The Economics of Property Law

One of the topics that we do not consider in the text but that is a tremendously important is the status of cultural artifacts in property law. By "cultural artifacts" or "cultural property" we mean property that has value to society as a whole. Examples might be some works of fine art, such as the paintings of Holbein or the sculpture of Henry Moore. Whatever value these articles may have to individuals who own them, they also may have a value to society as a whole. Generally speaking, economics argues that resources will be their highest value if they are protected by private property rights. Thus, if cultural property were no different from other resources, it might be most efficiently protected if it were to be put in the hands of individual owners. But this is not obviously the case. Imagine that Mr. Smith has purchased a painting by the great artist Rembrandt and his spouse, who dislikes the painting intensely, uses the painting as a dartboard. (For a wonderful discussion of these and related issues, see Joseph Sax, Playing Darts With a Rembrandt (1999).) Should society have a means of asserting its interest in the Rembrandt painting and protecting it from Mrs. Smith's darts? Or, on balance, is the preservation of cultural property enhanced by allowing a private owner to do with his property as his chooses?

Beginning in 1801 and through 1812 Thomas Bruce, the seventh Earl of Elgin (pronounced with a hard "g") and from 1799 to 1803 the British Ambassador to the Sublime Porte of the Ottoman Empire, which then included Greece, purchased 17 figures and 56 panels of a giant frieze that once decorated the Parthenon on the Athenian temple city, the Acropolis and had them transported to England. In 1816 after a full discussion in Parliament on all the nuances of the matter, Lord Elgin sold all these pieces -- always thereafter called the "Elgin Marbles" -- to the British Museum. He was paid 35,000 pounds sterling for his collection. (Incidentally, this sum did not come close to compensating Lord Elgin for the amount that he had paid in acquiring, refurbishing, cataloguing, and transporting the Marbles.) They have been on permanent display in the British Museum ever since.

In 1983 the Greek Government, through its Minister of Culture, the accomplished actress Melina Mercouri, asked that the Marbles be returned to Greece. The British Government refused. Late in the 1990s the Greek Government renewed its request, citing a desire to have the figures returned in time for the 2004 Olympics in Athens.

The heart of the Greek case for return is two propositions: (1) that the Marbles were wrongfully acquired by Lord Elgin and, therefore, do not rightfully belong to the British and (2) that whatever the legitimacy of Elgin's and the British acquisition, moral considerations argue for the return of the Marbles to their country of origin. According to Professor John Merryman (see his Michigan Law Review article cited at the end of this section), the first of these propositions is not correct. The Ottomans had controlled Athens since 1460 and had a legally recognizable claim to the Parthenon and the artifacts there. Also, Lord Elgin obtained formal written instrument -- called a "firman" -- from the Ottoman Government entitling him to do certain things with the Marbles. Arguably, Lord Elgin exceeded the grant of authority in the firman in removing some of the Marbles. However, he did receive a formal written instrument from the Government allowing him to export the Marbles from Piraeus, the port of Athens. Professor Merryman believes that this grant of export authority legitimizes Elgin's claim to the Marbles.

As to the moral nature of the Greek claim to the Marbles, Professor Merryman also favors the British case for retention. First, he notes that between 1828, when the Greeks gained their independence from the Ottomans, and 1983 -- a period of 155 years -- the Greeks made no assertion of their claim to the Marbles. Second, Professor Merryman notes that if Lord Elgin had not taken the Marbles, they might have been destroyed by the Ottoman rulers of Greece.

To refine the moral claims, Professor Merryman identifies cultural nationalism and cultural internationalism as possible bases for allocating cultural property. The gist of the cultural nationalism justification for returning the Marbles to Greece is that they were originally Greek. But Professor Merryman finds that justification unpersuasive. "One can admire the Greekness of the Marbles and respect their specific cultural importance to Greeks without concluding that they belong in Greece." (Merryman at 1916.) But cultural internationalism is something that he finds far more persuasive:

A new bit of evidence arguing, perhaps, for the return of the Marbles -- or, at least, denigrating the claim that the Marbles need to remain in England for their own safety -- is the revelation by William St. Clair, a former senior civil servant and now history fellow at Cambridge University, that in 1937 the British Museum may have permanently damaged the Marbles by cleaning them with steel wool, carborundum, hammers, and copper chisels in order to "skin" the Marbles' original stained patina. Mr. St. Clair has also alleged that Lord Elgin's (or his supporters') claim that he legitimately purchased the Marbles is unfounded; in fact, St. Clair says, Lord Elgin bribed Ottoman officials to take more than he had paid for. Ian Jenkins of the British Museum disputes Mr. St. Clair's account of the 1937 cleaning, claiming that while the cleaning was a "scandal," it affected only 40 percent of the pieces, not the 80 percent claimed by Mr. St. Clair and that Greek officials had been using the same cleaning techniques on pieces of the Hephaesteum temple in Athens in the 1950s. (See The New York Times, December 2, 1999.)

The Wall Street Journal in an editorial published on December 3, 1999, "Whose Elgin Marbles?," called for the Marbles to remain in England. Among other things justifying their retention in England the Journal particularly cited that the facts that 6 million people per year view the Marbles in the British Museum; that Lord Elgin bought and did not steal the Marbles; and that "Lord Elgin, contrary to the attacks on his reputation today, seems to have acted in good faith and out of a genuine desire to preserve what the ancient Greeks had created."

There are international agreements on cultural property. In 1970 UNESCO (the United Nations Education, Scientific, and Cultural Organization) brokered a Convention on the Means of Prohibiting and Preventing the Illicit Import, Export, and Transfer of Ownership of Cultural Property. The United States ratified the Convention in 1972, and Congress finally enacted implementing legislation in 1982 (the Cultural Property Implementation Act of 1983, codified as amended at 19 U.S.C. §§ 2601-2613 (1998). Interestingly, most major art importing countries are not parties to the UNESCO Convention. You may see the Convention on the UNESCO website at www.unesco.org/general/eng/legal/cltheritage/b572.html. The United States adopted the convention in the Cultural Property Implementation Act of 1983 (codified as amended at 19 U.S.C. §§ 2601-2613 (1998)).

For more on this and related issues, see John Merryman, "Thinking About the Elgin Marbles," 83 Michigan Law Review 1881 (1986); See John H. Merryman, "Two Ways of Thinking About Cultural Property," 80 Am. J. Int. L.. 831 (1986); and Joseph Sax, Playing Darts With a Rembrandt (1999). You might also look at John Keats' poem, "On Seeing the Elgin Marbles."

In a long article published in its March 18, 2000, edition, The Economist magazine reports that the British House of Commons has appointed a select committee of 11 to investigate the illegal trade in antiquities and the return of cultural objects to their countries of origin. The Committee will take testimony in England and then travel to Italy and to Athens for further testimony. Because, as we noted above, the Elgin Marbles were acquired by an act of Parliament in 1816, it will take another act of Parliament to send them back. That is, neither the British Museum, where the Marbles are on display, nor the Cabinet can take the action itself. The Economist polled the Members of Parliament and found what they characterize as "surprising strength" for returning the Marbles to Greece. Labour, Liberal Democrat, and a few unaffiliated MPs are strongly in favor of return -- on the order of 2 to 1. But Conservative MPs are strongly against -- only about 10 percent being willing to vote to return on a free vote -- that is, one in which the MPs are free to vote their conscience and not necessarily to follow party discipline.

1. Assuming that there is "cultural property" that has value to society beyond its value to a particular individual possessor, how could society assert its interest in that property?

2. Generally, is the preservation of cultural artifacts most efficiently served by allowing private property rights in those artifacts? Is there a conflict between efficiency and justice with respect to property in cultural artifacts? Should a government impose any constraints on the private ownership of cultural artifacts? If so, what constraints?

3. Should a government be able to "take" art that is held as private property upon the payment of just compensation? If so, under what circumstances should government take private property in cultural artifacts?

4. In the case of the Elgin Marbles is there scope for a bargain? Could the Greek government pay the British government to acquire the Marbles?

A New Method of Minimizing the Social Costs of Patents

A frequent criticism of the patent system is that it is not tuned precisely enough. All patents in the United States are for a term of 20 years from the date of filing. What may be inefficient about this system is that minor inventions receive a monopoly grant for a period that is far greater than they warrant while major inventions receive a monopoly grant for far less than is appropriate. Indeed, some argue that this system induces excessive effort toward minor inventive activity and inefficiently discourages investment in major patent activity. These critics suggest that patent life should be variable so as to reflect the social benefit of each particular invention. For instance, a tremendously important invention might have such extraordinary social benefits that it should receive a longer period of monopoly protection than 20 years. A minor invention might have very modest but positive social benefits so that a period of monopoly protection of less than 20 years would be enough to reward the inventor or to induce the inventive activity. Clearly, the costs of determining ex ante what the appropriate period of patent protection would be are very, very high.

Recently, Professor Michael Kremer of Harvard has proposed an alternative method of inducing the optimal amount of inventive activity: all patentable inventions should be "taken" by the federal government and placed in the public domain for anyone to use. This is apparently what the French government did when Louis Daguerre invented photography in 1837. They granted the patent to Daguerre but then took it from him upon payment of "just compensation."

