Discussion on Property & Intellectual Rights: Patents, Copyrights, Trademarks & Secrets, Study notes of Economics and Law

Download Discussion on Property & Intellectual Rights: Patents, Copyrights, Trademarks & Secrets and more Study notes Economics and Law in PDF only on Docsity! Econ 522 – Lecture 7 (Sept 27 2007) Tuesday, we discussed the question of what can be privately owned, and listed four ways for people to claim property rights over information: • patents • copyrights • trademarks • trade secrets We talked about patents, which protect ideas and innovations by granting the inventor a temporary legal monopoly to use their idea. Copyrights are property rights over “original expressions” – writing, music, or other artistic creations. Creations like this tend to fit the definition of a public good: • nonrivalrous – one more person reading a book, or listening to a song, or using a piece of software, doesn’t impose any costs on the creator or on other users • nonexcludable – this isn’t quite as literally true; but technology has made it very cheap, often free, to copy and share music or software, so in some instances it’s very difficult to prevent people from accessing it. (This has become more dramatically true in recent years, with Napster and other file-sharing programs/venues – once something is available digitally, it’s very hard to limit access to it.) So it is natural to think of creations like these in terms of public goods. As with any public good, if they are privately supplied, we would expect them to be undersupplied – that is, without any specific sort of reward system, creators could not capture the full social benefit of their creations, and so the free market would likely produce an inefficiently low level of “original expressions.” However, there are several possible ways to remedy this problem: • Have the government subsidize it, that is, have it publicly supplied. This happens with scientific research, since scientific knowledge can also be thought of as a public good; and it happens with art. • Another is for these activities to be paid for with charitable donations. This is implicitly what happens with shareware – you download it for free, but are asked to pay for it voluntarily if you use it. (Of course there’s the usual freerider problem.) And a lot of art is supported by private foundations and donations. • Finally, the creator of a song, or of a computer program, can be given legal rights to it, which make it illegal for others to disseminate it, so that in order to use it legally, people have to buy it from the creator (or from someone else who pays fees to the creator) Docsity.com This last one is the case of copyright – exclusive legal rights to written material. Copyright law is less rigid than patent law – patents serve as injunctions against any unauthorized use of the idea, while certain exceptions are recognized for copyrights. For example, the Posner article I distributed the first day of class is copyrighted, but I wasn’t breaking the law by handing out copies of it – educational use is recognized as “fair use” of copyrighted material, and is therefore exempt. Similarly, small selections from a book can legally be quoted in reviews, or used in satires, and pieces of songs can be sampled in other songs. On the other hand, copyrights last much longer than patents – the lifetime of a copyright has been extended several times. Copyrights currently expire 70 years after the death of the creator. Unlike patents, you don’t have to apply for a copyright – it automatically applies to anything you’ve written or created. Copyrights are generally more narrow than patents – they cover the specific text, not the general idea, although the line is sometimes a bit vague. In 2001, Alice Randall published the book “The Wind Done Gone,” which was meant as a retelling of “Gone With The Wind” from the point of view of a slave on Scarlett’s plantation. The estate of Margaret Mitchell sued the book’s publisher; an injunction was initially issued, halting publication, but was later overturned; in the end, a settlement was reached. In this case, though, even if the book did violate the copyright, it’s hard to see any financial damage to Mitchell’s estate. That is, it’s hard to imagine there are many people who would see an “unauthorized parody” as a substitute for the original; hard to imagine a lot of people who planned to buy a copy of Gone With The Wind, then read the parody and felt they no longer needed to. In my own opinion, copyright holders sometimes defend their copyright aggressively as a reflex, without giving much thought to whether the activity they’re opposing actually hurts their interests. Lots of book publishers were opposed to Google Print (now called Google Book Search), which would allow people to search the text of books, but would only return the relevant paragraph, not the whole work. Again, it’s hard to imagine that searching for a phrase or an idea, and finding it contained in a book you didn’t know about, would make you less likely to buy that book; yet the publishers felt some instinctive need to oppose the idea. (Google Print is now mostly limited to books in the public domain, that is, works whose copyrights have expired or which are not protected by copyright for other reasons.) A similar argument could be made about the well-publicized RIAA lawsuits against music downloaders. (There is little doubt that unlicensed copying of music does violate