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Article Excerpt
Clarity can be a considerable virtue in property rights. But even when property rights are defined clearly in the abstract, ascertaining the scope of those rights in concrete situations often entails significant cost. In some instances, the cost of acquiring information about the scope of property rights will exceed the social value of that information. In those circumstances, further search for information about the scope of rights is inefficient; the social harm avoided by further search does not justify the costs of the search.
Potential resource users, however, make decisions based on private costs and benefits, not social costs and benefits. Legal rules can create incentives to search for information even when the search would be inefficient. In particular, "property rule" protection often gives leverage to right holders disproportionate to the harm those right holders would suffer from intrusion on their rights. That leverage, in turn, gives potential resource users private incentives to expend time and money on search even when search will generate minimal social benefit. "Liability rule" protection, by contrast, limits incentives to conduct inefficient search for the scope of property rights.
Property doctrine reflects this insight in a number of contexts. Thus, high search costs can explain the unwillingness of courts to award injunctive relief in cases of "innocent" boundary encroachments, as well as the Supreme Court's recent limitations on the routine award of injunctive relief in patent and copyright cases.
TABLE OF CONTENTS INTRODUCTION I. THE REMEDIES LITERATURE A. The Impact of Information Costs on Ex Post Resolution of Property Disputes 1. Multiple Parties and High Transaction Costs 2. Two Parties and Low Transaction Costs B. Information Coordination: The Ex Ante Advantage of Property Rules II. THE SEARCH COST PROBLEM A. Real Property B. Intellectual Property C. Search Costs and Efficiency III. PROPERTY RULES, LIABILITY RULES, AND SEARCH COSTS A. Liability Rules B. Property Rules C. The Impact of Pre-Search Negotiations 1. A H D. Liability Rules for "Innocent" Encroachers E. Property Rules and Liability Rules: Impact on Owner Behavior F. A "No-Liability" Rule G. Implications IV. DOCTRINAL TREATMENT OF SEARCH COSTS A. Real Property 1. Boundary-Dispute Cases 2. Servitudes B. Copyright C. Patent Law CONCLUSION
INTRODUCTION
The scope of many property rights is not self-evident. A potential user of resources will often be less than completely certain whether use of those resources infringes on the rights of a property owner. Obtaining the information necessary to resolve that uncertainty comes at a cost.
What impact, if any, should these uncontroversial propositions have for the remedies available to a property owner when a resource user infringes on the owner's rights? That question has generated little attention in the now-voluminous literature on the remedies available to property owners against encroaching users.
Consider a simple real property law hypothetical. Bush and Clinton own adjacent land. Bush holds an easement over a strip of Clinton's land on their common boundary--but neither of them knows of the easement, which was negotiated between their predecessors thirty years ago. Clinton expands his house, and the extension encroaches onto a portion of the easement. Bush learns of the easement a year later, when he plans renovation of his house, and needs a way to get construction equipment to the back of his house. The portion of the easement on which Clinton has not built, together with space on Bush's own land, is wide enough to permit the equipment to pass. As a result, the harm to Bush amounts to, at most, a few hundred dollars, representing the loss of a few shrubs that might be trampled by construction equipment on Bush's side of the boundary line--shrubs that would not be trampled if Bush could use the easement's full width. Rebuilding Clinton's extension to avoid encroachment would cost Clinton $50,000.
What remedy should be available to Bush for Clinton's encroachment onto the easement? Should Bush be entitled to "property rule" protection--an injunction against Clinton's encroachment? Or should Bush be limited to "liability rule" protection--an award of money damages against Clinton? Or should Bush be denied relief altogether? In addressing issues of remedy, the academic literature has focused on efficiency concerns. (1) Much of the focus has been on ex post concerns--minimizing inefficiencies once a dispute between the parties has arisen. (2) Recent literature, however, has shifted focus to ex ante concerns---developing a legal structure that minimizes the risk of conflict before it arises. (3) From the ex ante perspective, Henry Smith has identified a significant advantage of property rules: the holder of a right protected by a property rule has more incentive to invest in producing information about productive uses of property than a right holder in a regime of liability rules. (4) That is, concentrating rights in a5 single owner enables that owner to coordinate use of the "owned" resource. (5)
The ex ante coordination advantage of property rules, however, depends critically on shared and accurate information about the boundaries of legal rights. If the scope of those rights is unclear, an "owner" cannot coordinate use of a resource until both she and potential users acquire information about the scope of her rights. (6) Acquiring that information, however, requires search, which can be costly.
