Lecture 8
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Econ 522 Economics of Law Dan Quint Fall 2015 Lecture 8 Last week… Discussed how efficient property law system would look Introduced dynamic games, sequential rationality, subgame-perfect equilibrium Saw problem of innovation when ideas could be appropriated or copied ex post Introduced patents as ways to solve innovation problem (at the cost of introducing a new problem, monopoly) 1 Marginal Revolution (blog): “Patent Policy on the Back of a Napkin” “Patent Policy on the Back of a Napkin” (Marginal Revolution) New York Times a couple years ago “Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products” (“The Patent, Used as a Sword”, 10/7/2012) 2 Do the details matter? Coase: without transaction costs, initial allocation of rights irrelevant for efficiency But transaction costs may be high Uncertainty on whether a patent is valid Uncertainty of outcome of research Many parties 3 Do the details matter? Coase: without transaction costs, initial allocation of rights irrelevant for efficiency But transaction costs may be high Uncertainty on whether a patent is valid Uncertainty of outcome of research Many parties 4 Do the details matter? Coase: without transaction costs, initial allocation of rights irrelevant for efficiency But transaction costs may be high Uncertainty on whether a patent is valid Uncertainty of outcome of research Many parties 5 Alternatives to patents for encouraging innovation government purchase of drug patents prizes Google $30 million prize for landing a rover on the moon direct government funding of research ~25% of research spending in U.S. is funded by government 6 patents copyrights trademarks trade secrets Copyright Property rights over original expressions writing, music, other artistic creations Creations like this tend to fit definition of public goods nonrivalrous nonexcludable so private supply would lead to undersupply Several possible solutions government subsidies charitable donations legal rights to creations – copyrights Copyright Copyright law less rigid than patent law Unlike patent law, allows for certain exceptions Copyrights last much longer than patents Current U.S. law: copyright expires 70 years after creator’s death No application process Copyright law automatically applies to anything you’ve written/created Copyrights more narrow than patents Cover exact text, not general idea Copyright Retelling of Gone With The Wind, from point of view of a slave on Scarlett’s plantation, published in 2001 Margaret Mitchell’s estate sued to halt publication Eventually settled out of court Was there really any harm? Copyright Retelling of Gone With The Wind, from point of view of a slave on Scarlett’s plantation, published in 2001 Margaret Mitchell’s estate sued to halt publication Eventually settled out of court Was there really any harm? patents copyrights trademarks trade secrets Trademarks Reduce confusion over who made a product Allow companies to build reputation for quality Don’t expire, unless abandoned Generic names can’t be trademarked 13 Trademarks – example WSJ article 9/17/2010: “Lars Johnson Has Goats On His Roof and a Stable of Lawyers To Prove It” Restaurant in Sister Bay WI put goats on roof to attract customers “The restaurant is one of the topgrossing in Wisconsin, and I’m sure the goats have helped.” Suing restaurant in Georgia “Defendant has willfully continued to offer food services from buildings with goats on the roof” http://online.wsj.com/article/SB10001424052748704285104575492650336813506.html 14 Trademarks – another example In court papers, the oil behemoth effectively argues that it owns the exclusive right to put two X’s next to each other. Deadline notes, “This double-cross brawl may come as a surprise to Dos Equis…” An FX spokesperson called the suit “entirely meritless” and said, “We are confident that viewers won’t tune into FXX looking for gas or motor oil and drivers won’t pull up to an Exxon pump station expecting to get ‘It’s Always Sunny in Philadelphia.’” source: http://www.salon.com/2013/10/04/big_oil_loses_it_exxonmobil_claims_it_owns_the_letter_x/ 15 Trademark dilution 16 patents copyrights trademarks trade secrets 17 Trade Secrets Protection against misappropriation But plaintiff must show… Valid trade secret Acquired illegally Reasonable steps taken to protect it 18 patents copyrights trademarks trade secrets 19 Discussion question Should record labels sue music downloaders? 20 Establishing, verifying, and losing property rights 21 When should resources become privately owned? We already saw two doctrines for how ownership rights are determined – First Possession and Tied Ownership Next question: when should a resource become privately owned? Cost of private ownership: owners must take steps to make the resource excludable – boundary maintenance Cost of public ownership: congestion and overuse An economically rational society will privatize a resource at the point in time where boundary maintenance costs less than the waste from overuse of the resource. 22 When should resources become privately owned? We already saw two doctrines for how ownership rights are determined – First Possession and Tied Ownership Next question: when should a resource become privately owned? Cost of private ownership: owners must take steps to make the resource excludable – boundary maintenance Cost of public ownership: congestion and overuse An economically rational society will privatize a resource at the point in time where boundary maintenance costs less than the waste from overuse of the resource. (either because congestion got worse… or because boundary maintenance became cheaper) 23 How do you give up (or lose) property rights? Adverse Possession (“squatter’s rights”) If you occupy someone else’s property for long enough, you become the legal owner, provided: 1. the occupation was adverse to the owner’s interests, and 2. the owner did not object or take legal action 24 How do you give up (or