1. Econ 522 Economics of Law Dan Quint Fall 2012 Lecture 8

2. 1  Second homework due this Thursday  First midterm next Wednesday (Oct 17) Logistics

3. 2 Intellectual Property

4. 3 patents copyrights trademarks trade secrets Intellectual Property

5. 4  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

6. 5  Narrow patents might allow us each to patent own invention  Broad patents might not  “Winner-take-all” race to be first Patent breadth

7. 6  Does a patent on the “pioneering invention” cover the application as well?  Can you patent an improvement to an existing product? Patent breadth

8. 7  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

9. 8 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)

10. 9  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?

11. 10  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?

12. 11  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?

13. 12  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

14. 13 patents copyrights trademarks trade secrets

15. 14  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

16. 15  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

17. 16  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

18. 17  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

19. 18 patents copyrights trademarks trade secrets

20. 19 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

21. 20 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 top- grossing 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

22. 21 Trademark dilution

23. 22 patents copyrights trademarks trade secrets

24. 23  Protection against misappropriation  But plaintiff must show…  Valid trade secret  Acquired illegally  Reasonable steps taken to protect it Trade Secrets

25. 24 patents copyrights trademarks trade secrets

26. 25 How do you establish, verify, or give up property rights?

27. 26  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?

28. 27  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?

29. 28  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?

30. 29  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?

31. 30  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?

32. 31 Limitations and Exceptions to Property Rights

33. 32  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

34. 33  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

35. 34  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

36. 35  Land ownership consisted of three separable pieces (“estates”)  Surface estate  Support estate  Mineral estate Example of unbundling: Pennsylvania and coal

37. 36  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

38. 37 An example (sort of) of unbundling source: http://articles.nydailynews.com/2009-08-24/news/17934480_1_ebay-auction-crypt-marilyn-monroe

39. 38  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

40. 39 Eminent Domain

41. 40  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

42. 41  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

43. 42  Why allow takings? Takings

44. 43  Why allow takings?  Why these limitations?  why require compensation? Takings

45. 44  Why allow takings?  Why these limitations?  why require compensation? Takings $3 MM$1 MM $9 MM $10 MM

46. 45  Why allow takings?  Why these limitations?  why require compensation?  why only for public use? Takings

47. 46  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

48. 47  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

49. 48  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)

50. 49  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 example of eminent domain