The potentially high cost of search to ascertain the scope of property rights leads to the insights explored in this Article. First, in some instances, the cost of acquiring information about the scope of property rights will exceed the social value of that information. Returning to our hypothetical, Clinton could not discover the existence or scope of Bush's easement without incurring private costs necessary to hire a lawyer (to discover the existence and terms of the easement) and a surveyor (to ascertain the location of the easement on the ground). The social costs Clinton would avoid by acquiring that information, however, are small. At most, if Clinton had learned of the easement and its location before expanding his house, he could have built in a way that would have avoided Bush's loss of a few hundred dollars in shrubbery. But even that measure overstates the social loss that additional information would prevent.
Second, even if the social cost of search is greater than its social value, the private value of search to a potential resource user may, in a property-rule regime, exceed its private cost, providing the potential resource user with excessive incentive to seek information about the scope of property rights. That is, the search for information might alter the distribution of wealth between the improver and the neighbor, and thereby generate private gains to the party incurring the search costs, while generating no comparable social gains. (7) In concrete terms, the social cost of expanding Clinton's house without checking deeds and commissioning a survey may only be a few hundred dollars, but the potential private cost to Clinton is much higher, because Bush can compel Clinton to remove the encroaching addition to his house, giving Bush leverage in negotiations far in excess of the social cost of the encroachment. Hence, property-rule protection threatens to generate inefficient expenditures in acquiring information about the scope of legal rights.
The importance of this insight does not depend on the belief that next-door neighbors will be so calculating in their decisionmaking, or in their dealings with each other. The basic problems--uncertainty about the scope of property rights and disparity between the social and private cost of acquiring information about those rights--also arise in commercial
settings, where dollars typically count for more and preservation of neighborly relations for less. The problems are particularly pervasive in the case of intellectual property rights, where boundaries tend to be less certain and where search costs are typically higher.
The notion that expenditures made to clarify legal rights can be inefficient is counterintuitive to lawyers, who often earn their living clarifying legal rights for their clients. My claim here, however, is a narrow one--not that all expenditures made to clarify property rights are inefficient, but that at some point, the marginal cost of additional clarity in the scope of property rights exceeds the value of that clarity. (8) Moreover, I do not contend that courts should invariably eschew property-rule protection in those cases where an encroacher's level of investigation into the scope of property rights was inefficient. Determining which investigations are efficient is no easy matter, even with the benefit of hindsight, and countervailing considerations-such as preserving personal autonomy and avoiding the difficulty of determining and accounting for subjective harm--often militate in favor of property-rule protection.
As a normative matter, however, the cost and social value of acquiring additional information about the scope of property rights should be relevant to a court in deciding between property-rule protection and liability-rule protection. As a descriptive matter, courts have sub silentio accounted for the cost and value of acquiring additional information in fashioning rights and remedies in a variety of legal contexts ranging from innocent border encroachments (9) to copyright and patent doctrines that give courts discretion to deny injunctive relief against certain classes of infringers. (10)
I. THE REMEDIES LITERATURE
Much of the scholarly literature on property remedies starts with the premise that information can be costly to obtain. The literature has focused principally on the difficulty of obtaining information about the value of property rights to potential users, resulting in potential inefficient use of resources. Liability rules might reduce the need for, and increase the quality of, information about values, limiting the potential for inefficient use. At the same time, property rules create an incentive for a single party, the owner, to invest in generating information about potential uses of the resource--an incentive that no single party enjoys in a liability-rule regime. In focusing on the costs of ascertaining uses and values of resources, the literature has largely ignored the costs associated with determining the scope of property rights. These costs serve as the focus for the succeeding section.
