1. Agenda for 10th Class Admin stuff Handouts Slides
Intellectual Property
Polinsky on Coase Theorem (optional)
Review of
Calabresi & Melamed
Coase
Nuisance
Easements (continued)
Real Covenants & Equitable Servitudes

2. Assignment for Next Class
Review any questions we did not discuss in class today
Read Intellectual Property Handouts
Questions to think about / writing assignments
Questions after Feist
2 (WG1), 3a (WG2), 3b (WG3)…. 3f (WG7)
Questions after Campbell
1 (WG1), 2 (WG2) ….. 7 (WG7)
Optional
Polinsky on Coase Theorem
Also discusses Calabresi & Melamed
Altman video on Calabresi

3. Calabresi & Melamed . Property Rule Liability Rule Neighbors have a
Right to Clean Air
1. Injunction to stop pollution. If the factory pollutes, the neighbors can get an injunction stopping the pollution. If the factory wants to pollute, it needs permission from the neighbors, which means the factory will need to negotiate and pay the neighbors to get permission to pollute.
2. Damages for pollution. If the factory pollutes, the neighbors can sue, but they only get damages (compensation) from the factory.
Factory has a
Right to Pollute
3. No remedy for pollution. The neighbors can only stop the factory from polluting if the factory consents, which means the neighbors will need to negotiate and pay the factory in order to convince the factory to stop polluting.
4. Injunction to stop pollution with compensation to polluter. If the factory pollutes, the neighbors can get an injunction stopping the pollution, but the neighbors must pay damages (compensation) to the factory.

4. Coase Theorem I
If there are no transactions costs, resources will be allocated efficiently regardless of the legal rule.
“Efficiency” means that the party the values the right more will get it.
Where “values more” means is willing and able to pay more
Suppose neighbors value clean air $100 and it would cost the factory $50 to end the pollution, factory will end pollution regardless of the legal rule.
Property Rule
Liability Rule
Neighbors have a
Right to Clean Air
1. Neighbors would get an injunction against the pollution. Factory would be unable to negotiate consent to pollute, because the maximum it would offer ($50) is less than the minimum the neighbors would accept ($100).
2. Factory would stop polluting, because it would rather pay $50 to end the pollution than $100 in damages.
Factory has a
Right to Pollute
3. Neighbors would negotiate to pay the factory between $50 and $100 to end the pollution.
4. Neighbors would sue and receive an injunction to stop the pollution, but would have to pay the factory $50. in compensation.

5. Coase Theorem II
If there are no transactions costs, resources will be allocated efficiently regardless of the legal rule.
“Efficiency” means that the party the values the right more will get it.
Where “values more” means is willing and able to pay more
Suppose neighbors value clean air $50 and it would cost the factory $100 to end the pollution, factory will pollute regardless of the legal rule.
Property Rule
Liability Rule
Neighbors have a
Right to Clean Air
1. Factory would pay the neighbors between $50 and $100 for them not to sue to end the pollution.
2. Factory would pollute, because it would rather pay $50 in damages than $100 to end the pollution.
Factory has a
Right to Pollute
3. Neighbors would be unable to negotiate to stop the pollution, because they would offer at most $50, but the factory would not accept less than $100.
4. Neighbors would not sue to stop the pollution, because they would rather suffer $50 in harm than pay $100 in compensation

6. Coase Theorem & Transactions Costs
If transactions costs are high (e.g. there is a collective action problem), legal rule may matter
Property rule may lead to inefficient result, because negotiation may be too costly or may breakdown
Suppose neighbors value clean air $100 and stopping pollution costs $50.
If factory has right to pollute protected by property right
Efficiency requires negotiation in which neighbors pay factory between $50 and $100
If there are many neighbors, they may not be able to agree on a negotiation strategy
Or, even if neighbors can agree on a negotiation strategy, bargaining may break down
Suppose neighbors value clean air $50 and stopping pollution costs $100
If neighbors have right to clean air protected by a property right
Efficiency requires negotiation in which factory pays neighbors between $50 and $100
But neighbors may not be able to agree on negotiation strategy
One neighbor may hold out for larger payment
Bargaining may breakdown
Liability rules may therefore be superior
But only if court can correctly assess damages

7. Nuisance Traditionally
If activity interfered substantially with neighbor’s use and enjoyment of the property, and if activity was unreasonable, then neighbor could get an injunction against the activity.
Calabresi & Melamed Rule #1 (if harm substantial and activity unreasonable)
Calabresi & Melamed Rule #3 (if harm insubstantial or activity reasonable)
Property rules -- may cause inefficiency, if transactions costs are high
Modern cases sometimes
Weigh costs and benefits of activity and interference with use and enjoyment
Refuse injunction if benefits of activity outweigh harm to neighbors
But require compensation to neighbors (Boomer)
Calabresi & Melamed Rule #2.
May allow inunction against nuisance
But require payment to party causing nuisance (Spur)
Calabresi & Melamed Rule #4
This is very rare
Spur involved compensation by developer, not by all neighbors
Liability rules

