1. Midterm: Mean=55/65 50+ fine 40-50 be a little worried

2. Midterm Midterm with answers will be on the web page A few points worth noting –Efficiency: Not just benefit>cost but How benefit and cost are defined –Externalities Why are external benefits a problem? More generally, efficiency isn't about people not getting what they deserve but about things not getting done that are worth doing Or being done that aren't worth doing –Prisoner's Dilemma: Two possible answers Original PD story or When A cops a plea it frees up resources to prosecute B Either way, zero transaction costs among defendants give you Coase theorem

3. The Rest of the Course: Applying these Ideas to Property Intellectual Property Contract Family Law Tort Crime Antitrust Other Paths Tort/Crime Puzzle Is the Common Law Efficient?

4. Property What is in the bundle? Application of Coaseian analysis –To whom is it worth most –How can we make it easy to transfer if efficient to do so? What things should be property v commons — how do you decide? –Advantages of treating something as property –Disadvantages –Primitive societies Real property vs unreal property –Fancy ownership, rebundling –Vs own it or don ’ t –Can still use contract, but not property Lead-in to Intellectual Property

5. Property: Bundling Rights What goes in the bundle for land? –Everything connected with? But some rights connect to two or more parcels Making noise, sending radio signals Pumping oil –What goes together If I have right A does that make me The likely highest value owner of right B? –Definition that lets you fix wrong answers At low transaction cost Consider the consequences of a right to enjoin radio waves Or photons

6. Adjacency Problems Sounds etc.: common law of nuisance –I want to be able to use my property –But using it too noisily affects your property Vertical adjacency: Pennsylvania –Surface estate –Mineral estate –Support estate –Old solution--low transaction cost rebundling Similar horizontal problem –If my house slides into your pit –You have violated my right of lateral support –Under traditional common law

7. Common Pool problems We are sitting over a pool of oil –Independent action means too many holes –Pumped too fast –Since I want to get the oil before you get it Unitization –By a supermajority vote of landowners –Oil becomes the joint property of all of them Problems –Who defines the extent of the pool? –How do we keep a majority from exploiting the rest?

8. Property vs Commons When should something be property at all? –Always? How about the English Language? –Advantage: Incentives to produce Not to overuse (“tragedy of the commons”) To allocate properly –Disadvantage? Costs of defining and enforcing property rights And transacting over them Consider primitive societies –Private property in land makes sense for agriculture –Perhaps not for hunting… but –Private property in beasts being pursued? Consider the Internet –Some people sell information, but many others –Give it away –Making most of the web an informational commons Consider “Fresh Choice” and similar restaurants

9. Radio Spectrum The right to transmit radio signals in some area in some range of frequencies –Gets treated sometimes as government property The FCC licensed radio stations, but … The right was not transferable--in theory And depended on using it in the "public interest" –Sometimes as private property, thanks to Coase Who proposed auctioning off the radio spectrum Which everyone thought was a nutty idea for some decades Until it happened –Sometimes as a commons Which most of us routinely use, and … Some may be using at this instant Larry Lessig and some others propose making it all a commons –The claim is that spread spectrum radio technologies –Reduce the advantages of property below the costs Suppose they are right –How might we get their result –Within the framework of the current auctioning system?

10. Examples of Problems Defining what you own –Stack Island in the Mississippi –Land along the Nile –A patented idea Land isn’t the only thing where what we own Is not a thing but a bundle of rights Enforcing your rights –The down side of private property in land –What we owe to the dogs. Creating rights –Homesteading law: Rent seeking problem –Homesteading law: Bug or feature? –Why didn’t they auction the land? The experiment was tried And faced serious enforcement problems

11. How big are the benefits? Incentive to produce –How sensitive is output to price? –Perhaps novels get written anyway? Homer didn’t have a copyright Neither did Dante Or Shakespeare –How many? Novelists have to eat too. Gain from efficient allocation –For I.P. efficient allocation is to everyone –For grain, on the other hand … Incentive (not) to consume –All you can eat salad bars are more common than –All you can eat sushi or good steak –Because the inefficiency from overconsumption is less.

12. In Summary Treating something as property rather than commons has –Costs Rent seeking problem when you propertise stuff Costs of defining, observing property lines Costs of enforcing property rights Costs of transacting over property –Benefits Allocation of things to the highest valued user An incentive to produce things worth producing And not to overuse –How large the costs and benefits are depends on the things It makes sense then to treat something as property –If benefits>costs –As commons if costs>benefits –Stay tuned for IP applications

13. The internet as a Commons Passing on email –I forward your packets –You forward mine –There isn’t a micropayment system available “Net neutrality” –Larry Lessig’s case for what he calls a commons Actually a commodity ISP charges, but … Not according to what is in the bits Or what they are going to be used for –Are there good reasons not to let carriers charge differently for carrying different stuff? –Good reasons to let them?