copyright; there is less clarity that treating potential customers as criminals is the best long-term strategy for the music and movie industries.) Docsity.com The book points out that organizations – churches, clubs, cooperatives, charities, and so on – tend not to be owned; but some corporations are owned, and can be bought and sold like property. They come up with the general principle that corporations whose goal is to earn profits should generally be owned, as they will be more highly valued by owners who can use them to generate higher profits; and so through voluntary negotiations (or hostile takeovers), they will tend to end up in the hands of whoever can run them most profitably. On the other hand, corporations with goals other than maximizing profits should be governed but not owned. They also point out that thin markets for corporations allow for them to pursue goals other than profits, but liquid markets do not. Principal-agent problem. The owners of a firm generally want it earn the highest profits possible; but the people making the day-to-day decisions of how the firm is run, the management of the firm, may have other goals in mind. This is a standard problem in contract theory, which we’ll see more on. More on corporations in the book. We return to the question of public and private ownership of resources. Three possible forms of public ownership: • Open access, where everyone can use the resource • Political control, where use is somehow regulated • Unanimous consent, where everyone must agree in order for anyone to be allowed access Book discusses oyster beds as an example of open access and the usual tragedy-of-the- commons problem. Early in their lives, oysters tend to permanently attach themselves to underwater rocks or other surfaces, which makes it possible to assign property rights to them. They discuss the fact that along the Atlantic and Gulf Coast, some states treat oyster beds as common property with open access – everyone has rights to use them – while other states treat oyster beds as private property, with the state leasing these rights to companies. They cite a paper showing that when oyster beds are common property, they become depleted, as measured by a greatly reduced output of oysters per man-hour of fishing – the classic tragedy of the commons problem that we’ve already discussed. Unanimous consent gives multiple owners veto power over any use of the resource. While open access resources will tend to be overutilized, resources governed by unanimous consent will tend to be underutilized. They give the example of vacant shops in Moscow after the fall of Communism: due to the overlapping property rights established under Communism, too many people had the power to veto anyone’s use of the space, and so no one was able to put the space to use. Docsity.com The third option for public resources is political regulation. They give an example of pasture land in parts of Iceland, which is held in common, but regulated – sheep can only graze on it during the summer, and the number of sheep an owner can graze on it is limited. This allows for efficient use of the land. Of course, there are administrative costs to this type of regulation – someone must enforce it. But in some instances, such regulation may be less costly than the transaction costs required for private ownership – in this case, building a lot of fences to separate different shepherds’ shares of the pastureland. Next, how are property rights established and verified? Begin with an example of “fugitive property”. Fugitive property is property that moves around or has indefinite boundaries, like foxes or whales. The book gives the example of natural gas, illustrated in the case Hammonds v. Central Kentucky Natural Gas Company (1934). The Central Kentucky Natural Gas Company leased tracts of land above deposits of natural gas; but the geological dome of natural gas lay partly under the land they were leasing, and partly under someone else’s land. When the company began extracting the gas, Hammonds, one of the other landowners, sued, claiming that some of the gas they were extracting came from under her land. There are two different principles for how to establish ownership of fugitive property: • first possession – fugitive property does not belong to anybody until someone extracts it, establishing ownership • tied ownership – ownership of fugitive property is tied to something else which is easier to establish – in this case, the owner of the surface under which the natural gas resides Under first possession, Central Kentucky Natural Gas Company was entitled to whatever gas it extracted; under tied ownership, they were only entitled to the gas under their own land, and Hammond’s claim was valid. (Tied ownership would also suggest that a landowner has rights to the foxes on his own land. Tied ownership might suggest that if you’re at a baseball game and a foul ball lands on your seat, you have automatic rights to it, while first possession suggests that whoever grabs the ball owns it.) First possession has the advantage of generally being very simple (and therefore cheap) to apply. Determining who first possessed property is usually straightforward. However, first possession also has a downside: it creates an incentive to invest too much too early, Docsity.com in order to establish ownership of a scarce resource. That is, firms might expend too many resources trying to establish first possession of a resource, leading