But what is each invention worth and how should worth be determined? This problem, it turns out, is easier to answer than is that of the appropriate patent life. Professor Kremer's suggestion is that the government put each patent up for auction -- with a twist. The twist is this: after the bids have been submitted, someone tosses a coin; if it comes up heads, the high bidder pays his bid to the patentee and receives the patent to do with as he chooses; if the coin comes up tails, the government pays the patentee the amount of money contained in the highest bid but puts the patent into the public domain for anyone to use. Either way the patentee receives the same lump sum of money. (In a variation, Professor Kremer suggests that if the government wins the coin toss, it might give the inventor 1.5 times the highest bid as a stronger incentive for future inventors.)

See Steven Landsburg's column on the Kremer proposal: www.slate.com/Economics/00-01-12/Economics.asp. Landsburg includes a link to Professor Kremer's homepage and to other related matters (such as a description of how Republic Pictures lost the intellectual property rights to the classic movie "It's a Wonderful Life" and then regained them).

1. Why should the probability of the patent's going to the public domain be .50? Why shouldn't it be, say, .90 or .27? Can you think of a principled reason for setting the probability at a particular level? Will the amount that private individuals are willing to bid for new inventions be influenced by the probability of their receiving the right to the invention? What, precisely, is the relationship?

2. Regardless of the probability of the private bidder's winning, how long does that private bidder have the exclusive right to the patent? For 20 years? Or without limit? Can the government "take" the private bidder's property interest in the invention at some future time? If so, how much should the government pay the private party for the remaining term of the invention?

3. What if there is collusion between the inventor and others to inflate the auction bids? Professor Kremer proposes a variation on the Vickery auction (under which the winner is the highest bid but she pays the second-highest bid) -- specifically, that if the coin toss comes up heads, the winning bidder pays the third-highest bid. (The virtue of a third-bid or higher auction is that it requires a greater number of conspirators, and the greater the number of conspirators, the less likely the conspiracy is to remain secret.)

4. How will the government finance such a scheme -- through taxes (which ones?), application fees, or some other device?

5. Will the amount, quality, and kinds of inventive activity be the same as, equal to, or greater than the mix under the current system? In short, is this reform of the patent system worth it?

Trademark

There are three sources of trademark law: common law, the Lanham Act of 1946, and the Trademark Revision Act of 1988.

Under common law, someone acquires an enforceable trademark through the rule of first possession, which means “use in commerce.” That is, one does not acquire a common law property interest in a trade- or servicemark except by actually using it in a commercial setting, but once having done so, one has that property interest.

The Lanham Act of 1946 combines first possession and registration as the sources of a property interest in a trade- or servicemark. The theory of the Act is that registration provides constructive notice to potential infringers of the existence of the mark and of the intention to use it. So, unlike common law, one does not have to use the mark to have acquired a property interest in it.

The Trademark Revision Act of 1988 includes an Intent-to-Use application, which substitutes for the actual use in commerce in establishing a property interest. The applicant has up to two years to use the trademark after filing the application. At the end of the period, the interest lapses.

For more on economic aspects of trademark, see Stephen L. Carter, “The Trouble with Trademark,” 99 Yale L.J. 759 (1990). See also Vincent N. Palladino, “The Real Trouble with Trademark,” 81 Trademark Rep. 150 (1991).

1. There are many troubling issues surrounding trademark infringement. One has to do with the definition of the market within which the trademark is meaningful. Suppose that GeeWhiz Toys produces a board game called "All Aboard" that is very popular on the West Coast of the United States but has not yet been marketed in other parts of the country. Should the law recognize GeeWhiz's property interest in the trademark "All Aboard" nationally or only regionally? Under what circumstances, if any, should the law recognize a trademark across national boundaries?

2. We argue that frequently, but not always, the rule of first possession creates socially appropriate incentives for investment in valuable resources. But what about investment in the newly valuable resource of addresses on the World Wide Web? Those addresses, called "domain names" or "URLs" (for Uniform Resource Locator), are valuable. What is the appropriate rule for assigning property interests in domain names? Should the first person to register www.ibm.com have a proprietary interest in that URL or should it belong, by default, to the International Business Machines Corporation? What do you think will happen if the rule is one of first possession? [Congress has recently stepped into this matter. We'll add more on what that legislation says in just a few days.]

Property Interests in Sunken Treasure

When ships carrying valuable cargo sink in deep water, there is frequently a scramble to claim an interest in that cargo. (The classic article on the economics of the issues raised in salvaging or finding others' property is William M. Landes & Richard A. Posner, “Salvors, Finders, Good Samaritans, and Other Rescuers: An Economic Study of Law and Altruism,” 7 J. Legal Stud. 83 (1978).) The legal issues involved in establishing ownership interests in sunken treasure are fascinating. We may illustrate these issues by considering the case of the S.S. Central America, a steam-driven sidewheeler that sank in 1857 but whose discovery in 1987 created a scramble for gold--literally--"involving self-styled 'finders' from Ohio, British, and American insurance underwriters, an heir to the Miller Brewing fortune, a Texas oil millionaire, an Ivy League university, and an Order of Catholic monks."

The details of how the gold and the S.S. Central America happened to fetch up on the floor of the Atlantic Ocean are told by Judge Donald Russell of the United States Court of Appeals for the Fourth Circuit in his opinion in Columbus-America v. Atlantic Mutual Insurance Co., 974 F.2d 450 (1992):

The Fourth Circuit remanded the case to the District Court for further action. Not surprisingly, in view of the fact that there was a fabulous sum, estimated at $1 billion, in dispute, there was much subsequent litigation. Finally, in 1998 a federal District Court in Norfolk, Virginia, divided the treasure in the following way: 92 percent of the value to the Columbus-America Discovery Group and 8 percent to the insurers. The other intervenors got nothing.

The search has inspired not only litigation but also a 1998 best-selling book -- Gary Kinder, Ship of Gold in the Deep Blue Sea. And now the wreck is about to result in wealth. The Wall Street Journal recently announced (January 28, 2000, B1 at col. 6) that on January 31, 2000, 525 coins salvaged from the wreck of the Central America will be auctioned off and are expected to bring in around $100 million. In addition, the California Gold Group, a syndicate of investors who purchased some of the interest in the treasure from the Columbus-America Discovery Group, will soon launch a tour of the gold and a large model of the S. S. Central America that will appear in New York, Las Vegas, San Francisco, Philadelphia, and Long Beach, California.

You can see what the display will be about and learn more about the S. S. Central America at www.sscentralamerica.com.

Organ Transplants

As the text indicates, federal law prohibits the sale of transplantable organs. Instead, there is a complicated method of allocating available organs. The United Network for Organ Sharing (UNOS) has a website with lots of interesting information on that system, including the administration's proposals for reform of the method of allocating transplantable organs. See www.unos.org.

Recall in Chapter 5 that we describe the case for making some commodities inalienable in response to problems of asymmetric information where quality is very important. The classic argument against a market for such commodities is Richard Titmuss, The Gift Relationship (1971). Titmuss argues that a market for human blood would cause a decline in the quality of blood donated. The Nobel Laureate Kenneth J. Arrow criticized Titmuss' view in “Gifts and Exchanges,” 1 Phil. & Pub. Aff. 343 (1972).

As possible ways of increasing the supply of transplantable organs without running too far afoul of societal notions of equitable distribution, consider these two proposals:

1. Those who agree to "sell" their organs would receive preferential access to organs in the pool. Only if the supply exceeds the demand, then those outside the pool would have access to the transplantable organs. (This used to be a feature of blood donations.) For more details, see Richard Schwindt and Aidan Vining, "Proposal for a Mutual Insurance Pool for Transplant Organs," 23 J. Health Pol. Pol’y & Law 725 (1998).

2. There would be a market for transplantable organs, but the federal government would be the only legitimate purchaser of those organs. The government would then allocate those organs according to equitable principles. (Thanks to Todd Ressler for this proposal.)

Would either or both of these proposals increase the supply of transplantable organs? On the ground of efficiency is either system preferable to the current system?

The Economic Costs of Patent Secrecy

In the United States patent applications are kept secret until the patent issues. (Recall that the old U.S. law was that a patent was good for 17 years from the date of issuance but that since 1995 the law has been that the patent is good for 20 years from the date of filing. This change was part of the conclusion of the Uruguay Round of talks that resulted in the creation of the World Trade Organization.) Only the Philippines also allows applicants to keep their patent application secret till issuance. Since the 1960s every other country has adopted a system in which the patent application must be published no later than 18 months after the date of filing.

The implicit deal in the U.S. has been that the government will grant the monopoly rights to the applicant in exchange for the applicant's making the invention public and that deal would be consummated only at the date of issuance of the patent. But for several years now there has been a desire to bring the United States' practice on application secrecy into conformity with the practice in the rest of the world. (There are some substantive economic reasons for the change, as we shall see shortly.) Annually since 1997 the Twenty-First Century Patent System Improvement Act has been introduced in Congress. The Act would provide for the pre-grant publication of patent applications 18 months after the earliest effective filing date.

There are several important economic implications of the change proposed in the Act. One is on trade secret law. Trade secrets are "any formula, pattern, device or compilation of information which is used in one's business, and which gives him an opportunity to obtain an advantage over competitors." Restatement of Torts § 757 cmt. b (1939). The trade secret is entitled to protection for as long as the holder keeps it from public knowledge. It may become public knowledge only through willful disclosure or independent discovery. (Trade secret infringement cases frequently turn on whether the holder willfully disclosed as, say, part of a business merger or whether a former employee really discovered a particular process independently.)