14. Arguments pro and con Argument for: –You and I, on opposite ends of the net –Can do something new: VoIP, virtual surgery, … –Without first clearing it with everyone in between Argument against –High bandwidth uses Either slow everyone down or require more hardware One way of charging for bandwidth is by identifying high bandwidth uses And either forbidding them or Charging more for them –Some uses require higher quality Low latency (games) High reliability (virtual surgery) Providers would like to offer that quality--and charge for it Which means those uses get priority over others

15. This is the same issue as zoning If I need permission from my neighbors to do anything nonstandard with my land –Transaction costs make it hard to get permission from all –Which prevents innovation. But … If I don’t, I can do things that –Impose costs on my neighbors –Whether in ugly buildings, noise, risk, … –Moral externalities? Whorehouse, fur factory –Just as high bandwidth imposes costs on other users –And zoning can provide “high quality environment” for those who value it--like high quality internet service. I haven’t yet persuaded Larry that he is against zoning –Which does by force of law –What he doesn’t want to allow people to do by contract

16. Rebundling Real property can be rebundled –Give an easement –Or a license –It runs with the land –Is binding on a future purchaser--usually Ordinary property can be restricted by contract –But the contract is not binding on a future purchaser –A constraint on the parties, not a change in the right –Usually Why the difference?

17. Information problems? When I buy a computer –I don’t know its history –Can’t reasonably be bound by “easements” For instance, an obligation Not to try to resurrect erased data from it When I buy land –Extensive system of title registration –Good reason for me to search –Easement or license may be observable from use of land –And if restriction is not findable may not bind –Benefits easier to pass than costs. Why? –Athenian law: Stone marker on land used as security for a loan Car? –Past liens on it are binding on the purchaser? –And show up on the title If information tech keeps getting better –Perhaps we should allow rebundling –For everything –And provide appropriate systems of title registration? –Pen # 1739206 may only be used on …

18. How to rebundle anything Land can be rebundled, so … –Put a non-land right into the bundle –Then rebundle as desired Touch and concern doctrine in common law –The bundle labeled ownership of this piece of land –Can only contain rights that have something to do with this piece of land Recent courts shift to a rule of –Enforce if reasonable (efficient?) –Otherwise don’t –A shift from “rule designed to produce the efficient outcome” –To “Court decides whether the outcome is efficient.”

19. Intellectual Property Our intuitions are a lot less clear –Some see it as the morally purest form of property I created this book/invention/song out of my own head With no use of any material provided by anyone So nobody else has any claim on it It’s mine, mine, mine –Others as a direct violation of property rights I own my copy of your book So should be able to use my Xerox machine to make copies of it –Economists perhaps as a substitute for a contract that cannot be enforced The buyer of the book agrees not to make copies How about the person he sells it to? Back with the bundling issue Copyright means I can sell the book with the right to copy pulled out of the bundle –But economists also note that Marginal cost on the margin of additional uses of IP is zero Hence the efficient allocation is to everyone who values it Which is an argument for an I.P. commons

20. Puzzle: Why are Patent and Copyright so different? 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; Copyright –Given for the asking--even without asking –Lasts practically forever Patent –Requires an elaborate process to get –Must satisfy many conditions –Lasts for a relatively short time Why the difference?

21. The law: Copyright What is protected: Expression not idea. Protected against –copying –derivative works (translation, decompilation??) –but not independent creation How could you prove it was independent? By doing it on purpose: Clean room technique for software –Exception for Scenes a Faire Protection on demand, or without, and … For a long period of time. With a fuzzy exception for "fair use"

22. The Law: Patent Idea, not machine. Must be –Novel –Non-obvious –Useful You define what ideas you are claiming when drawing up the claims. –The narrower it is, the less valuable, but … –The broader, the more likely that it won't satisfy the requirements, because … –Some part of it has been done before, or is obvious, or … –And you must describe the best way known to you of implementing the idea. –Reduction to practice. Constructive reduction. "What I invented?" –Morse's sixth claim Denied as overbroad But could have been as non-novel.

23. Useful, then and now 19th c. standard (quote from Judge Story) –All that the law requires is, that the invention should not be frivolous or injurious to the well-being, good policy, or sound morals of society. The word “useful,” therefore, is incorporated in the act in contradistinction to mischievous or immoral. For instance, a new invention to poison people, or to promote debauchery, or to facilitate private assassination, is not a patentable invention. Rickard v Du Bon –Rickard patents a process, Du Bon infringes –Rickard sues, Du Bon argues the patent is invalid –Because not useful--under Story’s standard –Patented process is pernicions, fraudulent, but legal –So not patentable. So Du Bon can do it too 20th century, “useful” means useful

24. Software as I.P. Controversy over copyrightability –Problem--machine language programs in chips –Arguments--player piano roll –Resolved by Congress Controversy over "look and feel" –What is expression and what is idea? –Consider the Lotus Menu Tree –And the Mac interface. Controversy over patentability –"Mental Steps Doctrine" –Gradually abandoned.

