately denied. In 1971, the state enacted legislation creating a coastal resources management council, which promulgated regulations designating salt
marshes like those on the corporation's property as protected coastal wetlands, on which only
limited development was permitted. In 1978, the corporation's charter was revoked and title to
the property passed to the individual, who subsequently made another series of applications to
the council for permission to fill the marsh and build a beach club. The council, however, ruled
that (1) under its regulations, a landowner seeking to fill salt marsh in that area needed a special
exception; and (2) the beach-club proposal conflicted with the regulatory standard for a special
exception, which standard required a compelling public purpose providing benefits to the public
as a whole. After state courts affirmed the council's decision, the individual filed an inverse condemnation action in Rhode Island Superior Court, which action (1) alleged that the state's wetlands regulations, as applied by the council, (a) had taken the individual's property without compensation in violation of the Federal Constitution's Fifth Amendment, and (b) specifically, had
deprived him of all economically beneficial use of the property, causing a "total taking" which
required compensation; and (2) sought damages based on an estimate of the value of a proposed
74-lot residential subdivision. The Superior Court ruled against the landowner. The Supreme
Court of Rhode Island affirmed on the grounds that (1) the takings claim was not ripe, because
the council's rejection of the individual's specific development proposals left some doubt as to
the extent of development which the council would allow on the property, (2) the individual had
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no right to challenge regulations which had already been in effect when he succeeded to ownership of the property; (3) the individual had not lost all economically beneficial use of the property, given uncontradicted evidence that the upland portion had $200,000 in residential development value; and (4) the individual could not recover on a takings claim since he had no reasonable investment-backed expectations that could be affected by the regulations, because they preceded his ownership.
The United States Supreme Court held that (1) the takings claim was ripe, where (a) the
council's decisions made clear its interpretation of the regulations as barring any filling or development activity in the wetlands on the individual's property, and (b) there was no uncertainty
about the land's permitted use and value, given uncontested evidence that the upland portion had
an estimated worth of $200,000 for residential use; and (2) the individual's total-taking claim was
not barred merely because of his post-regulation acquisition of title, for a regulation that would
otherwise be unconstitutional in the absence of compensation was not transformed into a background principle of state law by mere virtue of the passage of title; but (3) the individual was not
deprived of all economically beneficial use of his land, for regulations allowing the building of a
substantial residence on the 18-acre upland parcel did not leave the property economically idle.
Therefore, the case would be remanded.
David H. Lucas v. South Caroline Coastal Council, 505 U.S. 1003 (1992).
In 1986, petitioner Lucas bought two residential lots on a South Carolina barrier island, intending to build single-family homes such as those on the immediately adjacent parcels. At that
time, Lucas's lots were not subject to the State's coastal zone building permit requirements. In
1988, however, the state legislature enacted the Beachfront Management Act ("BMA"), which
barred Lucas from erecting any permanent habitable structures on his parcels.
The petitioner filed suit against respondent state agency, contending that, even though the Act
may have been a lawful exercise of the State's police power, the ban on construction deprived
him of all "economically viable use" of his property and therefore effected a "taking" under the
Fifth and Fourteenth Amendments that required the payment of just compensation.
The state trial court agreed, finding that the ban rendered Lucas's parcels "valueless," and entered an award exceeding $1.2 million. In reversing, the State Supreme Court held itself bound,
in light of Lucas's failure to attack the Act's validity, to accept the legislature's "uncontested . . .
findings" that new construction in the coastal zone threatened a valuable public resource. The
court ruled that when a regulation is designed to prevent "harmful or noxious uses" of property
akin to public nuisances, no compensation is owing under the Takings Clause regardless of the
regulation's effect on the property's value.
On certiorari, the United States Supreme Court reversed and remanded. The court held that
(1) the decision below was ripe for review, even though the BMA had been amended to allow the
issuance of special permits and even though Supreme Court precedents reflect an insistence on
knowing the nature and extent of permitted development before adjudicating the constitutionality
of regulations purporting to limit such development, because although the above considerations
would preclude review had the court below rested its judgment on ripeness grounds, that court
had instead disposed of the developer's claim on the merits; (2) where a state seeks to sustain a
regulation that deprives land of all economically beneficial use, the state may resist an asserted
right to compensation under the takings clause, on the theory that there has been no "taking," only if the logically antecedent inquiry into the nature of the owner's estate shows that the proscribed use interests were not part of the owner's title to begin with, so that the severe limitation
on property use is not newly legislated or decreed, but inheres in the title itself through the re62
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strictions that background principles of the state's law of property and nuisance already place upon land ownership; (3) the court below therefore erred in rejecting the developer's claim on the
merits on the basis of the state legislature's recitation of a noxious-use justification for the BMA;
and (4) the case would be remanded for a determination of the state-law question whether common-law principles would have prevented the erection of any habitable or productive improvements on the developer's land.
