Property rules, liability rules, and uncertainty about property rights

Michigan Law Review

Volumn 106, Issue 7, 2008, Pages 1285-1336

  Sterk, Stewart E ^a  

^a YESHIVA UNIVERSITY   (United States)

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EID: 45249104151     PISSN: 00262234     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (222)

1. See infra text accompanying notes 11-43.
2. The seminal article focusing on ex post concerns is Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089 (1972).
3. Other leading examples include Ian Ayres & Eric Talley, Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade, 104 YALE L.J. 1027 (1995);
4. Louis Kaplow & Steven Shavell, Property Rules Versus Liability Rules: An Economic Analysis, 109 HARV. L. REV. 713 (1996);
5. and A. Mitchell Polinsky, Resolving Nuisance Disputes: The Simple Economics of Injunctive and Damage Remedies, 32 STAN. L. REV. 1075 (1980).
6. Jim Krier and Stewart Schwab were among the first to emphasize the effect liability rules might have on ex ante behavior of parties. James E. Krier & Stewart J. Schwab, Property Rules and Liability Rules: The Cathedral in Another Light, 70 N.Y.U. L. REV. 440, 462-464 (1995). Carol Rose has noted that the emphasis on ex post concerns emerged from tort and contract scholars with a tendency to shortchange "the considerations uppermost in conventional property law - planning, effort, and investment."
7. Carol M. Rose, The Shadow of The Cathedral, 106 YALE L.J. 2175, 2188 (1997). Richard Epstein has emphasized the impact of liability rules on "the security of possession and the security of exchange needed for complex commercial life and a satisfying personal one."
8. Richard A. Epstein, A Clear View of The Cathedral: The Dominance of Property Rules, 106 YALE L.J. 2091, 2093 (1997).
9. Henry E. Smith, Property and Property Rules, 79 N.Y.U. L. REV. 1719, 1729, 1755-64 (2004).
10. Thus, Henry Smith has noted that property rules, which give to a single owner the right to exclude others from a particular resource, provide incentives for that owner to become a clearinghouse for information about the resource: Owners are closest to their assets and will be in a position both to develop information about (and attachment to) their assets and will be the recipients of information in the form of offers from potential purchasers. Owners are likely often to be the least-cost generators of information about assets, even if this information is not verifiable to third parties. Takers will likely be closer to assets than courts, and will be able to evaluate assets currently held by owners. Under exclusion and property rule protection, people in this position have to make offers . . . . Henry E. Smith, Exclusion and Property Rules in the Law of Nuisance, 90 VA. L. REV. 965, 985 (2004) (footnote omitted). By contrast, w ith liability rules: [T]akers can use information about assets and their owners to cherry-pick those undervalued by damages rules. An owner may not be able to communicate to a court the value of a use (or nonuse) such that damages could be given to reflect it. Takers, knowing this, can then select vulnerable owners for taking or extortion. Even if a court could detect all opportunistic takings, the effort to do so is likely to be costly. Id. at 985-86 (footnotes omitted);
11. see also Thomas W. Merrill & Henry E. Smith, The Property/Contract Interface, 101 COLUM. L. REV. 773, 793-96 (2001).
12. Merrill & Smith, supra note 5, at 793-96; Smith, supra note 5, at 985-86.
13. Cf. Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L.J. 557, 602-05 (1992) (noting differences between the private and social value of obtaining legal advice).
14. As Tom Merrill has noted, "[e]ntitlement-determination costs . . . are 'real' costs and should not be incurred unless they are justified by the expected returns." Thomas W. Merrill, Trespass, Nuisance, and the Costs of Determining Property Rights, 14 J. LEGAL STUD. 13, 25 n.47 (1985).
15. See infra Section III.D.
16. See infra Sections IV.B-C.
17. Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. REV. 1089 (1972).
18. See id. at 1118 (noting that when transaction costs are low, property rules enable efficient results because even when entitlements are set inefficiently, transactions would cure any errors); id. at 1106-10 (noting that liability rules can overcome holdout and freerider problems in cases when privately-negotiated solutions are impractical).
19. See Ayres & Talley, supra note 2; Kaplow & Shavell, supra note 2; Polinsky, supra note 2.
20. See, e.g., Krier & Schwab, supra note 3, at 453-57; Polinsky, supra note 2, at 1104-05.
21. Polinsky, supra note 2, at 1108-09.
22. Id. at 1093-94.
23. Id. at 1094 n.39.
24. See id. at 1094. Polinsky analyzed a situation in which each additional unit of factory production generated fewer returns for the factory and more harm to neighbors, rather than a more simple model in which the factory either operates, producing harm, or shuts down, producing no harm. As a result, in his model, no strategic behavior, and hence no inefficiency, would occur "if liability is less than or equal to actual damages up to the efficient output (and greater than or equal to actual damages beyond the efficient output)." Id. But the basic point remains: damages cannot guarantee efficient results unless the court knows how much harm each unit of production generates.
25. Krier & Schwab, supra note 3, at 459.
26. Id. at 460-64.
27. As Kaplow and Shavell put it, "[i]f parties do not bargain with each other, the legal rule will directly determine whether or not harm occurs." Kaplow & Shavell, supra note 2, at 724.
28. Id. at 725.
29. See id.
30. Id. (emphasis omitted). Kaplow and Shavell limited their analysis to cases involving externalities, reaching the opposite conclusion with respect to "things." Id. at 760-63.
31. Ayres & Talley, supra note 2, at 1030.
32. Id.
33. Id. at 1030-31.
34. Id.
35. Smith, supra note 4, at 1729.
36. Id. at 1729, 1755-64.
37. Id. at 1729.
38. Smith notes: [I]f someone believes that a rock formation on Blackacre will be a tourist site twenty years from now, one can buy Blackacre, become its Owner, and wait. If, in the meantime, someone (Taker) takes Blackacre and only has to pay damages, Owner will either have to convince a court that the rock formation is going to be valuable or will have to bribe Taker. Under some quite ordinary conditions, this situation will lead to social loss. Id.
39. The seminal work is Edmund W. Kitch, The Nature and Function of the Patent System, 20 J.L. & ECON. 265 (1977). Kitch argues that propertization of patent rights would enable a single owner to coordinate efficient development of patented works. Id. at 276;
40. see also William M. Landes & Richard A. Posner, An Economic Analysis of Copyright Law, 18 J. LEGAL STUD. 325, 354-57 (1989) (justifying copyright protection for derivative works as necessary to avoid inefficient delays in release of original work).
41. Property rules reflect what Merrill and Smith call an "exclusion strategy," which allocates resources by giving a single owner a broad right to exclude, rather than creating finely tuned governance rules. Merrill & Smith, supra note 5, at 793-94.
42. Id.
43. Moreover, the importance of providing incentives to produce information is greatest when the number of potential uses - as opposed to users - is high. For instance, the nature and timing of efficient development requires less information production when the property in question is a lot in a well-established, single-family subdivision than when the property is a large parcel in an undeveloped area or an area in transition. When development conditions have been constrained by law or by prior investment, even an owner in a property-rule regime is unlikely to make significant investments in information because those investments are unlikely to generate significant return. As a result, information production furnishes a less powerful reason for property rules.
44. Kaplow and Shavell have demonstrated that a liability-rule regime does not always give owners an adequate incentive to pay infringers to stop infringing because the payment does not stop subsequent infringers from conducting the same activity. Kaplow & Shavell, supra note 2, at 765-66. For instance, suppose an owner values the right to be free of trespass at $100, and a court would apply a liability rule that entitles the owner to $90 in damages against a trespasser, who values the right to trespass at $95. The owner, armed with $90 in damages, would not pay the trespasser $95 to give up the right to trespass because another trespasser could arrive the next day, requiring repetition of the same process. Hence, even though the owner values the right to be free of trespass more than any trespasser values the right to trespass, no agreement will be reached.