25. Economic Analysis: Copyright Copyright covers things where –Property lines can be sharply drawn –Trespass can be easily observed (except for small scale copying) –No depleting the commons problem Because writing the same book by chance vanishingly unlikely Scenes a faire exception takes care of the special case And independent invention not covered takes care of the other special case Thus incentive is not too high. Author is rewarded for what he added--writing his book--not what he took--the possibility of writing a particular book So we have long lasting property rights easily acquired Fair use exception covers –Uses where transaction cost of buying permission is large –Cost imposed on the owner is small –Hence a commons is better than property

26. Economic Analysis: Patent Patent covers things where –Property lines are very fuzzy –Trespass not always easy to observe--even by the trespasser –Consider the problem of a patent search after you invent something –Depleting the commons a problem Consider the logic of a patent race A week earlier gives you all of the rights Giving an incentive to invent too fast. What we want is not an incentive but the right incentive So rights are short and only for major ideas –i.e. not likely to be immediately invented by someone else anytime soon –Think about the "skilled in the art" rule. –Alias “the lightbulb going off over your head in the cartoon” And ideas that we want invented now –Consider the modern definition of “useful” –Vs the 19th century definition: Rikard v Du Bon –From the standpoint of depleting the commons

27. What about software copyright? Software has the same features as writing, wrt literal copying –So the economic analysis says Congress was right, –some of the courts were wrong, –at least for literal copying The question is not –Is machine language software burned into a ROM a writing? –But –“Does it, like a writing, have the characteristics that make copyright a sensible way of protecting it?” –Which is also an argument for plug mold statutes Copyright on look and feel an intermediate case –Looks rather like using copyright –For something more suited to patent

28. Does software need IP Protection? Again the property vs commons question. For literal copying, book or program –If copying is cheap compared to producing Then without legal protection it is hard to get paid Modern software, photocopying, but … Less true in the days of hand set type When you could have protection w/o law via a first mover advantage –If enforcement is not too expensive With really easy copying, enforcement against individual infringers is impractical: Cassette tapes, VCR And with really easy distribution, enforcement against mass infringers is impossible. Internet –We may be approaching a period when Protection of IP in digital form is often impossible And producers have to find other ways of getting paid Suggestions?

29. Rudyard Kipling on First Mover Advantages “They asked me how I did it and I gave them the scripture text You keep your light so shining a little ahead of the next They copied all they could copy, but they couldn’t copy my mind And I left them, sweating and stealing, a year and a half behind.” (The Mary Gloster)

30. Software patent, look and feel copyright Much more problematic because –Lines are fuzzy –Cost of knowing if you are trespassing high –It’s a new field and judges at high levels Are old men Unlikely to understand it very well Some programmers oppose patenting And the Open Source movement demonstrates –What can be done without protection. –At least of the usual sort

31. How Open Source Works Someone creates a first draft of a program –Makes the source code available –Anyone free to use, imrpove or modify, provided … –The same terms apply to their modified version Other programmers send their improvements –To the “owner”–usually the “someone” above –If he likes them, they go into the code base –Which everyone else works from Property rights of three senses –I.P. to prevent someone closing his version –“Ownership” meaning getting to decide what goes in –Ownership of credit–accompanying list of who wrote what For more, see Eric Raymond’s book or stuff online

32. Trade Secret What it protects –Information whose value depends on its secrecy –Demonstrated in part by acting to protect it. Notice to other people, also … Evidence, to an economist, that you are telling the truth. What it protects it against –Wrongful appropriation –Exception: DuPont v Christopher How: –Damages for loss to victim, gain to thief, or what would be bargained. –Injunction except for innocent third party sunk cost case

33. Why not more protection--or less? Why not have full property rights for trade secrets? –That would be patent without examination, we know why not. –Rent seeking as people try to claim the commons prematurely Why isn't trade secret preempted by patent? –If it isn't patentable, why protect it? Maybe PTO was wrong –It is non-obvious and –By keeping it secret I will prove it was Or maybe it is too short lived to qualify Or more long lived than patent law assumes Filling gaps in a one size fits all system. –Also, legal protection reduces the costs of private protection I am going to try to keep it secret, and doing so is less expensive If I have trade secret law to help And unlike patent –The reward for innovation automatically scales with –How long it is before someone else independently invents

34. IP Without Copyright Arguably, copyright protection is becoming unenforceable for digital IP One alternative is technological protection –Copy protected disks –CD required to play a game –DRM for music etc. It is ultimately unworkable for any work fully revealed in one use –Because someone who has bought one use –Can record the song he is listening to … –Copy and sell But consider sorts of IP that can be protected –Lexis and Westlaw, but not my book –Not movies, but World of Warcraft Another alternative is indirect sources of income –Write a book, collect lecture fees –Write a program, sell support services –Produce a movie, sell toys –Write academic articles, be hired as a professor. What we do now. Modern patronage system –“This book dedicated to the most noble, wide, and generous Lord X” –“This song produced under the sponsorship of Apple Computer”