Property Rules, Liability Rules, and Patents: One Experimental View of the Cathedral

Abstract

ABSTRACT In their seminal 1972 article, Rules, Liability Rules, and Inalienability: One View of the Guido Calabresi and A. Douglas Melamed proposed an analytic framework for comparing entitlements protected by property rules and liability rules. Their article has become one of the cornerstones of modern legal scholarship, and the influence of the theory of legal rules they established has extended far beyond tort and property into almost every area of the law, including intellectual property. Despite the prodigious influence this theory of legal rules has had, its implications have never been explored experimentally. To remedy this knowledge gap, we conducted a series of controlled experiments on liability and property rules, using the patent system as an experimental model. Expressed in the nomenclature of Calabresi and Melamed, the United States' patent law has recently witnessed a shift away from property rules and towards liability rules. This Article presents an experimental study that attempts to test the hypothesis that amounts of innovation, productivity, and social utility vary across patent systems that tend to emphasize either property rules or liability rules. The results of our experiments suggest that the choice between property and liability rules does, indeed, matter, but in a surprising way. Despite the common assumption that property rules tend to outperform liability rules, we found the opposite: in a computational model of the patent system, liability rules outperformed property rules in generating innovation, productivity, and social utility. TABLE OF CONTENTS INTRODUCTION I. PROPERTY RULES, LIABILITY RULES, AND INTELLECTUAL PROPERTY A. The Cathedral B. Property Rules, Liability Rules, and Patents C. An Experimental View of the Cathedral II. METHODS A. Technological Methods 1. Summary of the Patent Game 2. Injunction and Damages 3. Game Setup 4. Enforcement 5. Post-Enforcement Play A. Human Experimental Trials III. RESULTS 1. Injunction/Damages Treatment 2. Injunction Treatment 3. Damages Treatment 4. No Remedy Treatment 5. Innovation 6. Productivity 7. Social Utility IV. ANALYSIS CONCLUSION INTRODUCTION In Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, Guido Calabresi and A. Douglas Melamed proposed an analytic framework for comparing entitlements (1) protected by property rules and liability rules. (2) Their article is one of the cornerstones of modern legal scholarship, (3) and the influence of their theory of legal rules has extended far beyond tort and property into almost every area of the law, including intellectual property. (4) Although Calabresi and Melamed's theory has had a prodigious influence on legal scholarship, its implications have never been explored experimentally. To remedy this knowledge gap, we conducted a series of controlled experiments on liability and property rules, using the patent system as an experimental model. Expressed in the nomenclature of Calabresi and Melamed, U.S. patent law has recently shifted away from property rules and towards liability rules. (5) This Article presents an experimental study that attempts to test the hypothesis that amounts of innovation, productivity, and social utility vary across patent systems that emphasize either property rules or liability rules. The results of our experiments suggest that the choice between property and liability rules matters, but in a surprising way. Despite the common assumption that property rules tend to outperform liability rules, (6) we found the opposite: in our computational model of the patent system, liability rules outperformed property rules in generating innovation, productivity, and social utility. Until 2006, a patent owner that prevailed in an infringement suit was effectively entitled to a permanent injunction as a matter of right. …