Currently when a business has a patentable process or invention, it may choose between trade secret protection or patent protection. If the proposed Act passes, the requirement of pre-grant publication might have an impact on an inventor's choice between patent and trade secret protection. Some inventors might choose not to publish and to keep their inventions as trade secrets. (This will only affect those inventions that cannot be discovered through reverse engineering, which is a legitimate method of uncovering trade secrets. Why, incidentally, should that be a legitimate practice?)

The anticipated social benefit of pre-grant publication is the minimization of the social costs of "submarine patents." A "submarine" patent is one that, because of a lengthy and secret application process, stays hidden from view for a very long time and only "surfaces" long after its initial filing. Because during the pendency of the application there may have been many other patents issued to other applicants, some of those will seem to have infringed on the earlier applied-for submarine patent. The broader these submarine patents are when granted, the more infringers there will be. That is, submarine patents may be a strategic means of getting back at rival inventors. There could be a substantial social cost associated with submarine patents in that some inventors will be reluctant to ask for patent protection because of their fear of being later deemed an infringer when an earlier applied-for patent surfaces and receives a grant. To take an example, Jerome Lemelson filed applications in 1954 for patents that were not finally issued till 1992. When the patent was finally issued, almost every user and manufacturer of bar code technology was a potential infringer. Lemelson has received more than $1 billion in settlement of claims or suits arising from his submarine patents.

Are there any social costs associated with requiring the publication of patent applications 18 months after the filing? If so, what are they? On balance, are these social costs greater than or less than the social benefits of pre-grant publication?

Ownership of Genetic Material

Among the most exciting scientific discoveries of the last few years are those of important genetic materials in plants and animals in exotic locales. Sometimes, genetic material from, say, a rare plant in an equatorial rain forest can be used to produce very valuable pharmaceutical products.

In fact, of "the world's 25 top-selling drugs in 1997, seven, with a combined $11.6 billion in sales, were derived from natural products, according to The Commercial Use of Biodiversity []. These include Merck's Mervacor for lowering cholesterol, derived from a fungus on a Japanese golf course, and Novartis's cyclosporine, for fighting transplant rejection, derived from a Norwegian mountain fungus." Other natural resources are providing promising possibilities. For example, tribes living in the Amazon rain forest have long used secretions from the skin of a frog to make poison for blow darts. Abbott Laboratories is developing a pain-killer from those secretions that may be as effective as morphine but without the side effects. And University of Wisconsin scientists have isolated a protein from berries in West Africa that is 2,000 times sweeter than sugar. Their hope is to insert the gene for that protein into other fruits to make them sweeter and to develop a table sweetener based on the protein.

Because of the great value of these genetic resources, the governments of the countries in which these natural resources lie have become more aggressive in asserting a property interest in their genetic material. They have an international agreement to bolster their efforts. At the Earth Summit in Rio de Janeiro in 1992, the participants agreed upon a Convention on Biological Diversity, which established that the countries "have sovereignty over their genetic resources and are entitled to 'fair and equitable sharing of the benefits.'" Although the Clinton Administration supports that Convention, the United States Senate has never ratified it. One of the economic arguments that was made in support of the Convention was that if countries could receive compensation for their genetic resources, they would have an incentive to maintain them. For instance, Brazil, Peru, and other South American countries would have a heightened incentive not to destroy the Amazon rain forest. In 1995 the Philippines became the first country to enact national legislation based on the Biodiversity Convention. That law "requires compensation and collaboration with local scientists and informed consent from indigenous tribes in areas where the sampling will take place." Some countries have begun to protest the activities of U.S. pharmaceutical companies within their national borders. Thus, in 1998 China stopped a project partly financed by the U.S. National Institutes of Health that was studying the genes of 10,000 elderly Chinese in an effort to discover clues to human longevity.

The United States Government is itself asserting its interest in genetic materials in the national parks. "In 1997 for a $100,000 payment and royalties ranging from a half of 1 percent to 10 percent, the Diversa Corporation of San Diego won the right to collect microbes from Yellowstone National Park's geysers for five years."

The following table summarizes some of the disputes on patents pending or granted in genetic materials.

Source: Lyle Glowka, Biodiversity Strategies International, Bonn; Center for International Environmental Law. New York Times, November 26, 1999, C4 at col. 2.

See Andrew Pollack, "Biological Products Raise Genetic Ownership Issues," The New York Times, November 26, 1999, A1 at col. 1.

An Update on the Calabresi-Melamed Literature on Remedies

Recall that in Chapters 4 and 5 we examine the famous Calabresi-Melamed theory of efficient remedies for protecting property interests. In a nutshell, that theory suggests that when the transaction costs between the property owner and the potential infringer are low, bargaining is the most efficient method of resolving whether the owner values the right to be free from infringement more or less than the potential infringer values the right to make use of the owner's property. And, therefore, the more efficient remedy is injunctive relief. An award of injunctive relief against the infringer may be seen as an affirmation of the owner's interest and an instruction to the parties to leave the court and use bargaining to determine the relative valuation problem. By contrast, when the transaction costs between the parties are high, no bargain can take place, and the court must step in to perform a "hypothetical market transaction." They do this by determining the minimum price for which the owner would have been willing to sell to the infringer the right to use or invade his property. That amount is called "compensatory money damages."

On pp. 105-106 of Chapter 4 we mentioned some important new literature on this famous result in law and economics. Since the publication of the third edition of Law and Economics, an additional important study of this matter has appeared -- Ward Farnsworth, “Do Parties to Nuisance Cases Bargain After Judgment? A Glimpse Inside the Cathedral,” 66 U. Chi. L. Rev. 373 (1999).

In that article, Professor Farnsworth "examines twenty nuisance cases and finds no bargaining after judgment in any of them; nor did the parties’ lawyers believe that bargaining would have occurred if judgment had been given to the loser. The lawyers said that the possibility of such bargaining was foreclosed not by the sorts of transaction costs that usually are the subject of economic models, but by animosity between the parties and by their distaste for cash bargaining over the rights at issue."

Naturally, Professor Farnsworth asked the lawyers why they though that no bargaining occurred after judgment. The lawyers cited two impediments to post-judgment bargaining. "First, in almost every case the lawyers said that acrimony between the parties was an important obstacle to bargaining. The parties in these cases often thought that their adversaries were behaving in ways that were unreasonable, discourteous, and unneighborly. Frequently the parties were not on speaking terms by the time the case was over (sometimes much earlier). ... The second recurring obstacle involves the parties’ disinclination to think of the rights at stake in these cases as readily commensurable with cash."

The Appendix to the Article contains brief descriptions of the twenty cases that Professor Farnsworth considered.

1. Would the sample cases that Professor Farnsworth considered bias his conclusions in that he only considered cases that went to a final judgment?

2. You should also take a look at the underlying cases to see if, according to the factors we enumerate in the book, the bargaining costs were high or low.

4. What role might the lawyers have played in facilitating a post-judgment bargain, even where the parties were extremely hostile to each other?

5. Finally, consider again the point that Robert Ellickson makes -- in his marvelous article ("Of Coase and Cattle: Dispute Resolution Among Neighbors in Shasta County," 38 Stan. L. Rev. 623 (1986)) and again in Order Without Law (1991) -- namely, that neighbors tend to resolve disputes according to a norm of "neighborliness." They resort to litigation only when that norm has broken down. An implication of this finding might be that because the norm has broken down, we should not expect any bargaining to occur once someone has made resort to litigation. Does that observation affect the normative force of the Calabresi-Melamed theory?

One form of intellectual property to which we have heretofore given insufficient attention is trade secrets. A trade secret is any information "used in one's business" that gives its owner "an opportunity to obtain an advantage over competitors who do not know or use it." Restatement of Torts Sec 757, Comment b (1939). [Interestingly, the Restatement of Torts (Second) did not include misappropriation of a trade secret as a tort, apparently in recognition that the topic was no longer subject to general tort law principles.] The National Conference on Commissioners on Uniform State Laws published a Uniform Trade Secrets Act in 1979, which has been enacted, with modifications, in 40 states and the District of Columbia.

There are three elements to a claim of misappropriation of a trade secret. First, the information covered must be something covered by trade secret law. This has become a relatively meaningless distinction in that almost any valuable information is now protectable as a trade secret. The only substantive requirement is that the information must truly be a secret and not commonly known in a trade or industry. (As we shall see, a trade secret does not have to be unique in order to receive protection.) For example the Restatement (Third) of Unfair Competition defines a trade secret as follows:

Second, the owner of the trade secret must show that the defendant wrongfully acquired the trade secret. As we shall see, there are legitimate methods of acquiring someone else's trade secret -- such as by purchasing his product, tearing it apart, and thereby learning his production secrets. And third, the owner of a trade secret must demonstrate that he took reasonable precautions to keep the information from being disclosed.

One can imagine two theories that justify legal protection for trade secrets. One is that they constitute intellectual property and are entitled to the protections that all other forms of property receive. The U.S. Supreme Court said, in Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1001-1004 (1984) -- a case in which the Court had to decide if a federal law compelling Monsanto to divulge some trade secrets constituted a taking within the meaning of the Fifth Amendment -- that trade secrets were property: ""[they] have many of the characteristics of more tangible forms of property. A trade secret is assignable. A trade secret can form the res of a trust, and it passes to a trustee in bankruptcy" (1002-1004). An economic justification for this view is that protecting trade secrets as property creates an incentive for possessors of those secrets to innovate. (A classic statement of this view of intellectual property is Edmund W. Kitch, "The Law and Economics of Rights in Valuable Information," 9 J. Legal Stud. 683 (1980).)

