Windfalls

Yale Law Journal

Volumn 108, Issue 7, 1999, Pages 1489-1566

  Kades, Eric ^a  

^a WAYNE STATE UNIVERSITY   (United States)

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EID: 0348214815     PISSN: 00440094     EISSN: None     Source Type: Journal    
DOI: 10.2307/797442     Document Type: Article

References (365)

1. WILLIAM MORRIS & MARY MORRIS, MORRIS DICTIONARY OF WORD AND PHRASE ORIGINS 605 (1977). For an equivalent etymology, see ROBERT HENDRICKSON, THE FACTS ON FILE ENCYCLOPEDIA OF WORD AND PHRASE ORIGINS 722 (1997). Commoners' right to take windfallen wood was far from universal in medieval England. Local forest wardens, as a perquisite of office, sometimes had the right to sell "wind-fallen wood." CHARLES R. YOUNG, THE ROYAL FORESTS OF MEDIEVAL ENGLAND 78 (1979). At other times the Crown claimed the proceeds from sales of windfallen timber. See id at 115,126, 170.
2. WILLIAM MORRIS & MARY MORRIS, MORRIS DICTIONARY OF WORD AND PHRASE ORIGINS 605 (1977). For an equivalent etymology, see ROBERT HENDRICKSON, THE FACTS ON FILE ENCYCLOPEDIA OF WORD AND PHRASE ORIGINS 722 (1997). Commoners' right to take windfallen wood was far from universal in medieval England. Local forest wardens, as a perquisite of office, sometimes had the right to sell "wind-fallen wood." CHARLES R. YOUNG, THE ROYAL FORESTS OF MEDIEVAL ENGLAND 78 (1979). At other times the Crown claimed the proceeds from sales of windfallen timber. See id at 115,126, 170.
3. WILLIAM MORRIS & MARY MORRIS, MORRIS DICTIONARY OF WORD AND PHRASE ORIGINS 605 (1977). For an equivalent etymology, see ROBERT HENDRICKSON, THE FACTS ON FILE ENCYCLOPEDIA OF WORD AND PHRASE ORIGINS 722 (1997). Commoners' right to take windfallen wood was far from universal in medieval England. Local forest wardens, as a perquisite of office, sometimes had the right to sell "wind-fallen wood." CHARLES R. YOUNG, THE ROYAL FORESTS OF MEDIEVAL ENGLAND 78 (1979). At other times the Crown claimed the proceeds from sales of windfallen timber. See id at 115,126, 170.
4. WILLIAM MORRIS & MARY MORRIS, MORRIS DICTIONARY OF WORD AND PHRASE ORIGINS 605 (1977). For an equivalent etymology, see ROBERT HENDRICKSON, THE FACTS ON FILE ENCYCLOPEDIA OF WORD AND PHRASE ORIGINS 722 (1997). Commoners' right to take windfallen wood was far from universal in medieval England. Local forest wardens, as a perquisite of office, sometimes had the right to sell "wind-fallen wood." CHARLES R. YOUNG, THE ROYAL FORESTS OF MEDIEVAL ENGLAND 78 (1979). At other times the Crown claimed the proceeds from sales of windfallen timber. See id at 115,126, 170.
5. 20 OXFORD ENGLISH DICTIONARY 378 (2d ed. 1989) [hereinafter OED]. The OED traces usage back to Erasmus, who used the term to describe inheritance as a windfall. See id. (citing THE APOPHTHEGMES OF ERASMUS (Nicolas Udall trans., London, Robert Roberts 1877) (1542)). Under the economic definition of the term, it is not so clear that inheritance is a windfall. See infra Subsection IV.B.2.C. The OED traces the modern use of the term "windfall" to describe extraordinary and unexpected profits to JOHN MAYNARD KEYNES, The General Theory of Employment Interest and Money, in 7 THE COLLECTED WRITINGS OF JOHN MAYNARD KEYNES 57 (rev. ed. 1973). See OED, supra, at 378.
6. 20 OXFORD ENGLISH DICTIONARY 378 (2d ed. 1989) [hereinafter OED]. The OED traces usage back to Erasmus, who used the term to describe inheritance as a windfall. See id. (citing THE APOPHTHEGMES OF ERASMUS (Nicolas Udall trans., London, Robert Roberts 1877) (1542)). Under the economic definition of the term, it is not so clear that inheritance is a windfall. See infra Subsection IV.B.2.C. The OED traces the modern use of the term "windfall" to describe extraordinary and unexpected profits to JOHN MAYNARD KEYNES, The General Theory of Employment Interest and Money, in 7 THE COLLECTED WRITINGS OF JOHN MAYNARD KEYNES 57 (rev. ed. 1973). See OED, supra, at 378.
7. 20 OXFORD ENGLISH DICTIONARY 378 (2d ed. 1989) [hereinafter OED]. The OED traces usage back to Erasmus, who used the term to describe inheritance as a windfall. See id. (citing THE APOPHTHEGMES OF ERASMUS (Nicolas Udall trans., London, Robert Roberts 1877) (1542)). Under the economic definition of the term, it is not so clear that inheritance is a windfall. See infra Subsection IV.B.2.C. The OED traces the modern use of the term "windfall" to describe extraordinary and unexpected profits to JOHN MAYNARD KEYNES, The General Theory of Employment Interest and Money, in 7 THE COLLECTED WRITINGS OF JOHN MAYNARD KEYNES 57 (rev. ed. 1973). See OED, supra, at 378.
8. Comment, Taxation of Found Property and Other Windfalls, 20 U. CHI. L. REV. 748, 748 (1953).
9. Block v. Hirsh, 256 U.S. 135,157 (1921) (emphasis added).
10. The Coronation Cases involved contract disputes arising from the cancellation of celebrations in honor of the coronation of King Edward VII (who became ill days before the scheduled festivities). Parties that contracted for rooms along parade routes, boats able to cruise to the "illumination of the fleet," and similar services wished to rescind contracts and recover down payments. Sellers of these services, of course, wished not only to retain down payments, but to receive balances due. The primary case was Krell v. Henry, 1 K.B. 740 (Eng. C.A. 1903), which held that a party letting rooms along the parade route could retain the down payment but that a contract was otherwise rescinded because its purpose had been frustrated. For citations to 10 other opinions on contracts frustrated by the King's illness, along with extensive background on the disputes, see R.G. McElroy & Glanville Williams, The Coronation Cases, 4 MOD. L. REV. 241 (1941).
11. Andrew Kull, Mistake, Frustration, and the Windfall Principle of Contract Remedies, 43 HASTINGS L.J. 1 ,26 (1991).
12. Richard A. Epstein, Luck, 6 SOC. PHIL. & POL'Y 17, 18 (1988).
13. See, e.g., RICHARD A. MUSGRAVE & PEGGY B. MUSGRAVE, PUBLIC FINANCE IN THEORY AND PRACTICE 277-96 (5th ed. 1989).
14. See id. at 293.
15. It is the unearned feature that defines windfalls. The phrase "unearned surprise" may seem redundant. Most surprises are unearned (windfalls), and most earnings are expected. There are, however, examples of unsurprising windfall-type gains (for example, an expected inheritance) and surprise earnings (for example, a stock in a consciously diversified portfolio that exceeds expectations, or a seller landing a big contract after working hard on the deal while still calculating the odds of success as well below 50%). That a gain is a surprise, however, supports a presumption that it is an unearned windfall.
16. Gene Steuerle, Progressive Taxation and Windfall Incomes, 62 TAX NOTES 1197, 1197 (1994); see also Louis Kaplow, An Economic Analysis of Legal Transitions, 99 HARV. L. REV. 509, 556 (1986) (" [T]he revenue effects of windfall taxation may make it desirable because such benefits might exceed [costs] in terms of the optimal trade-off between incentives and risk-spreading.").
17. Gene Steuerle, Progressive Taxation and Windfall Incomes, 62 TAX NOTES 1197, 1197 (1994); see also Louis Kaplow, An Economic Analysis of Legal Transitions, 99 HARV. L. REV. 509, 556 (1986) (" [T]he revenue effects of windfall taxation may make it desirable because such benefits might exceed [costs] in terms of the optimal trade-off between incentives and risk-spreading.").
18. Saul Levmore, The Case for Retroactive Taxation, 22 J. LEGAL STUD. 265, 273 (1993).
19. Park & Tilford Distillers v. United States, 107 F. Supp. 941, 942 (Ct. Cl. 1952) (quoting 26 U.S.C. § 22(a) (1946)).
20. Id. at 942 (emphasis added). The Park & Tilford court held that the payment of insider trading profits to a corporation from an officer under section 16(b) of the Securities Act of 1934 is taxable income under section 22(a) of the Internal Revenue Code of 1934. The court failed to note one reason Congress might not have viewed corporate recovery of insider trading profits as a windfall: Section 16(b) clearly aims to recruit corporations as private attorneys general so as to deter insider trading. To the extent that such lawsuits serve public ends, they are not windfalls.
21. WALTER NICHOLSON, MICROECONOMIC THEORY 485 (3d ed. 1985).
22. For an accessible theoretical discussion of risk aversion, see id. at 203-09. The huge and varied markets for insurance are perhaps the strongest evidence that most individuals are risk-averse. Insurance markets and similar mechanisms give rise to "[t]he general presumption in economics ... that people are risk-averse over gambles affecting a significant proportion of their wealth." ROBERT COûTER & THOMAS ULEN, LAW & ECONOMICS 63 (1988).
23. While in common parlance the word "risk" is associated with the possibility of only adverse outcomes, in economics and finance it refers more generally to unpredictability and thus includes favorable as well unfavorable possibilities.
24. See Edward J. McCaffery, Why People Play Lotteries and Why It Matters, 1994 WIS. L. REV. 71, 93-99.
25. See, e.g., COOTER & ULEN, supra note 16, at 65-66 ("Moral hazard is the name for the problem that arises when the behavior of the insuree changes after the purchase of insurance so that the probability of loss or the size of the loss increases."); STEVEN SHAVELL, ECONOMIC ANALYSIS OF ACCIDENT LAW 194-97 (1987) (discussing the moral hazard problem and some partial solutions).
26. "[C]apitalized into the price of the asset" means that the price of the asset has been adjusted to reflect some known present or possible future influence. Thus, for example, when the value of a parcel of land rises due to the discovery that it likely contains a gold mine, we say that the likelihood of the mine's existence has been capitalized into the price of the land. Similarly, the mortgage interest deduction has made homes more valuable and has undoubtedly been capitalized into home prices. For an amusing and deceptively profound discussion of capitalizing the value of the mortgage interest deduction into property prices, see BORIS I. BITTKER, Tax Shelters and Tax Capitalization or Does the Early Bird Get a Free Lunch?, in COLLECTED LEGAL ESSAYS 547, 547-52 (1989).
27. Efficiency does have its critics. See, e.g., Debate: Is Law and Economics Moral?, 24 VAL. U. L. REV. 147 (1990); Symposium on Efficiency as a Legal Concern, 8 HOFSTRA L. REV. 485 (1980).
28. Efficiency does have its critics. See, e.g., Debate: Is Law and Economics Moral?, 24 VAL. U. L. REV. 147 (1990); Symposium on Efficiency as a Legal Concern, 8 HOFSTRA L. REV. 485 (1980).
29. A policy that leaves at least one person better off without harming anyone exemplifies efficiency in the strongest sense of the word: pareto efficiency. Windfall capture, considered ex post, is not pareto efficient since it leaves the windfall.recipient worse off. Considered ex ante, however, windfall capture that does not require excessive adminstrative costs is efficient under two less demanding standards: Societal gains exceed losses (Kaldor-Hicks efficiency), and over the long term covering many windfalls, everyone is statistically likely to be better off if the state captures windfalls (quasi-paretian efficiency). For a general discussion of these and other definitions of efficiency, see JULES L. COLEMAN, MARKETS, MORALS, AND THE LAW 95-132 (1988).
30. Richard A. Epstein, International News Service v. Associated Press: Custom and Law as Sources of Property Rights in News, 78 VA. L. REV. 85, 123 (1992). Epstein agrees that "the social losses generated by not creating the property right [for unanticipated benefits] seem fairly small." Id.
31. See Kaplow, supra note 11, at 551-53.
32. See NICHOLSON, supra note. 15, at ch. 15 ("Market Demand") (demonstrating how individual preferences are aggregated to construct the demand curve, and discussing empirical efforts to model real-world demand curves); id. at ch. 7 app. ("Technical Progress") (discussing the role of technological innovation in shaping the supply curve, and analyzing hypothesized causes of technical progress).
33. The proliferation of derivative markets - in options, futures, and similar contracts for stocks, bonds, commodities, and currencies - has lowered the transaction costs of planning for an uncertain future. Such instruments, however, have not banished surprises from the course of human events.
34. Epstein, supra note 7, at 36.
35. See JOHN RAWLS, A THEORY OF JUSTICE (1971).
36. See id.
37. See Epstein, supra note 7, at 28. Epstein admits that "[i]f there were a costless way in which the consequences of bad luck could be spread across everyone in society at large . . . then most of us would pronounce ourselves better off for the change." Id. at 17. He goes on to argue, however, that any scheme attempting to undo the effects of bad luck is "prey to great[] institutional and practical impediments." Id. at 28.
38. See id. at 36.
39. 614 P.2d 1294 (Wash. Ct. App. 1980).
40. See id. at 1295.
41. See id.
42. See id. at 1296-97.
43. See id. at 1299.
44. See id. at 1295.
45. See id. at 1297. That the buyers anticipated at least the possibility that the safe contained hidden value is central to the argument that they reaped no windfall and distinguishes Sumstad from the true private windfall cases examined infra Section III.D.
46. Note that, counterintuitively, the buyers would have an even stronger case if they knew that the safe contained cash. Presumably, they applied effort or skill to discover the existence of unknown resources. Such efforts, like high-tech explorations for oil, yield productive information. To encourage collection of productive information, parties possessing it are not required to disclose it to those with whom they trade. Thus, an oil company is not required to disclose its knowledge that a field contains oil when it negotiates to buy the land usually using a "straw," since the oil company's identity would tip off the present owner that his land contained oil. There is an important caveat in the Sumstad case, due to the fact that the plaintiffs discovered cash as opposed to items with intrinsic value. "In the case of currency (as distinct from treasure that has historical, aesthetic, or collectors' value), the optimal level [of search] is very low, perhaps zero. Finding money does not increase the wealth of society; it just enables the finder to have more of society's goods than someone else." RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW § 3.2 (5th ed. 1998).
47. 208 N.W.2d 860 (Minn. 1973).
48. For similar cases, see Booth v. Seaboard Fire & Marine Insurance, 431 F.2d 212 (8th Cir. 1970); and Douthet v. State Farm Mutual Automobile Insurance, 546 S.W.2d 156 (Mo. 1977).
49. See Brunmeier, 208 N.W.2d at 861.
50. See id.
51. See id. at 865.
52. See id.
53. Although the court claimed that the statute governing workmens' compensation insurance supports its result, it failed to apply portions of the statute that explicitly permitted insureds to contract for as much or as little uninsured motorist coverage as desired: "The named insured shall have the right to reject in writing [uninsured motorist coverage]. . . . [A]t the option of the insured, the uninsured motorist limits shall be equal to those provided in the policy of bodily injury liability insurance of the insured or such lesser limits as the insured elects to carry." Id. at 862 n.l.