lose) property rights? Adverse Possession (“squatter’s rights”) If you occupy someone else’s property for long enough, you become the legal owner, provided: 1. the occupation was adverse to the owner’s interests, and 2. the owner did not object or take legal action Pro: clear up uncertainty over time; allow land to be put to use Con: owners must incur monitoring costs to protect property 25 How do you give up (or lose) property rights? Adverse Possession (“squatter’s rights”) If you occupy someone else’s property for long enough, you become the legal owner, provided: 1. the occupation was adverse to the owner’s interests, and 2. the owner did not object or take legal action Pro: clear up uncertainty over time; allow land to be put to use Con: owners must incur monitoring costs to protect property Estray statutes – laws governing lost and found property 26 Limitations and Exceptions to Property Rights 27 Private Necessity Property rights generally protected by injunctive relief, BUT… Ploof v. Putnam (Sup. Ct. of Vermont, 1908) Ploof sailing with family on Lake Champlain, storm came up Tied up to pier on island owned by Putnam Putnam’s employee cut the boat loose, Ploof sued Court sided with Ploof: private necessity is an exception to the general rule of trespass In an emergency, OK to violate someone else’s property rights; still must reimburse them for any damage done 28 Private Necessity Property rights generally protected by injunctive relief, BUT… Ploof v. Putnam (Sup. Ct. of Vermont, 1908) Ploof sailing with family on Lake Champlain, storm came up Tied up to pier on island owned by Putnam Putnam’s employee cut the boat loose, Ploof sued Court sided with Ploof: private necessity is an exception to the general rule of trespass In an emergency, OK to violate someone else’s property rights; still must reimburse them for any damage done 29 Private Necessity Makes perfect sense as an exception when you think about transaction costs With private goods like land… “Normal times”: TC are low, so property rule typically efficient “Emergency” is a time when TC are high, so damages rule efficient (“When TC are high, structure the law to minimize harm due to failures of private bargaining”) 30 Unbundling Property: “a bundle of rights” Can you unbundle them? Separate them, sell some and keep others Usually, no Prohibition on perpetuities I can’t separate the right to own/live on my land from the right to sell it or turn it into a golf course But in some instances, yes… 31 Example of unbundling: Pennsylvania and coal Land ownership consisted of three separable pieces (“estates”) Surface estate Support estate Mineral estate 32 Unbundling Free unbundling of property rights generally not allowed Civil law more restrictive than common law For efficiency… In general, efficiency favors more complete property rights People would only choose to unbundle property when that increases its value, so we should allow it? But unbundling might increase transaction costs Increases uncertainty about rights May increase number of parties involved in future transactions 33 An example (sort of) of unbundling source: http://articles.nydailynews.com/2009-08-24/news/17934480_1_ebay-auction-crypt-marilyn-monroe 34 More on Remedies 35 Remedies (review) Maximum liberty: owner can do whatever he/she wants, as long as it doesn’t interfere with another’s property When it does interfere, externality, or nuisance Affects small number: private externality, or private bad Transaction costs low injunctions preferable Affects large number: public externality, or public bad Transaction costs high damages preferable 36 Types of damages Compensatory Damages intended to “make the victim whole” compensate for actual harm done make victim as well off as before Can be… Temporary – compensate for harms that have already occurred Permanent – also cover present value of anticipated future harm 37 Temporary versus permanent damages Temporary damages Only cover harm that’s already happened Require victim to keep returning to court if harm continues Create an incentive to reduce harm in the future Permanent damages Include value of anticipated future harm One-time, permanent fix No incentive to reduce harm as technology makes it easier 38 Efficient nuisance remedies If a nuisance affects a small number of people (private nuisance), an injunction is more efficient If a nuisance affects a large number of people (public nuisance), damages are more efficient If damages are easy to measure and innovation occurs rapidly, temporary damages are more efficient If damages are difficult/costly to measure and innovation occurs slowly, permanent damages are more efficient What’s done in practice for public nuisances? temporary damages and injunction against future harm but… 39 Boomer v Atlantic Cement Co (NY Ct of Appeals, 1970) Atlantic owned large cement plant near Albany dirt, smoke, vibration neighbors sued plant was found to be a nuisance, court awarded damages neighbors appealed, requesting an injunction Court ruled that… yes, this was a valid nuisance case and yes, nuisances are generally remedied with injunctions but harm of closing the plant was so much bigger than level of damage done that court would not issue an injunction ordered permanent damages, paid “as servitude to the land” 40 Boomer v Atlantic Cement Co (NY Ct of Appeals, 1970) Atlantic owned large cement plant near Albany dirt, smoke, vibration neighbors sued plant was found to be a nuisance, court awarded damages neighbors appealed, requesting an injunction Court ruled that… yes, this was a valid nuisance case and yes, nuisances are generally remedied with injunctions but harm of closing the plant was so much bigger than level of damage done that court would not issue an injunction ordered permanent damages, paid “as servitude to the land” 41 Next: two important limitations on property rights imposed by government Government can limit how you use your property Regulation The government can take your property “Eminent domain” 42