An alternative view of trade secrets is that their protection takes justification from a tort theory -- namely, that when someone makes unauthorized use of another's trade secret, he has breached a duty of care that he owes to the owner. Melvin Jager justifies this theory on the fact that it "[maintains] commercial morality." (See 1 Melvin Jager, Trade Secrets Law Sec.1.03, at 1-4.)

Let us consider some questions about the three elements of trade secrets on the basis of the economic view -- that protection of trade secrets is meant to foster innovation.

1. There are some interesting aspects of trade secret protection that bear discussion. First, "strict novelty is not required for trade secret protection." That is, the uniqueness that is a prerequisite for patent protection is not necessary for trade secret protection. But the subject of the trade secret must not be "generally known or reasonably ascertainable." (Merges, Menell, Lemley, & Jorde, at 42. See below for the title of this excellent work). If the purpose of providing legal protection to trade secrets is to spur innovation, why not require novelty?

2. In order to receive legal protection, there is no requirement that the possessor of the trade secret has made an investment in acquiring the trade secret. He or she could have simply stumbled upon it. Again, if the purpose of trade secret protection is to spur innovation, why not require some actual investment in discovering or acquiring the subject of the trade secret?

3. Clearly, a company that reveals a trade secret cannot claim protection from the consequences. Trade secret law does not protect a company against "reverse engineering," which occurs when a competitor purchases the company's product, tears it apart, and thereby discovers the company's trade secret. But doesn't this present a puzzle? If a company embodies a trade secret in its products and those products are for sale in the market, has the company disclosed the secret by marketing its products?

4. In order to protect a trade secret, a company must have taken reasonable precautions against wrongful misappropriation of the secret. Why should the law require the firm to invest in protecting its secret in order to enforce the firm's trade secret? Do we require the owner of real estate to fence his property in order to provide him protection for that real estate? If a firm's employees inadvertently leave the plans for a trade secret on a plane seat and a competitor discovers them, should the law continue to enforce the trade secret?

5. Recall that the property interest in patents and copyrights is time-limited and that in trade- and servicemarks is not time-limited. Trade secrets are like trade- and servicemarks in that there is no specified term of years for which they are endurable. Rather, a trade secret is enforceable for an unlimited term and terminate only upon public disclosure of the secret.

We have relied on the material in Robert P. Merges, Peter S. Menell, Mark A. Lemley, and Thomas M. Jorde, Intellectual Property in the New Technological Age 29-120 (1997).

The music industry is currently in an uproar over the new digital technology "MPEG1 Layer 3" or "MP3." MPEG, pronounced "em-peg," stands for "Motion Picture Experts Group," an entertainment industry group that has established standards for compressing large video and audio files so that they can be of a more reasonable size for transmission across the Internet. The compression preserves the near-CD quality of the audio file. (There is also a standard for compressing images into a far more reasonable size. That standard is called JPEG, pronounced "jay-peg." JPEG stands for Joint Photographic Experts Group, the original name of the committee that wrote the standard. The image at the start of this Web site -- a picture of the cover of the third edition of Law and Economics -- is a JPEG file. The fact that it is compressed makes it possible to load it from our Web site to your computer much faster than if it were in an uncompressed format.)

MP3 allows one to send and receive audio files over the Internet. More importantly, people can now download music from Web sites, usually for free but sometimes for a charge. Some sites -- such as www.mp3.com -- have large libraries of recorded music available for free downloading. This is why "MP3" has become the most popular word search on the web, even surpassing "sex." Naturally, artists, major record labels, and the Recording Industry Association of American (RIAA) has looked at much of the copying of files as copyright infringement and has sought to stop it.

Late in 1999 MP3.com announced a new service. Users could store libraries of their favorite songs at MP3.com under their names and with a password. The thought was that this would allow someone who owned a CD to upload some or all of that CD and store it in MP3 format and then access that music from any computer connected to the Internet simply by typing in their name and password at the MP3.com Web site. In essence, MP3.com argued, they were helping owners of CDs to make backup copies of their CDs that would be available for listening anywhere there was a computer.

The Recording Industry Association of America (RIAA) and major record labels filed a suit against MP3.com in January of 2000, alleging copyright infringement. The CEO of MP3.com, Michael Robertson, argues that the record company cannot control piracy and the recording companies need to create their own solution to the piracy instead of suing his company. “We are building the railroad system to run the music,” Robertson states. “We don’t own the music. We don’t own the rights.” Robertson claims that his company is providing a service that is protected by the “fair use” provisions of copyright law, just as consumers can make cassette copies of CDs they own.

According to Robertson, MP3.com has taken steps to prevent the piracy the recording industry fears by only allowing users to listen to the music on the computer and requiring a physical copy of the CD to add the music to their account. This is in contrast to the way in which many sites have operated.

But one can reasonably wonder how secure this system is. A lot of MP3 files are downloadable even when a person has not purchased a copy of the CD. Napster.com, a company sued by the RIAA in December, 1999, boasted having a collection of over 250,000 songs with that number rolling upward by the thousands every couple of minutes. The problem the industry sees deals with the fact that CD burners -- a device that allow MP3s to be put onto a blank CD and then played like a normal high-quality CD -- allows counterfeit CDs to be made. The artists and their record labels estimate that they are losing $4.5 billion dollars a year in revenue because of the illegitimate copying of their copyrighted works.

The industry has taken several approaches to try to stop this technology from becoming more prevalent. The music industry is currently developing technologies to protect their products. One example is the procedure of "watermarking." Watermarking is a process that limits the number of times a file can be copied.

Congress has sought to help by passing legislation to limit copyright infringement on the Internet. In 1997, Congress passed the No Electronic Theft Act, which provided penalties for those companies trying to achieve financial gain through the illegitimate sale of MP3s. This legislation did not have much affect on companies like MP3.com and Napster.com, which did not charge users for the music on their sites. Congress expanded copyright protection under the Digital Millennium Copyright Act, which required a compulsory license under certain circumstances, including the digital audio transmissions in Webcasts like those used by MP3s.

Another factor that is complicating attempts to limit piracy on the Net is that some bands are using MP3 technology to avoid corporate intermediaries between them and their fans. For example, the band Phish allows its fans to record its concerts, in some cases allowing them to have access to the band's soundboard. Fans then upload the concerts onto the Web and make them available for free or a nominal fee. The popular band, They Might Be Giants, has issued its newest album -- "Long Weekend" -- only in an MP3 format, available for a price from www.emusic.com.

1. How should the music industry deal with the fact that MP3 technology so greatly lowers the cost of piracy?

2. Do you think that the practice at MP3.com of allowing people to store and access copies of their own CDs is a violation of copyright protection? Or is it a "fair use" exception?

3. What effects might the availability of MP3 songs available for downloading from the Internet have on the quality and quantity of copyrightable music produced?

MP3 Downloads Tying Up University Computers

The following article appeared in The Chicago Tribune on February 25. One of your authors teaches at the University of Illinois at Urbana-Champaign and can testify that the clogging of the university's servers to which the article refers happens every evening. .

An epidemic of students downloading pirated music from the Internet has drastically slowed entire university computer systems in Illinois and elsewhere, forcing administrators to block use of a popular music site on the Web and in some cases to cut off students' access to campus Internet systems.

Despite efforts to quell the practice at the University of Illinois at Champaign-Urbana, the problem is so bad that the computer network security official there spends most of his time tracking down copyright violators, handling about 30 cases a week.

The downloading of pirated recordings and videos is a massive and widespread problem for the entertainment industry, hardly confined to college campuses. Yet it is having a particularly acute effect there because of the concentration of young people who have access to universities' large computer networks.

For campus officials, it is not the presumed illegality but the volume of traffic that is creating the worst problems.

High-speed networks at the U. of I., the University of Chicago, Northwestern University and other schools have become so clogged that students and faculty trying to get onto the Internet for academic purposes have found themselves facing long waits.

"It was unquestionably inhibiting" academic activities, said Gregory Jackson, chief information officer for the U. of C., the latest local school to crack down on the music download explosion.

Last week the university imposed a campus ban on the use of a program called Napster, which provides an easy way for users to download music as highly compressed, space-saving MP3 files, a format that allows the transmission of high-quality sound over the Internet.

The program can be downloaded from a Web site run by Napster Inc., an Internet start-up in California's Silicon Valley, which is being sued by the Recording Industry Association of America for allegedly facilitating widespread music piracy.

Jackson said his office, which oversees all campus networks and computers, began noticing an increase in Internet traffic early last fall. Use kept climbing, and a monitoring system identified Napster as the cause of the traffic, he said.

People trying to connect to the Internet for other purposes experienced "very slow responses," Jackson said.

Jackson noted that the most pernicious aspect of the program is that it allows entry to the user's computer by computer users all over the world, transforming it into what is called a server.

"In effect it was using our network as a distribution network to other places. The outbound traffic was causing huge problems," Jackson said.

The university blocked outside users of Napster and e-mailed students telling them to remove Napster and all similar software from their files or face disciplinary action. Internet traffic on the affected pipeline has been down 10 percent since then, Jackson said.

The move followed similar actions by the U. of I. and NU. Other schools that have imposed Napster bans are Boston University, the University of Texas and Oregon State University, according to the Chronicle of Higher Education.

In a statement, Napster spokeswoman Elizabeth Brooks stated: "The support of Napster by college students nationwide has been incredible and we welcome that, but we are also keenly aware of the band-width issues faced by some universities and we are working together to address that."

"It was not really a legal concern, strictly network allocation," said Alan Cubbage, NU's vice president of university relations. "It was hampering other users using it for library access, data and research."