54. See RICHARD R. POWELL & PATRICK J. ROMAN, POWELL ON REAL PROPERTY ¶ 246 (abridged ed. 1968).
55. Kendall v. Ernest Pestana, Inc., 709 P.2d 837, 841 (Cal. 1985).
56. Id. at 845 (citations and internal quotation marks omitted).
57. Id. (citations and internal quotation marks omitted).
58. Id. (citations and internal quotation marks omitted); see also Warner v. Konover, 553 A.2d 1138 (Conn. 1989) (holding that a landlord cannot unreasonably withhold consent for a sublease); Jack Frost Sales v. Harris Trust & Sav. Bank, 433 N.E.2d 941 (111. App. Ct. 1982) (same); Julian v. Christopher, 575 A.2d 735 (Md. 1990) (same). See generally POWELL & ROHAN, supra note 47, ¶ 17.04[1][b] (describing tenants' broad rights to assign and sublet).
59. Courts are not alone in making this unwarranted assumption; a leading treatise states that anti-assignment clauses "are justified as reasonable protection of the interests of the lessor as to who shall possess and manage property in which he has a reversionary interest and from which he is deriving income." ROBERT S. SCHOSHINSKI, AMERICAN LAW OF LANDLORD AND TENANT § 8.15, at 578-79 (1980); see also POWELL & ROMAN, supra note 47, 1246 (suggesting that landlords' rights to limit assignment or subletting be limited to substantive objections to the proposed new tenant). There may be rational grounds to impose a clear-statement rule requiring landlords to be exceptionally forthright and explicit about an unqualified right to reject sublets or assignments. Since they are generally better informed than tenants about the real estate market, the likelihood of early exit, and other relevant facts, clear-statement rules may be a sensible way of prodding landlords to share their knowledge with tenants. See generally Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87 (1989) (explicating the theory that default contract rules encouraging more knowledgeable parties to reveal information are efficient).
60. Courts are not alone in making this unwarranted assumption; a leading treatise states that anti-assignment clauses "are justified as reasonable protection of the interests of the lessor as to who shall possess and manage property in which he has a reversionary interest and from which he is deriving income." ROBERT S. SCHOSHINSKI, AMERICAN LAW OF LANDLORD AND TENANT § 8.15, at 578-79 (1980); see also POWELL & ROMAN, supra note 47, 1246 (suggesting that landlords' rights to limit assignment or subletting be limited to substantive objections to the proposed new tenant). There may be rational grounds to impose a clear-statement rule requiring landlords to be exceptionally forthright and explicit about an unqualified right to reject sublets or assignments. Since they are generally better informed than tenants about the real estate market, the likelihood of early exit, and other relevant facts, clear-statement rules may be a sensible way of prodding landlords to share their knowledge with tenants. See generally Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87 (1989) (explicating the theory that default contract rules encouraging more knowledgeable parties to reveal information are efficient).
61. Courts are not alone in making this unwarranted assumption; a leading treatise states that anti-assignment clauses "are justified as reasonable protection of the interests of the lessor as to who shall possess and manage property in which he has a reversionary interest and from which he is deriving income." ROBERT S. SCHOSHINSKI, AMERICAN LAW OF LANDLORD AND TENANT § 8.15, at 578-79 (1980); see also POWELL & ROMAN, supra note 47, 1246 (suggesting that landlords' rights to limit assignment or subletting be limited to substantive objections to the proposed new tenant). There may be rational grounds to impose a clear-statement rule requiring landlords to be exceptionally forthright and explicit about an unqualified right to reject sublets or assignments. Since they are generally better informed than tenants about the real estate market, the likelihood of early exit, and other relevant facts, clear-statement rules may be a sensible way of prodding landlords to share their knowledge with tenants. See generally Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87 (1989) (explicating the theory that default contract rules encouraging more knowledgeable parties to reveal information are efficient).
62. Another misidentified windfall almost exactly analogous to lease anti-assignment clauses came up in judicial treatment of mortgage due-on-sale clauses that effectively prevent a home buyer from taking over the seller's mortgage. In the rising-interest-rate environment of the late 1970s, courts in a number of states read in a reasonableness requirement and refused to enforce the clauses. See, e.g., Wellenkamp v. Bank of Am., 582 P.2d 970 (Cal. 1978). The courts found it unreasonable for lenders to be able to charge higher interest rates simply because a homeowner decided to move. As with anti-assignment clauses, however, there is reason to believe that at least part of the reason lenders inserted such terms was precisely to provide themselves with some protection if and when rates rose. Like landlords, lenders, as players with large pools of loans, seem in a better position than homeowners to calculate borrowers' average tenure in a given home and thus manage the risk of fluctuating interest rates. Homeowners are likely better off accepting lower interest rates and putting all the interest rate risk-upside and downside, given the homeowner's right to prepay-on the lender. Congress eventually preempted state law and mandated the validity of due-on-sale clauses in the Garn-St. Germain Act, Pub. L. No. 97-230, §341, 96 Stat. 1469, 1505 (1982) (codified as amended at 12 U.S.C. § 1701J-3 (1994)). For a detailed history of this episode, see GRANT S. NELSON & DALEA. WHITMAN, REAL ESTATE FINANCE LAW §§ 5.21-5.24 (3d ed. 1994).
63. 353 N.W.2d 464 (Mich. 1984).
64. No. 92 CIV. 7327(JSM), 1997 WL 251548, at *1 (S.D.N.Y. May 13, 1997).
65. In Squibb, there were actually multiple insurers settling and not settling, but that does not affect the analysis.
66. Lapeer Metal, 353 N.W.2d at 467 (quoting Stanley v. Hinchcliffe & Kenner, 238 N.W.2d 13 (Mich. 1976)).
67. Id. at 469 (Kavanagh, J., dissenting) (emphases added) (quoting Thick v. Lapeer Metal Products, 302 N.W.2d 902 (Mich. Ct. App. 1981)).
68. Squibb, 1997 WL 251548, at *2; see also Maryland Casualty v. W.R. Grace & Co., No. 99 CIV. 2613(JSM), 1996 WL 109068 (S.D.N.Y. Mar. 12, 1996) (holding that a liable nonsettling insurer could not deduct the payment made by a settling insurer).
69. Squibb, 1997 WL 251548, at *2; Lapeer Metal, 353 N.W.2d at 468-69 (Williams, C.J., concurring).
70. AS.
71. Other cases have correctly rejected windfall arguments made by parties in the context of litigation uncertainty. See, e.g., Beecher v. Able, 441 F. Supp. 426 (S.D.N.Y. 1977) (rejecting an argument that unexpectedly low claims filed in a class action should lead to an ex post reduction of the settlement amount). But see Nelson v. Taff, 499 N.W.2d 685, 690 (Gartzke, J., concurring) (Wis. Ct. App. 1993) (arguing erroneously that a bankrupt plaintiff obtained a windfall by settling a claim with the trustee for cents on the dollar and then later recovering the entire claim plus punitives from the responsible third party); id. at 692 (Sundby, J., dissenting) (same).
72. 212 N.E.2d 574 (Ohio 1965).
73. See id. at 577.
74. Id.
75. See Id. (citing Board of County Comm'rs v. Thormyer (In re Appropriation of Easement for Highway Purposes), 159 N.E.2d 612, 619 (Ohio 1959)).
76. Thormyer, 159 N.E.2d at 618.
77. A derivative suit is "[a] suit by a shareholder to enforce a corporate cause of action." BLACK'S LAW DICTIONARY 443 (6th ed. 1990). Shareholders bringing derivative actions believe the corporation has suffered an injury for which the officers in control, for one reason or another, will not initiate suit.
78. See 13 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS § 5981 (perm. ed. 1995).
79. See Bangor Punta Operations v. Bangor & Aroostook R.R., 417 U.S. 703 (1974); El Dorado Bancshares v. Martin, 701 F. Supp. 1515, 1519 n.3 (D. Kan. 1988) ("[T]he determination of whether shareholders can recover rests primarily on whether such a recovery would result in a windfall. . . ."); Courtland Manor, Inc. v. Leeds, 347 A.2d 144 (Del. Ch. 1975); Home Fire Ins. v. Barber, 93 N.W. 1024 (Neb. 1903).
80. As long as a suit is possible, "[a]n element of the purchase price paid [would] be attributable to the per share value of the possible corporate recovery." Paul P. Harbrecht, The Contemporaneous Ownership Rule in Shareholders' Derivative Suits, 25 UCLA L. REV. 1041, 1062 (1978). Similar reasoning leads Dean Clark to conclude that "it is difficult to justify the continued existence of the contemporaneous ownership rule." ROBERT CHARLES CLARK, CORPORATE LAW § 15.4, at 651 (1986).
81. As long as a suit is possible, "[a]n element of the purchase price paid [would] be attributable to the per share value of the possible corporate recovery." Paul P. Harbrecht, The Contemporaneous Ownership Rule in Shareholders' Derivative Suits, 25 UCLA L. REV. 1041, 1062 (1978). Similar reasoning leads Dean Clark to conclude that "it is difficult to justify the continued existence of the contemporaneous ownership rule." ROBERT CHARLES CLARK, CORPORATE LAW § 15.4, at 651 (1986).
82. Inverse condemnation refers to a suit by a landowner claiming that the state has taken some action so intrusive that it amounts to expropriation. Since the state has not filed a direct condemnation suit in order to take title and determine just compensation, the landowner may file an inverse condemnation suit, asking a court to (1) rule that there has been a taking; and (2) determine just compensation and order the state to make payment. See POWELL & ROHAN, supra note 47, § 79B.03; 2A JULIUS L. SACKMAN, NICHOLS ON EMINENT DOMAIN § 6.14 (rev. 3d ed. 1998).
83. Inverse condemnation refers to a suit by a landowner claiming that the state has taken some action so intrusive that it amounts to expropriation. Since the state has not filed a direct condemnation suit in order to take title and determine just compensation, the landowner may file an inverse condemnation suit, asking a court to (1) rule that there has been a taking; and (2) determine just compensation and order the state to make payment. See POWELL & ROHAN, supra note 47, § 79B.03; 2A JULIUS L. SACKMAN, NICHOLS ON EMINENT DOMAIN § 6.14 (rev. 3d ed. 1998).
84. For examples of cases holding that a subsequent purchaser may sue, see Lopes v. City of Peabody, 629 N.E.2d 1312 (Mass. 1994); and Moroney v. Mayor and Council of Old Tappan, 633 A.2d 1045 (N.J. Super. Ct. App. Div. 1993). For a general discussion and collection of cases, see Stephen E. Abraham, Windfalls or Windmills: The Right of a Property Owner To Challenge Land Use Regulations (A Call To Critically Reexamine the Meaning of Lucas), 13 J. LAND USE & ENVTL. L. 161 (1997).
85. Anello v. Zoning Bd. of Appeals, 678 N.E.2d 870, 871 (N. Y. 1997). In a similar decision issued simultaneously, the same court argued that a buyer's "reasonable expectations were reflected by his consideration of the inherent limitations on the property when he made the purchase offer for thousands less than its worth without the restrictions." Gazza v. New York State Dep't of Envtl. Conservation, 679 N.E.2d 1035,1043 (N.Y. 1997).
86. As with derivative suits and the contemporaneous ownership rule, efficiency considerations weigh strongly in favor of permitting inverse condemnation suits to run with the land. Alienability allows the party who most highly values the package of land and lawsuit to obtain the assets. Some courts that permit subsequent buyers to bring inverse condemnation suits explicitly discuss such efficiency concerns. See Lopes, 629 N.E.2d at 1315 (arguing that barring purchasers from bringing inverse condemnation suits " would threaten the free transferability of real estate" ). Massachusetts law may be less friendly to subsequent buyers after Leonard v. Town of Brimfield, 666 N.E.2d 1300 (Mass. 1996). The rules against suits by subsequent purchasers of shares or land are highly formalistic and hence manipulable. If the rule barring subsequent buyers from suing became sufficiently inconvenient, owners of shares or land could place their assets in a shell corporation. Instead of selling the underlying asset, they could sell all shares of the shell corporation. The shell corporation, not the underlying buyer, would (formally) own any cause of action; as a legal person in existence at the time of the wrong to the corporation or the offending statute, the corporation would have the indisputable right to sue no matter how many times the shares or land effectively changed hands. This use of formalism to circumvent rules extinguishing lawsuits when lands change hands rests on the universal power of corporations, as legal entities distinct from their shareholders, to hold title to real property. See, e.g., DEL. CODE ANN. tit. 8, § 122(4) (1991 & Supp. 1998); MODEL Bus. CORP. ACT ANN. § 3.02(4) (1984).
87. Saul Levmore, Explaining Restitution, 71 VA. L. REV. 65, 67 (1985).
88. For the most extensive survey of the field, see GEORGE E. PALMER, THE LAW OF RESTITUTION (1978).
89. See POSNER, supra note 39, § 4.13.
90. See id.
91. See Levmore, supra note 76, at 71.
92. See Richard A. Epstein, The Ubiquity of the Benefit Principle, 67 S. CAL. L. REV. 1369, 1380 (1994).
93. Of course, one only receives a windfall if the music was enjoyable, the purification system actually worked, and the windshield became cleaner as a result of the squeegee person's efforts.
94. See POSNER, supra note 39, § 4.13.
95. See Cotnam v. Wisdom, 104 S.W. 164 (Ark. 1907); In re Estate of Crisan, 107 N.W.2d 907 (Mich. 1961); Landmark Med. Ctr. v. Gauthier, 635 A.2d 1145, 1148 (R.I. 1994); RESTATEMENT OF RESTITUTION § 116 (1937).
96. See 3A BENEDICT ON ADMIRALTY §§ 1-4 & 232-44 (Martin J. Norris ed., 7th ed. 1997).
97. See generally Ayres & Gertner, supra note 52 (discussing default rules); Richard A. Posner & Andrew M. Rosenfield, Impossibility and Related Doctrines in Contract Law: An Economic Analysis, 6 J. LEGAL STUD. 83 (1977) (analyzing impossibility, impracticability, and frustration).
98. The frequency with which such cases are litigated is not necessarily tied to the stress of divorce and resulting deaths during the (usually) relatively short period between initial filing and final divorce decree, but because in some cases the divorce proceedings drag on for years, see, e.g., In re Violi, 482 N.E.2d 29 (N.Y. 1985), discussed infra note 89, or the final decree does not resolve clearly the status of jointly held property.
99. See POWELL & ROMAN, supra note 47, ¶ 617 (discussing survivorship rights among joint tenants); id. ¶ 624 (discussing survivorship rights between tenants by entireties).
