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Midterm - David D. Friedman's Home Page

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I am supposed to remind you to
Fill out theLSSSEWhich stands forLaw School Survey of Student Engagement???
Intellectual Property
Copyrightis long lastingandeasy to get,patent short andhard. Why?Copyrightis bettersuitedto be propertybecauseIt is easierto mark and observeboundariesAccidentalviolationis unlikely, for the same reason that …There is noproblem of depleting the commons.Butall of this is for protection against literal copyingLook and feel and derivative works raise more of a problemBecause they have fuzzier boundariesPatent is worse suited to be property becauseBoundariesare fuzzyand invisiblePatent racesare evidence of a problem of depleting the commons of ideas to be invented
What is the Right Incentive to Create IP?
It depends on the value produced by the IPPatentand copyright provide an automatic solution tothe problem of setting the reward sinceHowmuch people will pay you to use itevidenceof itsvalueBut thereare costs to rewarding innovation in that wayThe deadweight cost of monopoly pricingThe transaction costs of treating ideas as property rather than commonsItalso depends on howlong before someoneelse would produce the same IPWhy notpermanent copyright protection, since nobody else would ever write my book?There is a tradeoffbetween a little moreincentiveandthe deadweightcost of monopolySopatent term should be shorter than“set reward equal to value produced” implies
The Exceptions to Copyright Protection
Scenes a faireMergerof idea and expression doctrineIf there is only one way, or a few ways, of saying somethingSaying something in that way is not protectedBecause copyrighting that way would deplete the commonsFair Use exceptionSmall infringements cost more to transact over than they are worthAnd some uses are believed to produce positiveexternalitiesButthere is a problem of fuzzy borders
Requirements for Patent Protection
NoveltyIf the idea is already knownNothing of value has been producedNon-obviousnessIf anyone who needs the idea can easily hire someone to produce itNot much of value has been producedUsefulness.Old definition: Not perniciousStory: “a new invention to poison people, or to promote debauchery, or to facilitate private assassination, is not a patentable invention”Argumentfor the old definition: If the inventor wants to waste money getting a patent on something nobody wants to do, why should we object?New definition: Useless means not useful.Yet. No reason to reward premature inventionOne reason: Knowing a chemical can be synthesized is a reason to look for uses
Kitch’sProspect Theory of Patent
There are two reasons to give a prospector rights to what he findsOne is to reward him, give him an incentive to find itThe other is to create a property right that can be used to better develop what he findsEdmundKitchargued that the same applied to patentsAn invention requires further development, other inventionsThe patent holder has the incentive and ability to coordinate that processJust as homesteading turns public land into private propertyMaking it possible to invest in improving itCoordinate uses of itPatents viewed as homesteading idea space
The Argument AgainstIntellectual Property
In the 19th century, there were serious arguments against IPSome made by people who saw it as inconsistent with liberal free market principlesSwitzerland did not have patent law until 1907Boldrinand Levine,The Case Against Intellectual MonopolyOne argument is the deadweight loss of charging when MC is zeroIn addition, they argue that patent law retardsinnovationJustthe opposite ofKitch’sapproach, arguingcommons are better for idea space
Computer Law
Is a computer program a writing?Thecourtsdisagreed,Congress stepped in to legislate the answerThe right solution but the wrong questionNot “is a program a writing?” butDoes a program have the characteristics that make copyright appropriate for writings?Clean room reproduction of thePC ROMs:Copyingwould violate copyright, but independent creation didn’tSo they used the clean room approachCould theyhave copied and claimed thescenes a fairemerger exceptionThere being only one way of writing the ROMs that would run the PC programs
The Death of Copyright
Nowthat anyone can easily copy digital works and share themDigital copyright is largely unenforceable. Possible exceptions?Software used by large organizations whose employees could betray them for piratingFancy digital rights management schemes to make sharing harder, but…Any protection of a work fully revealed in one use is broken by the analog holeWhatsort of works are not fully revealed in use?A database such as WestlawA game such as World of WarcraftSo how do you get paid to create IP?Patronage–the 18thcentury solutionCharity–Patreon. The same technology makes small scale donations easy.Tie-ins—web your books for free, charge for speeches or consultingOther ideas?