45. Merrill & Smith, supra note 5, at 793 (finding no need to create rights of exclusion when the only occupants of an island are Robinson Crusoe and Friday).
46. Id. at 794.
47. Id. at 795.
48. See, e.g., Richard Craswell, Instrumental Theories of Compensation: A Survey, 40 SAN DIEGO L. REV. 1135, 1172 (2003); Kaplow & Shavell, supra note 2, at 764-65. Indeed, Ayres and Talley go further as they emphasize that liability rules can sometimes "cause more forthright and efficient bargaining" than property rules.
49. Ian Ayres & Eric Talley, Distinguishing Between Consensual and Nonconsensual Advantages of Liability Rules, 105 YALE L.J. 235, 237 (1995). For a statement of the conventional position that property rules encourage negotiation where transaction costs are low, see RICHARD A. POSNER, ECONOMIC ANALYSIS OF LAW 57 (4th ed. 1992) ("[T]he law should require the parties to transact in the market; it can do this by making the present owner's property right absolute (or nearly so), so that anyone who thinks the property is worth more has to negotiate with the owner.").
50. See Smith, supra note 4, at 1728-29.
51. See id. at 1763-64 (noting that property rules make the owner a "broker" of rights across time); id. at 1776 (discussing how property rules delegate to owners decisions about how much information is optimal).
52. For the classic discussion, see Carol M. Rose, Crystals and Mud in Property Law, 40 STAN. L. REV. 577 (1988). Merrill and Smith note that "[t]he unique advantage of in rem rights . . . is that they conserve on information costs relative to in personam rights in situations where the number of potential claimants to resources is large, and the resource in question can be defined at relatively low cost." Merrill & Smith, supra note 5, at 793 (emphasis added);
53. cf. Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 110 YALE L.J. 1, 26-34 (2000) (discussing standardization of property rights as means to reduce cost of determining property rights).
54. Cf. Smith, supra note 4, at 1782 (noting that property rules minimize the need for dutyholders to acquire information because they need to know only to "keep off" - a burden that is small only if rights are clear).
55. See Thomas W. Merrill & Henry E. Smith, What Happened to Property in Law and Economics?, 111 YALE L.J. 357, 387 (2001) (noting an intolerable burden on potential dutyholders if scope of rights required too much investigation - a burden that would defeat benefits of security, investment, and planning).
56. In an early article, Tom Merrill explored the circumstances in which it might be efficient for the legal system to develop judgmental rather than mechanical rules, despite the higher "entitlement-determination costs" of judgmental rules. Merrill, supra note 8, at 25-26. His focus, however, was on judicial determination of legal rights, not on search by private parties.
57. See Rose, supra note 44.
58. The conception of property as a set of correlative rights and duties emerged from Wesley Newcomb Hohfeld, Some Fundamental Legal Conceptions as Applied in Judicial Reasoning, 23 YALE L.J. 16, 28-59 (1913).
59. For a discussion of the practical problems of determining land boundaries, even with modern technology, see Jeffrey Evans Stake, The Uneasy Case for Adverse Possession, 89 GEO. L.J. 2419, 2447-48 (2001).
60. Cf. Lee Anne Fennell, Efficient Trespass: The Case for "Bad Faith" Adverse Possession, 100 NW. U. L. REV. 1037, 1071 (2006) (noting that encroachers will make at least an implicit calculation on "the question of whether it is worth becoming educated about the true state of ownership"). Fennell goes on to note that the calculation "depends, in part, on the costs associated with being wrong." Id. Jeffrey Stake has observed that although the technology has reduced the cost of surveys in recent years, "low-cost surveys are still not a practical reality." Stake, supra note 50, at 2447.
61. See Clarisa Long, Information Costs in Patent and Copyright, 90 VA. L. REV. 465, 483-84 (2004).
62. As Henry Smith has put it, with intellectual property, " 'keeping off' is not as easy as in the case of tangible property." Henry E. Smith, Intellectual Property as Property: Delineating Entitlements in Information, 116 YALE L.J. 1742, 1782 (2007).
63. See 17 U.S.C. § 102(b) (2000) (providing that copyright does not extend to "any idea, procedure, process, system, method of operation, concept, principle, or discovery"). For criticism of the idea/expression doctrine as incoherent, see John Shepard Wiley, Jr., Copyright at the School of Patent, 58 U. CHI. L. REV. 119, 121-29 (1991).
64. See 17 U.S.C. § 107 (2000) (enumerating four fair-use factors).
65. The current copyright statute protects works for a period measured by the life of the author plus 70 years, unless the work is anonymous, psueudonymous, or a work made for hire, in which case the work is protected for 95 years from first publication or 120 years from creation, whichever expires first. Id. § 302(a), (c). For works produced before 1978, see id. § 303.
66. Id. § 201. Section 201 provides for joint works and works made for hire, terms defined in section 101, but without sufficient precision to avoid controversies about ownership. Id.
67. Id. § 201(d). Section 201(d) permits transfer of ownership of a copyright (and section 205 provides a recording system for transfers), but section 203 permits the author (or persons who hold the author's termination interest) to terminate any transfer during a statutory five-year window period.
68. Reliance on the author's assurances will not insulate the publisher from liability. See De Acosta v. Brown, 146 F.2d 408, 411 (2d Cir. 1944) (holding publisher liable for infringement even if it erroneously relied on assurances of author).
69. Cf. Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259 (9th Cir. 1996) (holding operator of a flea market liable for infringement by vendors participating at flea market).
70. See infra notes 181-183 and accompanying text.
71. See infra notes 185-186 and accompanying text.
72. Kaplow and Shavell have compared the effect of negligence and strict-liability regimes on optimal provision of legal advice. Louis Kaplow & Steven Shavell, Private versus Socially Optimal Provision of Ex Ante Legal Advice, 8 J.L. ECON. & ORG. 306, 307 (1992) (noting the possibility of divergence between the private and social values of that legal advice).
73. Merrill & Smith, supra note 5, at 794 (noting that when in personam agreements become less feasible, an in rem exclusion regime conserves information by "restricting the duties to a short list of negative obligations, easily defined and understood by all").
74. See generally POSNER, supra note 41, at 553-557 (discussing settlement of disputes in which liability is unclear).
75. See Merrill, supra note 8, at 24 ("[T]he parties should negotiate to the same welfaremaximizing allocation of resources they would have agreed on if property rights were certain, discounting the price to reflect the shared perception of the probability of who should pay whom.").
76. James Gibson has noted that in intellectual property cases, parties routinely negotiate licensing agreements even when it is entirely unclear whether the potential user of the intellectual work needs to obtain a license. James Gibson, Risk Aversion and Rights Accretion in Intellectual Property Law, 116 YALE L.J. 882, 890-95 (2007). Gibson is concerned that this tendency has produced doctrinal feedback that ultimately expands the scope of intellectual property protection. Id. at 898-900.
77. Merrill, supra note 8, at 24.
78. When parties try to create entirely new property rights, they do impose external costs on potential users of those rights. As a result, legal rules constrain the categories of property rights parties may create. See Merrill & Smith, supra note 44, at 26-27. But expenditures to determine whether a particular use would violate an established property right are unlikely to generate comparable external effects.