100. For a typical example of this formal approach, see Violi, 482 N.E.2d 29, in which the court awarded a house held by the entireties to the husband after the wife died. While the couple had a divorce agreement calling for division of the value of the house, they remained separated for years without legally dissolving their marriage. Thus the divorce agreement was never executed. In addition to relying on the formality that the tenancy by the entireties had never terminated, the court said that its holding rested in part on a "public policy favoring certainty in title to real property." Id. at 32. While certainty of title would be relevant if a third party were involved, the dissent points out that it has nothing to do with a dispute between co-owners. [The divorcing couple, H and W,] made clear their intent that the tenancy by entirety between them be no longer continued and, the present contest being over whether [H] should receive a windfall to the exclusion of [W's] heirs, no public policy with respect to the protection of bona fide purchasers should play any part in our determination. Id. at 33 (Meyer, J., dissenting). For other decisions following the formalist approach despite evidence of the parties' intent to the contrary, see Kirven v. Reynolds, 536 So.2d 936 (Ala. 1988); Jones v. Earnest, 819 S.W.2d 280 (Ark. 1991); Bruce v. Dyer, 524 A.2d 777 (Md. 1987); Pavluvcik v. Sullivan, 495 N.E.2d 869 (Mass. App. Ct. 1986); In re Estate of Sander, 806 P.2d 545 (Mont. 1991); Shutt v. Butner, 303 S.E.2d 399 (N.C. Ct. App. 1983); and In re Marriage of Lutzke, 361 N.W.2d 640 (Wis. 1985).
101. Indeed, one way to recharacterize the formal approach is to analogize each spouse's contingent right to obtain sole title as a strange sort of life insurance on the other. This immediately raises an important question: Do separated or divorced spouses, still tied by an undissolved joint ownership interest, have an insurable interest in each other's lives? The law takes a dim view of those wishing to take out life insurance on those with whom they have no familial or economic ties. See 3 GEORGE J. COUCH, COUCH ON INSURANCE 3D § 41:1 -: 10,: 17-:24 (Lee R. Russ & Thomas F. Segalla eds., 1997 & Supp. 1998) (describing the legal requirements of an insurable interest).
102. Sondin v. Bernstein, 467 N.E.2d 926, 929 (111. App. Ct. 1984).
103. See id. at 928.
104. See id.
105. For other cases dividing proceeds after one spouse died despite the formal existence of a tenancy with survivorship rights, see Wardlow v. Pozzi, 338 P.2d 564 (Cal. App. Ct. 1959); and Mann v. Bradley, 535 P.2d 213 (Colo. 1975).
106. 131 N.Y.S.2d 261 (App. Div. 1954).
107. Id.
108. Id.
109. Id. at 265-66. The court also found it significant that the plaintiff knew of the defendant's plan to place her interest in trust but did not invoke his right of first refusal until after she had made the transfer. See id. at 264-65. It is somewhat disturbing, and seemingly inconsistent with the reasoning of the opinion, that the plaintiff could recover damages. Perhaps the court could think of nothing better than the law/equity distinction as a basis to rule for the defendant. The remaining discussion of the case suggests an alternative reading that would preclude legal as well as equitable relief.
110. See id. at 264.
111. UNIF. LAND TRANSACTIONS ACT § 2-302(b)-(c) (amended 1977, 13 U.L.A. 523 (1986)); see POWELL & ROHAN, supra note 47, Î881 [5].
112. UNIF. LAND TRANSACTIONS ACT § 2-302(b)-(c) (amended 1977, 13 U.L.A. 523 (1986)); see POWELL & ROHAN, supra note 47, Î881 [5].
113. See U.C.C. § 2-614(1) (1989).
114. See PALMER, supra note 77, § 14.17(a).
115. See RESTATEMENT (SECOND) OF CONTRACTS §152 (1981) (discussing mutual mistake); id. § 153 (discussing unilateral mistake).
116. See Kull, supra note 6, at 2-3.
117. See RESTATEMENT (SECOND) OF CONTRACTS, supra note 103, §§ 151-158 (1981) (discussing mistake rules); id. at §§ 261-272 (discussing impracticability and frustration rules); Posner & Rosenfield, supra note 86, at 117-118.
118. See Kull, supra note 6, at 38-54 ("The Trouble with 'Gap-Filling'").
119. See id. at 5-6 (stating Kull's thesis). While it sounds like a "four corners" approach (to the extent that it looks to terms within the four corners of the contract, and no further), Kull's approach is more nuanced. Older common-law cases show that a strict four corners approach has no need for doctrines of mistake, impossibility, or frustration. See, e.g., Paradine & Jane, 82 Eng. Rep. 519 (K.B. 1647) (requiring a tenant to pay rent despite eviction by an invading army). Kull, however, accepts the need for rules to deal with mistake, impossibility, and frustration. He says the need for special rules in such cases is "best explained as a judicial refusal to enforce contracts beyond their original limits. Common sense sets limits to a promise, even where contractual language does not." Kull, supra note 6, at 38. Kull apparently thinks that it is acceptable for courts to assume that all parties would adopt this one term, but no others, to manage risk.
120. See MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 14 (1995) (describing corporate law as "standard 'contracts'"); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 34 (1991) ("[Corporate law is a set of terms available off-the-rack so that participants in corporate ventures can save the cost of contracting.").
121. See MICHAEL P. DOOLEY, FUNDAMENTALS OF CORPORATION LAW 14 (1995) (describing corporate law as "standard 'contracts'"); FRANK H. EASTERBROOK & DANIEL R. FISCHEL, THE ECONOMIC STRUCTURE OF CORPORATE LAW 34 (1991) ("[Corporate law is a set of terms available off-the-rack so that participants in corporate ventures can save the cost of contracting.").
122. We assume that F is an invitee who "stumbled across" the property; if F devoted resources to unearthing the item, I argue (perhaps counterintuitively) that L has a stronger claim. The idea is that the law encourages F to proceed via a market transaction with L (for example, by buying the land, leasing it, or negotiating for the right to extract the valuables) rather than via trespass or exploiting a license granted for one purpose to achieve other ends.
123. See. e.g., Michael v. First Chicago Corp., 487 N.E.2d 403, 409 (III. App Ct.. 1985); McAvoy v. Medina, 93 Mass. (11 Allen) 548 (1866).
124. See RAY ANDREWS BROWN, THE LAW OF PERSONAL PROPERTY § 14 (2d ed. 1955).
125. The rationale drawn in the text for the lost/mislaid distinction elides over much of the complexity and confusion in the cases. For a more nuanced overview of the case law, along with criticism of the purported policy grounds for the distinction, see R.H. Helmholz, Equitable Division and the Law of Finders, 52 FORDHAM L. REV. 313, 316-27 (1983).
126. 670 S.W.2d 69 (Mo. Ct. App. 1984).
127. Kull argues that the maxim "let the gains and losses lay where they fall" expresses the proper grounds to decide a wide variety of similar contract disputes (for example, cases of mistake, frustration, and impossibility). See generally Kull, supra note 6. I address his thesis supra notes 104-108 and accompanying text.
128. 599 F.2d 363 (10th Cir. 1979).
129. See id. at 364.
130. See id.
131. See id.
132. See ROBERT E. KEETON, CASES AND MATERIALS ON BASIC INSURANCE LAW 121 (2d ed. 1977). Keeton states: The "principle of indemnity" . . . is the principle that insurance is legitimately aimed at conferring a benefit that is no more than an offset (total or partial) for accidental loss. To be consistent with this principle, the benefit must be no greater in value than the loss suffered, though it may be less than the loss. Id. at 121.
133. There was no wrongdoer in Continental Oil - well blowouts are presumably acts of God. See Continental Oil, 599 F.2d at 364. Thus, the insurer would need some other grounds to extract Quasar's second recovery from Continental.
134. See 16 COUCH, supra note 90, § 62:1. To serve the same ends as subrogation clauses, insurance contracts sometimes include reimbursement or repayment clauses, requiring the insured to turn over to the insurance company any legal recovery against the wrongdoer. These alternatives, however, may be less valuable than subrogation clauses since the insured must bring suit instead of the insurer, yet has little incentive to do so when she must turn over any recovery to the insurer. See SHAVELL, supra note 19, at 238-39.
135. See SHAVELL, supra note 19, at 235-37.
136. "The virtually universal rule in [America] has been to treat first-party benefits that plaintiff has received as 'collateral' to the defendant's responsibility and not relevant to tort law's determination of liability or damages." MARC A. FRANKLIN & ROBERT L. RABIN, CASES AND MATERIALS ON TORT LAW AND ALTERNATIVES 676 (5th ed. 1992).
137. Continental Oil illustrated this moral hazard problem. See Continental Oil, 599 F.2d at 364. It is precisely in such cases that insurance companies are most likely to include subrogation or reimbursement clauses. One way to deal with moral hazard and deterrence is to have the state tax away any plaintiff recovery beyond actual damages. See SHAVELL, supra note 19, at 238 n.9. I examine this decoupling solution vis-à-vis punitive damages infra Subsection IV.C.2 . Decoupling may not work in this context, however, since plaintiffs will simply obtain full compensation from the source available at least transaction costs - invariably their insurers - and fail to bring suit against the wrongdoer. Underdeterrence will result.
138. 452 So.2d 514 (Fla. 1984).
139. 244 N.W.2d 340 (Mich. Ct. App. 1976).
140. See id. at 343. Note that in Epps, unlike Brunmeier v. Farmers Insurance Exchange, 208 N.W.2d 860 (Minn. 1973), the first-party health insurance apparently contained no clause requiring the insured to turn over any workmen's compensation recovery.
141. See Epps, 244 N.W.2d at 343.
142. 585 P.2d 1182 (Wash. 1978) (en banc).
143. Id. at 1184.
144. Again, note that in health insurance cases, there is little fear of moral hazard: People are generally unlikely to risk bodily injury in order to reap a windfall based on duplicate coverage. The windfall varies directly with the injury and hence the insured would have to risk serious harm to realize a large windfall. If feasible, Medicare should have subrogated rights against the injurer, but as discussed above, this may prove too expensive. For another case where the court allowed an efficient double recovery out of sympathy for é crime victims, see People v. Sullivan, 71 Cal. Rptr. 2d 440 (Cal. Ct. App. 1998), appeal granted and opinion superseded, 955 P.2d 448 (Cal. 1998), which held that under a statute requiring criminal convicts to pay restitution, convicts could not deduct payments from a victims' insurer. The appeals court in Sullivan explicitly noted that the insurer could have included subrogation rights against criminals in its policies. See id. at 445-46.
145. Most contemporary casebooks discuss the two cases and ask students to reconcile the seemingly irreconcilable outcomes. See, e.g., JOHN P. DAWSON ET AL., CASES AND COMMENT ON CONTRACTS 621-30 (6th ed. 1993); E. ALLEN FARNSWORTH & WILLIAM F. YOUNG, CASES AND MATERIALS ON CONTRACTS 799-802 (5th ed. 1995); FRIEDRICH KESSLER ET AL., CONTRACTS: CASES AND MATERIALS 84-88,886-98 (3d ed. 1986).
146. Most contemporary casebooks discuss the two cases and ask students to reconcile the seemingly irreconcilable outcomes. See, e.g., JOHN P. DAWSON ET AL., CASES AND COMMENT ON CONTRACTS 621-30 (6th ed. 1993); E. ALLEN FARNSWORTH & WILLIAM F. YOUNG, CASES AND MATERIALS ON CONTRACTS 799-802 (5th ed. 1995); FRIEDRICH KESSLER ET AL., CONTRACTS: CASES AND MATERIALS 84-88,886-98 (3d ed. 1986).
147. Most contemporary casebooks discuss the two cases and ask students to reconcile the seemingly irreconcilable outcomes. See, e.g., JOHN P. DAWSON ET AL., CASES AND COMMENT ON CONTRACTS 621-30 (6th ed. 1993); E. ALLEN FARNSWORTH & WILLIAM F. YOUNG, CASES AND MATERIALS ON CONTRACTS 799-802 (5th ed. 1995); FRIEDRICH KESSLER ET AL., CONTRACTS: CASES AND MATERIALS 84-88,886-98 (3d ed. 1986).
148. 25 N.W. 42 (Wis. 1885).
149. 33 N.W. 919 (Mich. 1887). For recent scholarly commentary on Wood and Sherwood. see David Frisch, Buyer's Remedies and Warranty Disclaimers: The Case for Mistake and the Indeterminacy of U.C.C. Section 1-103,43 ARK. L. REV. 291 (1990); Hoffman F. Fuller, Mistake and Error in the Law of Contracts, 33 EMORY L.J. 41, 58-62 (1984); and Kenneth L. Schneyer, The Culture of Risk: Deconstructing Mutual Mistake, 34 AM. BUS. L.J. 429 (1997).
150. 33 N.W. 919 (Mich. 1887). For recent scholarly commentary on Wood and Sherwood. see David Frisch, Buyer's Remedies and Warranty Disclaimers: The Case for Mistake and the Indeterminacy of U.C.C. Section 1-103,43 ARK. L. REV. 291 (1990); Hoffman F. Fuller, Mistake and Error in the Law of Contracts, 33 EMORY L.J. 41, 58-62 (1984); and Kenneth L. Schneyer, The Culture of Risk: Deconstructing Mutual Mistake, 34 AM. BUS. L.J. 429 (1997).
151. 33 N.W. 919 (Mich. 1887). For recent scholarly commentary on Wood and Sherwood. see David Frisch, Buyer's Remedies and Warranty Disclaimers: The Case for Mistake and the Indeterminacy of U.C.C. Section 1-103,43 ARK. L. REV. 291 (1990); Hoffman F. Fuller, Mistake and Error in the Law of Contracts, 33 EMORY L.J. 41, 58-62 (1984); and Kenneth L. Schneyer, The Culture of Risk: Deconstructing Mutual Mistake, 34 AM. BUS. L.J. 429 (1997).
152. 33 N.W. 919 (Mich. 1887). For recent scholarly commentary on Wood and Sherwood. see David Frisch, Buyer's Remedies and Warranty Disclaimers: The Case for Mistake and the Indeterminacy of U.C.C. Section 1-103,43 ARK. L. REV. 291 (1990); Hoffman F. Fuller, Mistake and Error in the Law of Contracts, 33 EMORY L.J. 41, 58-62 (1984); and Kenneth L. Schneyer, The Culture of Risk: Deconstructing Mutual Mistake, 34 AM. BUS. L.J. 429 (1997).
153. Kull offers a powerful rationale for both outcomes that resolves the paradox: In both cases the court left everything as it was at the time the parties discovered their mutual mistake. All transfers up to that point were valid, but all future obligations disappeared. See Kull, supra note 6, at 5-6.1 analyze his wider and more controversial thesis supra notes 104-108.
154. Kull, supra note 6, at 41.
155. Pure private windfall cases like Wood and Sherwood surface rarely, undoubtedly because it is only in exceptional cases that the party selling an item with surprise value ever hears the good news. The purchaser - recipient of the pleasant surprise - has no incentive to publicize the parties' mutual mistake and risk a lawsuit. Every once in a while, however, a particularly noteworthy contractual windfall becomes public knowledge. See, e.g., A 50¢ Frame That Just Might Hold a Treasure, N.Y. TIMES, June 4, 1995, at A29 (reporting how the purchaser of a frame at a flea market found that it contained a draft of Henry Wadsworth Longfellow's poem ne Village Blacksmith, appraised at approximately $7000).
156. Pure private windfall cases like Wood and Sherwood surface rarely, undoubtedly because it is only in exceptional cases that the party selling an item with surprise value ever hears the good news. The purchaser - recipient of the pleasant surprise - has no incentive to publicize the parties' mutual mistake and risk a lawsuit. Every once in a while, however, a particularly noteworthy contractual windfall becomes public knowledge. See, e.g., A 50¢ Frame That Just Might Hold a Treasure, N.Y. TIMES, June 4, 1995, at A29 (reporting how the purchaser of a frame at a flea market found that it contained a draft of Henry Wadsworth Longfellow's poem ne Village Blacksmith, appraised at approximately $7000).