A. The Impact of Information Costs on Ex Post Resolution of Property Disputes
In their pathbreaking article on the comparative efficiency of property and liability rules, (11) Calabresi and Melamed developed what has now become the conventional wisdom: property rules are efficient in cases of low transaction costs, while liability rules are preferable in cases of high transaction costs, typically defined as cases in which multiple parties generate the potential for holdouts and freeriders. (12)
Calabresi and Melamed did not ignore information costs in their pathbreaking analysis, but those costs were not their focus. Others, however, have focused on information costs in evaluating the efficiency advantages of injunctive relief and money damages. (13) Until recently, the focus of this scholarship has largely been on ex post concerns: once a concrete dispute between parties has arisen, which remedy is more likely to lead to efficient resolution of the dispute? The scholarly literature has undermined, to a considerable degree, both tenets of the conventional wisdom that emerged from Calabresi and Melamed: that liability rules generate more efficient use in high-transaction-cost cases, and that property rules generate more efficient use in low-transaction-cost cases.
1. Multiple Parties and High Transaction Costs
Information costs--particularly errors in damage assessment--can generate inefficient results when courts use liability rules to deal with the transaction costs associated with multiple-party negotiations. (14) Although Calabresi and Melamed focused on liability rules as a way to overcome holdout problems, Mitchell Polinsky has noted that the same holdout problems will obstruct negotiations after a court awards damages to the victim. (15) For instance, in a pollution dispute, if the court awards damages that exceed actual harm, the polluter will stop polluting even though it would be efficient for the polluter to continue. (16) while if actual harm exceeds the damages awarded, the polluter will continue to pollute even though the pollution is inefficient. (17) As a result, a liability rule guarantees efficient results only when damages are equal to actual harm. (18) Courts, however, do not always have reliable information on which to base their assessments of actual harm.
The practical question, of course, is not whether a liability rule guarantees efficient results in cases of high transaction costs; no rule does that. The relevant comparison, as Jim Krier and Stewart Schwab have formulated it, is between the ability of judges to overcome assessment cost problems and the ability of the parties to overcome transaction cost problems. (19) Krier and Schwab have argued that in multiple-party cases, the very facts that create high transaction costs also generate high assessment costs, making both property rules and liability rules problematic from an efficiency standpoint. (20)
2. Two Parties and Low Transaction Costs
Information costs have also played a central role in two arguments for using liability rules rather than property rules, even to resolve disputes between two parties. First, litigated cases will more often generate efficient results if courts use liability rules. Second, liability rules are more likely to overcome strategic bargaining, and therefore reduce the need for litigation. Both arguments focus on information: the first on the information available to courts adjudicating disputes over property rights, and the second on the flow of information between the disputing parties.
a. Liability Rules and Reduced Assessment Costs
Suppose parties litigate a dispute over property rights. If the court wants to promote efficient use of the rights, but concludes that strategic bargaining will prevent negotiations between the parties, the court must assess the value of the parties' competing uses. (21) If the court is limited to property rules, the court has two choices: enjoin the defendant's behavior, or deny relief to the plaintiff. Only one of those two alternatives leads to efficient use, and the court cannot know which one without determining the value of both uses.
Louis Kaplow and Steven Shavell have highlighted an important advantage of liability rules--they generate efficient results so long as a court can assess the value of one of the competing uses, rather than the value of both. (22) Thus, if a court can accurately assess the harm the defendant's use would cause to the plaintiff, and applies a liability rule that permits the defendant to engage in its proposed use so long as the defendant pays damages equal to the harm caused, the court will assure efficient use even if it is ignorant of the benefits generated by the defendant's use. If, after judgment, the defendant's use is more valuable than the harm it causes, the defendant will pay damages and pursue its use. If the defendant's use is less valuable, the defendant will withdraw and plaintiff will not suffer harm. (23) As Kaplow and Shavell put it, liability rules permit the state to "harness the information that the injurer naturally possesses about his prevention cost." (24) The Kaplow/Shavell argument for liability rules focuses on reducing the information necessary for courts to assemble in order to guarantee efficient decisions in those cases where strategic bargaining prevents parties from negotiating to efficient solutions.