79. Suppose, for instance, the potential improver's search involves consultation with a lawyer followed by the commission of a survey. If a successor in interest contemplates a similar (or different) improvement, the successor will not know of the initial improver's consultation, or of the information conveyed, and will therefore have to repeat the consultation process. The survey, by contrast, might be of some value to successors, subject to qualifications: first, as time passes, the monuments used to mark the survey on the ground (fences, trees, etc.) have a tendency to disappear, diminishing the survey's value; second, even if the survey itself does not degrade, it will have little value to a successor in interest unless that successor contemplates an improvement like that contemplated by the initial improver.
80. See generally Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 DUKE L.J. 557, 602-05 (1992) (noting differences between the private and social value of obtaining legal advice).
81. Merrill, supra note 8, at 24-25; POSNER, supra note 41, at 556.
82. Of course, bargaining might break down for other reasons as well. For instance, the improver might not be a rational maximizer. That is, if the improver is confident that the improvement does not encroach, the improver may simply proceed with the improvement without seeking to extract payment from the neighbor to build away from the boundary line. Additional information is not likely to have significant impact on the improver who is not a rational maximizer.
83. Indeed, in light of the termination provisions in the copyright statute, it is sometimes impossible to know whose consent will be necessary to secure the rights a potential user wants. Section 203 to title 17 of the United States Code gives an author an inalienable right to terminate any copyright assignment. 17 U.S.C. § 203 (2000). That right, however, passes to statutory successors - who will not be determined until the author's death. As a result, a user who wants to purchase a long-term right to exploit the copyrighted work may be stymied in doing so. Section 203(b)(1) does qualify the inalienability provision in one way: if a user prepares a derivative work under authority of a grant before termination, the user may continue to use the derivative work after termination. Id. This provision avoids the difficulty the Supreme Court faced in Stewart v. Abend, 495 U.S. 207 (1990), decided under the renewal provisions that preceded the current termination provisions. See R. Anthony Reese, Note, Reflections on the Intellectual Commons: Two Perspectives on Copyright Duration and Reversion, 47 STAN. L. REV. 707, 727-35 (1995) (explaining how the 1976 Act would prevent the result in Stewart v. Abend).
84. Stewart E. Sterk, Neighbors in American Land Law, 87 COLUM. L. REV. 55, 95 (1987) (noting that legal doctrine "suggests a conception of neighbors that includes continuing mutual dependence rather than a pattern of discrete and unrelated transactions").
85. The problem is twofold. First, the neighbor may - rightly or wrongly - perceive harm from the fact of encroachment, without regard to whether the encroachment interferes with any of the neighbor's prospective uses of her parcel. Hence, the neighbor may be unwilling to evaluate any deal without knowing whether the improver's use would actually encroach. Second, the fact that the potential improver professes uncertainty may induce suspicion in the neighbor that the improver has more information than she is revealing, making the neighbor wary of any deal the improver proposes. This second problem - fear of asymmetric information - is a problem even with arms-length transactions between commercial parties, but those parties will typically be in a better position to evaluate the risks involved.
86. See supra text accompanying notes 63-71.
87. If search would generate significant positive externalities, search might be efficient even if the cost were greater than H-A. If the disputes requiring search costs were primarily cases in which abstract legal rules were unclear, the caveat might swallow up the basic thesis. In fact, however, most of the cases involving high search costs are cases involving difficulty applying legal rules to particular circumstances. Because of the particularity of the problems, search will not generate positive externalities. See supra note 69 (discussing search costs in boundary dispute cases). In copyright cases where the search difficulty is locating the holder of copyright, positive externalities will be rare. Other potential users are not likely to discover prior searches, and the searcher will have little reason to publicize them. When the difficulty involves scope of copyright protection, so much will depend on the particulars of the allegedly infringing and infringed works that positive externalities are unlikely to be a significant factor. But cf. Gibson, supra note 67, at 887-906 (arguing that the incentive for potential users to negotiate rather than litigate creates a feedback loop that ultimately contracts the scope of copyright defenses). Positive externalities may be more common in those patent cases in which search - almost inevitably through litigation - establishes the validity or invalidity of a previously issued patent. In that case, the determination itself has clear value to any potential users of the invention. See Mark A. Lemley & Carl Shapiro, Probabilistic Patents, 19 J. ECON. PERSP. 75, 87-90 (2005).
88. On legal rules' limited ability to affect behavior, see generally Duncan Kennedy, Form and Substance in Private Law Adjudication, 89 HARV. L. REV. 1685, 1699 (1976).
89. See POSNER, supra note 41, at 167-68 (discussing the administrative costs of sorting among groups of potential tortfeasors as a reason for embracing the "reasonable man" standard in tort law).
90. Cf. Steven Shavell, The Fundamental Divergence between the Private and the Social Motive to Use the Legal System, 26 J. LEGAL STUD. 575 (1997) (discussing inefficiencies resulting from divergence of the private and social benefits of engaging in litigation).
91. In fact, the potential user faces a fourth alternative: negotiate with the ostensible owner without engaging in any search to discover the scope of their respective legal rights. For clarity of exposition, that alternative is discussed in Section III.C, infra.
92. The analysis assumes risk-neutral potential users. Risk-averse users would be less likely to use without searching.
93. The analysis assumes that the potential resource user can arrive at an estimate of H without incurring significant search costs. For discussion of incentives to obtain legal advice about how courts will determine the amount of harm suffered by a victim, see Kaplow & Shavell, supra note 63, at 306-20.
94. The assumption here is that the potential user derives no value from preservation of a harmonious relationship with the ostensible owner, and therefore is not harmed by actions that threaten that relationship. If the model incorporated harm to the relationship, the analysis would be similar if we assume that the potential user would suffer harm to the relationship only if her actions would actually intrude upon a right of the ostensible owner. On that assumption, pH would capture the harm to the potential user so long as H were defined to include harm to the relationship. If, however, the potential user's actions would harm the relationship regardless of whether those actions interfere with the ostensible owner's legal rights, the analysis would become more complicated.
95. The baseline assumption of the model is that the potential user has an unquestioned right to use the resource without incurring any liability to the ostensible owner. Against that baseline, each alternative - search, use without search, and avoidance - leaves the user worse off. The model, therefore, considers how much worse off the potential user would be with each alternative. Each alternative presents different costs. It would, of course, be possible to use a different baseline without changing the comparative advantages of the alternatives open to the potential user.
96. John Nash developed a model predicting equal division of gains from trade in cases where each party would receive nothing in the absence of agreement. See John F. Nash, Jr., The Bargaining Problem, 18 ECONOMETRICA 155, 157-62 (1950). For a more recent discussion, see Gideon Parchomovsky et al., Of Equal Wrongs and Half Rights, 82 N.Y.U. L. REV. 738, 761-63 (2007).
97. This is especially true when the parties share a common understanding of H and A, and where the parties share a common estimate of p. In that situation, the parties both have an incentive to divide the gains from trade, with payment running from ostensible owner to potential user in order to defray the user's avoidance costs.
98. At the same time, in circumstances under which the potential user's estimate of p is lower than she expects the ostensible owner's estimate to be, the potential user in a liability-rule regime may derive strategic advantages from searching even when negotiations without search would be a more efficient alternative. Thus, the potential user who believes the owner is overestimating his prospect of success may conduct a search to persuade the owner to make a larger payment than the owner would otherwise be inclined to make. For instance, suppose H = 16, A = 10, and the resource user's estimate of p is .4, but the owner's estimate is .5. In that circumstance, the ostensible owner believes that the resource user's use of the resource will inflict an expected harm of 8, considering a 50% likelihood that the owner would receive compensation (.5 x 16). Although the ostensible owner would be willing to pay up to 8 to persuade the user to avoid that harm, the owner would probably not want to see the resource user reap all of the gains from trade, and would therefore expect to pay an amount closer to 5, which would evenly divide the gains from trade as a result of avoidance. In this situation, if search costs are relatively low, the resource user will find it worthwhile to search as a means of increasing the ostensible owner's offer.