157. See POSNER, supra note 39, at 68-69.
158. It is important to distinguish serendipitous finds from discoveries made by the application of toil, skill, and enterprise. This is productive activity bearing only the most facile resemblance to windfalls, and there is no good reason to subject income from such activities to extraordinary taxation in the first place. See supra note 39. While subject to no special tax, finds do count as ordinary income for federal income tax purposes. See Cesarini v. United States, 296 F. Supp. 3 (N.D. Ohio 1969), aff d, 428 F.2d 812 (6th Cir. 1970) (per curiam) (holding that $4467 in cash found in a used piano purchased by taxpayers for $15 was taxable as ordinary income under the broad language of section 61 of the Internal Revenue Code). Like any tax, this creates some incentive to hide the find and to engage in less finding in the first place, and thus is at odds with the purposes of finders law. A contrary holding, that finds are not taxable income, would create powerful incentives for taxpayers to recharacterize earned income as " lucky finds" (for example, real estate brokers could claim that they earned commissions serendipitously).
159. This assertion rests on the seemingly universal belief that the law, including the Constitution, protects property obtained via windfalls just as much as it protects property earned by effort or enterprise. See supra notes 4-7 and accompanying text.
160. CHARLES FRIED, CONTRACT AS PROMISE: A THEORY OF CONTRACTUAL OBLIGATION 71 (1981) (footnote omitted). Fried makes the case for sharing losses as well as gains. There may often be a stronger case, however, that in the case of losses one party or the other is the best risk bearer and should therefore absorb the entire loss.
161. 715 P.2d 514 (Wash. 1986).
162. See id. at 518.
163. The court could infer that the parties would have agreed to hire an impartial land appraiser to estimate the incremental value of a house straddling the two lots, but such an appraisal itself may be expensive.
164. See R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 (1960).
165. Contrary to appearances, private condemnation is not a form of sharing. The condemner pays a fixed value - the cost of her imposition - that is unrelated to the size of any windfall. Similarly, the law of salvage limits awards to the reasonable cost of the rescue, which is supposedly independent of the value of the cargo saved. See 3A BENEDICT ON ADMIRALTY, supra note 85, §§ 1-4. In Brown, the likely cost of the additional easement would be zero, since the path already existed and the plaintiffs technical overburdening was in reality no additional burden at all. See Brown, 715 P.2d at 518.
166. Contrary to appearances, private condemnation is not a form of sharing. The condemner pays a fixed value - the cost of her imposition - that is unrelated to the size of any windfall. Similarly, the law of salvage limits awards to the reasonable cost of the rescue, which is supposedly independent of the value of the cargo saved. See 3A BENEDICT ON ADMIRALTY, supra note 85, §§ 1-4. In Brown, the likely cost of the additional easement would be zero, since the path already existed and the plaintiffs technical overburdening was in reality no additional burden at all. See Brown, 715 P.2d at 518.
167. See, e.g., C/V TV, Inc. v. Shannondale, Inc., 27 F.3d 104 (4th Cir. 1994); Centel Cable Television v. Cook, 567 N.E.2d 1010 (Ohio 1991). See generally JON W. BRUCE & JAMES W. ELY, JR., THE LAW OF EASEMENTS AND LICENSES IN LAND ¶ 12.07 (1995 & Supp. 1998) (collecting cases).
168. This assumes that the new use has no negative effect on existing uses.
169. See POSNER, supra note 39, at 570. Recall the difficulty courts have in cases involving only three parties: Two parties fight over proceeds that properly belong to a third. See supra Section III.C.
170. See Louis Kaplow & Steven Shavell, Why the Legal System Is Less Efficient than the Income Tax in Redistributing Income, 23 J. LEGAL STUD. 667 (1994).
171. Epstein, supra note 7, at 30. Epstein addresses bad luck, but he treats good and bad luck symmetrically, overlooking the reporting problem.
172. The following discussion draws heavily on Robert C. Ellickson, Property in Land, 102 YALE L.J. 1315, 1388-91 (1993), which contains numerous references to historical and economic analyses of medieval open-field agriculture.
173. For a detailed summary of the tragedy.resulting from Soviet attempts to collectivize agriculture, see DMITRI VOLKOGONOV, STALIN: TRIUMPH AND TRAGEDY (Harold Shukman ed. & trans., 1991). On China, see JONATHAN D. SPENCE, THE SEARCH FOR MODERN CHINA 583 (1990) (describing the result of collectivization efforts in Mao's "Great Leap Forward" in the late 1950s as "famine on a gigantic scale, a famine that claimed 20 million lives or more between 1959 and 1962"). For a discussion of the more recent failure of communal agriculture in Ethiopia, see DAWIT WOLDE GIORGIS, RED TEARS: WAR, FAMINE AND REVOLUTION IN ETHIOPIA 265-80 (1989). For additional citations documenting the almost universal failure of collectivized agriculture, see Ellickson, supra note 152, at 1318 nn.4-7,1335 nn.73 & 75.
174. For a detailed summary of the tragedy.resulting from Soviet attempts to collectivize agriculture, see DMITRI VOLKOGONOV, STALIN: TRIUMPH AND TRAGEDY (Harold Shukman ed. & trans., 1991). On China, see JONATHAN D. SPENCE, THE SEARCH FOR MODERN CHINA 583 (1990) (describing the result of collectivization efforts in Mao's "Great Leap Forward" in the late 1950s as "famine on a gigantic scale, a famine that claimed 20 million lives or more between 1959 and 1962"). For a discussion of the more recent failure of communal agriculture in Ethiopia, see DAWIT WOLDE GIORGIS, RED TEARS: WAR, FAMINE AND REVOLUTION IN ETHIOPIA 265-80 (1989). For additional citations documenting the almost universal failure of collectivized agriculture, see Ellickson, supra note 152, at 1318 nn.4-7,1335 nn.73 & 75.
175. For a detailed summary of the tragedy.resulting from Soviet attempts to collectivize agriculture, see DMITRI VOLKOGONOV, STALIN: TRIUMPH AND TRAGEDY (Harold Shukman ed. & trans., 1991). On China, see JONATHAN D. SPENCE, THE SEARCH FOR MODERN CHINA 583 (1990) (describing the result of collectivization efforts in Mao's "Great Leap Forward" in the late 1950s as "famine on a gigantic scale, a famine that claimed 20 million lives or more between 1959 and 1962"). For a discussion of the more recent failure of communal agriculture in Ethiopia, see DAWIT WOLDE GIORGIS, RED TEARS: WAR, FAMINE AND REVOLUTION IN ETHIOPIA 265-80 (1989). For additional citations documenting the almost universal failure of collectivized agriculture, see Ellickson, supra note 152, at 1318 nn.4-7,1335 nn.73 & 75.
176. For a detailed summary of the tragedy.resulting from Soviet attempts to collectivize agriculture, see DMITRI VOLKOGONOV, STALIN: TRIUMPH AND TRAGEDY (Harold Shukman ed. & trans., 1991). On China, see JONATHAN D. SPENCE, THE SEARCH FOR MODERN CHINA 583 (1990) (describing the result of collectivization efforts in Mao's "Great Leap Forward" in the late 1950s as "famine on a gigantic scale, a famine that claimed 20 million lives or more between 1959 and 1962"). For a discussion of the more recent failure of communal agriculture in Ethiopia, see DAWIT WOLDE GIORGIS, RED TEARS: WAR, FAMINE AND REVOLUTION IN ETHIOPIA 265-80 (1989). For additional citations documenting the almost universal failure of collectivized agriculture, see Ellickson, supra note 152, at 1318 nn.4-7,1335 nn.73 & 75.
177. For an extensive review of these laws and related policy discussions, see WINDFALLS FOR WIPEOUTS: LAND VALUE CAPTURE AND COMPENSATION (Donald G. Hagman & Dean J. Misczynski eds., 1978). The editors use a subject-specific definition: "A windfall, broadly conceived, is an increase in property value caused by public action; a wipeout is an analogous decrease." Donald G. Hagman & Dean J. Misczynski, Introduction to WINDFALLS FOR WIPEOUTS, supra, at 1, 1.
178. For an extensive review of these laws and related policy discussions, see WINDFALLS FOR WIPEOUTS: LAND VALUE CAPTURE AND COMPENSATION (Donald G. Hagman & Dean J. Misczynski eds., 1978). The editors use a subject-specific definition: "A windfall, broadly conceived, is an increase in property value caused by public action; a wipeout is an analogous decrease." Donald G. Hagman & Dean J. Misczynski, Introduction to WINDFALLS FOR WIPEOUTS, supra, at 1, 1.
179. See, e.g., Lucas v. South Carolina Coastal Council, 505 U.S. 1003, 1007 (1992).
180. See Donald G. Hagman & Dean J. Misczynski, Executive Summary, in WINDFALLS FOR WIPEOUTS, supra note 154, at xxix, xl-xli.
181. Special assessments date back to at least 1287, when an ordinance required residents of Sussex, England, to pay for shoring up a sea wall. The statute based assessments on the size of a landowner's acreage that benefited from the sea wall. See EDWIN CANNAN, THE HISTORY OF LOCAL RATES IN ENGLAND 11 (1912). By the 1890s, special assessments were common practice in the United States. See TAX FOUND., SPECIAL ASSESSMENTS AND SERVICE CHARGES IN MUNICIPAL FINANCE 8 (1970).
182. Special assessments date back to at least 1287, when an ordinance required residents of Sussex, England, to pay for shoring up a sea wall. The statute based assessments on the size of a landowner's acreage that benefited from the sea wall. See EDWIN CANNAN, THE HISTORY OF LOCAL RATES IN ENGLAND 11 (1912). By the 1890s, special assessments were common practice in the United States. See TAX FOUND., SPECIAL ASSESSMENTS AND SERVICE CHARGES IN MUNICIPAL FINANCE 8 (1970).
183. Apparently, homeowners on Gladstone Boulevard in Kansas City, Missouri, were the first to prod a locality to adopt a ZSAFED in order to preserve the residential character of their neighborhood. Thirty years later the statute survived a constitutional challenge. See In re Kansas City Ordinance No. 39946, 252 S.W. 404 (Mo. 1923) (upholding the constitutionality of a ZSAFED against, inter alia, a challenge that the benefit for homeowners in one neighborhood was not a public use for which the state could invoke its takings power). For additional history and analysis of ZSAFEDs in both the United States and abroad, see Douglas G. Hagman, Betterment for Worsement: The English 1909 Act and Its Progeny, in WINDFALLS FOR WIPEOUTS, supra note 154, at 491; and Donald G. Hagman, Zoning by Special Assessment Financed Eminent Zone (ZSAFED), in WINDFALLS FOR WIPEOUTS, supra note 154, at 517.
184. Apparently, homeowners on Gladstone Boulevard in Kansas City, Missouri, were the first to prod a locality to adopt a ZSAFED in order to preserve the residential character of their neighborhood. Thirty years later the statute survived a constitutional challenge. See In re Kansas City Ordinance No. 39946, 252 S.W. 404 (Mo. 1923) (upholding the constitutionality of a ZSAFED against, inter alia, a challenge that the benefit for homeowners in one neighborhood was not a public use for which the state could invoke its takings power). For additional history and analysis of ZSAFEDs in both the United States and abroad, see Douglas G. Hagman, Betterment for Worsement: The English 1909 Act and Its Progeny, in WINDFALLS FOR WIPEOUTS, supra note 154, at 491; and Donald G. Hagman, Zoning by Special Assessment Financed Eminent Zone (ZSAFED), in WINDFALLS FOR WIPEOUTS, supra note 154, at 517.
185. See Madelyn Glickfield & Donald G. Hagman, Special Capital and Real Estate Windfalls Taxes (SCREWTs), in WINDFALLS FOR WIPEOUTS, supra note 154, at 437 & back leaf tb1.20-1.
186. The individual states originally held title to Western lands, but, after considerable haggling, each ceded its holdings to the federal government. See MERRILL JENSEN, THE ARTICLES OF CONFEDERATION: AN INTERPRETATION OF THE SOCIAL-CONSTITUTIONAL HISTORY OF THE AMERICAN REVOLUTION 1774-1781, at 225-38 (1940).
187. Streams of water with high salt content, saltlicks were a valuable resource for farmers raising animals.
188. PELATIAH WEBSTER, POLITICAL ESSAYS ON THE NATURE AND OPERATION OF MONEY, PUBLIC FINANCES, AND OTHER SUBJECTS 497-98 (Philadelphia, Joseph Crukshank 1791).
189. Such breaches of faith by local officials were common. See PAUL W. GATES, HISTORY OF PUBLIC LAND LAW DEVELOPMENT 705 (1968); MALCOLM J. ROHRBOUGH, THE LAND OFFICE BUSINESS: THE SETTLEMENT AND ADMINISTRATION OF AMERICAN PUBLIC LANDS, 1789-1837, at 32-34, 197-99 (1968).
190. Such breaches of faith by local officials were common. See PAUL W. GATES, HISTORY OF PUBLIC LAND LAW DEVELOPMENT 705 (1968); MALCOLM J. ROHRBOUGH, THE LAND OFFICE BUSINESS: THE SETTLEMENT AND ADMINISTRATION OF AMERICAN PUBLIC LANDS, 1789-1837, at 32-34, 197-99 (1968).
191. Letter from George Washington to Richard Henry Lee (Dec. 14, 1784), in 28 THE WRITINGS OF GEORGE WASHINGTON 9, 11 (John C. Fitzpatrick ed., 1938).
192. 10 JOURNALS OF THE COOTNENTAL CONGRESS 378 (May20, 1785).
193. See SIR EDWARD COKE, THE SECOND PART OF THE INSTITUTES OF THE LAWS OF ENGLAND *577-78 (David S. Berkowitz & Samuel E. Thorne eds., Garland Publ'g 1979) (1642) (explaining the King's claim based on the necessity of precious metals for coinage). Early grants in Massachusetts colonies reserved to the Crown one-fifth of all gold and silver discovered. See James Warren Springer, American Indians and the Law of Real Property in Colonial New England, 30 AM. J. LEGAL HIST. 25, 32 (1986) (citing 1 RECORDS OF THE GOVERNOR AND COMPANY OF THE MASSACHUSETTS BAY IN NEW ENGLAND 4, 9 (Nathaniel B. Shurtleff ed., Boston, William White 1853-1854)). Other grants hewed to English tradition and reserved all gold and silver for the King. See ALBERT TANGEMAN VOLWILER, GEORGE CROGHAN AND THE WESTWARD MOVEMENT 1741-82, at 251 (1926) (discussing a 1769 grant in New York State to George Croghan).