At the other end of the spectrum is Bob Foertsch, security officer for the campus computing operation at the U. of I., who says he regularly lectures students on copyright laws when they are caught downloading large amounts of music.

The problem is: "The taxpayers of the state are paying . . . to satisfy the demands for illegal materials," he said. "We're trying to be responsible to the record industry and the movie industry and federal law."

The university put a ban on Napster in November, after officials noted that traffic it was generating was taking up to 50 percent of space on the campus Internet system. Violators can have their computer connections cut off temporarily.

Yet the fact that Foertsch still handles about 30 music and video downloading cases a week from the 7,500 computers in the school's residence halls shows that the practice has not stopped. There are other programs that students can use that do not clog up the school networks as much, experts say.

The existence of such alternatives--and methods for using Napster so it is not as noticeable--might be why student reactions to the bans have been relatively muted.

"In general people aren't too angry," said Stephen Witt, news editor of the U. of C.'s student newspaper, the Chicago Maroon.

The most outrage came from "hard-core libertarian computer nerds" arguing that concept of copyright is outdated in the computer age, he said.

Other students are likely finding ways to download music illegally without infringing on network space, he said.

"It's a very popular and common phenomenon," Witt said. "Almost everyone who has a computer is somehow involved in the illegal piracy software trade."

In late March, 2000, Napster and Indiana University announced an agreement whereby Napster would chance the method by which students downloaded music from their site without tying up IU's computer network in exchange for which IU would again allow students, faculty, and staff to access Napster from university computers. It is likely that other campuses will join the agreement.

The Distributive Aspect of Takings

In Chapter 5 we discuss the economic aspects of the government's ability to take private property. The U.S. Constitution and the constitutions of all but one state require government to pay "just compensation" to a property owner whose property the government takes for a public purpose. Our discussion -- at pp. 162 - 69 -- stresses the efficiency aspects of the government's power to take private property.

In important recent article -- "Deterrence and Distribution in the Law of Takings," 112 Harv. L. Rev. 997 (1999) -- Professor Michael A. Heller and James E. Krier, both from the University of Michigan Law School, have broadened our understanding of the distributive aspects of taking. (See also, on our Cases page on this Web site, Poletown Neighborhood Council v. City of Detroit.) The fairness or distributive justice aspect of requiring governmental compensation for a taking is best put by Justice Black in Armstrong v. United States, 364 U.S. 40, 49 (1960):

Heller and Krier suggest that we think about the distributional goal of compensation for taking in a general and in a specific sense (just as we think about general and specific criminal deterrence). By specific distribution they mean what the courts do in takings cases today: they simply determine the amounts due to specific individuals. General distribution occurs when there is an argument for the government to pay compensation but not to any specific individuals. This might occur when the taking agency of government pays a sum to a specific governmental fund or to general governmental revenues. Thereby, the agency bears a cost but no particular individual benefits.

The authors use the figure below -- Figure 1 in their Article -- to show that there are four possible combinations with respect to deterrence and distribution associated with governmental action affecting private property owners:

Figure 1: Uncoupling deterrence and distribution, taking and compensation. (From Krier & Schwab)

Heller and Krier contend that the standard analysis focuses only on the possibilities in Boxes 1 and 4 but ignores the possibilities in Boxes 2 and 3. Box 1 covers the situation in which the government regulates some activity but has no duty to pay for any losses that arise, nor is there any specific distribution to the losers. This is the situation of ordinary regulation of private property or activity. (There may be lots of losers and beneficiaries and the transactions costs of toting up the losses and benefits and then taxing the beneficiaries and transferring these to the losers may be too burdensome.) Box 4 represents the normal governmental taking for a public purpose: the government has a duty to compensate and must compensate specific individuals for their property losses. Box 2 is a taking without compensation—that is, a taking without any specific distribution. But there may be a general distribution, where the taking agency of government pays into a specific fund or into general government revenues. Box 3 occurs when there is a case for specific distribution to aggrieved parties, even though there was no taking.

They cite Loretto v. Teleprompter Manhattan CATV Corp., 458 U.S. 419 (1982), as an example of Box 2 (Taking but No Distribution at All). “The dispute there arose from a New York statute requiring landlords to allow the installation of cable television equipment on their buildings. To be sure, the statute did in a sense take something, a little space that belonged to landlords, but the taking was minuscule in terms of both physical dimension (about a cubic foot per building) and monetary value (one dollar per building). The de minimis nature of the taking, in the Court’s view, mattered not at all. Permanent physical occupations authorized by the government are takings, even though they yield significant public benefits and have ‘only minimal economic impact’ on property owners.”

They cite Hadacheck v. Sebastian, 239 U.S. 394 (1915), as an example of Box 3. “The petitioner there had purchased land because it contained a bed of clay valuable for making high-quality bricks. Used for making bricks, the land was worth $800,000, but when the land was put to the next best use, its value plummeted to $50,000. The tract was outside the city limits and far away from any residences, and for all anyone could have foreseen, that would always be the case. But progress intervened, the city grew, and house came to built in the vicinity []. The petitioner’s operations had become a nuisance, an the city enacted an ordinance that put him out of business. When the measure was challenged as a taking, the Supreme Court upheld it as a valid exercise of the police power. No compensation was due.” (1009-1010)

"Hadacheck stands as a clear example of another per se rule in the law of takings: diminution in property value caused by nuisance-control measures never requires compensation. … In Hadacheck, for instance, the neighbors had come to the nuisance, and their doing so had been unforeseeable by all concerned. Beyond this, the petitioner’s activities involved not even the tiniest degree of moral culpability. Why, then, should he have to bear the necessary costs of admittedly worthwhile change.?” (1010)

They cite Just v. Marinette County, 2001 N.W.2d 761 (Wis. 1972) as another example. “There, the Wisconsin Supreme Court held that an ordinance regulating the development of wetlands did not work a taking, notwithstanding that wetlands development had been a standard practice in Marinette County for many years. Once again, the problem with Just is not efficiency; the very fact that wetlands were disappearing no doubt increased their value and justified their preservation. But because the Justs had done nothing more or worse than their neighbors before them, arguably they deserved compensation.” (1011) There’s no need to deter regulation in these circumstances. The government should not be compelled to pay damages in order to deter them. But as a matter of fairness, the losers should be compensated. They say that whether the courts can compel compensation in these cases is not clear. It could be complicated. [But perhaps as a matter of politics or executive order this compensation could be accomplished.] “Indeed, the legislature might be the appropriate forum to implement our suggestions generally, for it is not clear that courts have the authority—or, if they do, the administrative capacity—to carry out general distributions.” (1013)

As a further example of the distributional aspect of takings, they have an extended discussion of Phillips v. Washington Legal Foundation, 118 S.Ct. 1925 (1998).

1. Do you think that courts can, within the duty to pay "just compensation," solve the problems of Boxes 2 and 3? Or must a legislature take this on?

2. Be certain to look at Hodel v. Irving and Poletown Neighborhood Council v. City of Detroit on the Cases page of this Web site.

Professor Fischel on Takings and on Pennsylvania Coal v. Mahon

Law and Economics (3d ed. 1999) discusses taking and regulatory taking at pp. 162-174. There is so much to be said on the economics of those topics that we have taken the opportunity in various entries on this Web site to broaden our coverage.

One of the most important recent additions to the literature on taking and regulatory is a book by Professor William A. Fischel of Dartmouth College: Regulatory Takings: Law, Economics, and Politics (Harvard University Press, 1995). One of us reviewed that book in Law and Social Inquiry -- Ulen, "Still Hazy After All These Years" -- and below we have two brief excerpts from that review. The first explains Professor Fischel's theory of when there should be compensation for a regulatory taking. The second gives his wonderful account of what was really going on in the famous case of Pennsylvania Coal Co. v. Mahon, some excerpts from which you will find on the Cases page on this Web site.

Compensation for regulatory taking should occur only for regulations by local governments of property that is immovable or in inelastic supply.

He justifies this position in two main ways. First, he argues that, at the federal and state levels, the democratic political process works to constrain governmental excess in regulating property so that the regulations that emerge from those governments are not likely to be inefficient. However, democratic processes do not necessarily work to constrain local governments, so that they might regulate in ways that deprive local owners of their property in unconstitutional ways. Second, he argues that compensation for regulatory takings, even at the local level, is not centrally about efficiency but rather about fairness. The implication of Fischel’s hypothesis is that judicial review of regulatory takings should generally defer to federal and state government action and not require compensation for property owners but should scrutinize local government regulations and be prepared to order compensation for property owners as a means of constraining those governments.