99. Consider the calculus facing a resource user contemplating search as an option where A = $300, H = $500, and p = .8. Search in this situation may be inefficient: If the user in this situation conducts a search, she will incur the cost of the search S. If the user searches, the .8 probability of liability will clarify into either 0% or 100% chance of liability. If the search confirms the existence and identity of an owner with a right to the disputed resource, the resource user will then incur the avoidance cost of $300 because it is cheaper than the certain liability of $500. If, on the other hand, the search reveals that the resource user can use the resource without incurring liability, she could use the resource and avoid further cost. Additionally, the resource user will often - but not always - be able to offset some of the cost of the search by extracting payment from the ostensible owner. The user could approach the ostensible owner - who would suffer $500 harm upon use of the resource by the user - and agree to avoid using the resource in return for a payment of between $300 and $500. The ostensible owner, confronted with proof that she cannot hold the resource user liable for using the resource, will find it in her interest to pay in order to avoid $500 in harm. Let us assume that the user and the ostensible owner would split these gains from trade evenly so that the ostensible owner would pay $400 if the user agrees to avoid using the resource. In that event, so long as search costs are lower than $80, the potential user has an incentive to search. If the user pays, for instance, $50, the user will face an 80% chance that the search will generate liability, in which case the user will pay the avoidance costs, and a 20% chance of no liability, in which case the user would receive a benefit of $100 - the difference between the $400 payment from the ostensible owner and the $300 avoidance cost. As a result, the total expected cost for the owner who searches would be $50 + (.8 x $300) - (.2 x $100) = $270. That total is less than the $300 in avoidance cost, which represents the user's next best alternative. Hence, the user will search, in this case, even though the cost of the search exceeds its social benefit.
100. The shift in calculus will, however, generate one efficiency advantage unrelated to search: it will increase the number of cases in which the user's default position - the position in case of bargaining breakdown - will be avoidance rather than using the resource without further search. Because, by hypothesis, A < H, the result will be fewer inefficient uses of the resource. The significance of this advantage depends on the expected frequency of bargaining breakdown.
101. This type of transaction is typically available when the potential users of the resource are limited in number, as is typically the case in real property situations involving boundary disputes or easement scope. The parties could structure the transaction to transfer rights - either a fee interest or a servitude - from the lower-valuing user to the higher-valuing user in return for a payment of money. As Kaplow and Shavell have noted, transactions like these will be more problematic when the number of potential users is high. Kaplow & Shavell, supra note 2, at 765-66. In those cases, the high-valuing user will be reluctant to part with money because another potential user could instantly begin to cause the same harm. Thus, in some, but not all, intellectual property transactions, negotiations like these will be difficult to arrange. For instance, if a potential user's search were to reveal that the invention the user wants to use was never patented, or that the patent was invalid, the initial inventor would find it unwise to pay the potential user not to use the invention - even if the inventor is the highest-valuing user - because another potential user might come along and make precisely the same use, causing the same harm. On the other hand, if the question is not whether the original inventor (or author) held a property right in the work, but rather whether the user's work constitutes infringement, there is more room for negotiation. In that case, the user may acquire patent or copyright protection in the user's invention or work of authorship, and the original inventor might then take an assignment of that patent or copyright - providing protection against similar uses by other potential users. When the number of potential users makes structuring an arrangement difficult, search will have less potential value to the parties.
102. By contrast, when A > (1/2)p(R + H), search will not present any advantage to the potential user, because use without search will remain the best alternative for the user regardless of the results of the search. No information revealed by the search will induce the owner to pay the user to avoid rather than cause harm.
103. Moreover, in this situation, adoption of a property-rule regime creates another inefficiency independent of search costs: it ensures that in cases of bargaining breakdown, the user's default position is to avoid use rather than employ the more efficient alternative of using the resource regardless of permission.
104. See supra text accompanying note 74.
105. Conversely, the ostensible owner will not sell the right to use the resource to the user because the right to use the resource is only worth A to the user, while use of the resource would cause harm H to the ostensible owner. Because, by hypothesis, H > A, no bargain would be struck.
106. Note that in this situation, the probability of liability does not affect the amount the user will pay in negotiations. Cf. Mark A. Lemley & Carl Shapiro, Patent Holdup and Royalty Stacking, 85 TEX. L. REV. 1991, 2004-05 (2007) (reaching a similar conclusion about pre-infringement negotiations in the patent context).
107. See Gibson, supra note 67, at 887.
108. The expected cost of search to the potential user will be S + pA, while the expected cost of negotiation without search (if we ignore the cost of negotiation) will be (1/2)(A + H). Hence, the potential user will search rather than negotiating when S + pA < (1/2)(A + H) or when S < (1/2)(A + H) - pA. As p rises, the inequality becomes less likely to hold. Similarly, as S rises, the inequality becomes less likely to hold.
109. For discussion of the difficulties of a rule that focuses on actual knowledge in the recording act context, see Dan S. Schechter, Judicial Lien Creditors Versus Prior Unrecorded Transferees of Real Property: Rethinking the Goals of the Recording System and Their Consequences, 62 S. CAL. L. REV. 105, 164-68 (1988). The difficulty of proving state of mind also arises in discussion of adverse possession standards.
110. See, e.g., R.H. Helmholz, Adverse Possession and Subjective Intent, 61 WASH. U. L.Q. 331, 339 (1983). And in patent litigation, where a finding of willful infringement can lead to treble damages, one recent empirical study concludes that more than ninety percent of infringement claims include allegations of willfulness.
111. Kimberly A. Moore, Empirical Statistics on Willful Patent Infringement, 14 FED. CIR. B.J. 227, 232 (2004). Moreover, these claims are never decided on summary judgment motions. Id. at 234.
112. See supra text accompanying notes 64-71.
113. Cf. Smith, supra note 4, at 1785-90 (discussing the potential that liability rules will induce owners to engage in inefficient self-help).
114. An owner who marks off would certainly be entitled to property-rule protection in a regime that applies liability rules only to innocent encroachers. See supra Section III.D. In such a regime, a potential user who encroaches after the owner has marked off a right will have acted unreasonably, disqualifying the user from application of liability rules.
115. Indeed, even when subjective value exceeds the cost of marking off, it is far from certain that the owner will expend resources marking off. First, marking off will be feasible only if the owner knows, or can ascertain at relatively low cost, the scope of her own property rights with respect to potential users. Suppose, for instance, the owner's subjective value is SV and the marking off costs are M. If search costs approach SV-M, the owner will not find it worthwhile to search or mark off, because the owner will only be able to obtain SV by expending both search costs and marking off costs. Second, there is some probability that even if the owner does not mark off, no one will encroach because the prospect of money damages will be sufficient to prevent encroachment. As a result, even when SV > M and search costs are low, the owner may find it worthwhile to take the risk of encroachment - and consequent loss of subjective value - when the probability of encroachment is significantly less than one.
