Of Property Rules, Coase, and Intellectual Property

Abstract

My colleagues in this Symposium have done a fine job of cataloguing the many merits (and occasional lapses) of the paper by Jerry Reichman on which I am asked to comment.'I cannot add much to this theme.I would like instead to take the Reichman paper as an opportunity to comment on certain foundational issues in the law of intellectual property rights (IPRs).Taking my cue from Reichman's characterization of his approach as an "off-the-rack liability rule" regime, 2 in this Comment I discuss the simple economics of the strong preference for injunctionsthe classic instance of a property rule-in IPR law.I conclude that proponents of IPR liability rules (including, apparently, Reichman) carry a heavy burden.According to the foundational literature on legal entitlements, 3 a property rule is a legal entitlement that can only be infringed after bargaining with the entitlement holder.The holder thus sets the price for infringing ex ante.Under a liability rule, by contrast, one may infringe first, and a tribunal will determine the appropriate compensation in an ex post proceeding.Ever since Calabresi and Melamed, transaction costs have dominated the choice of the proper entitlement rule, with a liability rule being the entitlement of choice when transaction costs are high.Some of this thinking finds its way into Reichman's proposals. 4To the extent it does, I take issue.In my view, property rules can and do work effectively in many situations involving IPRs.This is so because, in the presence of high transaction costs, industry participants have an incentive to invest in institutions that lower the costs of IPR exchange.Thus, at least in some cases, the costly bargaining occasioned by a strong property rule leads to an administrative structure that serves much the same function as a statutory liability rule.Consequently, the benefits of lower transaction costs may be achieved without sacrificing the strong property rule built into most IPRs.

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