Examples of IP That Already Works That Way
The academic worldYourreward is in the position or promotion you get from publicationMore generally the reputation you getOpen source softwareContributing to a project helps establish credentials as a programmer, gets you a jobFirms that use open source software want an employee who is part of the projectTheWebPut up web pages, blogs, to spread ideas, get reputationGet paid by putting advertisements on them
Trade Secret
What is it?Law that gives the holder of a trade secret rights against someone who gets it wrongfullyProvided the holder made reasonable efforts to protect itReverse engineering is not wrongful. Getting an employee to reveal the secret is.What about aerial photography of a factory under construction?Why is itNota property rightNotunnecessary because of patent lawConsider itasless of a onesize fits allapproach than patent lawSuppose I believe my invention will not be duplicated for a hundred yearsPatent law only gives my 14 years (or whatever it then is) of protectionI might be able to keep my trade secret for a century.The formula for Coca Cola has been a trade secret since 1891Suppose I think my invention is non-obvious, the patent examiner doesn’tConsider it as away of making unpatentedinventionsless costly toprotect
Contract
Reputational Enforcement
In a world without legal enforcement of contractsIf I break a contract, other people won’t want to contract with meWhich is a punishment, but that is not why they are doing itIt is a side effect of third parties wanting to protect themselvesIt depends on their knowing I was the one responsibleI claim it was your faultIf third parties cannot easily tell, they avoid both of usSo you, anticipating that, don’t accuse me of breaking the contractAnd reputational enforcement doesn’t workOne solution is to lower the information cost to third partiesIf we have agreed in advance to arbitrationAll they have to know is the arbitrator’s verdictAnother is to post a bond with a trusted third party arbitratorIf he concludes that I broke the contract, the bond forfeits to youThis also works against a party with no reputation to lose—perhaps a one time transactionProvided the arbitrator has a reputation
Contract Enforcementin Cyberspace
Public key encryptionI create a pair of keys, long numbersA message encrypted with one can only be decrypted with the otherI make one key public, keep the other privateTo send me secret messages, you encrypt it with my public keyTo digitally sign a message, I encrypt it with my private keyWe agree on a contract and an arbitratorBoth of us digitally sign the contractAnd it includes the public key of the arbitratorI break the contract, you appeal to the arbitrator, he rules against meHe writes up his decision, signs it using his private keyI put that result online with your name on itAnyone searching for information on you finds itAnd can prove, by checking the signaturesThat the arbitrator I agreed on in advance ruled against meThus reducing the information cost to third parties to near zero
Imperial Chinese Solution
Design contracts to minimize the cost to third parties of knowing who broke themOwnership goes with possessionCaveat emptor—I am responsible for checking goods when I buy themPut the temptation to breach on the party with a reputational incentive not toIf the seller can be trusted, pay in advanceIf the buyer can be trusted, pay on receipt
So why do we have contract law?
To decide if there is a contractCourtsmay not wish to enforce all contracts either becauseThey do not trust individuals to act in their own interest (paternalism) orThey believe some contracts have large effects on third partiesBecausethere is never enough small print to cover everythingIf the court’s default rules are known, parties can leave things outUnless they disagree with the defaultrule
The Case for Freedom of Contract
Coase Theorem in a low transaction cost contextAny change that helps you more than it hurts meCan be combined with a side payment to make both of us better offUnequal bargaining power:What about a monopoly seller?It still pays me to include features that benefit you more than they cost meAnd charge for themButproductcharacteristics, contractterms, can be used for price discriminationThat mightproduce an inefficientcontract orproduct design, but …Has little to do with unequal bargaining powerPriceconstraint—apartment under rent controlIf the controlled price is less than the market priceIt pays the landlord to lower quality if doing so saves him moneyEven if it is inefficientSo there is then an argument for mandatory terms (or abolishing rent control)
The Case Against Freedom of Contract
Contracts that impose costs on third partiesHiring a hit manContracts in restraint of trade—cartel agreementsContracts by people not competent to act in their own interestChildren, lunaticsSpendthrifts?Contracts the court believes could only have been signed by people not competent to …That assumesthe court can judge the interest of the party better than he canConsider the case of liquidated damagesThe court will not enforce what it interprets as a penalty clauseLiquidated damages >>actual damagesBut that’s just a privately negotiated propertyrule
Actual Duress
Is a contract under literal duress enforceable?Your money or your lifeWill you take a check?Argument for: I prefer my life, which is why I agreeArgument against: It makes mugging more profitable, so more muggingProbably a good argumentin the case of mugging, but considerPinochet caseMilitary dictator agrees to give up power in exchange for immunityShould the contract be broken?What is the cost of treating it as enforceable?Of not doing so?Parole prior to the 19thcenturyPrisoners of war gave their parole not to try to escape, makes it much pleasanterPossibly sent home, give their word not to rejoin the army until exchangedContract enforced by social pressure at home, sinceIf people break it, the next prisoner stays in prisonBenefit: War is less unpleasantCost: And therefor there will be more of it“It is well that war is so terrible, otherwise we should grow too fond of it.” Robert E.Lee
Unequal Bargaining Power as Duress?
Youare lost in the desert, I havewaterMy price: Everything you own plus half your income foreverYouare better offif that contract is not enforceableThat is relevant only whereUnenforceabilitysubstitutes for a commitmentstrategyA way of limiting what you can pay in a bilateral monopolyAnd even there, my high price has some efficiency benefitThe supply argument from the mugging case turned upside downIt makes it more worth while being in the desert with waterLooking for people dying of thirstWhich is a good thing
What counts as duress?
Yourship is sinking Thetug wantsto charge you most of what it is worthYou agree. When you get back to shore, can you renege on the contract?Is this duress?Unlike the mugging case, the effect of the incentive is goodThe tug boat didn’t get you into the problemAnd you want it to be there to get you outWhich is more likely the more it canchargeAs with the water in the desert caseWhat is the efficient price for saving the ship?