194. See SIR EDWARD COKE, THE SECOND PART OF THE INSTITUTES OF THE LAWS OF ENGLAND *577-78 (David S. Berkowitz & Samuel E. Thorne eds., Garland Publ'g 1979) (1642) (explaining the King's claim based on the necessity of precious metals for coinage). Early grants in Massachusetts colonies reserved to the Crown one-fifth of all gold and silver discovered. See James Warren Springer, American Indians and the Law of Real Property in Colonial New England, 30 AM. J. LEGAL HIST. 25, 32 (1986) (citing 1 RECORDS OF THE GOVERNOR AND COMPANY OF THE MASSACHUSETTS BAY IN NEW ENGLAND 4, 9 (Nathaniel B. Shurtleff ed., Boston, William White 1853-1854)). Other grants hewed to English tradition and reserved all gold and silver for the King. See ALBERT TANGEMAN VOLWILER, GEORGE CROGHAN AND THE WESTWARD MOVEMENT 1741-82, at 251 (1926) (discussing a 1769 grant in New York State to George Croghan).
195. See SIR EDWARD COKE, THE SECOND PART OF THE INSTITUTES OF THE LAWS OF ENGLAND *577-78 (David S. Berkowitz & Samuel E. Thorne eds., Garland Publ'g 1979) (1642) (explaining the King's claim based on the necessity of precious metals for coinage). Early grants in Massachusetts colonies reserved to the Crown one-fifth of all gold and silver discovered. See James Warren Springer, American Indians and the Law of Real Property in Colonial New England, 30 AM. J. LEGAL HIST. 25, 32 (1986) (citing 1 RECORDS OF THE GOVERNOR AND COMPANY OF THE MASSACHUSETTS BAY IN NEW ENGLAND 4, 9 (Nathaniel B. Shurtleff ed., Boston, William White 1853-1854)). Other grants hewed to English tradition and reserved all gold and silver for the King. See ALBERT TANGEMAN VOLWILER, GEORGE CROGHAN AND THE WESTWARD MOVEMENT 1741-82, at 251 (1926) (discussing a 1769 grant in New York State to George Croghan).
196. See SIR EDWARD COKE, THE SECOND PART OF THE INSTITUTES OF THE LAWS OF ENGLAND *577-78 (David S. Berkowitz & Samuel E. Thorne eds., Garland Publ'g 1979) (1642) (explaining the King's claim based on the necessity of precious metals for coinage). Early grants in Massachusetts colonies reserved to the Crown one-fifth of all gold and silver discovered. See James Warren Springer, American Indians and the Law of Real Property in Colonial New England, 30 AM. J. LEGAL HIST. 25, 32 (1986) (citing 1 RECORDS OF THE GOVERNOR AND COMPANY OF THE MASSACHUSETTS BAY IN NEW ENGLAND 4, 9 (Nathaniel B. Shurtleff ed., Boston, William White 1853-1854)). Other grants hewed to English tradition and reserved all gold and silver for the King. See ALBERT TANGEMAN VOLWILER, GEORGE CROGHAN AND THE WESTWARD MOVEMENT 1741-82, at 251 (1926) (discussing a 1769 grant in New York State to George Croghan).
197. See GATES, supra note 163, at 700-07.
198. The Sixteenth Amendment to the Constitution, ratified in 1913, established the validity of a federal tax on income. See U.S. CONST, amend. XVI. Soon thereafter, a leading account discussing the nation's ability to raise money for the war effort noted that "[w]e appreciate more than ever before the great advantage of having developed the administrative machinery of the income tax." T.S. Adams, Federal Taxes upon Income and Excess Profits, 8 AM. ECON. REV. 18, 40 (Supp 1918) (quoting the comments of Arthur N. Young); see also ROBERT M. LA FOLLETTE, WAR PROFITS TAX: Is IT DISLOYAL To ADVOCATE THE TAXATION OF WAR PROFITS AND SURPLUS INCOMES? 3-32 (1917) (containing speeches before the Senate on Sept. 1, 1917 and Sept. 10, 1917).
199. The Sixteenth Amendment to the Constitution, ratified in 1913, established the validity of a federal tax on income. See U.S. CONST, amend. XVI. Soon thereafter, a leading account discussing the nation's ability to raise money for the war effort noted that "[w]e appreciate more than ever before the great advantage of having developed the administrative machinery of the income tax." T.S. Adams, Federal Taxes upon Income and Excess Profits, 8 AM. ECON. REV. 18, 40 (Supp 1918) (quoting the comments of Arthur N. Young); see also ROBERT M. LA FOLLETTE, WAR PROFITS TAX: Is IT DISLOYAL To ADVOCATE THE TAXATION OF WAR PROFITS AND SURPLUS INCOMES? 3-32 (1917) (containing speeches before the Senate on Sept. 1, 1917 and Sept. 10, 1917).
200. JOHN R. HICKS ET AL., THE TAXATION OF WAR WEALTH 42 (1942) (emphases added).
201. During the Civil War, the Confederate State of Georgia enacted a business profits tax, with an exemption based on capital, that was similar in many ways to the world war EPTs. See KOSSUTH KENT KENNAN, INCOME TAXATION: METHODS AND RESULTS IN VARIOUS COUNTRIES 212-14 (1910). Michigan classified railroads according to net earnings per mile and assessed an EPT-like tax with rates depending on this measure. See HENRY CARTER ADAMS, THE SCIENCE OF FINANCE 466 (New York, Holt & Co. 1898).
202. During the Civil War, the Confederate State of Georgia enacted a business profits tax, with an exemption based on capital, that was similar in many ways to the world war EPTs. See KOSSUTH KENT KENNAN, INCOME TAXATION: METHODS AND RESULTS IN VARIOUS COUNTRIES 212-14 (1910). Michigan classified railroads according to net earnings per mile and assessed an EPT-like tax with rates depending on this measure. See HENRY CARTER ADAMS, THE SCIENCE OF FINANCE 466 (New York, Holt & Co. 1898).
203. During World War I, " [financially, the excess profits tax was a huge success. It formed the backbone of our war tax system. . . ." KENNETH JAMES CURRAN, EXCESS PROFITS TAXATION 189 (1943). By the end of the war, it accounted for 59% of the American government's revenue. See id. at 136-37 & tbl.3. At its peak, the British EPT raised about 36% of the government's revenue. See JOSIAH STAMP, TAXATION DURING THE WAR 249 app.IV (1932). During World War II, the EPT at its peak raised about 23% of federal government revenue. See U.S. TREASURY DEP'T, ANNUAL REPORT OF THE SECRETARY OF THE TREASURY ON THE STATE OF THE FINANCES 562-63 (1945) (noting that the EPT raised $5 billion out of a total revenue of $22 billion in the fiscal year ending on June 30, 1944).
204. During World War I, " [financially, the excess profits tax was a huge success. It formed the backbone of our war tax system. . . ." KENNETH JAMES CURRAN, EXCESS PROFITS TAXATION 189 (1943). By the end of the war, it accounted for 59% of the American government's revenue. See id. at 136-37 & tbl.3. At its peak, the British EPT raised about 36% of the government's revenue. See JOSIAH STAMP, TAXATION DURING THE WAR 249 app.IV (1932). During World War II, the EPT at its peak raised about 23% of federal government revenue. See U.S. TREASURY DEP'T, ANNUAL REPORT OF THE SECRETARY OF THE TREASURY ON THE STATE OF THE FINANCES 562-63 (1945) (noting that the EPT raised $5 billion out of a total revenue of $22 billion in the fiscal year ending on June 30, 1944).
205. During World War I, " [financially, the excess profits tax was a huge success. It formed the backbone of our war tax system. . . ." KENNETH JAMES CURRAN, EXCESS PROFITS TAXATION 189 (1943). By the end of the war, it accounted for 59% of the American government's revenue. See id. at 136-37 & tbl.3. At its peak, the British EPT raised about 36% of the government's revenue. See JOSIAH STAMP, TAXATION DURING THE WAR 249 app.IV (1932). During World War II, the EPT at its peak raised about 23% of federal government revenue. See U.S. TREASURY DEP'T, ANNUAL REPORT OF THE SECRETARY OF THE TREASURY ON THE STATE OF THE FINANCES 562-63 (1945) (noting that the EPT raised $5 billion out of a total revenue of $22 billion in the fiscal year ending on June 30, 1944).
206. HICKS ET AL., supra note 169, at 4.
207. "The only effective way of preventing war wealth from arising is to rely upon the compulsory method of mobilization rather than the voluntary method . . . ." Id. at 2.
208. See STAMP, supra note 171, at 39-40; see also id. at 42 (stating that profits of the King's Norton Metal Company rose 350% from 1913 to 1914).
209. The profits of the American Agricultural Chemical Company and Standard Oil of New York doubled between 1913 and 1916. Du Font's profits increased 14-fold over the same period, while the American Zinc, Lead, and Smelting Company saw profits rise by a factor of 45. See LA FOLLETTE, supra note 168, at 27.
210. See PAOLO E. COLETTA, SEA POWER IN THE ATLANTIC AND MEDITERRANEAN IN WORLD WAR I, at 25-28, 29 map (1989).
211. Carl C. Plehn, War Profits and Excess Profits Taxes, 10 AM. ECON. REV. 283, 285 (1920)
212. See CURRAN, supra note 171, at 8. The United States passed the Vinson-Trammel excess profits tax on munitions manufacturers as Title III of the Revenue Act of 1916, Pub. L. No. 64-271, 39 Stat. 756, 780-82 (1916). In the ensuing years of World War I, Congress passed a succession of more broadly based and more complex EPTs. See Revenue Act of 1917, Pub. L. No. 64-377, tit. II, 39 Stat. 1000, 1000-02; War Expense Act, Pub. L. No. 65-50, tit. II, 40 Stat. 300, 302-08 (1917); Revenue Act of 1918, Pub. L. No. 65-254, tit. II, 40 Stat. 1057, 1088-96 (1919).
213. In 1919, President Wilson advocated a permanent EPT as a way to "reach undue profits without discouraging the enterprise and activity of our business men." 58 CONG. REC. 41-42 (1919).
214. President Roosevelt's New Deal included a very modest EPT in the National Industrial Recovery Act, Pub. L. No. 73-67, §§ 216-17,48 Stat. 195, 208-09 (1933). This measure, however, was designed not to raise revenue, but rather to encourage businesses to assess fairly their capital stock for a complementary tax on capital stock. See id. § 215, at 207-08.
215. The (second) Vinson-Trammel Act taxed naval contractors 100% of profits in excess of the contract price. See Act of March 27,1934, Pub. L. No. 73-135, § 3(b), 48 Stat. 503, 505.
216. The United States enacted an EPT during initial mobilization, before it had entered the war. See Second Revenue Act of 1940, Pub. L. No. 76-801, tit. II, 54 Stat. 974, 975-98.
217. See JOHN F. WITTE, THE POLITICS AND DEVELOPMENT OF THE FEDERAL INCOME TAX 137-44 (1985).
218. America's first World War I EPT, Title II of the Revenue Act of 1917, Pub. L. No. 64-377, 39 Stat. 1000, 1000-02 (1917), taxed profits above eight percent of invested capital, plus $5000, at an eight-percent rate.
219. Title II of the War Revenue Act, Pub. L. No. 65-50, 40 Stat. 300, 302-08 (1917), added an alternative definition of excess profits: those exceeding average profits in the three years preceding the war.
220. By the end of World War I, both Britain and the United States offered taxpaying firms such a choice. See session laws cited supra note 178; Plehn, supra note 177, at 287. Both nations offered the same choice throughout World War II. Congress enacted the first World War IIEPT in 1940. See Second Revenue Act of 1940, Pub. L. No. 76-801, tit. H, 54 Stat. 974, 975-98 (1940). Both definitions survived equal protection challenges despite disparate impacts resulting from prewar profit fluctuations, varying definitions of invested capital across industries, and other sources of seeming unfairness in application. See LaBelle Iron Works v. United States, 256 U.S. 377 (1921).
221. LA FOLLETTE, supra note 168, at 16-17. For similar optimism about separating war profit windfalls from fairly earned profits, see 54 CONG. REC. 2319 (statement of Rep. Dickinson) (1917) (" [T]hose who reap large war profits in times of distress should help to bear the burdens of Government, increased by reason of the very conditions that add to the wealth of those who flourish and fatten on the misfortunes of the country.").
222. Adams, supra note 168, at 19-20 (1918). Commentators continue to define windfall profits as equivalent to excess profits. See HAROLD S. SLOAN & ARNOLD J. ZURCHER, DICTIONARY OF ECONOMICS 467 (5th ed. 1970) (defining a windfall profit as " [a] profit in excess of that which can be considered normal").
223. See STAMP, supra note 171, at 41 (arguing that "the difficulty in determining what were war profits [is] fundamental" ); Plehn, supra note 177, at 285 ("[T]he line of demarcation between 'war profits' and other unusual profits proved exceedingly hard to draw.").
224. See generally RICHARD A. BREALEY & STEWART C. MYERS, PRINCIPLES OF CORPORATE FINANCE 129-212 (4th ed. 1991) (explaining in detail the theory and evidence showing that returns are positively correlated with risk).
225. Robert Murray Haig, British Experience with Excess Profits Taxation, 10 AM. ECON. REV. 1, 12 (1920).
226. Thomas S. Adams, Should the Excess Profits Tax Be Repealed?, 35 Q.J. ECON. 363, 380, 390, 392 (1921).
227. See, e.g., OTTO H. KAHN, SOME COMMENTS ON WAR TAXATION 24 (1917).
228. See STAMP, supra note 171, at 182.
229. See Adams, supra note 192, at 388-89.
230. STAMP, supra note 171, at 48-49.
231. See supra text accompanying note 178.
232. While under Title II of the Revenue Act of 1942, Pub. L. No. 77-753, 56 Stat. 798, 899-936, the marginal tax rate on excess profits was 90%, a separate provision limited an enterprise's total tax to 80% of net income. The 1934 Vinson-Trammel Act taxed 100% of naval contractor profits. See supra note 181. Such a high tax rate "is beyond all question very dangerous indeed," HICKS ET AL., supra note 169, at 44, as the nation soon realized. "As the [American] rearmament program progressed, there developed throughout the country a belief that the severe restrictions placed upon profits by the Vinson-Trammel Act were retarding plant expansion and production in the defense industries." CURRAN, supra note 171, at 172. Congress repealed the Act when it imposed the general wartime EPT in 1940.
233. See Haig, supra note 191, at 6 ("There was much evidence that the war tax . . . had led to extravagant and wasteful expenditure . . . ."); see also CURRAN, supra note 171, at 5 (noting " [t]he tendency of an excess profits tax to lead to wasteful expenditures and lax methods in industry").
234. Haig, supra note 191, at 9.
235. Id. at 7-9.
236. See KAHN, supra note 193, at 20. Kahn himself took no credit for this relationship, which economist Arthur Laffer rediscovered to much fanfare in the late 1970s. See Arthur B. Laffer, Statement Prepared for the Joint Economic Committee (May 20, 1977), reprinted in THE ECONOMICS OF THE TAX REVOLT: A READER 75-79 (Arthur B. Laffer & Jan P. Seymour eds., 1979). Kahn regarded the insight as ancient: " It is one of the oldest principles of taxation that an excessive impost destroys its own productivity." Id. at 21. For a comprehensive analysis and historical summary of the idea behind the Laffer Curve, tracing it back at least to ADAM SMITH, THE WEALTH OF NATIONS ( 1776), see Don Fullerton, On the Possibility of an Inverse Relationship Between Tax Rales and Government Revenue, 19 J. PUB. ECON. 3 (1982).