Daryl J. Levinson, “Making Governments Pay: Markets, Politics and the Allocation of Constitutional Costs,” 67 U. Chi. L. Rev. 345 (2000).
Instrumental analysis of private law damage remedies assumes rational economic actors in a
market environment. A privately-owned factory forced by the tort system to internalize $1000 in
pollution costs suffered by a downstream neighbor will continue to pollute if, and only if, the
private benefits of the pollution-producing activity exceed $1000. Once the firm has internalized
the full social costs and full social benefits of its activities, its self-interested, profit-maximizing
decisions about whether or how much to pollute will be both privately and socially optimal.
The invisibility of these assumptions becomes problematic, however, when government is
substituted for the private firm in this analysis. This substitution takes place routinely in discussions of constitutional remedies. Several important public law remedial systems seek to deter
government, to some socially optimal extent, from violating constitutional rights by forcing government agencies to internalize the monetary costs of their constitutionally problematic conduct.
Government entities and officials are liable for monetary damages to compensate the victims of
constitutional violations. The eminent domain clause of the Constitution prohibits government
from taking private property for public use without just compensation - in effect mandating a
“remedy” of just compensation for interference with certain constitutionally protected property
rights.
In light of the similarities between the goals (deterrence) and mechanisms (cost internalization) of private law damages and constitutional cost remedies, perhaps it should come as no surprise that courts and commentators have routinely applied conventional assumptions about the
behavior of firms in market environments to government. Discussions of constitutional cost remedies usually start from the assumption that the incentive effects of cost-internalization will be
the same for government as for private firms and that cost-benefit analysis by government decisionmakers will result in socially optimal choices about activities that threaten constitutional
rights. Courts and commentators usually take for granted that government will respond to costinternalization more or less like a corporation, so that requiring government to compensate the
victims of takings or constitutional torts ensures that government will take full account of the
costs of its actions.
If government does not respond to costs and benefits in the same way as a private firm, however, then none of these predictions about the instrumental effects of constitutional cost remedies
on government behavior are likely to be accurate. In fact, for reasons that are discussed in this
article, the author argues that there is every reason to expect government to behave quite differently from private firms. Because government behavior is responsive to political, not market, incentives, we should not assume that it will internalize social costs just because it is forced to
make a budgetary outlay. The only way to predict the effects of constitutional cost remedies is to
convert the financial costs they impose into political costs. This may be possible, but only by
constructing models of government decisionmaking that are capable of exchanging economic
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costs and benefits into political currency. As this Article goes on to demonstrate, any such model
will be highly contextual, complex, and controversial.
In short, this Article seeks to expose, and then move beyond, the present confusion about
how government responds to constitutional costs and benefits, as well as to examine the justification for constitutional cost remedies in a world where government cannot be expected to respond
to forced financial outflows in any socially desirable, or even predictable, way. The author concludes that constitutional cost remedies make government pay dollars for constitutionally problematic conduct, but government cares not about dollars, only about votes. The challenge is to
find ways of closing this gap.
Michael A. Heller & James E. Krier, “Deterrence and Distribution in the Law of Takings,” 112
Harv. L. Rev. 997 (1999).
The law of takings couples together matters that should be treated independently. The conventional view, shared by courts and commentators, has been that any takings case can be resolved in one of two ways: wither there is a taking and compensation is due, or there is no taking
and no compensation is due. The authors argue that any of these results are correct as long as one
holding or the other served the two central concerns of the Takings Clause – efficiency and justice. However, a problem arises when in some takings cases there are good reasons to require
payment by the government, but not compensation to the aggrieved property owners, or when the
vice versa is true. What is needed is therefore a set of four possible resolutions, instead of the
conventional two; the two new resolutions become available when we uncouple efficiency considerations from justice considerations, or in other words when we uncouple "taking" from
"compensation".