116. United States v. Carroll Towing Co., 159 F.2d 169, 173 (2d Cir. 1947) (emphasis added).
117. Intellectual property scholarship, however, has begun to engage in debate about whether liability should be imposed on nonwillful infringers. See, e.g., Mark A. Lemley, Should Patent Infringement Require Proof of Copying?, 105 MICH. L. REV. 1525 (2007);
118. R. Anthony Reese, Innocent Infringement in U.S. Copyright Law: A History, 30 COLUM. J.L. & ARTS 133 (2007);
119. Samson Vermont, Independent Invention as a Defense to Patent Infringement, 105 MICH. L. REV. 475 (2006).
120. Cf. Alvin K. Klevorick, Legal Theory and the Economic Analysis of Torts and Crimes, 85 COLUM. L. REV. 905, 914 (1985) (noting that both strict liability and negligence would induce efficient behavior on assumptions analogous to those applicable here). Professors Kaplow and Shavell have identified the incentive to obtain information about the appropriate level of care a potential actor should take as an inefficiency of a negligence regime. Kaplow & Shavell, supra note 63, at 316. But a rule that absolves an actor from liability when the actor fails to conduct an inefficient search for information is hardly likely to induce actors to seek additional information.
121. It is true, however, that courts might have to determine search costs in a regime that provided liability-rule protection when search costs are higher than H-A, but property-rule protection in other cases.
122. Cf. Smith, supra note 4, at 1730 (noting incentive of owners to engage in costly self-help, including erection of fences, when legal rules provide inadequate protections).
123. See supra text accompanying note 131.
124. The tort literature has long recognized that a rule absolving an actor of liability creates an incentive for potential victims to take precautions against harm the actor might cause. See, e.g., Posner, supra note 41, at 169-70; Guido Calabresi & Jon T. Hirschoff, Toward a Test for Strict Liability in Torts, 81 YALE L.J. 1055, 1058 (1972). But the potential tort victim who takes precautions does not interfere with the efficiency-promoting activity of the harm-producing actor. Consider a permutation of the example used by Posner (and derived from Coase) where a railroad could avoid $100 in damage to a farmer's crops by expending $150 in greater care. POSNER, supra note 41, at 49-50;
125. see also R.H. Coase, The Problem of Social Cost, 3 J.L. & ECON. 1 (1960). The Learned Hand formula would absolve the railroad from liability and shift to the farmer the incentive to take precautions against harm - perhaps by planting flame-resistant crops. Note, however, that any expenditure on flame-resistant crops that generates private benefit to the farmer also generates social benefit in the form of more undamaged crops; the expenditure does not prevent the railroad from operating in a way that generates more benefit than cost. By contrast, in the typical encroachment case - whether in the real property context or in the intellectual property context - monitoring or "fencing in" expenditures would not only protect the owner, but would increase the cost to a potential user seeking to engage in value-enhancing behavior. Lee Anne Fennell has made a similar point in explaining why the law does not absolutely prohibit landowners from taking actions that have negative impact on neighboring land: Each time the law decides to enjoin an activity with extra-boundary impacts, it drains away a property owner's privilege to engage in the activity in question. As more and more uses are drained away from a given parcel of property, the less use-content remains that would give ownership of that parcel value.
126. Lee Anne Fennell, Property and Half-Torts, 116 YALE L.J. 1400, 1440 (2007).
127. For the seminal statement of this point, see Harold Demsetz, Toward a Theory of Property Rights, 57 AM. ECON. REV. 347, 354-55 (1967); see also Smith, supra note 4, at 1754-56.
128. A rule of capture creates, in effect, a race to use valuable rights, which tends toward inefficiency because various contestants may expend resources during the race, but only the winner of the race derives any benefit from those expenditures. See generally Terry L. Anderson & Peter J. Hill, The Race for Property Rights, 33 J.L. & ECON. 177 (1990).
129. See Calabresi & Melamed, supra note 2, at 1092.
130. Pierre N. Leval, Toward a Fair Use Standard, 103 HARV. L. REV. 1132-34 (1990) (distinguishing between cases of simple piracy, in which injunctive relief is routinely awarded, and fairuse cases, in which Judge Leval concluded that more careful analysis of remedy is required).
131. Cf. Smith, supra note 53, at 1818 (discussing the movement of courts toward damage awards, in part to avoid inefficient ex ante costs such as surveys).
132. E.g., D'Andrea v. Pringle, 52 Cal. Rptr. 606, 608 (1966) (involving three conflicting surveys over a three-month period); Amkco, Co. v. Welborn, 21 P.3d 24 (N.M. 2001) (finding that landowner's gasoline station encroached by fifty-eight feet because surveyors made a mistaken assumption about property's boundary); Zerr v. Heceta Lodge No. 111, 523 P.2d 1018 (Or. 1974) (noting that encroachment arises when a party conveys a strip of land on which a building is located in reliance on an erroneous survey); Howard v. Kunto, 477 P.2d 210 (Wash. 1970) (finding that an inaccurate survey resulted in fifty-foot discrepancies in a series of deeds); Somerville v. Jacobs, 170 S.E.2d 805, 812 (W. Va. 1969) (noting that landowners built in mistaken reliance on an erroneous surveyor's report).
133. The landowner might seek removal of the improvement, see, e.g., Mannillo v. Gorski, 255 A.2d 258, 258 (N.J. 1969), or, when none of the improvement is on the improver's land, the landowner might claim to the entire building, see, e.g., Somerville, 170 S.E.2d at 812.
134. Some courts have granted injunctive relief, concluding that failure to conduct a proper survey precludes the improver from contending that the encroachment was the result of an innocent mistake. E.g., Sheehan v. Kaden, No. 75292, 1999 WL 166025, at *4 (Ohio Ct. App. Mar. 25, 1999).
135. For academic discussion of these cases, see Kelvin H. Dickinson, Mistaken Improvers of Real Estate, 64 N.C. L. REV. 37 (1985); Carol M. Rose, Property and Expropriation: Themes and Variations in American Law, 2000 UTAH L. REV. 1, 9-10; and Sterk, supra note 75, at 61-62.
136. 255 A.2d 258 (N.J. 1969), remanding for trial 241 A.2d 276 (N.J. Super. Ct. Ch. Div. 1968).
137. Mannillo, 255 A.2d at 264 (emphasis added).
138. 170 S.E.2d 805 (W. Va. 1969).
139. Somerville, 170 S.E.2d at 813 (emphasis added).
140. See, e.g., Stuttgart Elec. Co. v. Riceland Seed Co., 802 S.W.2d 484 (Ark. Ct. App. 1991); Hirshfield v. Schwartz, 110 Cal. Rptr. 2d 861 (2001) (applying relative hardship doctrine to deny injunctive relief); Dundalk Holding Co. v. Easter, 137 A.2d 667, 671 (Md. 1958) (denying injunction requiring expenditure of $60,000 to tear down wall on land worth no more than $500, stating doctrine of comparative hardship applicable "if the mistake is innocent and . . . the invasion and the benefit to the injured owner are slight"); Kratze v. Indep. Order of Oddfellows, Garden City Codge No. 11, 500 N.W.2d 115 (Mich. 1993); Szymczak v. LaFerrara, 655 A.2d 76 (N.J. Super. Ct. App. Div. 1995) (applying "relative hardship" doctrine to limit landowner to money damages when inaccurate survey led neighbor to encroach); Amkco, Ltd. v. Welborn, 21 P.3d 24 (N.M. 2001) (applying the relative hardship doctrine to deny injunction requiring removal of encroaching gas station); Zerr v. Heceta Lodge No. 111, Indep. Order of Oddfellows, 523 P.2d 1018 (Or. 1974) (applying relative hardship doctrine to deny injunction to tear down encroaching building).