Coase at Sea
What is the efficient price for saving the ship?The price that gives the tugboat the right incentive to be out there?The price that gives you the right incentive not to go out in bad weather?One price can’t be optimal for both marginsThis is Coase’s dual causation problemThe ship owner can keep the ship from sinking by not going out in a stormThe tug boat owner can keep the ship from sinking by going out in the stormEither might, in a particular situation, be the least cost avoiderBargaining over an enforceable contract on a sinking shipIs a bilateral monopoly gameBargaining breakdown means the ship sinksWhich is an argument against an enforceable contractEither have the salvage price set by the admiralty court orBargained in advance between the ship owner and the tug owner
Contracts of Adhesion
One side sets the terms, the others takes it or leaves itAslong as one or the terms being set is the price the contract is still efficientSo constraintson what the court will enforce make both parties worse offWhy does Avis not bargain over each contract?That would increase transaction costsAnd make it easier for their employees to cheat them, accept bribes for betterterms
Is there a contract?
Formalities so we and the courtknow if there isThe doctrine of considerationMy rich uncle offers to pay my expenses at Harvard, then changes his mindNo consideration, so no contract?But the doctrine of detrimental reliance might save meLost catsI post a reward offer, you find the cat and return it, not knowing of the rewardWhen you find out, can you collect it?If you can, I will be less likely to post a reward, but …If you see a lost cat you will be more likely to try to locate the owner, because there might be a rewardMedical services for an unconscious victimCharging for them is a negativePigouviantaxWe don’t usually have those for services, because a property rule works betterBut if I am unconscious I can’t agree to hireyou
How should a court fill in missing terms?
Figure out what the parties would have agreed toBecause those are the efficient terms, andDoing it that way reduces the need to writea moredetailedcontract
Allocating Risk
If something goes wrong developing my filmMakeWalgreen’s liable for losing myfilmBecause they can spread the risk over many transactionsAnd I am risk averseWhat if the photographer knows these films are unusually valuable?Makethe photographerliableSincehe knows these films are especiallyvaluableAnd so need to be treated with special careFurther, if Walgreen’s is liable and knew, they wouldn’t agree save at a higher priceSince it is costly to them to take special care with one batch of filmOr to pay your hundred thousand dollar damage awardA specialist lab could handle this batch at lower costLet the party who knows the risk beliableTheneach party knowswhether the contract is worth signingEconomics of insurance: Risk Aversion, Moral Hazard, Adverse SelectionNote formillenials”Film” is a device for storing graphic informationA sort of analog flash disk
Rules for Breach
Some contracts should be breachedWhen circumstances change, such thatPerformance now results in a net lossWhat rules give the right incentivesTo breach when performing is a net negativeTo sign a contract when doing so is a net positiveFor decisions during performanceDo I bear costs that are a waste if the contract gets breached?That depends on who, in case of breach, pays for themIn the usual context of individuals acting in their own interestWhich depends on what happens if there is a breachAnd possibly on bargaining
Alternative Rules
No damages:Ifprofit goes negativeforme, I breach, even if net profit for both of us is still positiveThatmight be avoided by renegotiating the contractBut that opens up the possibility of continuous expensive renegotiationsSpecific performance: No breach without permissionNow you don’t breach even when doing so is efficientBut … again bargaining can solve that problemExpectation damages: Make the victim as well off as if you hadn’t breachedGives efficient breachSince it only pays me to breach if my gain is larger than your lossReliance damages: Make the victim as well off as if he hadn’t signed the contractGives efficientsigning when oneparty knows more about the risk of having to breachButinefficient reliance. I build the new factory, knowing that if you breach you pay for itExpectation damages has the same problemLiquidated damages: Parties agree inadvance on damages for breachNow reliance expenditures do not increase what you get if I breach, so efficient relianceCould set the amount atwhatexpectation or reliance damages would be. But …This requires that we know that at the time ofsigning
Contracts With Asymmetric Information
After the treaty ending thewar of 1812and the blockade of New Orleans was signedOrgan, with advance information, ordered tobacco from LaidlawWhen the treaty became public Laidlaw tried to cancel, lost in the courtWhat is the argument against that verdict?The transaction produced no net benefitMade Organ money at Laidlaw’sexpenseWhich gave Organ an incentive to spend resources getting early newsAnd a suspicious Laidlaw an incentive to decline what might be a profitable offerDead weight costs due to rent seekingCosts to Organ paid to transfer wealth from LaidlawCosts to Laidlaw of defending himself from such a transfer
Speculation
It produces a benefit by smoothing out price movementsSince a successful speculator buys when prices are low, pushing them upSells when they are high, pushing them downWhich makesfamines lesslikelyThe successful speculator is transferring grain from times when there is lots, price lowTo times when there is little, price high, and making money doing itBecause he correctly predicted the shortageIt produces profits for those who correctly predict movementsBut the profits are not a measure of the social benefitSpeculationmight be profitable even when it provided no benefitIn which case resources spent doing it are a dead weight costConsidertradersgetting their orders in fifty milliseconds fasterAt the cost of putting in high speed links to the marketAnd high end computers

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Midterm - David D. Friedman's Home Page