8. Easements
Easement is right to use property of another for specific purpose
Rights of way (e.g. driveway)
Utilities (water, sewer, electricity)
Negative easements
View easements (not to block view)
Solar easement (not to block solar panels)
Conservation easements (to prevent development)
Lateral easement (not to remove support for house on neighboring property)
Creation
By grant or reservation in deed
By necessity
Right of way for landlocked parcel (Thomas)
By prescription
Actual, open & notorious, hostile & adverse, continuous & uninterrupted use for prescriptive period (usually same as statute of limitations for adverse possession)
Easement appurtenant
Runs with land. Binds/benefits later holders of property
Easement in gross does not run with land. Disfavored. Must be clear.

9. Felgenhauer 1971 Felgenhauers purchased lot
In Felgenhauers operated restaurant
Deliveries made through back over lot owned by bank
1982. Felgenhauers reopened restaurant
Deliveries through back lot resumed
1984. Restaurant leased to Enloes (who sold to others)
Deliveries through back lot continued, even though Enloes did not think had right to do so
1988. Bank constructs fence with gate for Enloes’ access
1998. Sonis purchased bank property
1999. Sonis told Felgenauer tenant that planned to cut off acces
Felgenauer sues to quiet title
Court holds that Felgenauer had acquired easement by prescription
Even though Enloes never claimed right to use bank property
“claim of right” means “without permission” e.g. without license or lease (same as “hostile”)
Construction of gate in 1988 does not show permission
B/c after prescriptive period

10. Felgenhauer
Do you think the court reached the right decision in Felgenhauer? What is the best argument for the contrary result?
How would the Coase Theorem apply to Felgenhauer? What is the efficient result? Would/could the parties have bargained to it even if the court had ruled there was no easement? If the parties could/would have bargained to the efficient solution, why does it matter which way the court ruled?

11. Real Covenants & Equitable Servitudes
3 kinds of servitudes
Easements
Covenants
Equitable servitudes
Covenants and Equitable Servitudes are essential the same
Both are agreements that run with the land
But covenants are enforced by damages
Equitable servitudes are enforced by injunctions
Same agreement may be both
Traditionally
Both covenants and equitable servitudes require
Intent to bind successors
Subject “touches and concerns” property
Equitable servitudes require
Notice (usually through depositing agreement in recording office)
Real covenants require
Horizontal privity – satisfied if covenant is put in deed by common grantor (e.g. when property subdivided) (not required in Cal.)
Vertical privity – satisfied if both inherited or purchased property (but neither leased)

12. Real Covenants & Equitable Servitudes II
Restatement 3rd tries to simplify and unify
No distinction between easements, real covenants, and equitable servitudes
Only require
Intent
Not violate public policy
Arbitrary, spiteful, capricious, unreasonable, unconscionable
Notice required to bind successors
Not required
Touch & concern
Horizontal privity
Vertical privity
Not explicitly adopted anywhere
But reflects trends to simplification of law

13. Neponsit
Covenant required payment of Property Owners’ Association dues
“for maintenance of roads, paths, parks, beach, sewers and … other public purposes”
Q: Does covenant to pay dues “touch and concern” the land?
Yes
Q: Can Property Owners’ Association enforce, even though not in “privity of estate”?
Do you think the court reached the right decision in Neponsit as a matter of law and/or policy? What is the best argument for the contrary result?
How would Neponsit be resolved if the Restatement (Third) were followed by New York in 1938?

14. Fong
1940 /1944. Fogarty sold lots 4 & 5 to predecessors of Junior & Senior Fongs
No height restriction
Mauka (mountain) side of street
1940 agreement of sale (a/s) as to lot 4 & deed as to lot 5
1944 deed as to lot 4
1941/1943. Fogarty sold lot 11 to predecessor of Hashimotos
Height restriction in recorded deed
Makai (ocean side) of street
Suit by Senior Fongs to enforce height restriction
Court refused enforcement
No horizontal privity, b/c Fogarty only retained legal title to lot 4 in under a/s not yet memorialized in deed
Fongs cannot enforce, b/c lot 11 deed does not give them right to enforce
No common scheme, b/c only 3 of 15 lots subject to height restriction
4th lot “similarly situated” not burdened

15. Fong Questions
Do you think the court reached the right decision in Fong as a matter of law and/or policy? What is the best argument for the contrary result?
How would Fong be resolved if the Restatement (Third) were followed by Hawaii in 2000?