141. E.g., Hollifield v. Monte Vista Biblical Gardens, 553 S.E.2d 662 (Ga. Ct. App. 2001); McConnell v. Stivers, Nos. 2004-CA-001835-MR, 2004-CA-001894-MR, 2004-CA-002302-MR, & 2004-CA-002213-MR, 2007 WL 80897 (Ky. Ct. App. Jan. 12, 2007). Even when the improver knows that the owner believes the improvement will encroach, courts have held that the owner is entitled to injunctive relief. E.g., Goulding v. Cook, 661 N.E.2d 1322, 1325 (Mass. 1996) (awarding injunction when improvers, who were warned to proceed at their own peril, went ahead with their plans while the matter was still being litigated); Renaissance Dev. Corp. v. Universal Props. Group, Inc., 821 A.2d 233 (R.I. 2003) (noting that owner had instructed improver not to build); Bach v. Sarich, 445 P.2d 648, 652 (Wash. 1968) (noting that improvers built "with full knowledge that their right to do so was contested").
142. See, e.g., CAL. CIV. PROC. CODE §§ 871.1-.7 (West 2007) (providing protection for good faith improvers who build on land that turns out not to be their own). By its terms, the statute does not apply when the landowner builds in part on its own land, apparently because the legislature deemed common law doctrine adequate to deal with that problem. See id. § 871.6. Where the statute is applicable, "the degree of negligence of the good faith improver should be taken into account by the court in determining whether the improver acted in good faith and in determining the relief, if any, that is consistent with substantial justice to the parties under the circumstances of the particular case." Id. § 871.3(b) (emphasis added). In Raab v. Casper, 124 Cal. Rptr. 590 (Cal. Ct. App. 1975), the court remanded because the trial court had made no finding on negligence, emphasizing the critical role negligence plays in application of the statute.
143. Professor Lee Anne Fennell has argued that, after the passage of time, the adverse possession doctrine should extend greater protection to knowing encroachers than to innocent encroachers. Fennell, supra note 51. But she reaches that conclusion in part because other doctrines provide more effective protection to innocent encroachers. Id. at 1072 (noting that doctrines requiring innocent encroachers to pay for owners' losses "roughly align incentives to avoid mistakes with the cost those mistakes impose on others").
144. The inefficiency of search costs also provides an answer to a puzzle Professor Fennell explores: why should legal doctrine protect innocent encroachers? Professor Fennell finds no "positive correlation between ignorance about the trespass and the social value of the trespass." Id. at 1066-67. She adds that "[t]here is no reason to think that people who are making honest mistakes are necessarily also making efficient mistakes." Id. at 1067. But innocent encroachment may, in fact, reflect a calculation that the potential cost of encroachment is smaller than the cost of search. Indeed, Professor Fennell herself suggests as much. Id. at 1071.
145. As Professor Fennell has put it, "[e]ncouraging (or failing to discourage) ignorance about boundaries generates inefficiencies, at least where the costs of obtaining knowledge are relatively low and the social costs of building beyond one's boundaries are relatively high." Id. at 1071 (emphasis added).
146. See Pahl v. Ribero, 14 Cal. Rptr. 174 (Cal. Ct. App. 1961) (granting an injunction when removal cost would be $5,950 and decline in market value of owner's property would have been $5,600).
147. See, e.g., Grunden v. Hurley, 736 P.2d 548 (Okla. Civ. App. 1987); Burkey v. Baker, 492 P.2d 563 (Wash. Ct. App. 1971). See generally Stewart E. Sterk, Estoppel in Property Law, 77 NEB. L. REV. 756, 788-91 (1998).
148. 715 P.2d 514 (Wash. 1986).
149. Brown, 715 P.2d at 517.
150. Id. at 517-18.
151. Id. at 518.
152. After the case was resolved, the improver indicated that he had always assumed that he had a right to use the easement to get to his house. Elizabeth J. Samuels, Stories Out of School: Teaching the Case of Brown v. Voss, 16 CARDOZO L. REV. 1445, 1467 (1995).
153. 963 P.2d 157 (Or. Ct. App. 1998).
154. Vossen, 963 P.2d at 158.
155. Id. at 161.
156. See Alabama Power Co. v. Drummond, 559 So.2d 158 (Ala. 1990) (denying injunctive relief to power company against homeowner who unintentionally built a house atop the company's flood easement when, although the easement was of record and homeowner knew of the easement's existence, she did not know that the house itself encroached). By contrast, courts invariably refuse to apply the relative hardship doctrine, which permits court to deny injunctive relief when the cost of removing an encroachment is high relative to the damage caused by the encroachment, in cases where the encroacher knew of the encroachment or "proceeded despite notice or warning." Ariola v. Nigro, 156 N.E.2d 536, 540 (Ill. 1959).
157. 593 P.2d 1118 (Or. 1979).
158. Drulard, 593 P.2d at 1119.
159. Id. at 1120.
160. Id. at 1123.
161. The court never formally determined whether the purchasers' house violated the covenant. Instead, the court noted that there was a serious question about compliance, and concluded that even if the house did violate the covenant, the neighbor was not entitled to injunctive relief (or, for that matter, to damages, because the neighbor had not adequately proved harm). Id. at 1123-25.
162. Perhaps the purchasers could have contracted with the neighbors in the face of uncertainty, but because the source of the uncertainty was contained in a subdivision restriction, the purchasers might have faced significant holdout costs, because, in all likelihood, each of the neighbors would have had standing to enforce the restriction. As one commentator has noted, [w]here the agreement in question is entered into pursuant to a general building plan for the subdivision, the courts uniformly hold that evidence of the existence of such a plan at the time the agreement is made will be sufficient evidence of an intention to attach the benefit to the remaining lots of the subdivider. II AMERICAN LAW OF PROPERTY § 9.29, at 418 (A. James Casner ed., 1952).
163. The restrictive covenant unequivocally permitted the purchaser to build a one-story house twenty-four feet in height, leading the court to conclude that the measure of damages would be the difference between the value of the neighbors' house with a one-story, twenty-four-foot house next door, and the value with the purchasers' house (which did not exceed twenty-four feet in height) next door. The court noted that the neighbors had offered no evidence of damages measured by this standard. Drulard, 593 P.2d at 1124-25.
164. See Holmes Harbor Water Co. v. Page, 508 P.2d 628 (Wash. Ct. App. 1973) (denying injunctive relief for violation of height restriction when scope of prohibition was uncertain, landowner attempted to comply with restrictive covenant, neighbor delayed bringing suit until construction was complete, and cost of removal was high compared with damage to the neighbor).
165. See, e.g., Flying Diamond Airpark, LLC v. Meienberg, 156 P.3d 1149 (Ariz. Ct. App. 2007) (awarding injunctive relief against violation of height restriction when builder had been warned before commencing construction that proposed building would violate restriction); Gen. Am. Realty Co. v. Greene, 438 N.E.2d 540 (Ill. App. Ct.1982) (granting injunctive relief requiring removal of portions of building when builder constructed building knowing that it was directly above the easement, and finding the dominant owner's failure to show harm irrelevant); Aragon v. Brown, 78 P.3d 913 (N.M. Ct. App. 2003) (issuing an injunction requiring removal of manufactured home in violation of restrictive covenant when landowner had actual knowledge of the covenant's prohibition).
166. See, e.g., Sandstrom v. Larsen, 583 P.2d 971 (Haw. 1978) (awarding injunction when landowner completed construction in violation of height restriction after neighbors had warned landowner to cease construction until issue was resolved); Davis v. Huey, 608 S.W.2d 944, 949 (Tex. Ct. App. 1980) (awarding injunction against improvements made in violation of covenants when landowners "deliberately and intentionally proceeded with the construction of their building . . . knowing that their right to do so was being challenged in court"); Bauman v. Turpen, 160 P.3d 1050 (Wash. Ct. App. 2007) (issuing an injunction that required landowner to modify the roof of an already-constructed home when landowner began construction after neighbors sought injunctive relief for violation of restrictive covenant limiting houses to one story); Curtis v. Chinn, No. 44408-5-I, 2000 WL 703008 (Wash. Ct. App. May 30, 2000) (issuing injunction requiring removal of addition when neighbor warned landowner that addition violated height restriction and began litigation as soon as landowner started construction).