Why is Fischel sanguine about the ability of the political process to constrain federal and state governments from excessive regulation but not about the process’ ability to constrain local governments? First, the federal government certainly and the state governments only slightly less so are broadly representative. All those who stand to gain and all those who stand to lose from a regulation have a voice in the process. Politicians respond to these contesting groups in such a manner as to pass only those regulations that have clear net gains. Moreover, politicians at the federal and state levels seek to spread the benefits and costs of any regulation equitably across the population because, at those levels of government, but not at the local level, there are relatively few underrepresented outsiders onto whom the legislatures can shift the burdens of regulation.[1]

Fischel identifies an additional factor that constrains any government from excessive property regulation: resource mobility. If a jurisdiction imposes regulations that excessively deprive property owners of value, then owners may liquidate their assets and move them to more favorable jurisdictions, and new owners will shun a jurisdiction that regulates excessively. Even at the federal level, property owners can avoid the effects of regulation by moving to another country, although this is not an easy outlet. At the state and local levels, a property owner might have a large number of different jurisdictions among which to choose and will presumably move her assets to the jurisdiction in which she will receive the most favorable treatment.[2]

Fischel asserts that participation in the political process and resource mobility do not necessarily provide protections for property owners against excessive regulation by local governments. At the local level, there is greater danger than is the case at the state or federal level that the minority may be at the mercy of the majority. With respect to property, this means that local governments have an incentive to adopt regulations that confer benefits on residents and costs on outsiders or to regulate only property that is immovable or in inelastic supply. Taking outsiders first, although they are not exactly a minority, they are likely to be underrepresented in the political process of the locality. Therefore, they are an easy target onto whom to shift any costs of government action. Municipalities frequently make precisely that calculation in deciding to raise revenue by imposing a tax on hotel and motel guests. This would seem to suggest adopting property regulations that target absentee owners. ...

One of the high pleasures of Fischel’s book is the contextual detail that he provides when discussing famous (and some not-so-famous) cases. He rarely gives the reader just the well-known facts. Instead, he elaborates, not merely to provide detail but typically to show that there is more to the story than we have thought.

The best example is Fischel’s discussion of Pennsylvania Coal v. Mahon. In 1878 the Pennsylvania Coal Company, following the practice of most anthracite mining concerns, had purchased the right to remove coal from beneath the property of surface owners, with the surface owners expressly waiving all claim to damages that might result from the Coal Company’s exercising its subsurface rights. In short, the surface owners had sold or waived the right to support of the surface. Then in 1921 the Pennsylvania legislature passed the Kohler Act, which made it illegal to mine anthracite coal in such a way as to cause damage to surface structures. After passage of the Kohler Act, the Pennsylvania Coal Company brought an action against the state on the theory that the regulation contained in the Act took their property without compensation. The Act prevented the Coal Company from continuing to mine existing subsurface deposits to which it thought it had a clear entitlement. The United States Supreme Court agreed.

Fischel’s discussion of the case is in Chapter 1, “Of Coase and Coal.” The homage to Ellickson’s famous study is apt. Ellickson went to Shasta County, California, to learn how farmers and cattlemen really dealt with the damage caused by straying cattle. This, remember, was the central example of the advantages of bargaining given by Ronald Coase in his seminal piece that outlined the Coase Theorem (1960). Coase suggested that the law did not need to intervene in some disputes in order for property to be efficiently used because the parties themselves could bargain to an efficient outcome. Indeed, the Theorem holds that, when transaction costs are low, an efficient outcome will result regardless of the law. Thus, in the case of farmers’ crops being damaged by the straying cattle of their neighbors, Coase suggested that it did not matter whether or not the law held the cattlemen liable for the damages: cattlemen and farmers would strike a bargain for the efficient contiguous use of their properties as farmland and grazing land. In a result that comes down somewhere between the Coase Theorem and its critics, Ellickson’s study found that social custom, rather than the law, governed the relationships in Shasta County between farmers and cattlemen.

Fischel sought to discover the extent to which the holding in Pennsylvania Coal affected the anthracite coal region of eastern Pennsylvania.[3] He traveled to Scranton, Pennsylvania, and elsewhere, to interview engineers and lawyers and to track down memoirs, newspaper accounts, and other contemporaneous documentation of the early 1920s in an effort to discover the prevailing practices in Scranton with respect to sub-surface support and damage, before and after that momentous Supreme Court opinion. What he found, consistent with Ellickson’s finding about stray-cattle damage, was that social custom, not the law, governed relationships between the coal companies and the owners and occupants of surface structures threatened by sub-surface mining. In short, the holding in Pennsylvania Coal was irrelevant to prevailing practice.

Fischel asks two questions about the practical effects of the holding. First, what had been occurring prior to Pennsylvania Coal that prompted the Pennsylvania legislature to act? Second, and depending on the answer to the first question, what were the effects of the holding on the practices of coal companies?

As to the first question, Fischel shows that, contrary to our expectations, there was not an epidemic of subsidence prior to 1921, when the legislature passed the Kohler Act. Quite to the contrary, “almost all of the apparent goals of the Kohler Act seem to have been accomplished prior to its passage.” (30) This had happened for easily-discernible reasons of mutual benefit. The coal companies and the citizens of Scranton were neighbors; some were employers; many were employees; and social contacts among them were, and long had been, frequent. Even if the companies had retained subsurface rights and landowners had waived their right to claims for subsidence damages, as was frequently the case, there was the strong likelihood of hard feelings among surface owners towards the coal companies, and those feelings would interfere with employment and other on-going social relationships. Long before Pennsylvania Coal and the Kohler Act, the very practical necessity of maintaining good public relations led the coal companies to adopt a policy of routinely repairing surface damage caused by their subsurface mining, regardless of the contractual assignment of liability. According to a retired executive of the Pennsylvania Coal Company to whom Fischel spoke, “[I]f the company caused subsidence to any surface structure, it sent a crew up to fix the damage, at company expense. It did not matter to whom the right of support belonged, although it typically belonged to the company.” (38) So, the Act was irrelevant, as were the consensual agreements between the coal companies and the surface owners. Social custom, in Ellickson’s phrase, had taken care of the problem.

Naturally, this wonderful discovery answers the second question, too. In response to the holding in Pennsylvania Coal we might have predicted a flurry of bargaining activity between coal companies and surface owners for the rights to surface support and an adjustment of coal-mining activity to take advantage of accessible subsurface deposits. But if the prevailing practice in Scranton before the case was for the coal companies routinely to repair subsidence damages, then there would have been no reason to have expected anything different to have occurred after the Supreme Court’s 1922 opinion. And that is precisely what Fischel found. The holding was irrelevant to the behavior of the anthracite coal companies and surface owners in the Scranton area.

That leaves a mystery as to why the Pennsylvania legislature felt moved to pass the Kohler Act and why the Pennsylvania Coal Company was willing to contest the constitutionality of the Act to the United States Supreme Court. Fischel provides answers to both of these questions. As to the passage of the Act, the story involves an improvement in the technology of extraction that allowed the removal of subsurface coal pillars that, under the old technology, would have had to remain as support (absent a waiving of claims for surface damages). There were apparently fears that, regardless of the prevailing practice, surface subsidence would become a more serious issue under the new technology. In addition, and apparently more importantly, one of the seven local mining interests in the Scranton area, Peoples Coal Company, had caused substantial subsidence damage but had become bankrupt and was, therefore, unable to pay for repairs. This state of affairs prompted the legislature to couple a bill imposing an excise tax on anthracite coal with the Kohler Act. The taxes were to be paid by all anthracite coal companies. The revenues were to be dedicated to a public fund to pay for subsidence damages. Pennsylvania Coal Company’s objection was principally to this tax, on the ground that it (and all other companies) had always been willing to pay for their own surface-subsidence damages but that they were not willing to pay for the damages of another company—specifically, those of Peoples Coal Company. (41-42) ...

[1] Fischel is here relying on John Hart Ely’s theory of the political process and judicial review. (See Ely, Democracy and Distrust (1980) and "Another Such Victory: Constitutional Theory and Practice in a World Where Courts Are No Different from Legislatures," 77 Va. L. Rev. 833 (1991).) This is a widely-known and widely-admired position about the appropriate circumstances under which courts should declare legislative acts to be unconstitutional, and it is refreshing to find it cited in an economically-sophisticated treatise. At its core, Ely’s political process theory holds that judges should give great deference to the actions of legislatures. This deference is due because society may safely rely upon democratic political processes to resolve societal concerns by majority vote, save in carefully circumscribed situations, of which the two most obvious are, “(1) where a majority votes to exclude [a minority] from the process or otherwise to dilute their influence on it; [or] (2) where such a majority enacts one regulatory regime for itself and another, less favorable one, for one or another minority.” (Ely 1991: 833, n. 4) The third condition, about which Ely expresses some reservations, is “(3) where other side constraints seem sufficiently important (and vulnerable to majority sentiment) that the framers decide by supermajority vote to designate them in a constitutional document and thereby render them immune to displacement by anything short of a similar supermajority vote in the future.” Id.

[2] Fischel does not make this point, but I think that it follows, and is important, that these two constraining factors on excessive governmental regulation of property—participation in the political process and resource mobility—are themselves inversely related. I mean that a property owner’s incentive to participate in the political process is greater, the less mobile is her property. Indeed, to the extent that this occurs, the political process provides, even at the local level, a flexible means of protection calibrated to the property owner’s stake in being heard.

[3] The Coase Theorem, if applicable, would have suggested that neither the common law nor the Kohler Act would have any effect. Surface owners and the anthracite coal companies would have ordered their relationships in an efficient manner regardless of the law.

Religious Artifact or Just a Rock?

The American Museum of Natural History in New York City has asked a federal court to declare it the rightful owner of a 15-ton meteorite on display in the museum. An Indian group—the Confederated Tribes of the Grand Ronde Community of Oregon—contend that the object, called the “Willamette Meteorite,” is sacred to them, and they want it returned to Oregon.

The meteorite is thought to be 10,000 years old and to have fallen to Earth from the asteroid belt that lies between Mars and Jupiter. It was found in the Upper Willamette Valley of Oregon. The museum purchased the meteorite for $20,600 in 1906 from the Oregon Iron and Steel Company, on whose land the meteorite rested.

