Property Law

Index to Sections on Property Law

Cultural Property: The Elgin Marbles

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?  

    Consider the case of the Elgin Marbles.  

    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.  

"Ottoman soldiers who had used the Acropolis as their Citadel for centuries, and who had used both the Propylea and the Parthenon as powder magazines, would have had another decade and a half to expose the Marbles to the kind of danger that had already led to ruinous explosions in both of those structures.  The Propylea was shattered when explosives stored in it by the Ottomans were struck by lightening.  The Ottomans then moved their powder magazine to the Parthenon and it exploded when hit by a Venetian cannon ball.  The little temple of Athena Nike was deliberately razed by the Ottomans to make way for an artillery installation.  Individual Ottoman soldiers could have continued to break up marble objects to build walls or to burn for lime.  The growing trade in antiquities, fed by Greeks as well as by Ottomans, would have dispersed many of the Marbles to individual collections of uncertain fate (many individual works in effect disappeared in this way, taken by some traveler to Europe and eventually lost or discarded or rendered anonymous).  Elgin's removal had the added merit of keeping works of major importance together in a way that ensured full knowledge of their origins."  (Merryman at 1906-07.)  

    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: 

"The values of cultural internationalism -- preservation, integrity, and distribution / access -- lead in different directions.  The most powerful of them, preservation, does not under present circumstances advance the Greek cause, since there is no basis for arguing that the Marbles would be safer in Athens.  The integrity argument favors reuniting the Marbles with the Parthenon, but at present that is not possible without exposing them to unacceptable hazards.  There are no developed criteria for applying the distribution / access concern, but it does not appear that the present distribution of Greek antiquities argues strongly for returning the Marbles to Athens."  (Merryman at 1921.)  

    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.)  

Further Notes:

     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.  

Questions:

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?  

    Our thanks to Sean Odendahl for his help with this material.  

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 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).  

Questions:  

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?  

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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). 

Questions:

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.]  

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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):  

This gold was deposited on the ocean floor, 8,000 feet below the surface and 160 miles off the South Carolina coast, when the S.S. Central America sank in a hurricane on September 12, 1857.  The precise whereabouts of the wreck remained unknown until 1988, when it was located by the Columbus-America Discovery Group [].  This enterprise has since been recovering the gold, and last year it moved in federal district court to have itself declared the owner of the treasure.  Into court to oppose this maneuver came British and American insurers who had originally underwritten the gold for its ocean voyage and then had to pay off over a million dollars in claims upon the disaster.  Also attempting to get into the stew were three would-be intervenors who claimed that Columbus-America had used their computerized ‘treasure map’ to locate the gold.  

    The Central America was a [] three-decked, three-masted sidewheeler.  Built in 1852, and launched the following year, she carried passengers, mail, and cargo between Aspinwall, Colombia (on the Caribbean side of the isthmus of Panama), and New York City, with a stopover in Havana.  Most, if not all, of her passengers were headed to or from California [with their take from the California Gold Rush].  …  It has been said that the ship carried one-third of all gold shipped at that time from California to New York. 

   In August of 1857, over four hundred passengers and approximately $1,600,000 (1857 value) in gold (exclusive of passenger gold) left San Francisco for Panama aboard the S.S. Sonora.  …  The travelers and the cargo reached Panama without incident, and they crossed the isthmus by rail.  On September 3, over six hundred people cam aboard the Central America, as well as $1,219,189 of the gold shipped on the Sonora, the remainder being shipped to England aboard a different vessel.  The Central America first headed for Havana, which was reached on September 7.  There, the ship lay over for a night, and some of the passengers debarked to catch another vessel for New Orleans.  On September 8, under clear skies, the Central America left Havana for New York, carrying approximately 580 persons and her golden treasure.  [They sailed into a storm.]  As the storm worsened around the Central America, a leak developed and soon water was rushing into the boat.  The water extinguished the fires in the ship’s boilers, and this in tern caused the ship’s pumping system to fail.  All able male passengers began a systematic bailing of water out of the ship, but it was to no avail; after thirty frantic hours, the boiler fires would still not light and the water level continued to rise. 