237. See KAHN, supra note 193, at 20. Kahn himself took no credit for this relationship, which economist Arthur Laffer rediscovered to much fanfare in the late 1970s. See Arthur B. Laffer, Statement Prepared for the Joint Economic Committee (May 20, 1977), reprinted in THE ECONOMICS OF THE TAX REVOLT: A READER 75-79 (Arthur B. Laffer & Jan P. Seymour eds., 1979). Kahn regarded the insight as ancient: " It is one of the oldest principles of taxation that an excessive impost destroys its own productivity." Id. at 21. For a comprehensive analysis and historical summary of the idea behind the Laffer Curve, tracing it back at least to ADAM SMITH, THE WEALTH OF NATIONS ( 1776), see Don Fullerton, On the Possibility of an Inverse Relationship Between Tax Rales and Government Revenue, 19 J. PUB. ECON. 3 (1982).
238. See KAHN, supra note 193, at 20. Kahn himself took no credit for this relationship, which economist Arthur Laffer rediscovered to much fanfare in the late 1970s. See Arthur B. Laffer, Statement Prepared for the Joint Economic Committee (May 20, 1977), reprinted in THE ECONOMICS OF THE TAX REVOLT: A READER 75-79 (Arthur B. Laffer & Jan P. Seymour eds., 1979). Kahn regarded the insight as ancient: " It is one of the oldest principles of taxation that an excessive impost destroys its own productivity." Id. at 21. For a comprehensive analysis and historical summary of the idea behind the Laffer Curve, tracing it back at least to ADAM SMITH, THE WEALTH OF NATIONS ( 1776), see Don Fullerton, On the Possibility of an Inverse Relationship Between Tax Rales and Government Revenue, 19 J. PUB. ECON. 3 (1982).
239. HICKS ET AL., supra note 169, at 23.
240. Id. at 23-24.
241. Id. at 8. While there was significant worry about the outbreak of war, the actual outbreak of hostilities in the fall of 1914 was still surprising, and thus it is far from clear that the likelihood of war was capitalized into asset prices. See MARTIN GILBERT, THE FIRST WORLD WAR: A COMPLETE HISTORY 11, 13 (1994) ("[W]ar seemed unlikely in the spring and summer of 1914. . . . [T]he fact that almost every European Head of State was related by marriage to every other. . . created bonds that seemed unbreakable." ).
242. See HICKS ET AL., supra note 169, at 43.
243. Adams, supra note 168, at 45 (quoting Edwin R.A. Seligman).
244. See, e.g., Revenue Act of 1941, Pub. L. No. 77-259, § 203, 55 Stat. 687, 702 (containing special tax provisions for new plants useful only during wartime); CURRAN, supra note 171, at 181-82 (encouraging increased production by allowing new plant expenditures to count 125% in defining invested capital); Plehn, supra note 177, at 287, 292 (describing administrative measures varying tax rates to address differences in risk across enterprises).
245. See, e.g., CURRAN, supra note 171, at 178 (stating that the EPT "proved next to impossible for any one other than the tax expert to understand"); Adams, supra note 192, at 369 (describing enormous "resentment at [the EPT's] intricacy"). The Secretary of the Treasury himself complained about the complexity of the EPT in an annual report after the war. See 1920 DEP'T. OF THE TREASURY ANN. REP. 30. Though similar perceptions are common today, taxpayers in the nascent days of the income tax found it preposterous that officials and experts often disagreed about key aspects of the EPT. See Adams, supra note 168, at 46.
246. STAMP, supra note 171, at 71.
247. Adams, supra note 192, at 367.
248. MARION HAMILTON GILLIM, THE INCIDENCE OF EXCESS PROFITS TAXATION 55 (1945).
249. CURRAN, supra note 171, at 175.
250. STAMP, supra note 171, at 40. For a discussion of Spillers & Bakers's extraordinary profits, see supra text accompanying note 174. Conspicuous consumption led to extremely high personal income tax rates during the war. The British press bemoaned " 'the Asquith wedding of 1915, which was so awkward a stumbling block in the way of preachers of economy for many months afterward,'" and similarly railed against a ball given by Lady Curzon in 1917 that was " 'beautifully done and extremely smart.'" LA FOLLETTE, supra note 168, at 19 (citing The Loan and the Moral, ECONOMIST, Mar. 3, 1917, at 424).
251. CURRAN, supra note 171, at 174 (quoting Text of Address by the President, N. Y. TIMES, Sept. 4, 1939, at 6).
252. RANDOLPH E. PAUL, TAXATION IN THE UNITED STATES 263 (1954).
253. STAMP, supra note 171, at 51.
254. Id. at 147 (quoting Sir A. Markham, M.P.); see also Note, Mobilization for Defense, 54 HARV. L. REV. 278, 311 (1940) (stating that Congress passed the EPT on the eve of WWII in large part to protect the morale of laborers, consumers, and draftees from high wartime profits by industry).
255. For a comprehensive overview of the limited economic literature examining models in which people's welfare depends on the welfare of others, see Richard H. McAdams, Relative Preferences, 102 YALE L.J. 1 (1992).
256. KAHN, supra note 193, at 22.
257. See Dennis B. Drapkin & Philip K. Verleger, Jr., The Windfall Profit Tax: Origins, Development, Implications, 22 B.C. L. REV. 631, 639 (1981).
258. For a more detailed history of the Windfall Profit Tax on Oil, see id. The lynchpin regulatory measure to deal with the huge disparity between domestic and world market oil prices created by the price freeze on petroleum was the Emergency Petroleum Allocation Act of 1973, 15 U.S.C. §§ 751-756 (repealed 1975). This Act "established a mechanism for allocating the benefits of lower-cost price-controlled crude oil equitably throughout the country-not by physically allocating oil, but by a system of cash transfers among the refiners based upon their relative access to such oil." Texaco v. Department of Energy, 795 F.2d 1021, 1023 (Temp. Emer. Ct. App. 1986). For a summary and analysis of the Act, see Note, National Energy Goals and FEA's Mandatory Crude Oil Allocation Program, 61 VA. L. REV. 903 (1975).
259. Price controls are one way to capture windfalls - indeed, they are more precise than general taxation in redistributing gains from lucky winners to losers. As experience with oil price controls showed, however, the misallocative effects of price controls are significant. To highlight these misallocations, consider another context giving rise to frequent complaints of windfalls: hardware stores charging high prices for everything from flashlights to shovels in the wake of a natural disaster such as a hurricane. If the store owner cannot raise prices in the short run (before additional supplies can arrive), then someone may wander in and buy the last flashlight to use as a nightlight for a mildly scared child, while the next person to rush in may need one to search for survivors in a collapsed building. A higher price signals less needy users to forgo consumption in favor of those in greater need. Contrary to popular belief, then, raising prices in the wake of a disaster is not price-gouging - indeed, it may save lives. In the long run, of course, we rely on higher prices to encourage greater production of flashlights (eventually driving price back down to cost). If the natural disaster were truly an unprecedented surprise, and if it were administratively feasible, the state might enact a windfall profits tax on hardware stores after the fact. Price regulation, however, is a foolhardy substitute. These observations apply with equal force to one popular form of price regulation: rent control. While temporary, surprise housing shortages make the strongest economic case for barring landlords from raising rents, see ANTHONY DOWNS, RESIDENTIAL RENT CONTROLS: AN EVALUATION 1-2 (1988), such regulations mean, for example, that some families will retain excessive space, while others in great need may have to look far afield.
260. United States v. Ptasynski, 462 U.S. 74, 76 (1983) (holding that the Crude Oil Windfall Profit Tax Act of 1980 did not violate the Constitution's Uniformity Clause, see U.S. CONST., art. I, § 8, cl. 1) (internal citations omitted).
261. See Crude Oil Windfall Profit Tax Act of 1980, Pub. L. No. 96-223, 94 Stat. 229-308. To the extent that the incidence of the tax fell on producers (that is, insofar as they could not shift the tax onto their customers), as primarily appears to have been the case, the tax ultimately did reduce profits instead of raising prices.
262. See supra notes 189-195 and accompanying text.
263. H.R. REP. No. 96-304, at 7 (1979), cited in Ptasynski, 462 U.S. at 77; see also S. REP. No. 96-394, at 6 (1979). "It is easy to see why a windfall profits tax on oil, for example, might be best applied to oil already extracted, with future oil exempted." Levmore, supra note 12, at 273 n.16.
264. See supra text accompanying note 211.
265. An external cartel benefits domestic producers in ways similar to a tariff: A cartel maintains an artificially high price worldwide, while a tariff maintains an artificially high price domestically. Economists have long argued that industries benefiting from tariffs (if there must be tariffs) should pay some sort of windfall profits tax. See, e.g., CURRAN, supra note 171, at 3.
266. It is important to note that, to the extent that all citizens own a diversified portfolio of stocks, they would to some extent share in many windfalls such as that experienced by oil producers in the wake of OPEC. What people lost at the gas pump, they would gain back in their mutual funds and pension plans. Diversified investing, however, is unlikely to make windfalls a wash. The windfall may occur in an industry largely in private hands, concentrating the gain in relatively few hands. This was the case with the oil industry in the 1970s and 1980s, when independents produced roughly half the nation's annual oil output. See William P. Streng & Mark W. Romefelt, Structure of the Windfall Profits Tax, in PRACTICING LAW INST., WINDFALL PROFITS TAX 11, 17-18 (William P. Streng ed., 1980). In addition, of course, wealth is not perfectly distributed. The wealthy own stocks disproportionate to their numbers; relying on individual portfolios to spread windfalls is thus regressive.
267. The standard assumption in economics is that price-fixing cartels are unstable, since, in the absence of some enforcement mechanism, each supplier has an incentive to produce and sell more, reducing prices. See NICHOLSON, supra note 15, at 449. OPEC did eventually succumb to this " law" of economics, but only after a number of years, during which the cartel soaked billions of dollars from the U.S. economy. See Salvatore Lazzari, Should the Windfall Profits Tax Be Reinstated?, 48 TAX NOTES 1695 (1990).
268. "Over its eight-year life span, the windfall profits tax reduced domestic oil production by between three and six percent, depending on the price elasticity of oil supply." Lazzari, supra note 231, at 1695. The main source of disincentives were base prices that discouraged additional development of existing oil fields. See Impact of Windfall Profits Tax Repeal on U.S. Production Outlined in DOE Study, PLATT'S OILGRAM NEWS, Oct. 19, 1987, at 6.
269. GAO, ADMINISTRATION OF THE CRUDE OIL WINDFALL PROFIT TAX ACT OF 1980 (1984), quoted in Lazzari, supra note 231, at 1695.
270. It cost the federal government $15 million per year to administer the tax and cost private industry $100 million a year to comply. See Oil Producers Win in Windfall Profits Tax Repeal, UPI, Apr. 1, 1988, available in LEXIS, News Library, WIRES File.
271. For a conventional static analysis showing that producers, not consumers, paid the WPTO, see Stephen L. McDonald, The Incidence and Effects of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 331, 336-39 (1981). There followed between McDonald and Dale Lehman a rather involved debate over the relative merits of this simple static model and a more complex dynamic exhaustible resource model of the oil market. See Dale E. Lehman, Reader Response, A Reexamination of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 683 (1981); Stephen L. McDonald, Reader Response, The Incidence and Effects of the Crude Oil Windfall Profit Tax: A Reply to Lehman, 21 NAT. RESOURCES J. 690 (replying to Lehman); Dale E. Lehman, Reader Response, 22 NAT. RESOURCES J. 275 (1982) (offering a rejoinder to McDonald); Stephen L. McDonald, Reader Response, 22 NAT. RESOURCES J. 277 (1982) (providing a riposte to Lehman).
272. For a conventional static analysis showing that producers, not consumers, paid the WPTO, see Stephen L. McDonald, The Incidence and Effects of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 331, 336-39 (1981). There followed between McDonald and Dale Lehman a rather involved debate over the relative merits of this simple static model and a more complex dynamic exhaustible resource model of the oil market. See Dale E. Lehman, Reader Response, A Reexamination of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 683 (1981); Stephen L. McDonald, Reader Response, The Incidence and Effects of the Crude Oil Windfall Profit Tax: A Reply to Lehman, 21 NAT. RESOURCES J. 690 (replying to Lehman); Dale E. Lehman, Reader Response, 22 NAT. RESOURCES J. 275 (1982) (offering a rejoinder to McDonald); Stephen L. McDonald, Reader Response, 22 NAT. RESOURCES J. 277 (1982) (providing a riposte to Lehman).
273. For a conventional static analysis showing that producers, not consumers, paid the WPTO, see Stephen L. McDonald, The Incidence and Effects of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 331, 336-39 (1981). There followed between McDonald and Dale Lehman a rather involved debate over the relative merits of this simple static model and a more complex dynamic exhaustible resource model of the oil market. See Dale E. Lehman, Reader Response, A Reexamination of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 683 (1981); Stephen L. McDonald, Reader Response, The Incidence and Effects of the Crude Oil Windfall Profit Tax: A Reply to Lehman, 21 NAT. RESOURCES J. 690 (replying to Lehman); Dale E. Lehman, Reader Response, 22 NAT. RESOURCES J. 275 (1982) (offering a rejoinder to McDonald); Stephen L. McDonald, Reader Response, 22 NAT. RESOURCES J. 277 (1982) (providing a riposte to Lehman).
274. For a conventional static analysis showing that producers, not consumers, paid the WPTO, see Stephen L. McDonald, The Incidence and Effects of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 331, 336-39 (1981). There followed between McDonald and Dale Lehman a rather involved debate over the relative merits of this simple static model and a more complex dynamic exhaustible resource model of the oil market. See Dale E. Lehman, Reader Response, A Reexamination of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 683 (1981); Stephen L. McDonald, Reader Response, The Incidence and Effects of the Crude Oil Windfall Profit Tax: A Reply to Lehman, 21 NAT. RESOURCES J. 690 (replying to Lehman); Dale E. Lehman, Reader Response, 22 NAT. RESOURCES J. 275 (1982) (offering a rejoinder to McDonald); Stephen L. McDonald, Reader Response, 22 NAT. RESOURCES J. 277 (1982) (providing a riposte to Lehman).
275. For a conventional static analysis showing that producers, not consumers, paid the WPTO, see Stephen L. McDonald, The Incidence and Effects of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 331, 336-39 (1981). There followed between McDonald and Dale Lehman a rather involved debate over the relative merits of this simple static model and a more complex dynamic exhaustible resource model of the oil market. See Dale E. Lehman, Reader Response, A Reexamination of the Crude Oil Windfall Profit Tax, 21 NAT. RESOURCES J. 683 (1981); Stephen L. McDonald, Reader Response, The Incidence and Effects of the Crude Oil Windfall Profit Tax: A Reply to Lehman, 21 NAT. RESOURCES J. 690 (replying to Lehman); Dale E. Lehman, Reader Response, 22 NAT. RESOURCES J. 275 (1982) (offering a rejoinder to McDonald); Stephen L. McDonald, Reader Response, 22 NAT. RESOURCES J. 277 (1982) (providing a riposte to Lehman).