The Confederated Tribes contend that the meteorite is a “sacred representation of sky, earth, and water” and that some of their tribes had “adopted” the meteorite in their rituals. The Tribes assert their claim to the object under the Native American Graves Protection and Repatriation Act of 1990. That federal statute allows Native Americans to make claims for their tribal cultural and religious artifacts that are in museums that receive federal money.

The American Museum of Natural History, which has prominently displayed the very large meteorite in its recently opened Rose Center for Earth and Space, argues that the object is not the sort of thing that the legislation was meant to cover. Far from being a “sacred or ceremonial object,” the Museum argues in its pleading to the court that the meteorite is a “natural feature of the landscape.”

Attempts to negotiate between the Museum and the Confederated Tribes have been unavailing, the Tribes arguing that “the only acceptable resolution of this matter will be through the unconditional repatriation of the Willamette Meteorite.”

See Benjamin Weiser, “Museum Sues in Bid to Keep Big Meteorite,” The New York Times, February 29, 2000, A23, col. 6.

How would you resolve this dispute? What are the incentive effects of ruling on behalf of the Confederated Tribes? On behalf of the American Museum of Natural History? Is one decision more efficient that the other? More just?

The following two articles from recent New York Times describe an increasingly perplexing problem of resource allocation -- how to apportion the limited electromagnetic spectrum among the many competing uses. The first article -- from the February 24, 2000, New York Times -- describes the problem, and the second -- from the March 13, 2000, Times -- describes a solution proposed by the Federal Communications Commission. We also include a map of how the spectrum is currently allocated.

Directing Traffic in the Radio Spectrum’s Crowded Neighborhood

By DYLAN LOEB MCCLAIN

In the past decade, an explosion in the number of wireless devices -- cellular telephones, satellite television dishes and pagers, to name just a few -- has led to crowded airwaves.

So far, the range of radio frequencies, which lie between audible sound and infrared radiation on the electromagnetic spectrum, has been able to accommodate all the increased uses.

More and more, though, ensuring that different devices can be used without interference from others is a high-wire act achieved only through technological advances and the careful management of the radio spectrum.

Different uses are allotted different portions of the usable spectrum, from relatively low frequencies (measured in thousands of hertz, or kilohertz) to high-frequency microwaves (measured in billions of hertz, or gigahertz). The result is a crazy quilt of frequency bands reserved for a variety of civilian and military applications, like conventional AM and FM radio, television, ham radio, mobile phones, aircraft and ship communications, and navigation systems. Some frequency bands are left unused to avoid interfering with radio astronomy and other scientific efforts.

The International Telecommunication Union, a United Nations organization that is the intergovernmental rule-making body for the radio spectrum, used to review how radio frequencies were used every 20 years. Since 1992, though, it has stepped up its reviews to every two years to keep up with the demand.

In the United States, the agencies responsible for managing the spectrum have never been busier. They are the National Telecommunications and Information Administration, which handles the parts of the spectrum reserved for the government’s use, and the Federal Communications Commission, which keeps watch over private use.

"As you make more of the spectrum available, more people want to use it," said Norbert Schroeder, a program manager in the office of spectrum management at the national telecommunications agency. Decisions about how to use the spectrum hinge on practical questions -- what it is possible to do -- as well as on public policy, international regulations and economics, Mr. Schroeder said. Technology has come to play a crucial role. "It is only because of the developing technologies that the spectrum has become available at the higher frequencies," Mr. Schroeder explained.

But tapping into ever-higher frequencies has its own problems. The signals at higher frequencies are more easily obstructed by buildings and other structures. To use these frequencies, which start around three gigahertz and are mostly in the microwave part of the spectrum, it is necessary to use relays to strengthen and retransmit the signals or to build very big antennas. Both solutions are expensive, Mr. Schroeder said.

Dale Hatfield, director of the Federal Communications Commission’s office of engineering and technology, said an alternative approach was to use the lower frequencies more efficiently.

Here, too, technology can help. Digital systems are making it possible to compress signals, reducing the width of the frequency bands needed for some transmissions. For example, the frequency bands allocated for two-way radios for taxis and the police used to be 50 kilohertz wide. Now they are 12 kilohertz, and technology is becoming available that could reduce them further, to 6 kilohertz. Still, there are trade-offs. "With the smaller bands, you lose transmission power," Mr. Schroeder said. "But system design can overcome these problems by using relays or repeaters that rebroadcast the signals."

Sharing frequencies is another way to manage the demand. The radio broadcasts of the Voice of America, for example, share frequency bands that are used by the military for training.

Reallocating what is already in use is a possibility. The part of the spectrum used for U.H.F. (ultrahigh frequency) television channels 60 to 69 ranges from 746 to 806 megahertz. That band is not in use in some parts of the country, so part of that chunk of the spectrum in those areas is being sold at auction to companies that want to provide wireless Internet communications for personal digital assistants, cell phones and personal computers. Other parts are being reassigned by the Federal Communications Commission for use by the police and other public safety agencies.

Even with changes and technological developments, spectrum management remains difficult. One strain on the system is unlicensed use. The spectrum from 902 to 928 megahertz, for example, is occupied by signals that do not need to be licensed, like those coming from cordless phones and keyless security systems for doors.

"People a lot of times are using radio spectrum without realizing it," Mr. Hatfield said. And equipment that makes no use of radio frequencies can also cause interference. "The spectrum is a natural resource that can be polluted," Mr. Hatfield said. "A person turning on a hair dryer can cause snow on the TV next door."

F.C.C. to Promote a Trading System to Sell Airwaves

By STEPHEN LABATON

ASHINGTON -- As the airwaves grow ever more congested with modern wireless communications, the federal government is developing plans to open up the spectrum by, in effect, treating its frequencies as commodities to be bought and sold as routinely as pork bellies or soybeans in the open market.

Officials at the Federal Communications Commission say they are preparing rules that would create a trading system in which telecommunications companies of all kinds, from old-fashioned radio stations and telephone companies to purveyors of wireless Internet services, could bid for underused slivers of the spectrum that are already under the control of other companies.

It would be a radical overhaul of the rules governing one of the most valuable, if intangible, forms of property in the new economy: the rights to transmit electronic signals at specific radio frequencies that constitute the spectrum. It would also have profound implications, not only for the telecommunications industries, but for consumers as well.

Under the current system, the federal government licenses each user and regulates what frequencies and signal power can be used. Most times these rights have been sold to the industry, although the oldest license holders got them for free. But they have never been bought and sold in a secondary market like so many bushels of grain.

With the proliferation of cell phones, pagers, satellite services and other wireless devices, the communications agency's top officials have warned that demand is so outstripping supply that it may lead to what they call a spectrum drought, making the scarce spectrum even more valuable to haves and have-nots alike.

Right now, for instance, the agency reports that the volume of traffic on the Internet is doubling every 100 days, a stunning increase considering that telephone traffic has traditionally risen about 5 percent a year. As consumers increasingly reach the Internet through wireless connections, like cell phones and handheld computers, experts fear the heavy use of the airwaves will begin to create bottlenecks and interference that could greatly frustrate the further development of the technology.

"What a tragedy it would be if, right as we're on the verge of the Internet migrating to inexpensive handheld devices and offering real hopes of truly democratizing the technology, the movement would be stymied by overloading the spectrum," William E. Kennard, the chairman of the Federal Communications Commission, said in an interview on Friday.

Kennard, who has been pushing the agency to consider what rules need to be changed to help deregulate the spectrum to foster a new market, said the FCC was just beginning to enable the licensees who own the rights to a given slice of the spectrum to make money from any surplus they have, like parts of the airwaves they may not be using 24 hours each day.

The plan began to take effect last week and will take many months to complete. In a little noticed announcement last Thursday, the FCC released rules for an auction this spring of a slice of the spectrum used by public safety organizations, including police departments and hospitals, as well as railroads.

Described by Kennard as "putting our toe in the water," the rules will reserve some of the frequencies to be auctioned to "guard band managers." They would be able to lease and trade the frequencies they win at the auction to commercial companies or private wireless users, setting up a system that opens the door to brokers who could help match buyers with sellers.

Another auction this year for even more valuable frequencies, those being vacated by broadcasters as they convert to digital television, is also being prepared in a way intended to encourage new spot markets. These frequencies, considered beachfront property by the industry, can be used for a wide variety of technologies beyond television, including cell phone and Internet communications.

If the idea works, the trading of spectrum futures could benefit the telecommunications companies that own licenses and other companies that cannot function without obtaining access to the airwaves. And consumers, in theory, would benefit from more capable communications devices and cheaper bills.

Just as the trade in physical commodities allows farmers to hedge against abrupt swings in price and enables consumers to count on steady supplies, economists and communications experts say a new approach that treated scarce frequencies as a commodity would allow new and older technologies to continue to flourish.

In theory, officials and economists say, the secondary market would be beneficial to consumers in several ways. Economically, it would create a more efficient and predictable way of matching supply and demand, and therefore would result in lower costs for using any equipment that makes use of the spectrum, like cell phones and pagers.

Technologically, it offers the hope of better reception for consumers who have begun to encounter greater interference as the spectrum has become overloaded.

"There is a severe spectrum shortage," said Peter Cramton, an economics professor at the University of Maryland who as chairman of the Spectrum Exchange Group, a Washington company, is involved in a private effort to auction parts of the UHF television spectrum in conjunction with the broadcast auction.

"Consumers want better services," Cramton said. "They want high-speed data. They want a connection every time they place a call on their cell phones, not three-quarters of the time. The needs for users right now are great."

Officials at the Federal Communications Commission described a variety of ways a commodity market in the spectrum would work.