to inefficiency. In the natural gas example, if ownership of the gas were tied to ownership of the surface, there would be no hurry to extract the gas; provided it got rights to all the land above the deposit, the firm could extract the gas in the most efficient way. However, with first possession, imagine there were two firms interested in extracting the gas. This would create a race between them, since the gas was a scarce resource that belonged to whoever possessed it first; this would lead to both firms to try to extract it inefficiently quickly, using means that are more expensive than necessary. Efficiency demands utilizing a resource in a way that leads to the highest value of production; but in this case, first possession leads to investments that are not efficient from a production point of view, in order to establish a claim to a scarce resource. (The book also gives an example of fencing in “waste” land. Fencing it in may increase the productivity from grazing cattle on the land; but this gain in productivity may be smaller than the cost of building the fence. But if fencing it in establishes ownership, and if people expect land to become scarce and to increase in value in the future, it may be worthwhile to fence it in now, in order to establish possession of it for later. To put it another way, efficiency concerns the production of wealth, not the transfer of it. In this case, firms may expend resources to get wealth – in this case, a scarce resource – transferred to them, which is inefficient.) The Homestead Act of 1862 was meant to encourage people to settle the Western part of the U.S. The act allowed citizens to acquire up to 160 acres of public land; but it required them to fulfill certain requirements to establish ownership (title) to the land: • the claimant had to be the head of a family or 21 year old • the claim had to be “for the purpose of actual cultivation, and not, either directly or indirectly, for the use or benefit of” someone else • the claimant had to live on the claim for 6 months and make “suitable” improvements before title was granted These requirements were meant to prevent a mad rush to acquire land and do nothing with it; however, these requirements were not enforced particularly well. Back to the principle of tied ownership of fugitive property. The common and civil law often tie ownership using the principle of accession: the principle that a new thing is owned by the owner of the “proximate or prominent” property, that is, the nearest (or most obvious) thing to link ownership to. For example, a newborn calf belongs to the owner of its mother; when a river shifts and creates new land, the owner of the river bank owns that new land; and the owner of a brand name tends to have the default right to the corresponding Internet address. Docsity.com (This can happen either because congestion becomes a greater cost, or because technology makes boundary maintenance cheaper. In the Demsetz example of Native American land rights, the cost of congestion became higher as the fur trade led to overhunting. On the other hand, the invention of barbed wire lowered the cost of boundary maintenance, and would be expected to have encouraged privatization of land rights in the American West.) Another question is, what can be done to prove ownership of goods? Branding one’s cattle discouraged theft by making it easier to prove the cattle was taken from you. The same idea holds with vehicle identification numbers on cars. In some instances, the government may provide a registry of ownership. Trademarks are registered to avoid overlap; states grant paper titles for cars and deeds for property, to clearly establish (and register) the legal owner. Why is this necessary? Suppose you decide to buy a farm. You drive around the countryside and find a plot you like, approach the farmer, and agree on a price. You pay the man and move onto the property. A month later, a man arrives claiming to own the property you are living on, saying he’s come to evict the tenant who had been renting the house you’re now living in. What happens? The book contains a funny story about how sales of property were supposedly (maybe apocryphally) “recorded” in England in the Middle Ages. The seller would hand the buyer a bit of dirt and a twig from the land, in a ceremony officially passing on ownership; then they would take a child who had witnessed the transfer, and “beat him so severely that he would remember that day for the rest of his life,” in order to create a permanent record of the transaction. In the U.S., each of the 50 states has some system for recording the legal owner of land; a change in ownership is recorded in a registry of deeds, and the records are open to the public, so that I can ensure I’m buying a house from its rightful owner. With smaller objects, there is no such registry. If you sell me an apple, I have no way of knowing for sure whether you are the rightful owner of the apple. This is because the costs of maintaining such a registry would be much greater than the problem it attempted to solve, the difficulty in trade due to uncertainty in ownership. For large items like houses and cars, the cost to commerce of uncertain ownership is large, and the number of Docsity.com items small enough to make a formal registry feasible. For smaller items, the opposite is true, so you mostly have to take a seller at his word. So now suppose (in the example from the book) that you got a great deal