b. Liability Rules as an Antidote for Strategic Bargaining
Another argument for liability rules focuses on their alleged advantages in generating information that might overcome strategic bargaining. In particular, Ian Ayres and Eric Talley have argued that liability rules can induce parties to reveal information that they might withhold under a property-rule regime, increasing the likelihood that efficient bargains will be brought to fruition. (25) The thrust of their argument is that when entitlements are divided, as they are with liability rules, each party is uncertain whether he will emerge as a buyer or a seller. (26) This reduces each party's incentive to misrepresent the value he attaches to the entitlement. (27) Property rules, by contrast, allocate the entire entitlement to a single person, so that each party knows whether he will be a seller or a buyer, creating an incentive for misrepresentation. (28)
B. Information Coordination: The Ex Ante Advantage of Property Rules
The most prominent arguments for liability-rule protection focus on the ex post information advantages generated in resolving existing disputes. But what effect, if any, do liability rules have on the behavior of property owners and potential infringers ex ante? Henry Smith has demonstrated that liability rules reduce the incentive to collect information about productive uses of property, decreasing the likelihood that property will be put to its most productive use. (29) Smith argues persuasively that the holder of a right protected by a property rule has more incentive to invest in producing information about productive uses of the resource than does any actor (owner, taker, or court) in a liability-rule regime. (30) As Smith points out, in a property regime, "[o]wnership concentrates on the owner the benefits of information developed about--and bets placed on--the value of the asset." (31) This coordination advantage of property rules is apparent, as Smith makes clear, in many real property situations. (32) Real property tends to be rivalrous in nature: two cannot plow the same furrow. But the coordination advantage of property rules has also been trumpeted as a justification for expansive legal protection of nonfivalrous goods--particularly through patents and copyrights. (33)
Liability rules, on the other hand, inhibit coordination of resource use. If resource rights were protected only by liability rules, no "owner" would be in a position to coordinate resource use. Any potential user could interfere with coordination by simply using the resource and offering to pay court-determined damages. Competition among potential users could ultimately prove unresolvable by the coordinating owner, and, instead, might be resolved only through litigation.
In more general terms, Smith and Tom Merrill have argued that property rules are optimal for allocating resources when the potential users of the resource are unidentified and large in number. (34) Property rules concentrate in a single person a set of well-defined rights to use a particular resource, putting the world on notice of the duties they owe to the "owner" of the resource without requiring investigation into the owner's identity or preferences. Merrill and Smith argue that the property-rule approach is optimal when information costs would make it infeasible to allocate resources by contract among the many interested parties. (35) Property rules reduce information costs by permitting the single owner to coordinate use of each resource.
The information cost advantages of property rules increase with the number of potential users of the contested right. (36) When the number of potential contestants for a right is high, contract solutions are impractical because any single claimant's incentive to negotiate with other claimants is low; whatever agreement they reach would be subverted by the appearance of yet another claimant. (37) By contrast, when a resource has only two potential users, allocation by agreement is more feasible, and property rules that give owners a broad right to exclude are less necessary. (38)
Merrill and Smith recognize that, to coordinate resource use efficiently, property rules must be uniform, easily identified, and understood by all. (39) Rules that are complex or detailed require potential claimants to process too much information, dissipating the advantages of a system that gives a single owner the right to exclude. (40) We will return to that constraint in the next Section.
Property-rule protection also provides an incentive for potential users--whether one or many--to inform the right holder of the conflicts created by the potential use, thereby setting the stage for negotiated solutions. Recent law and economics literature has attacked the argument that property rules promote efficiency by providing potential infringers with an incentive to negotiate, emphasizing that any legal rule provides some party with an incentive to negotiate. (41) That critique assumes, however, that the parties share information about potential conflicts. But a party unaware of potential competing uses is unlikely to initiate negotiations to eliminate conflicts. Typically, it is the encroacher or infringer who is in the best position to anticipate conflict. Rules that induce the encroacher or infringer to disclose conflict at the earliest moment are more likely to generate efficient settlements.