    Knowing the situation was hopeless, Captain William Lewis Herndon managed to hail a passing ship, the brig Marine, and one hundred persons, including all but one of the women and children aboard, were safely transferred to the other ship.  Time and conditions would not allow for any more transfers, however, and shortly after 8 pm on September 12, the Central America began making its quick descent to the bottom of the ocean. 

    After being flung into the sea, many of the men managed to come to the top and float there, desperately holding onto any buoyant material available.  Six to nine hours after the sinking, fifty of these men were rescued by the Norwegian bark Ellen.  …  In all. 153 persons were rescued, while approximately 425 lost their lives.  Also lost were hundreds of bags of mail and the $1,219,189 in gold. 

    The commercial shipments of gold had been insured, though, and the insurance underwriters began advertising in the newspapers that they would pay off their commitments upon the proper proofs being presented.  Approximately one-third of the treasure had been underwritten by New York insurers while the rest was underwritten in London.  Without doubt, most, if not all, of the claims were promptly paid off by the underwriters. 

    Under applicable law, then and now, once the underwriters paid the claims made upon them by the owners of the gold, the treasure became theirs.  …  [There were contemporaneous attempts at salvage, but nothing came of them.]  While the underwriters negotiated with several groups about the salvage, they did not enter into any salvage contracts nor did they relinquish any of their rights to the gold. 

    One of the groups that contacted several of the underwriters was Plaintiff Columbus-America Discovery Group, the eventual salvor.  Columbus-America asked the underwriters to convey to it any claims they might have regarding the gold, but this was not done.

    Another group that was interested in salvaging the gold was Santa Fe Communications, Inc. [], whose interests are now owned by Plaintiff-Intervenors Harry G. John and Jack R. Grimm.  [Footnote 1: John is an heir to the Miller Brewing Company, while Grimm is a multimillionaire Texas oilman who has in the past led searches for Noah’s Ark, the Loch Ness Monster, and the Titanic.  [John died during the pendency of subsequent litigation.]]  In 1984, Santa Fe paid Plaintiff-Intervenor Columbia University $300,000 for Columbia’s Dr. William B. F. Ryan to conduct a sonar search over a 400 square mile area of the Atlantic Ocean.  During his sonar search, Dr. Ryan identified seven ‘targets’ on the ocean floor.  Of these targets, he found only one, target #4, to be a good candidate for being the Central America.  Santa Fed, though, did not further pursue the matter, and on December 31, 1984, it transferred to a Catholic monastic order, the Province of St. Joseph of the Capuchin Order—St. Benedict Friary of Milwaukee, Wisconsin [], any and all rights and interests arising out of its undersea salvage operations.  It now appears that target #4 was indeed the Central America. 

    The contract between Santa Fe and Columbia provided that Columbia would be able to freely publish the results of the sonar survey, but only after keeping such results confidential for a year. 

    In 1987, after much effort and expense, Columbus-America believed it had found the Central America.  Thus, on May 27, 1987, it filed, in the United States District Court for the Eastern District of Virginia, an in rem action against the wreck, alleging that, under the law of finds, it was its ‘finder,’ or, alternatively, under the law of salvage, its ‘salvor.’  Columbus-America then asked for and received, on July 17, 1987, a preliminary injunction enjoining the other would-be salvors from operating within a specified area (‘injunction box #1’) of the sea.  Injunction box #1 covered an area which was approximately thirty miles from Dr. Ryan’s target #4. 

    After receiving this injunction, Columbus-America spent two years attempting to salvage the wreck they thought was the Central America—this time was also spent battling the other would-be salvors in court.  Plaintiffs recovered several artifacts, as well as a good many lumps of coal, but at some point they recognized that they were salvaging the wrong ship.  They then began to look at other likely targets, and, eventually, they discovered the right ship.  Thus, Columbus-America requested the Court to rant them, by permanent injunction, exclusive control over the area round this new find, and this was done through an Order entered on August 18, 1989 (‘injunction box #2’).  Within the area of injunction box #2 was Dr. Ryan’s target #4. 