167. For instance, copyright protects only expression, not ideas. Learned Hand remarked, in a case involving the alleged infringement of a play, that there is a point in a series of abstractions about a play "where they are no longer protected, since otherwise the playwright could prevent the use of his 'ideas,' to which, apart from their expression, his property is never extended. . . . Nobody has ever been able to fix that boundary, and nobody ever can." Nichols v. Universal Pictures Corp., 45 F.2d 119, 121 (2d Cir. 1930) (citations omitted); see also Reyher v. Children's Television Workshop, 533 F.2d 87, 91 (2d Cir. 1976) (noting that copyright protects expression, but not ideas). Moreover, even when an alleged infringer uses protected expression, the multifactored "fair-use" doctrine may authorize the appropriation. See 17 U.S.C. § 107 (2000) (enumerating fair-use factors). As a result of these problems, "[a] user may know that a particular work is copyrighted, but that knowledge gives him little sense of whether a particular use of the work is legal or not." Mark A. Lemley, Reply, What's Different About Intellectual Property?, 83 TEX. L. REV. 1097, 1101 (2005).
168. See, e.g., DeAcosta v. Brown, 146 F.2d 408 (2d Cir. 1944) (finding publisher liable for infringement even if it erroneously relied on assurances of author).
169. Reese, supra note 106.
170. In particular, nineteenth-century copyright law protected largely against reproduction and distribution of a copyrighted work, not against taking extracts from the work or producing derivative works. Thus, translating Uncle Tom's Cabin into German did not constitute infringement of Stowe's copyright. Stowe v. Thomas, 23 F. Cas. 201 (C.C.E.D. Pa. 1853) (No. 13,514). See generally Reese, supra note 106, at 140-44, 178 (describing narrow scope of early copyright protection, particularly with respect to derivative works).
171. Congress endorsed the notice requirement as late as 1976, largely to protect innocent improvers against the burdens of search. The House Report accompanying the 1976 Copyright Act enumerated the functions of the copyright notice: "(2) It informs the public as to whether a particular work is copyrighted; (3) It identifies the copyright owner; and (4) It shows the date of publication." H.R. REP. No. 94-1476, at 143 (1976). The report went on to explain why the notice requirement should be retained: [A] person acting in good faith and with no reason to think otherwise should ordinarily be able to assume that a work is in the public domain if there is no notice on an authorized copy or phonorecord and . . . if he relies on this assumption, he should be shielded from unreasonable liability. Id. at 148. The duration of copyright protection, initially fourteen years, Copyright Act of 1790, ch. 15, 1 Stat. 124 (repealed 1831), has gradually expanded to the current "life plus seventy years" formulation. Especially significant in expanding the number of works subject to copyright was the 1976 Act's substitution of a unitary term from the previous practice of requiring renewal after twenty-eight years - a practice which resulted in the vast majority of copyrighted works falling into the public domain after twenty-eight years.
172. E.g., Reese, supra note 106, at 156-60.
173. 17 U.S.C. § 102(a) (2000).
174. The Berne Convention Implementation Act of 1988 amended sections 401 and 402 of the Copyright Act to strike out the requirement that copyright notice "shall be placed on all" publicly distributed copies and phonorecords and to substitute a requirement that notice "may be placed on" those copies and phonorecords. The Berne Convention Implementation Act of 1988, Pub. L. No. 100-568, 102 Stat. 2853 (codifed as amended at 17 U.S.C. §§ 401-402 (2000)). The statute retained some incentive to include notice on copies by making it more difficult for an infringer to contend that his infringement was innocent, and should therefore subject him to reduced actual or statutory damages, when notice was affixed to all copies. §§ 401(d), 402(d).
175. The assumption here is that the bundle of rights the copyright statute gives to the copyright holder roughly accounts for the external benefits and costs of copyright protection. Protection generates public benefits (by providing an incentive for authors to create potentially valuable works), but also imposes costs on the public (by limiting the ability of future authors to build on those works, and by increasing the cost of public access to works in which the author enjoys copyright protection). There is no a priori basis for assuring that the correlation is perfect. See James Boyle, Cruel, Mean, or Lavish? Economic Analysis, Price Discrimination and Digital Intellectual Property, 53 VAND. L. REV. 2007, 2013 (2000).
176. Copyright law provides remedies for the copyright holder in this situation largely to discourage the user from bypassing the market "by stealing the copyright and forcing the owner to seek compensation from the courts." Taylor v. Meirick, 712 F.2d 1112, 1120 (7th Cir. 1983) (Posner, J.).
177. Dane S. Ciolino & Erin A. Donelon, Questioning Strict Liability in Copyright, 54 RUTGERS L. REV. 351, 414 (2002) (noting that innocent users facing risk of liability can curtail use of copyrighted work, and ultimately reduce their level of creative activity).
178. E.g., Gibson, supra note 67, at 890 (noting high costs that might be engendered by injunctive relief in infringement cases).
179. Bright Tunes Music Corp. v. Harrisongs Music, Ltd., 420 F. Supp. 177 (S.D.N.Y. 1976), aff 'd sub nom. ABKCO Music, Inc. v. Harrisongs Music, Ltd., 722 F.2d 988 (2d Cir. 1983).
180. Settlement negotiations between Harrison and the holder of the copyright in "He's So Fine" yielded an offer by Harrison of $148,000, an offer the copyright holder's lawyer regarded as "a good one." ABKCO Music, Inc. v. Harrisongs Music, Ltd., 508 F. Supp. 798, 802 (S.D.N.Y. 1981), modified, 722 F.2d 988 (2d Cir. 1983). The total earnings of "My Sweet Lord," by contrast, exceeded $2,000,000. Id. at 801.
181. Not only do these high removal costs increase the potential users' incentive to search, but as suggested in Section III.C, they increase the potential users' incentive to negotiate with ostensible owners, even when ownership is uncertain. James Gibson has recently noted that licensing in the face of uncertainty has an unintended and potentially unwelcome consequence: it expands the scope of copyright protection by establishing the existence of a licensing market - a factor courts and scholars deem relevant to fair-use analysis. Gibson, supra note 67, at 888-98.
182. See generally Ciolino & Donelon, supra note 162, at 376-85 (challenging notion that potential infringer is the "cheapest cost avoider" in light of the uncertainties generated by copyright law). Mark Lemley and Philip Weiser have recently emphasized another reason to believe that injunctive relief promotes inefficiency in copyright cases: injunctions, or bargains conducted in the shadow of injunctions, can generate negative externalities. Injunctive relief effectively gives copyright holders leverage "to control a wide swath of noninfringing uses." Mark A. Lemley & Philip J. Weiser, Should Property or Liability Rules Govern Information?, 85 TEX. L. REV. 783, 796 (2007). That is, injunctive relief can operate not merely to adjust the relative positions of the copyright holder and the infringer, but also to deprive the public of works that would otherwise be available.
183. See Stewart E. Sterk, Intellectualizing Property: The Tenuous Connections Between Land and Copyright, 83 WASH. U. L.Q. 417, 460-61 (2005).
184. See 17 U.S.C. § 502(a) (2000) ("Any court having jurisdiction of a civil action arising under this title may . . . grant temporary and final injunctions on such terms as it may deem reasonable to prevent or restrain infringement of a copyright.") (emphasis added).
