Econ 522Economics of Law

Dan Quint

Fall 2012

Lecture 8

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Second homework due this Thursday

First midterm next Wednesday (Oct 17)

Logistics

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Intellectual Property

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patents

copyrights

trademarks

trade secrets

Intellectual Property

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First U.S. patent law passed in 1790

Patents currently last 20 years from date of application

For a patent application to be approved, invention must be: novel (new) non-obvious have practical utility (basically, be commercializable)

Patentholder whose patent has been infringed can sue for both damages and an injunction against future violations

Patents are property – can be sold or licensed to others

Patents: a bit of history

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Narrow patents might allow us each to patent own invention Broad patents might not

“Winner-take-all” race to be first

Patent breadth

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Does a patent on the “pioneering invention” cover the application as well?

Can you patent an improvement to an existing product?

Patent breadth

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Patent length Need to last long enough for firms to recover up-front investment… …But the longer patents last, the longer we have DWL from monopoly (Example from textbook: drug price drops from $15 to $1 per pill when

patent expires) Tradeoff between ex-post inefficiency and ex-ante incentive provision

U.S.: all patents last 20 years Jeff Bezos (founder of Amazon) once suggested software patents

should last just 3 years Germany: full-term patents for major inventions, 3 year “petty patents”

for minor ones, annual renewal fees

Patent length

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Marginal Revolution (blog):“Patent Policy on the Back of a Napkin”

“Patent Policy on the Back of a Napkin”(Marginal Revolution) Yesterday’s New York Times

“Last year, for the first time, spending by Apple and Google on patent lawsuits and unusually big-dollar patent purchases exceeded spending on research and development of new products”

(“The Patent, Used as a Sword”, 10/7/2012)

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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

Do the details matter?

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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

Do the details matter?

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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

Do the details matter?

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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

Alternatives to patents for encouraging innovation

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patents

copyrights

trademarks

trade secrets

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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

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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

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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

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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

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patents

copyrights

trademarks

trade secrets

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Trademarks

Reduce confusion over who made a product

Allow companies to build reputation for quality

Don’t expire, unless abandoned

Generic names can’t be trademarked

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Trademarks – example

WSJ article 9/17/2010: “Lars Johnson Has Goats On His Roof and a Stable of Lawyers To Prove It”

Restaurant in Sister Bay WI putgoats on roof to attract customers

“The restaurant is one of the top-grossing in Wisconsin, and I’m sure the goats have helped.”

Suing restaurant in Georgia

“Defendant has willfully continuedto offer food services from buildings with goats on the roof”

http://online.wsj.com/article/SB10001424052748704285104575492650336813506.html

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Trademark dilution

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patents

copyrights

trademarks

trade secrets

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Protection against misappropriation

But plaintiff must show… Valid trade secret Acquired illegally Reasonable steps taken to protect it

Trade Secrets

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patents

copyrights

trademarks

trade secrets

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How do you establish, verify, or give up property rights?

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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.

When should resources become privately owned?

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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)

When should resources become privately owned?

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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

How do you give up (or lose) property rights?

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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

How do you give up (or lose) property rights?

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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

How do you give up (or lose) property rights?

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Limitations and Exceptions toProperty Rights

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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

Private Necessity

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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

Private Necessity

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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…

Unbundling

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Land ownership consisted of three separable pieces (“estates”)

Surface estate

Support estate

Mineral estate

Example of unbundling: Pennsylvania and coal

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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

Unbundling

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An example (sort of) of unbundling

source: http://articles.nydailynews.com/2009-08-24/news/17934480_1_ebay-auction-crypt-marilyn-monroe

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The government can take your property “Eminent domain”

And the government can tell you what to do with it Regulation

Two other ways in which property rights are limited

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Eminent Domain

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One role of government: provide public goods When public goods are privately provided undersupply Defense, roads and infrastructure, public parks, art, science… To do this, government needs land

(which might already belong to someone else)

In most countries, government has right of eminent domain Right to seize private property when the owner doesn’t want to sell This type of seizure also called a taking

Takings

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U.S. Constitution, Fifth Amendment: “…nor shall private property be taken for public use, without just compensation.”

Government can only seize private property for public use

And only with just compensation Consistently interpreted to mean fair market value – what the owner

would likely have been able to sell the property for

Takings

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Why allow takings?

Takings

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Why allow takings?

Why these limitations? why require compensation?

Takings

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Why allow takings?

Why these limitations? why require compensation?

Takings

$3 MM $1 MM$9 MM

$10 MM

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Why allow takings?

Why these limitations? why require compensation? why only for public use?

Takings

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Why allow takings?

Why these limitations? why require compensation? why only for public use?

The government should only take private property (with compensation) to provide a public good when transaction costs preclude purchasing the necessary property through voluntary negotiations

Takings

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1981: GM was threatening to close Detroit plant Would cost city 6,000 jobs, millions in tax revenue

City used eminent domain to condemn entire neighborhood 1,000 homeowners and 100 businesses forced to sell land then used for upgraded plant for GM city claimed employment and tax revenues were public goods,

which justified use of eminent domain

Mich Sup Ct: “Alleviating unemployment and revitalizing the economic base of the community” valid public purposes; “the benefit to a private interest is merely incidental” Overturned in 2004 ruling (Wayne v Hathcock)

Poletown Neighborhood Council v Detroit

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Posner (Economic Analysis of Law) describes: …Pfizer had decided to build a large research facility next to a 90-acre stretch of

downtown and waterfront property in New London.

The city hoped that Pfizer’s presence would attract other businesses to the neighborhood.

The plaintiffs owned residential properties located on portions of the 90-acre tract…

It might have been impossible to develop those areas… had the areas remained spotted with houses.

The city… solved the problem by condemning the houses.

It said, “the area was sufficiently distressed to justify a program of economic rejuvenation.”

Attorney arguing case: “If jobs and taxes can be a justification for taking someone’s

home or business, then no property in America is safe.”

More recent case: Kelo v. City of New London (2005 US Supreme Court)

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Bruce Ratner owned the Nets from 2004-2011 Bought for $300 MM, sold for less (80% for $200 MM) This “loss” held up by David Stern as evidence NBA owners were losing

money, players needed to make concessions

Recent Malcolm Gladwell article on Grantland Ratner didn’t want the Nets – he wanted

development rights to a 22-acre site in Brooklyn Buying it all up would be difficult Seizure a la Kelo would be possible, but

politically unpopular If plans included a basketball stadium, becomes

clear-cut case for eminent domain Even if Ratner took a “loss” on the team, he got

what he wanted out of the deal

Recent exampleof eminent domain