    Since 1989, Columbus-America, through its invention of a submersible robot which can pick up objects ranging from small gold coins to a ship’s anchor weighing thousands of pounds, has been salvaging objects left on the ocean floor by the Central America.  …   

    On September 29, 1989, many of the original underwriters of the gold, plus the Superintendent of Insurance of the State of New York for several insurance companies now defunct, filed claims with the district court asserting that they were the proper owners of the gold.  …   

    Three days before trial, John and Grimm moved to intervene, as did Columbia [University] two days later.  The intervenors claimed that Columbus-America must have used the information from Dr. Ryan’s sonar survey in locating the Central America, and thus they wished for a percentage of the recovery.  Two weeks earlier, John had bought back for $10 any claims the Capuchins would have on the Central America.  When Santa Fe had originally donated their rights to the monks in 1984, the Capuchins recognized the gift as worthless, and John did nothing to enlighten them on the discovery of the ship or the upcoming trial.  After later realizing what John was up to, though, the monks must have protested, for on April 10 both John and Grimm signed an agreement with the Capuchins giving the Order one-third of any judgment they (John of Grimm) would recover.  …  

    On August 14, 1990, the Court found for Columbus-America on all the issues, dismissing the claims of the underwriters, Columbia, John, and Grimm.  Columbus-America Discovery Group v. The Unidentified, Wrecked and Abandoned Sailing Vessel, 742 F.Supp. 1327 (E.D. Va. 1990). 

    The underwriters and the intervenors now appeal.

    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.  

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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?  

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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?  

Thanks to Jon Birmingham for much of this information. 

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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. 

Disputed Patents of 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.   

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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.

    In evaluating this evidence, you might ask yourself these questions:  

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.   

3.  Should animosities between parties count as transaction costs?  

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?  

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The Economics of Trade Secrets

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: 

"A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others."  

    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.  

Questions:

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).  

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MP3

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. 

Questions:

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?    

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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.  .  

Web music clogs college computers

By J. Linn Allen

Tribune Staff Writer

February 25, 2000

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."

The issue of copyrights often is not the main concern of university officials.

"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."  

Note:  

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.  

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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):  

The Fifth Amendment's guarantee that private property shall not be taken for a public use without just compensation was designed to bar Government from forcing some people along to bear public burdens which, in all fairness and justice, should be borne by the public as a whole.  

     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).  

Before 1980, the only checking accounts that federally insured banks could provide paid no interest.  Lawyers used the accounts anyway for pooling and disbursing certain funds entrusted to them by or for clients, namely any funds too nominal in amount, or held for too short a term, to earn interest net of expenses in a savings account.  (Savings accounts were usually used for large amounts held on behalf of individual clients.)  Beginning in 1980, the rules were changed to permit federally insured interest-bearing checking accounts for some kinds of deposits; lawyer trust funds could earn interest if charitable organizations received the interest.  States moved quickly to capitalize on the new rules by enacting Interest on Lawyer Trust Account (IOLTA) programs.  The programs provide that any client funds otherwise incapable of earning interest (that is, nominal and short-term accounts) are to be pooled together in IOLTA accounts.  The interest thereby earned by the aggregated funds is then distributed to nonprofit organizations that render legal services to the poor.  Every state and the District of Columbia has such a program, and in over half of them attorney participation is mandatory. 

    The plaintiffs in Phillips challenged Texas’s mandatory IOLTA program on several constitutional grounds, but the only question that reached the Court, and the only one that shall concern us here, was whether the interest on IOLTA accounts is private property for purposes of the Takings Clause.  The district court rejected the plaintiffs’ claims on summary judgment.  …  A panel of the Court of Appeals for the Fifth Circuit nevertheless disagreed, choosing to apply a different but no less rigorous logic.  The principal amounts deposited into IOLTA accounts are obviously the property of the various clients who handed over the money.  Under Texas law, the Court observed, the general rule is that ‘interest follows principal’; therefore, the interest must be the clients’ property as well.  The Supreme Court, in an opinion by Chief Justice Rehnquist, affirmed.  (1013-14) 

Questions:

1.  Do you think that courts can, within the duty to