In Phillips v. Washington Legal Foundation, the Supreme Court considered the meaning of
"private property" in the Constitution's context. The majority and dissenting opinions interpreted
the meaning of the phrase in a sensible way but not in a way fully faithful to the animating concern of the just compensation requirement. All justices agreed that it is possible for the government to take private property without compensation. This decision, the authors argue, has moved
us to think anew about the conventional law of takings, and to consider the virtue of an expended
approach.
Prior to the Pennsylvania Coal case, takings law was pretty simple and solid, although it was
not particularly satisfying. When the government took title to property or actually occupied it,
then just compensation was due; otherwise it was not. The Pennsylvania Coal case made things
complicated. Suddenly, even the burden worked by regulatory measures might amount to takings, unless the measures were intended to control nuisances. Developments since have only
added to the muddle. Supreme Court decisions over the last three-quarters of a century have obscured and bifurcated the nuisance exception to regulatory takings; have waffled on the question
of conceptual severance; have distinguished inconsistently between permanent and temporary
takings; have suggested that what is not just compensation actually is just compensation, if only
regulators are crafty; have made little of large losses unless they are entire, and much small ones,
even when they are zero; have become confused about what "private property" is for the purpose
of the Takings Clause; have, in short, turned the words of the Takings Clause into a cryptogram
that only the Justices in a given case are able to decipher (and seldom do all of them agree).
The courts created a mess by changing times, values, politics, and personalities result in different views among the members of the court. Therefore, the authors argue, in order to make
sense of the Taking Clause, it is time to look beyond its text to its purposes and go anew from
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there. One such purpose is fairness, and the other is efficiency. Whatever the court's decision in
the Pennsylvania Coal case left obscure, it made clear that regulations are often substitute for
eminent domain. There is abundant agreement that the power of eminent domain is justified and
constrained for reasons having to do, in part, with efficient use of society's resources. It would be
strange to suppose that the same is not true of regulatory substitutes.
A problem with this observation is that it calls up the ghost of substantive due process. If the
courts are to review regulatory measures with efficiency in mind and the means for deterrence in
hand, then arguably this is a little different from empowering them to second-guess the legislature generally.
Whatever the boundaries of the Taking Clause, the author think that there is much to be
gained by analyzing takings in terms of the clause's underlying purposes and by understanding
that efficiency and justice are best served by uncoupling matters and methods of deterrence from
matters and methods of distribution.
Benjamin E. Hermalin, “An Economic Analysis of Takings,” 11 J. Law Econ. & Organ. 64
(1995).
The state has the power to both physically and regulatory take private property. When the
state exercises its taking power it has to compensate the citizen for taking his property. In this
article the author identifies economically efficient rules for governing compensation when the
state takes private property. The central questions in this article are when should the state compensate a citizen for a property taking and what amount should it pay.
The author argues that despite a variety of informational and behavioral assumptions, a basic
principle emerges: a fully efficient rule entails compensation based on the gains society enjoys
from the taking. Moreover, in many takings situations this principle can be implemented in more
than one way, providing society some flexibility with which to achieve its other goals without
sacrificing economic efficiency.
Although the economic analysis suggests that the compensation grated to the citizen should
be tied to the social benefit, it does not say how it should be tied to the social benefit. The author
argues that there are two equally effective ways to tie a citizen's compensation to the social benefit: one, she can be paid the social benefit if her private benefit is taken; or two, she can be
charged the social benefit if she retains her private benefit. This analysis is actually repeating the
Coase Theorem. In an externality problem which essentially is what a takings problem is – the
property right can reside with the citizen, so she is compensated for what is taken; or the property
right can reside with the state, so the citizen pays for the privilege of enjoying her private benefit.
At another level, however, this goes beyond the Coase Theorem, because it requires determining
not only who is compensated but also how compensation is paid.
The analysis in this article also goes beyond the Coase Theorem because of the need to consider both strategic behavior and asymmetric information. Previous literature typically assumed
that the state act benevolently to maximize social welfare. Recalling, however, that a large impetus for the Fifth Amendment was the danger of the state acting tyrannically, the assumption of a
benevolent state clearly is not always appropriate. Thus, this article also analyses the takings
problem when the state is acting non-benevolently
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