276. The Congressional Research Service found that, over its lifetime, the tax raised $77.7 billion in gross revenue (roughly $126 billion in current dollars) but only $43.7 billion in net revenue (roughly $71.7 billion in current dollars), since producers could deduct WPTO payments on their regular income tax returns. See Oil Producers Win in Windfall Profits Tax Repeal, supra note 234. Current dollar calculations are based on the Consumer Price Index for All Consumer Goods, seasonally adjusted, U.S. average, for all items, Bureau of Labor Statistics series I.D. no. CUSR0000SA0, available at http://www.bls.gov.
277. Lazzari, supra note 231, at 1695.
278. See Omnibus Trade and Competitiveness Act of 1988, Pub. L. No. 100-418, § 1941,102 Stat. 1107, 1322-24.
279. Silvio O. Conte, . . . Or Tax Excess Profits, N.Y. TIMES, Sept. 10, 1990, at A23.
280. See Lazzari, supra note 231, at 1696.
281. Id.
282. See WTI Crude Monthly Averages (visited March 1, 1999) 〈http://www.wen.co.za/ wen/charts/oil/comawt.htm〉.
283. In theory, a windfall tax on domestic oil discovered before 1973 but still in the ground would be sensible. After 25 years, a large portion of domestic reserves consists of later discoveries. As time goes on, it becomes increasingly difficult to determine which fields and what percent of each field were discovered before 1973.
284. See Michael Prescott, Power Firms Face £2.5 Bn. Windfall Tax, SUNDAY TIMES (London), Sept. 24, 1995 (discussing the political clamor for the tax); U.K. Utilities Hit by "Windfall" Taxation Plan, OIL & GAS J., July 14, 1997, at 27 (discussing enactment of the tax by the new Labour government).
285. See Michael Prescott, Power Firms Face £2.5 Bn. Windfall Tax, SUNDAY TIMES (London), Sept. 24, 1995 (discussing the political clamor for the tax); U.K. Utilities Hit by "Windfall" Taxation Plan, OIL & GAS J., July 14, 1997, at 27 (discussing enactment of the tax by the new Labour government).
286. One official drew the following analogy: "If you sell a house and three years later you regret the price you sold you have no right to say you should change the terms of the contract." Peter Rodgers, City Antipathy Fuelled by Fear and Loathing, THE INDEPENDENT (London), Sept. 27, 1995, at 2 (quoting Adair Turner).
287. Id.
288. The government may fool them once, but investors are likely to catch on to patterns of governmental behavior that affect returns and capitalize them into prices. Thus, the government cannot rely on surprise as a long-term policy tool. See Finn E. Kydland & Edward C. Prescott, Rules Rather than Discretion: The Inconsistency of Optimal Plans, 85 J. POL. ECON. 473 (1977); R.H. Strotz, Myopia and Inconsistency in Dynamic Utility Maximization, 23 REV. ECON. STUD. 165 (1955-1956).
289. The government may fool them once, but investors are likely to catch on to patterns of governmental behavior that affect returns and capitalize them into prices. Thus, the government cannot rely on surprise as a long-term policy tool. See Finn E. Kydland & Edward C. Prescott, Rules Rather than Discretion: The Inconsistency of Optimal Plans, 85 J. POL. ECON. 473 (1977); R.H. Strotz, Myopia and Inconsistency in Dynamic Utility Maximization, 23 REV. ECON. STUD. 165 (1955-1956).
290. Britain: Chasing Windfalls: Taxation, ECONOMIST, June 14-20, 1997, at 61.
291. Id.
292. Despite its absolutist tone, the Economist editorial admits that banks earned "genuine windfalls" when the government tightened monetary policy in 1980 and thus they defend a windfall profits tax on those gains. See id. They distinguish this episode from the utilities tax by noting that "the circumstances appeared unusual" for the banks, but not for the utilities. Id. This simply may be another way of saying that the banks experienced higher profits due to a complete surprise (and hence received a windfall), while the utilities earned their higher profits by effort and enterprise (and hence, under this Article's definition of the term, did not receive a windfall). See Id.
293. Steuerle, supra note 11, at 1197.
294. Mat 1198.
295. See Jerry A. Hausman, Labor Supply, in HOW TAXES AFFECT ECONOMIC BEHAVIOR 27 (Henry J. Aaron & Joseph A. Pechman eds., 1981); Jerry A. Hausman & James M. Poterba, Household Behavior and the Tax Reform Act of 1986, 1 J. ECON. PERSP. 101 (1987).
296. See Jerry A. Hausman, Labor Supply, in HOW TAXES AFFECT ECONOMIC BEHAVIOR 27 (Henry J. Aaron & Joseph A. Pechman eds., 1981); Jerry A. Hausman & James M. Poterba, Household Behavior and the Tax Reform Act of 1986, 1 J. ECON. PERSP. 101 (1987).
297. The seminal work on tournaments as compensation systems is Edward P. Lazear & Sherwin Rosen, Rank-Order Tournaments as Optimum Labor Contracts, 89 J. POL. ECON. 841 (1981). The seemingly inordinate rewards garnered by Olympic gold medalists compared to all other competitors may play the same role, motivating all contestants to practice harder and longer, and thereby producing a better competition in general. Steuerte seems to contemplate this possibility when he admits that "the potential of large rewards may compel some to work harder than ever." Steuerte, supra note 11, at 1197.
298. The seminal work on tournaments as compensation systems is Edward P. Lazear & Sherwin Rosen, Rank-Order Tournaments as Optimum Labor Contracts, 89 J. POL. ECON. 841 (1981). The seemingly inordinate rewards garnered by Olympic gold medalists compared to all other competitors may play the same role, motivating all contestants to practice harder and longer, and thereby producing a better competition in general. Steuerte seems to contemplate this possibility when he admits that "the potential of large rewards may compel some to work harder than ever." Steuerte, supra note 11, at 1197.
299. See supra note 2 (citing use by Erasmus in Apophthegmes). For a similar modern-era characterization, see Plehn, supra note 177, at 283 ("Inheritance may be regarded as something unexpected and of the nature of a windfall. . . .").
300. See WILLIAM M. MCGOVERN, JR. ET AL., WILLS, TRUSTS AND ESTATES 17-18 (1988).
301. See 2 ADAM SMITH, AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS 386-87 (Edwin Cannan ed., Univ. of Chicago 1976) (1775-1776).
302. See 1 JEREMY BENTHAM'S ECONOMIC WRITINGS 283 (W. Stark ed., 1952).
303. See UNIF. PROBATE CODE § 2-103 (amended 1990), 8 U.L.A. 1 (1998) (adopted in 14 states). At least three other states that have not adopted the Code have nonetheless followed its lead and have limited the remoteness of relatives who take in cases of intestacy. See KAN. STAT. ANN. § 59-509 (1997); OR. REV. STAT. § 112.017 (1997); WASH REV. CODE ANN. § 11.04.015 (West 1998).
304. See UNIF. UNCLAIMED PROPERTY ACT § 2(a)(1) (amended 1995), 8B U.L.A. 89 (Supp. 1998).
305. The United States had no federal securities laws until Congress enacted the Securities Act of 1933, 15 U.S.C. §§ 77a-77bbbb (1994), and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78a-78lll (1994). The Securities and Exchange Commission did not promulgate Rule 10b-5, the provision used to police insider trading, until 1948. See 17 C.F.R. 240.10b-5 (1998).
306. See Daniel R. Fischel, Insider Trading and Investment Analysts: An Economic Analysis of Dirks v. Securities and Exchange Commission, 13 HOFSTRA L. REV. 127, 135 (1984).
307. This Subsection addresses the more difficult case of insider trading on positive information likely to increase share prices. Rules against insider trading on negative information are universally endorsed: Manufacturing bad news is much easier than manufacturing good news, and if corporate executives could make money by trading in advance of bad news, the perverse incentives would be overwhelming.
308. See HENRY G. MANNE, INSIDER TRADING AND THE STOCK MARKET 131-45 (1966); Fischel, supra note 262, at 132. This justification applies only to "classic" insider trading-trading by executives in the shares of their employer. It cannot justify insider trading by, for example, printers, see Chiarella v. United States, 445 U.S. 222 (1980), or by lawyers representing an acquirer who trade in shares of the target, see United States v. O'Hagan, 521 U.S. 642 (1997).
309. See HENRY G. MANNE, INSIDER TRADING AND THE STOCK MARKET 131-45 (1966); Fischel, supra note 262, at 132. This justification applies only to "classic" insider trading-trading by executives in the shares of their employer. It cannot justify insider trading by, for example, printers, see Chiarella v. United States, 445 U.S. 222 (1980), or by lawyers representing an acquirer who trade in shares of the target, see United States v. O'Hagan, 521 U.S. 642 (1997).
310. See HENRY G. MANNE, INSIDER TRADING AND THE STOCK MARKET 131-45 (1966); Fischel, supra note 262, at 132. This justification applies only to "classic" insider trading-trading by executives in the shares of their employer. It cannot justify insider trading by, for example, printers, see Chiarella v. United States, 445 U.S. 222 (1980), or by lawyers representing an acquirer who trade in shares of the target, see United States v. O'Hagan, 521 U.S. 642 (1997).
311. Fischel, supra note 262, at 132.
312. See Stephen A. Ross, Disclosure Regulation in Financial Markets: Implications of Modem Finance Theory and Signaling Theory, in ISSUES IN FINANCIAL REGULATION 177, 184 (Franklin R. Edwards ed., 1979).
313. See Fischel, supra note 262, at 135.
314. See id. at 140-42.
315. See Ronald J. Gilson & Reinier H. Kraakman, The Mechanisms of Market Efficiency, 70 VA. L. REV. 549, 629-34 (1984). This argument does not hold if the market knows that insiders, or others likely to possess superior information, such as arbitrageurs warehousing shares, are trading; such trades amount to new information that will lead to a permanently higher price.
316. See id. at 632; Lynn A. Stout, The Unimportance of Being Efficient: An Economic Analysis of Stock Market Pricing and Securities Regulation, 87 MICH, L. REV. 613 (1988).
317. See David D. Haddock & Jonathan R. Macey, A Coasian Model of Insider Trading, 80 Nw. U. L. REV. 1449, 1457 (1986).
318. See id. at 1459.
319. This statement must be qualified, since determining whether a particular trader is a "loser" depends on particular circumstances. For instance, a shareholder liquidating her entire portfolio to raise cash for some pressing expenditure would have traded even with full knowledge - though she would have received a higher price had the insider made disclosure. A shareholder selling only a small portion of her portfolio, on the other hand, might have held onto her shares had she known they were likely to rise in value.
320. This conclusion rests on the previous analysis demonstrating that insider trading is not a sensible form of executive compensation and that it does not serve the social purpose of efficiently pricing securities. See supra text accompanying notes 271-273.
321. See POSNER, supra note 39, at 62, 68-72.
322. See supra text accompanying note 85.
323. For the leading federal case limiting just compensation to market value, see United States v. Miller, 317 U.S. 369 (1943). Two states, Florida and Georgia, deviate from this prevailing rule and require the state to award property owners a portion of the gain due to a public project. See Department of Transp. v. Naiven, 455 So. 2d 301 (Fla. 1984); Calhoun v. State Highway Dep't, 153 S.E.2d 418 (Ga. 1967) (declaring the rule established by Hard v. Housing Authority, 132 S.E.2d 25 (Ga. 1963), constitutionally compelled, and hence not alterable by statute). See generally 3 SACKMAN, supra note 72, § 8A.02[3] (describing the minority view that an enhancement attributable to a proposed public project is recoverable).
324. See supra text accompanying note 85.
325. United States v. 320.0 Acres of Land, More or Less, 605 F.2d 762, 782 (5th Cir. 1979).
326. 337 U.S. 325 (1949).
327. See POSNER, supra note 39, at 65.
328. Id. at 65-66.
329. Id. at 65.
330. See id.
331. See id.
332. See id.
333. The stakes in World War II could hardly have been higher. When skeptically asked what good resulted from the billions of dollars expended on armaments during the struggle, a Nobel Prize-winning economist replied, "Well, all we got for those outlays was the salvation of western civilization." James Tobin, Seminar on Modem Economics at Yale University (Spring 1984).
334. POSNER, supra note 39, at 66.
335. See CURRAN, supra note 171, at 57.
336. See generally A. Mitchell Polinsky & Steven Shavell, Punitive Damages: An Economic Analysis, 111 HARV. L. REV. 869 (1998). Polinksy and Shavell at times seem to argue that this is the sole grounds for imposing punitive damages: "[P]unitive damages ordinarily should be awarded if, and only if, an injurer has a chance of escaping liability for the harm he causes." Id. at 874. It seems, however, that they would limit this statement to corporations and other artificial legal entities. They note elsewhere that real persons who commit intentional tons should be liable for punitive damages, even if detection is virtually certain, as it often is for intentional torts like assault. See id. at 905-10.
337. Implicit in treble damages is a belief that victims detect only one in three violations. This is a specific example of the general reciprocal rule for calculating punitive damages when detection is less than certain: Multiply actual damages by one over the odds of detection. Thus, the lower the odds of detection, the greater the damages assessed against the wrongdoers caught. If plaintiffs detect one in three violations, the rule calls for treble damages; if they detect only one in 10, punitive damages should be 10 times actual damages. More sophisticated approaches account for additional features of real-world litigation. For example, if the expense and risk of a lawsuit deters some plaintiffs who detect wrongs from suing, the reciprocal rule must reflect this by jacking up damages even higher. See id. at 921.
338. See POSNER, supra note 39, at 227. Thus, assessing punitive damages equal to 10 times actual damages in automobile torts would certainly cause drivers to exercise more care, but probably too much care - possibly to the point of ceasing the activity entirely. Driving is a very productive activity, economically speaking, and excessive penalties for negligence may cost more in precautionary behavior than they garner in reduced accidents.
339. An important assumption here is that compensatory damages do indeed fully compensate victims so that punitive damages are not needed as some sort of ad hoc supplement to bring compensatory damages up to actual damages.
340. Bass v. Chicago & N.W. Ry., 42 Wis. 654, 672 (1877).
341. See Smith v. Wade, 461 U.S. 30, 59 (1983) (Rehnquist, J., dissenting) ("Punitive damages are generally seen as a windfall to plaintiffs . . . . [T]he penalty should go to the State, not to the plaintiff-who by hypothesis is fully compensated."); Rosenbloom v. Metromedia, Inc., 403 U.S. 29, 84 (1971) (Marshall, J., dissenting) ("These awards are not to compensate victims; they are only windfalls." ).