185. For example, in Apple Computer, Inc. v. Franklin Computer Corp., the court wrote that "a showing of a prima facie case of copyright infringement or reasonable likelihood of success on the merits raises a presumption of irreparable harm," 714 F.2d 1240, 1254 (3d Cir. 1983) - a presumption that leads to the award of a preliminary injunction.
186. 533 U.S. 483 (2001).
187. Tasini, 533 U.S. at 520 (Stevens, J., dissenting) (emphasis added).
188. The Court noted that "it hardly follows from today's decision that an injunction against the inclusion of these Articles in the Databases . . . must issue," id. at 505 (majority opinion), and held that remedial issues were "open for initial airing and decision in the District Court," id. at 506.
189. 863 F.2d 1465 (9th Cir. 1988), aff 'd on other grounds, Stewart v. Abend, 495 U.S. 207 (1990).
190. Abend, 863 F.2d at 1468.
191. Miller Music Corp. v. Charles N. Daniels, Inc., 362 U.S. 373 (1960).
192. 510 U.S. 569 (1994).
193. Acuff-Rose, 510 U.S. at 578 n.10.
194. eBay, Inc. v. MercExchange, L.L.C., 126 S. Ct. 1837 (2006).
195. Title 17, section 102(a) of the United States Code provides that copyright protection "subsists" in original works of authorship. 17 U.S.C. § 102(a) (2000).
196. Title 35, section 111 of the United States Code provides that "[a]n application for patent shall be made, or authorized to be made, by the inventor." 35 U.S.C. § 111 (2000).
197. For a discussion of this difference, see Clarisa Long, Information Costs in Patent and Copyright, 90 VA. L. REV. 465, 525-33 (2004).
198. A patent search tutorial prepared by the University of Texas engineering library estimates that the average preliminary search takes between twenty-five and thirty hours, and an exhaustive search requires exploration of other avenues. McKinney Engineering Library Patent Searching Guide, http://www.lib.utexas.edu/engin/patent-tutorial/tutorial/patenttutorialframeset. htm (follow "Introduction" hyperlink) (last visited Jan. 28, 2008).
199. For a discussion of the various commercial databases and the difficulties of searching, see John T. Butler, Electronic Resources for Patent Searching, 84 LAW LIBR. J. 121 (1992).
200. A number of studies suggest that even federal district judges misunderstand the meaning of those claims about a third of the time. Christian A. Chu, Empirical Analysis of the Federal Circuit's Claim Construction Trends, 16 BERKELEY TECH. L.J. 1075, 1103-04 (2001);
201. Kimberly A. Moore, Are District Judges Equipped to Resolve Patent Cases?, 15 HARV. J.L. & TECH. 1, 2 (2001);
202. Michael Saunders, A Survey of Post-Phillips Claim Construction Cases, 22 BERKELEY TECH. L.J. 215, 236 (2007).
203. Although patent applications may take two to three years to process, a patent examiner spends an average of about eighteen hours on each application. Mark A. Lemley, Rational Ignorance at the Patent Office, 95 NW. U. L. REV. 1495, 1500 (2001). Nearly eighty-five percent of patent applications in the United States result in an issued patent. Lemley & Shapiro, supra note 78, at 79.
204. See John R. Allison & Mark A. Lemley, Empirical Evidence on the Validity of Litigated Patents, 26 AIPLA Q.J. 185 (1998).
205. For a description of the process of obtaining so-called submarine patents, see Steve Blount, The Use of Delaying Tactics to Obtain Submarine Patents and Amend Around a Patent that a Competitor Has Designed Around, 81 J. PAT. & TRADEMARK OFF. SOC'Y 11 (1999);
206. David B. Conrad, Mining the Patent Thicket: The Supreme Court's Rejection of the Automatic Injunction Rule in eBay v. MercExchange, 26 REV. LITIG. 119, 140-45 (2007);
207. and Maureen A. O'Rourke, Toward a Doctrine of Fair Use in Patent Law, 100 COLUM. L. REV. 1177, 1239-43 (2000).
208. 35 U.S.C. § 122(b)(1)(A) (2000).
209. This uncertainty is particularly problematic with continuation applications, because the patentee can continue to change claims to track competitors until the patent is issued. See Mark A. Lemley & Kimberly A. Moore, Ending Abuse of Patent Continuations, 84 B.U. L. REV. 63, 88-90 (2004). Moreover, applicants for "submarine patents" can avoid the publication requirement by not filing or publishing abroad. Id. at 88-89.
210. See Lemley & Shapiro, supra note 97, at 1997 (discussing lost sales resulting from time lag caused by redesign around the patent).
211. Mark Lemley and Philip Weiser state as follows: [I]njunctions against infringement of a patent covering a small component of a larger product will end up preventing the sale of all the noninfringing components of the product, at least until the defendant can redesign its product to exclude the infringing component. In the case of hardware such as semiconductors or cell phones, pulling and redesigning the product can potentially involve a year of additional research and development and tens of millions of dollars. Lemley & Weiser, supra note 167, at 797-98; see also Lemley & Shapiro, supra note 97, at 1997 (noting that redesign costs "could be so large that redesigning the product is not commercially feasible").
212. 126 S. Ct. 1837 (2006).
213. eBay, 126 S. Ct. at 1842 (Kennedy, J., concurring).
214. Id.
215. The assumption here is that if the patent owner has suffered no losses, there is no social harm, because patent law has been properly calibrated to provide the patent holder with optimal incentives to innovate. See, e.g., id. at 1837 (majority opinion).
216. Id. at 1842 (Kennedy, J., concurring).
217. See Symbol Techs., Inc. v. Lemelson Med. Educ. & Research Found., LP, 422 F.3d. 1378, 1385-86 (Fed. Cir. 2005). The doctrine can be traced to two earlier Supreme Court cases, Woodbridge v. United States, 263 U.S. 50 (1923), and Webster Electric Co. v. Splitdorf Electrical Co., 264 U.S. 463 (1924).
218. See supra text accompanying note 132.
219. Moreover, when a patent holder does not delay in prosecuting the patent application, but instead delays in bringing actions for infringement, the Federal Circuit has held that laches may bar injunctive relief against the user of an infringing product who may have been lulled into acting in reliance on a belief that the product's use would not generate legal liability. See Odetics, Inc. v. Storage Tech. Corp., 185 F.3d 1259, 1272-74 (Fed. Cir. 1999). After noting that permitting injunctive relief would permit the patent holder to extract from the infringer the cost of shifting to a noninfringing product, which might be more than a reasonable royalty, the court emphasized that such a result "would encourage patentees to adopt a strategy of ambush rather than providing fair notice." Id. at 1273. That is, when the owner could have acted to reduce the user's search costs, but didn't, the owner may not be entitled to injunctive relief.
220. Mark Lemley has recently noted that under existing law many researchers and companies simply don't engage in patent searches, instead taking their chances on the outcome of potential litigation. Mark A. Lemley, Ignoring Patents (2007) (unpublished manuscript, on file with author).
221. For application of the maxim to a modern gun control case - and discussion of limits on application of the maxim even in criminal law - see Bryan v. United States, 524 U.S. 184, 194-96 (1998).
222. Thus, Richard Epstein, a staunch defender of property rules, concedes that in cases of necessity, property rules would be inefficient: The need to save life is so evident that the law allows the individual at risk to use someone else's property as though it were his own. . . . No one could seriously maintain that for some hidden reason the owner has greater need for his dock that the sailor who is at risk for his life. . . . Only cynics doubt that, at the critical moment, the boat owner attaches greater value to the use of the dock than the dock owner attaches to his right to exclude. Epstein, supra note 3, at 2110 (1997).