-- News organizations covering political conventions or the Olympics would be able to buy contracts to use a piece of the spectrum during the event to give them extra capacity to beam pictures, sound and data back to their headquarters.

-- A large metropolitan airport congesting the local airwaves around it with everything from air traffic transmissions to car rentals and cell phone users would be able to reserve space from other spectrum users who are not fully using their space during peak hours.

-- Nationwide cell telephone companies would be able to buy and sell pieces of the spectrum in different regions of the country depending on the available supply and the demands of their customers.

Kennard and executives of some companies that are involved in creating markets for fiber-optic cable use said they envisioned a secondary market that could be set up by brokers on the Internet, much the way a secondary market exists for reserving the excess capacity of fiber-optic cable. They said the market would exist on a Web site listing what is available from licensees to trade to other companies who would want to buy or lease space, an eBay for telecommunications companies.

Companies like Arbinet Communications, Enron, and The Williams Cos. now act as brokers to essentially buy and then sell unused telephone time on fiber-optic cables.

At a telecommunications conference sponsored by Credit Suisse First Boston in New York last week, executives from some of the companies now involved in trading unused telephone time said that the FCC's proposal held great promise, but that it would take time to develop.

"The beauty of wireless is that the current system for trading it is so inefficient," said Eric L. Rabb, managing director of AIG Telecom, a unit of the American International Group that acts as a broker for access to time on fiber-optic cable. "What we apply now to the wired world we can apply to the wireless."

Officials at the FCC say they are planning a forum this spring on ideas and rules changes for encouraging spot markets for the spectrum.

"Just through our licensing records we already have the most comprehensive list of potential sellers," Kennard said. But even as it seeks comment on changing the rules, he said, the agency is beginning to take steps beyond just the way it structures spectrum auctions to encourage the new marketplace.

This week, for instance, the agency plans to begin writing rules for a new technology that could have a profound effect on a secondary market. The technology is known as digitally defined radio, and it would allow new kinds of radios and cell phones with special software to seek out different and broader frequencies than current radios and phones.

The military has expressed interest in digitally defined radio because it would enable radios to avoid being jammed by an enemy by searching for a clean signal. But other companies are also developing products that rely on the technology.

By making broader use of the spectrum, digitally defined radio would also encourage telecommunications companies who are not using all of their licensed frequencies to their full capacity to lease their underused portions in a secondary market.

Reduce the Term of Some Patents?

In 1994, as part of the final phase of the agreement to establish the World Trade Organization, Congress changed the United States patent law. From January, 1995, on a patent, if granted, would be good for 20 years from the date of filing the application. Prior to that date, U.S. patents were good for 17 years from the date on which the patent was granted. This change brought the U.S. into alignment with the practice in the rest of the world.

Since the mid-1990s the U.S. Patent and Trademark Office (PTO) has been willing to grant (and courts to enforce) so-called "business process" or "business methods" patents. These are patents on methods of doing business. (We shall soon have on the Cases page of this Web site a redacted version of a famous case on business methods -- State Street Bank & Trust Co. v. Signature Financial Group. There are also questions about the matter of software patents. We'll also have an entry on this page about those.)

Two of the most famous recent "business methods" patents were those granted to Amazon.com, the seller of books, music, videos, and more. To speed customer ordering through its Web site, Amazon developed a very rapid process called "1-Click Ordering." Customers, having entered information on shipping address, billing address, method of payment, and the like, could turn on the "1-Click Ordering" simply by pointing their mouse device at the appropriate icon. That action immediately entered an order for the item the customer desired. The second patent was for an "Internet-based customer referral system." Under that scheme one Web site puts an ad for another Web site on its Web page and receives a portion of any sale that results from the referral.

Consider the consequences of one of these patents. Late in 1999 Amazon moved to block Barnesandnoble.com from using a rapid ordering method very similar to "1-Click Ordering." A court agreed to enjoin Barnesandnoble.com from infringing on Amazon.com's patent.

Both Amazon's original patent and its seeking to enjoin Barnesandnoble.com from using a similar device created a great deal of controversy within the e-commerce industry. Tim O'Reilly, the founder chief executive officer of O'Reilly & Associates, a California firm that publishes computer books and is a leader in the so-called "Open Source" movement, posted a letter on his Web site that was very critical of the Amazon "1-Click" patent. (See, for example, "Patently absurd claims: clueless courts and a broken patent system help Amazon," Randall E. Stross, U.S. News & World Report, March 20, 2000, p. 56.)

Jeff Bezos, the chairman of Amazon, has taken the criticisms to heart. In a letter posted on Amazon's Web site (www.amazon.com) Bezos called for reform of the system that grants software and business methods patents. Bezos contends that in an industry that moves as quickly as does e-commerce 20 years is too long for a patent to be enforceable. He calls 20 years "a silly length of time for software patents." Instead, he suggests that software and business methods patents last for three to five years and only after a period of public comment on the patent application.

1. Should patent life be adjusted for different industries according to a determination of the rate of innovation in the industry? Specifically, in vibrant sectors where innovation is rapid, should patent life be shorter than in stagnant sectors where innovation is slow? How are those sectors to be determined?

2. If the U.S. PTO was to continue to grant 20-year patents to novel software and business methods, would that substantially hurt the ability of rivals to innovate? Why or why not?

3. If Mr. Bezos really believes that a 20-year life for his "1-Click" patent is too long, does he really need to have the U.S. patent law changed? What else might he do? Are these alternatives to using a full 20 years open to all inventors or only to software and business methods patents?

4. Would you support Mr. Bezos' call for shorter patent life for software and business methods patents? What about allowing renewal of the patent for a second three-to-five-year term? If you would allow renewal, what should be the criteria for renewal? Would you allow renewal for a third three-to-five-year term? On what criteria?

You might also wish to look at James Gleick, "Patently Absurd," The New York Times Sunday Magazine, 44-49 (March 12, 2000). (We're grateful to Sam Gove for bringing this article to our attention.) Gleick comments extensively on Amazon's "1-Click Ordering" patent and criticizes the Patent Office for the abandon with which, he believes, they are awarding business methods patents to e-commerce firms for what are really routine operations. In addition to its vigorous and interesting point of view, there is much other interesting detail in the article. For example, when the first U.S. patent law took effect in 1790, the patent examiners were three: Secretary of State Thomas Jefferson, Secretary of War Henry Knox, and Attorney General Edmund Jennings Randolph. Gleick also comments on the accelerating rate at which the U.S. Patent Office has been granting patents. It took that Office 46 years to grant the first 10,000 patents. Today the Office grants 10,000 patents every three weeks. The Patent Office has been partially privatized since 1991 in that the federal government no longer subsidizes the Office through general revenues of the federal government. Rather, the Patent Office now pays for itself through filing and other fees.

Napster-Bertelsmann Deal (MP3)

At several points above we have dealt with the potential copyright problems that Napster and other on-line music-sharing arrangements create. And we have mentioned that the action brought by five major music companies against Napster for (federal) copyright infringement. A District Court injunction against Napster was stayed, pending appeal to the Ninth Circuit Court of Appeals. An opinion from that Court should be handed down soon and will be reported here.

But in early November there was a dramatic development outside the courtroom with large implications for the lawsuit. Bertelsmann, AG, is a large international publishing company. Its BMG music unit is the fifth-largest music label with such artists as Carlos Santana, Whitney Houston, and 'N Sync. BMG is one of the original plaintiffs in the action against Napster.

Bertlesmann and Napster will together develop a "secure membership-based service." There were no details about the service -- perhaps because the partners have yet to develop them. BMG will withdraw as a plaintiff as soon as Napster develops a for-pay version of its service that protects copyrightholders. Bertelsmann will loan Napster money to develop the new service and will hold a warrant that may become an equity stake in Napster.

Napster is an on-line music-sharing service founded in 1999 by Shawn Fanning, a 19-year-old college dropout. Napster has 38 million users.

(See "Bertelsmann, Napster Agree on Service," Wall Street Journal, Nov. 1, 2000. A3, col. 4)

Material and U.S. Patent	Owner	Source and Traditional Use	Status
Ayahuasca. Gives rights over the plant in the U.S.	Loren Miller, International Plant Medicine	Ecuador. Vine cultivated in the Amazon Basis; shaman use hallucinogens in tribal rituals.	Preliminary decision to revoke patent.
J’oublie. Covers brazzein, a plant protein 2,000 times sweeter than sugar.	University of Wisconsin.	Gabon. The plant’s berries are traditionally used as a sweetener.	Patent claims still valid.
Basmati rice. Covers marketing of certain varieties if grown in the Western Hemisphere.	RiceTec.	India and Pakistan. Developed and grown by farmers in the Punjab region.	Patent claims still valid.
Turmeric. Covers marketing rights for its use in healing wounds.	University of Mississippi Medical Center.	India. Root has traditionally been used to treat sprains, inflammation and surface wounds.	Canceled after challenge from India. Refiled.
Bitter melon. Covers rights to a protein for anticancer and anti-HIV use.	National Institutes of Health, New York University, American Biosciences.	China. Widely eaten as a protection against infection and tumors.	Patent claims still valid.

		Should there be payment by the government?
		No	Yes
Should there be specific distribution to claimants?	No	Box 1 Ordinary regulation	Box 2 Taking / no compensation
Should there be specific distribution to claimants?	Yes	Box 3 No taking / compensation	Box 4 Ordinary taking

Property Law

Cultural Property: The Elgin Marbles