342. W. PAGE KEETON ET AL., PROSSER AND KEETON ON THE LAW OF TORTS § 2, at 14 (5th ed. 1984).
343. See, e.g., E. Jeffrey Grube, Punitive Damages: A Misplaced Remedy, 66 S. CAL. L. REV. 839, 841 (1993) ("One criticism, the 'windfall theory' of punitive damages, is that punitive damages are an unjust windfall to civil plaintiffs."); James B. Sales & Kenneth B. Cole, Jr., Punitive Damages: A Relic That Has Outlived Its Origins, 37 VAND. L. REV. 1117, 1165 (1984) ("[P]unitive damages simply provide a windfall to the plaintiff, penalize the innocent consumers of society, and unnecessarily sap the vitality of the economy upon which society is totally dependent."); James A. Breslo, Comment, Taking the Punitive Damage Windfall Away from the Plaintiff: An Analysis, 86 Nw. U. L. REV. 1130, 1133 (1992) (stating that "commentators and courts uniformly [maintain] that punitive damage awards amount to a windfall for plaintiffs, who have already been fully compensated by ordinary compensatory damages" (footnote omitted)); Note, An Economic Analysis of the Plaintiffs Windfall from Punitive Damage Litigation, 105 HARV. L. REV. 1900, 1907 (1992) ("From the plaintiffs perspective, [a large punitive damage award] amounts to the legal equivalent of a winning lottery ticket."); Lynda A. Sloane, Note, The Split Award Statute: A Move Toward Effectuating the True Purpose of Punitive Damages, 28 VAL. U. L. REV. 473, 481 (1993) (finding a "public perception that punitive damages are nothing but a windfall to plaintiffs"); Leo M. Stepanian II, Comment, The Feasibility of Full State Extraction of Punitive Damages Awards, 32 DUQ. L. REV. 301, 303 (1994) (advocating "full statutory extraction of punitive damages as a means of taking the windfall of punitive damages away from the plaintiff and compensating society for the injury the defendant inflicted upon it"); see also TORT POLICY WORKING GROUP, AN UPDATE ON THE LIABILITY CRISIS 52 (1987) (" [P]unitive damages by their very nature do not serve to compensate plaintiffs. They are a pure windfall, whose only legitimate purpose is to deter truly outrageous and harmful conduct.").
344. See, e.g., E. Jeffrey Grube, Punitive Damages: A Misplaced Remedy, 66 S. CAL. L. REV. 839, 841 (1993) ("One criticism, the 'windfall theory' of punitive damages, is that punitive damages are an unjust windfall to civil plaintiffs."); James B. Sales & Kenneth B. Cole, Jr., Punitive Damages: A Relic That Has Outlived Its Origins, 37 VAND. L. REV. 1117, 1165 (1984) ("[P]unitive damages simply provide a windfall to the plaintiff, penalize the innocent consumers of society, and unnecessarily sap the vitality of the economy upon which society is totally dependent."); James A. Breslo, Comment, Taking the Punitive Damage Windfall Away from the Plaintiff: An Analysis, 86 Nw. U. L. REV. 1130, 1133 (1992) (stating that "commentators and courts uniformly [maintain] that punitive damage awards amount to a windfall for plaintiffs, who have already been fully compensated by ordinary compensatory damages" (footnote omitted)); Note, An Economic Analysis of the Plaintiffs Windfall from Punitive Damage Litigation, 105 HARV. L. REV. 1900, 1907 (1992) ("From the plaintiffs perspective, [a large punitive damage award] amounts to the legal equivalent of a winning lottery ticket."); Lynda A. Sloane, Note, The Split Award Statute: A Move Toward Effectuating the True Purpose of Punitive Damages, 28 VAL. U. L. REV. 473, 481 (1993) (finding a "public perception that punitive damages are nothing but a windfall to plaintiffs"); Leo M. Stepanian II, Comment, The Feasibility of Full State Extraction of Punitive Damages Awards, 32 DUQ. L. REV. 301, 303 (1994) (advocating "full statutory extraction of punitive damages as a means of taking the windfall of punitive damages away from the plaintiff and compensating society for the injury the defendant inflicted upon it"); see also TORT POLICY WORKING GROUP, AN UPDATE ON THE LIABILITY CRISIS 52 (1987) (" [P]unitive damages by their very nature do not serve to compensate plaintiffs. They are a pure windfall, whose only legitimate purpose is to deter truly outrageous and harmful conduct.").
345. See, e.g., E. Jeffrey Grube, Punitive Damages: A Misplaced Remedy, 66 S.
346. See, e.g., E. Jeffrey Grube, Punitive Damages: A Misplaced Remedy, 66 S. CAL. L. REV. 839, 841 (1993) ("One criticism, the 'windfall theory' of punitive damages, is that punitive damages are an unjust windfall to civil plaintiffs."); James B. Sales & Kenneth B. Cole, Jr., Punitive Damages: A Relic That Has Outlived Its Origins, 37 VAND. L. REV. 1117, 1165 (1984) ("[P]unitive damages simply provide a windfall to the plaintiff, penalize the innocent consumers of society, and unnecessarily sap the vitality of the economy upon which society is totally dependent."); James A. Breslo, Comment, Taking the Punitive Damage Windfall Away from the Plaintiff: An Analysis, 86 Nw. U. L. REV. 1130, 1133 (1992) (stating that "commentators and courts uniformly [maintain] that punitive damage awards amount to a windfall for plaintiffs, who have already been fully compensated by ordinary compensatory damages" (footnote omitted)); Note, An Economic Analysis of the Plaintiffs Windfall from Punitive Damage Litigation, 105 HARV. L. REV. 1900, 1907 (1992) ("From the plaintiffs perspective, [a large punitive damage award] amounts to the legal equivalent of a winning lottery ticket."); Lynda A. Sloane, Note, The Split Award Statute: A Move Toward Effectuating the True Purpose of Punitive Damages, 28 VAL. U. L. REV. 473, 481 (1993) (finding a "public perception that punitive damages are nothing but a windfall to plaintiffs"); Leo M. Stepanian II, Comment, The Feasibility of Full State Extraction of Punitive Damages Awards, 32 DUQ. L. REV. 301, 303 (1994) (advocating "full statutory extraction of punitive damages as a means of taking the windfall of punitive damages away from the plaintiff and compensating society for the injury the defendant inflicted upon it"); see also TORT POLICY WORKING GROUP, AN UPDATE ON THE LIABILITY CRISIS 52 (1987) (" [P]unitive damages by their very nature do not serve to compensate plaintiffs. They are a pure windfall, whose only legitimate purpose is to deter truly outrageous and harmful conduct.").
347. See, e.g., E. Jeffrey Grube, Punitive Damages: A Misplaced Remedy, 66 S. CAL. L. REV. 839, 841 (1993) ("One criticism, the 'windfall theory' of punitive damages, is that punitive damages are an unjust windfall to civil plaintiffs."); James B. Sales & Kenneth B. Cole, Jr., Punitive Damages: A Relic That Has Outlived Its Origins, 37 VAND. L. REV. 1117, 1165 (1984) ("[P]unitive damages simply provide a windfall to the plaintiff, penalize the innocent consumers of society, and unnecessarily sap the vitality of the economy upon which society is totally dependent."); James A. Breslo, Comment, Taking the Punitive Damage Windfall Away from the Plaintiff: An Analysis, 86 Nw. U. L. REV. 1130, 1133 (1992) (stating that "commentators and courts uniformly [maintain] that punitive damage awards amount to a windfall for plaintiffs, who have already been fully compensated by ordinary compensatory damages" (footnote omitted)); Note, An Economic Analysis of the Plaintiffs Windfall from Punitive Damage Litigation, 105 HARV. L. REV. 1900, 1907 (1992) ("From the plaintiffs perspective, [a large punitive damage award] amounts to the legal equivalent of a winning lottery ticket."); Lynda A. Sloane, Note, The Split Award Statute: A Move Toward Effectuating the True Purpose of Punitive Damages, 28 VAL. U. L. REV. 473, 481 (1993) (finding a "public perception that punitive damages are nothing but a windfall to plaintiffs"); Leo M. Stepanian II, Comment, The Feasibility of Full State Extraction of Punitive Damages Awards, 32 DUQ. L. REV. 301, 303 (1994) (advocating "full statutory extraction of punitive damages as a means of taking the windfall of punitive damages away from the plaintiff and compensating society for the injury the defendant inflicted upon it"); see also TORT POLICY WORKING GROUP, AN UPDATE ON THE LIABILITY CRISIS 52 (1987) (" [P]unitive damages by their very nature do not serve to compensate plaintiffs. They are a pure windfall, whose only legitimate purpose is to deter truly outrageous and harmful conduct.").
348. See, e.g., E. Jeffrey Grube, Punitive Damages: A Misplaced Remedy, 66 S. CAL. L. REV. 839, 841 (1993) ("One criticism, the 'windfall theory' of punitive damages, is that punitive damages are an unjust windfall to civil plaintiffs."); James B. Sales & Kenneth B. Cole, Jr., Punitive Damages: A Relic That Has Outlived Its Origins, 37 VAND. L. REV. 1117, 1165 (1984) ("[P]unitive damages simply provide a windfall to the plaintiff, penalize the innocent consumers of society, and unnecessarily sap the vitality of the economy upon which society is totally dependent."); James A. Breslo, Comment, Taking the Punitive Damage Windfall Away from the Plaintiff: An Analysis, 86 Nw. U. L. REV. 1130, 1133 (1992) (stating that "commentators and courts uniformly [maintain] that punitive damage awards amount to a windfall for plaintiffs, who have already been fully compensated by ordinary compensatory damages" (footnote omitted)); Note, An Economic Analysis of the Plaintiffs Windfall from Punitive Damage Litigation, 105 HARV. L. REV. 1900, 1907 (1992) ("From the plaintiffs perspective, [a large punitive damage award] amounts to the legal equivalent of a winning lottery ticket."); Lynda A. Sloane, Note, The Split Award Statute: A Move Toward Effectuating the True Purpose of Punitive Damages, 28 VAL. U. L. REV. 473, 481 (1993) (finding a "public perception that punitive damages are nothing but a windfall to plaintiffs"); Leo M. Stepanian II, Comment, The Feasibility of Full State Extraction of Punitive Damages Awards, 32 DUQ. L. REV. 301, 303 (1994) (advocating "full statutory extraction of punitive damages as a means of taking the windfall of punitive damages away from the plaintiff and compensating society for the injury the defendant inflicted upon it"); see also TORT POLICY WORKING GROUP, AN UPDATE ON THE LIABILITY CRISIS 52 (1987) (" [P]unitive damages by their very nature do not serve to compensate plaintiffs. They are a pure windfall, whose only legitimate purpose is to deter truly outrageous and harmful conduct.").
349. See, e.g., E. Jeffrey Grube, Punitive Damages: A Misplaced Remedy, 66 S. CAL. L. REV. 839, 841 (1993) ("One criticism, the 'windfall theory' of punitive damages, is that punitive damages are an unjust windfall to civil plaintiffs."); James B. Sales & Kenneth B. Cole, Jr., Punitive Damages: A Relic That Has Outlived Its Origins, 37 VAND. L. REV. 1117, 1165 (1984) ("[P]unitive damages simply provide a windfall to the plaintiff, penalize the innocent consumers of society, and unnecessarily sap the vitality of the economy upon which society is totally dependent."); James A. Breslo, Comment, Taking the Punitive Damage Windfall Away from the Plaintiff: An Analysis, 86 Nw. U. L. REV. 1130, 1133 (1992) (stating that "commentators and courts uniformly [maintain] that punitive damage awards amount to a windfall for plaintiffs, who have already been fully compensated by ordinary compensatory damages" (footnote omitted)); Note, An Economic Analysis of the Plaintiffs Windfall from Punitive Damage Litigation, 105 HARV. L. REV. 1900, 1907 (1992) ("From the plaintiffs perspective, [a large punitive damage award] amounts to the legal equivalent of a winning lottery ticket."); Lynda A. Sloane, Note, The Split Award Statute: A Move Toward Effectuating the True Purpose of Punitive Damages, 28 VAL. U. L. REV. 473, 481 (1993) (finding a "public perception that punitive damages are nothing but a windfall to plaintiffs"); Leo M. Stepanian II, Comment, The Feasibility of Full State Extraction of Punitive Damages Awards, 32 DUQ. L. REV. 301, 303 (1994) (advocating "full statutory extraction of punitive damages as a means of taking the windfall of punitive damages away from the plaintiff and compensating society for the injury the defendant inflicted upon it"); see also TORT POLICY WORKING GROUP, AN UPDATE ON THE LIABILITY CRISIS 52 (1987) (" [P]unitive damages by their very nature do not serve to compensate plaintiffs. They are a pure windfall, whose only legitimate purpose is to deter truly outrageous and harmful conduct.").
350. Katko v. Briney, 183 N.W.2d 657, 662 (Iowa 1971) (emphasis added).
351. At least one judge has eschewed such passivity and declared that courts have the inherent common-law power, even absent legislation, to divert punitive damage awards from plaintiffs to the state. See Fuller v. Preferred Risk Life Ins., 577 So. 2d 878, 886-87 (Ala. 1991) (Shores, J., concurring). Justice Shores elaborated on the theme in Janie L. Shores, A Suggestion for Limited Tort Reform: Allocation of Punitive Damage Awards To Eliminate Windfalls, 44 ALA. L. REV. 61 (1992). Her colleagues have seemingly found her arguments convincing. See, e.g., Smith v. States Gen. Life Ins., 592 So. 2d 1021 (Ala. 1992) (using similar reasoning).
352. For a fairly recent collection of citations to state statutes decoupling punitive damage awards, see BMW of North America v. Gore, 517 U.S. 559, 617-19 (1996) (Ginsburg, J., dissenting). 301. See supra notes 198-202 and accompanying text.
353. One state court has held that decoupling statutes violate the Takings Clause, see Kirk v. Denver Publ'g, 818 P.2d 262, 273 (Colo. 1991) (holding that a Colorado statute violated the Takings Clauses of the federal and state Constitutions), while others have rejected such challenges, see, e.g., Gordon v. State, 585 So. 2d 1033 (Fla. Dist. Ct. App. 1991), aff'd per curiam, 608 So.2d 800 (Fla. 1992); Shepherd Components v. Brice Petrides, 472 N.W.2d 612 (Iowa 1991). Another court found that a decoupling statute, since it introduced the state into private litigation, violated the Excessive Fines and Due Process Clauses. See McBride v. General Motors, 737 F. Supp. 1563 (M.D. Ga. 1990) (holding that a Georgia statute violated the Excessive Fines Provision and Due Process Clause of the Georgia and federal Constitutions). For a decision reaching the opposite conclusion, see Burke v. Deere & Co., 780 F. Supp. 1225 (S.D. Iowa 1991).
354. Thomas C. Galligan, Jr., Augmented Awards: The Efficient Evolution of Punitive Damages, 51 LA. L. REV. 3, 58 (1990).
355. See Polinsky & Shavell, supra note 290, at 923.
356. Id.
357. See Doggett v. United States, 505 U.S. 647 (1992).
358. "The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated . . . ." U.S. CONST, amend. IV.
359. See Mapp v. Ohio, 367 U.S. 643 (1961).
360. See POSNER, supra note 39, at 749.
361. Few areas of law can rival the hypertechnical distinctions the courts have drawn between legal and illegal searches. See generally WAYNE R. LAFAVE & JEROLD H. ISRAEL, CRIMINAL PROCEDURE § 3.2 (2d ed. 1992 & Supp. 1995) ("Protected Areas and Interests"); id., § 3.8 (" Stop and Frisk and Similar Lesser Intrusions" ).
362. Carol S. Steiker, Second Thoughts About First Principles, 107 HARV. L. REV. 820, 848 (1994).
363. See generally JOSEPH D. GRANO, CONFESSIONS, TRUTH, AND THE LAW (1993) (outlining at length the problems with constitutional protections of criminal defendants).
364. See Akhil Reed Amar, Fourth Amendment First Principles, 107 HARV. L. REV. 757, 796 (1994).
365. See supra note 1 and accompanying text.