on a used TV from a guy in a parking lot outside a bar. A few days later, the police arrive with a person who claims to own your TV. Do you get to keep it, or is it returned to its original owner? That is, if person B steals an item from A, sells it to an innocent buyer C and disappears, does A still have a claim to the good? The rule varies in different places. In the U.S., you can only transfer property rights that you legitimately have. So a person without title (without lawful ownership) cannot transfer title to a buyer. In this case, even though you thought you were buying the TV, you were buying nothing, and the original owner still owns the TV. If you can find the seller, you are entitled to your money back. There are exceptions, however. If a thief steals money and uses it to buy your TV, the original owner of the money cannot get it back from you. So while a thief cannot give good title to most stolen goods, he can convey good title to money. Another exception is that if you buy a TV from a legitimate TV dealer and it turns out to be stolen, it is still yours; the original owner can only take it up with the dealer. In much of Europe, the rule is more favorable to the buyer; as long as you acted “in good faith,” that is, you genuinely believed the seller owned the object, it is yours to keep; the original owner would have to try to recover your money from the thief. The book again tries to derive a general rule by comparing two costs: Let CO be the cost to an owner of protecting himself against theft by, for example, engraving his social security number on the side of his TV. Let CB be the cost to a buyer of verifying that he is dealing with the rightful owner of a good. Then if CO is generally less than CB, it is more efficient for a good-faith buyer to acquire good title But if CO is generally higher than CB, it is more efficient for the original owner to retain title in these situations In Spain, a hybrid rule applies. The “American Rule” – a thief cannot convey title, so if you bought a stolen good, you’re out of luck – applies to goods stolen from a house and sold to a merchant. This rule discourages merchants from buying stolen goods, in turn discouraging theft by making it less profitable. On the other hand, the “European Rule” that a good-faith buyer receives good title applies to goods stolen from a merchant. Docsity.com We already asked the question, how do you establish property rights over something? Also worth asking is, how do you give up (or lose) property rights over something? One way that this can occur is Adverse Possession. Suppose that you own a vacant plot of land next to my house, and decide to build yourself a house there. By mistake, you build it so that it intrudes into my land by a couple of feet. Now suppose that I don’t notice for a long time, but that, 15 years later, I decide to replant my garden, examine the property line, and realize you have trespassed on my property. Do I still have the right to force you off my property? Or by being there for long enough, have you established a legal right to that bit of land? Adverse possession is so named because trespasser’s possession of the land is adverse to the owner’s own interests. In such a case, if you occupy the property for a long enough time (specified by law), you gain legal rights to it; provided the occupation is adverse to the owner’s interests, and he does not object or take legal action. That is, if an owner “sleeps on his rights” and allows you to trespass, he eventually gives up his ownership. The advantage of this is that, over time, it clears up any uncertainty about ownership, allowing property to be traded more easily and therefore efficiently allocated. For example, suppose you want to buy a house that was built in 1910 and sold in 1925, again in 1937, and again in 1963. When you research the title, there seems to be some confusion about whether the 1937 sale was legal. However, if the current tenant has lived there since 1963 without legal challenge, he has gained legal right to the land; and so you can buy it from him without worry. So one defense of adverse possession is that it resolves uncertainty. Another defense is that it prevents valuable resources from being left idle for too long, by specifying a way for a more productive user to gain title to the resource. Of course, adverse possession also has a cost – property owners must actively monitor their land against possible trespass. When you built your house that cut slightly into my property, I could not say to myself, “I’m not using that bit of land now, so I’ll let it go, and raise a stink later if I decide I want to use it.” Thus, I incur monitoring costs, and trespassers are less likely to get away with it since I’m watching more closely. Another potential way to give up property rights to something is to lose it. You’re walking down the street and find a diamond ring; is it yours, or do you have to try to find the rightful owner? The relevant legal area is estray statutes. A typical estray rule specifies a procedure for a finder to establish ownership of lost or abandoned property. If the property is above a certain value, the finder may have to go to court and document where and how he found the object. The court may then place an ad in the newspaper. After a certain amount of time, if the owner has not claimed the property, it belongs to the finder. A finder who does not go through this process is subject to a fine. Docsity.com