Consider, for instance, a landowner who seeks to expand her house in a way that encroaches significantly on her neighbor's lot--or even requires bulldozing of her neighbor's house. The neighbor is unlikely to be aware of the landowner's plans until after they have been formulated and perhaps executed. A property rule provides maximum incentive for the landowner to negotiate before expending money in planning and executing the house expansion, thus assuring that the value of the expansion exceeds the harm to her neighbor. While a liability rule could theoretically provide greater incentive for the neighbor to negotiate, the neighbor is far less likely to initiate negotiations before the landowner has expended money on the encroachment because the neighbor is not in a position to anticipate the conflict.
The existing literature, thus, suggests that whatever advantages liability rules might have in overcoming ex post strategic bargaining are generally overwhelmed by the ex ante advantages that property rules generate. Property rules enable the "owner" of a resource to serve as a clearinghouse for information about the values potential users attach to that resource. (42) Because property rules require all potential users of a resource to buy rights from that owner, property rules enable the owner to accumulate information about potential bidders and the values those bidders attach to those rights. (43) As a result, property rules enable resource owners to channel those resources to the bidders who value them most--promoting efficient use of those resources.
II. THE SEARCH COST PROBLEM
An assumption underlying the information cost analysis discussed in Part I is that property rules are relatively clear--unlike, for instance, tort rules, which are generally assumed to be muddy. (44) That is, the discussion assumed the absence of search costs--the costs of obtaining information about where and whether to acquire legal rights to use particular resource. Only if potential resource users know that use of the resource would intrude on someone else's property right, and can readily identify the owner of that right, will they approach the owner, enabling the owner to act as an information clearinghouse. (45) Clarity in property rights makes it possible to structure a market that efficiently allocates resources. (46)
In practice, however, property rules are often unclear--at least to the universe of potential resource users. It may be costly for a potential resource user to discover the need to negotiate with a right holder, or to discover the right holder's identity. These costs arise even when rules are, from an abstract legal perspective, crystal clear. The process of applying clear rules to concrete problems often entails significant search costs. A cynic might note that these costs are the bread and butter of many law practices, but in fact the costs extend beyond legal bills. Scholarly analysis of property and liability rules, however, has not accounted for these search costs. (47)
My objective in this Part is to demonstrate that search costs are often high. Part III demonstrates that in cases of high search costs, property rules sometimes generate excessive incentives to search. These insights require qualification of the emerging consensus that, from an ex ante perspective, property rules are superior to liability rules.
A. Real Property
Real property law is often treated as a refuge for clear legal fights, free from the need to balance competing interests. (48) To take the most basic example, I have a right to prevent my neighbor from trespassing or encroaching on my land, and my neighbor has a correlative duty not to trespass or encroach. (49) This clear property rule puts my neighbor on notice that she must deal with me if she wants to use "my" land.
But how does my neighbor know when she is trespassing or encroaching on my land? However clear the legal rule is, it does not lay down markers on the boundary of my land with a sign that says "keep off." (50) Instead, my neighbor may need to commission a survey to determine whether the uses she wants to undertake will, in fact, intrude on land that belongs to me. (51) Moreover, although property lawyers immediately recognize that a neighbor needs to consult a surveyor before building near a property line, a neighbor may not realize this unless she consults a lawyer--introducing an additional search cost into the process.
To take another example, consider a homeowner who has been using a pathway across neighboring land to reach a public street. The homeowner intends to build an additional apartment to accommodate aging parents. Will the homeowner know to investigate whether her parents will be entitled to use the path? Even if the homeowner knows to investigate, how would she find an answer to her question? She could hire a lawyer to examine her deed to determine whether she has an express easement to use the pathway, and to determine the easement's scope. But if the deed says nothing about an easement, or is silent about the easement's scope, the homeowner, or her lawyer, will have to investigate further. The lawyer will have to uncover the origins of the pathway's use to determine whether the homeowner has acquired an implied easement, and if so, what its scope is.
In both of these situations, and in many others that arise in the context of real property, a potential resource user will not immediately know who owns the rights the user covets. Indeed, in these situations, the user might believe that she owns those rights. To discover whether someone else owns the rights she wants to use requires search and expenditure of resources--even where legal doctrines are crystal clear.
B. Intellectual Property
Search costs may be even more significant in copyright and patent law. (52) First, some areas of copyright law are inherently fuzzy even to lawyers with expertise in the area, let alone to lay users of prior works....
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