Adverse Effects of Moving from Property Rules to Liability Rules in Intellectual Property: A New View of the <i>Cathedral</i> Without the Disintegration of Property Rights in Patent Law

Abstract

In 1972, Calabresi and Melamed published a seminal article seeking to unify property law, tort law, contract law and criminal law. In their view, there are conditions under which property rights would be subservient to liability rules. In these cases, an appropriator of a property would have justification to continue appropriating the property if it paid monetary damages. The authors advocate liability rules to justify the imposition of monetary damages because they claim that the holdout right by the property holder empowers the owner to set a price so high that it constrains the appropriator. The main claim to justify a shift to liability rules is that economic efficiency is promoted by limiting transaction costs. The present article argues that there are only a few very narrow justifications for the application of liability rules as a priority over property rules. The article critiques the view that property holdout is a justification for imposition of liability rules. Patent critics use the Calabresi and Melamed arguments to claim a priority of liability rules over property rules in patent law, in which a patent infringer seeks to pay monetary damages in a compulsory license to the patentee. Patent critics seek to apply liability rules to patents with a claim that patentee holdout creates higher transaction costs and harms economic efficiency. The article criticizes the application of liability rules to patent law. While the argument favoring the application of liability rules to limit property rights in patents uses high transaction costs to justify using liability rules because of a claim of economic efficiency, the article critiques the idea that an appropriator may manipulate the transaction costs and thus justify patent piracy that benefits the stronger party. The article shows a set of contradictions with the view of prioritizing liability rules over property rules. First, there is a tendency to under-compensate the property holder by using liability rules, as demonstrated in eminent domain cases. Second, courts of equity are organized to prevent the imposition of monetary damages to support the stronger party. In the context of patent law, a compulsory license conflicts with the exclusive right in the constitutional patent entitlement. Finally, while the use of liability rules benefits the patent infringer, it harms the incentives for invention. Strong property rules – whether applied to real property or intellectual property – require an injunction to protect the property right. Application of liability rules serves to disintegrate the property right in a patent, with adverse consequences to economic progress.