Pliability rules.

• Author: Bell, Abraham
• Position: Legal rights and duties

TABLE OF CONTENTS INTRODUCTION I. THE EVOLUTION OF ENTITLEMENT THEORY A. Coase and the Problem of Social Cost B. The Calabresian-Melamedian Framework C. Subsequent Contributions 1. Normative Challenges 2. Descriptive Challenges II. ENTER PLIABILITY RULES A. Property + Liability = Pliability 1. Pliability and Grue 2. Pliability and Calabresi and Melamed B. Classic Pliability Rules 1. Mergers and Acquisitions 2. Essential Facilities and Antitrust Damages 3. Post-Boomer Nuisance C. Zero Order Pliability Rules 1. Copyright and Patent Protection 2. Genericism in Trademark Law D. Simultaneous Pliability Rules 1. Fair Use 2. Privileged Takers E. Loperty Rules F. Title Shifting Pliability Rules 1. Adverse Possession G. Multiple Stage Pliability Rules 1. Eminent Domain H. Elements of Pliability Rules III. THE NORMATIVE CASE FOR PLIABILITY A. When Pliability Rules Should Be Used 1. Changed Circumstances 2. Conflicting Interests 3. Inherent Limitations B. Revising Existing Pliability Rules 1. Adverse Possession 2. Patents 3. Genericism C. Introducing New Pliability Rules 1. Anti-Commons 2. Eminent Domain and Private Takings CONCLUSION INTRODUCTION

In 1543, the Polish astronomer, Nicolas Copernicus, determined the heliocentric design of the solar system. (1) Copernicus was motivated in large part by the conviction that Claudius Ptolemy's geocentric astronomical model, which dominated scientific thought at that time, was too incoherent, complex, and convoluted to be true. (2) Hence, Copernicus made a point of making his model coherent, simple, and elegant. Nearly three and a half centuries later, at the height of the impressionist movement, the French painter Claude Monet set out to depict the Ruen Cathedral in a series of twenty paintings, (3) each presenting the cathedral in a different light. Monet's goal was to demonstrate how his object of study may be perceived by observers differently depending on the circumstances of the observation. In the spirit of these two projects, in 1972, Guido Calabresi and Douglas Melamed resolved to craft a comprehensive, yet elegant, (4) model for organizing the universe of legal entitlements. (5) The article's impact has been profound and enduring. (6)

In their path-breaking article, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, (7) Calabresi and Melamed established a new way of conceptualizing legal rights and duties. Departing from traditional jurisprudential notions, Calabresi and Melamed introduced the concepts of "property rules" and "liability rules" as the ordering principles of the legal system, and then analyzed their virtues and vices as means of protecting legal entitlements. Property rule protection forces potential takers to secure the consent of the entitlement owner, and thus allows the owner to determine the price of her entitlement. Liability rule protection, by contrast, allows potential takers to avail themselves of other people's entitlements as long as they are willing to pay a collectively determined price that is usually set by a court, a legislator, or an administrative agency. (8)

Having introduced the distinction between property rules and liability rules, Calabresi and Melamed ventured to explain how these rules should be employed to promote economic efficiency. Their normative insight was that property rules should be favored over liability rules when transaction costs are low, and parties can cost-effectively bargain with one another. When, on the other hand, transaction costs are high, and voluntary bargaining cannot be expected, liability rules should be employed.

In the vast literature that followed, (9) commentators have attempted to refine, revamp, and, at times, challenge the Calabresi-Melamedian analysis. In particular, attempts have been made to distinguish between various types of transaction costs, and then examine which type of rules is better suited to combat each particular cost. Yet, the analytical structure devised by Calabresi and Melamed, and in particular, the foundational distinction between property and liability rules, has been accepted by virtually all the commentators--supporters and critics alike. The Calabresi-Melamedian typology has been widely understood to exhaust all possible ways of protecting legal entitlements, and the binary system they devised has dominated legal thought and scholarship. Almost thirty years after its publication, The Cathedral is experiencing a renaissance as increasing numbers of preeminent scholars flock to reevaluate and improve upon Calabresi and Melamed's classic. (10) This Article shares the same ambition.

We contend that, while the Calabresi-Melamedian framework presents a solid basis for understanding legal entitlements, (11) a more complete analysis must probe beyond the ostensible dichotomy between property and liability rules. We seek to add another level to Calabresi and Melamed's analysis, to capture fully the protection of entitlements in our legal system.

Bylooking at their cathedral frozen in a moment in time--as in a single one of Monet's paintings--Calabresi and Melamed have overlooked the importance of examining the cathedral over the course of time, as did Monet's series. More concretely, by focusing their attention on static property and liability rules, Calabresi and Melamed have obscured the possibility of protecting legal entitlements by means of dynamic rules that we call "pliability rules." (12)

Pliability, or pliable, rules are contingent rules that provide an entitlement owner with property rule or liability rule protection as long as some specified condition obtains; however, once the relevant condition changes, a different rule protects the entitlement--either liability or property, as the circumstances dictate. Pliability rules, in other words, are dynamic rules, while property and liability rules are static. This can be seen by revisiting the famous case of Boomer v. Atlantic Cement Co. (13) In Boomer, homeowners near a manufacturing plant of Atlantic Cement complained that the plant's pollution gave rise to an actionable nuisance, and they sought an injunction that would close down the plant. The court, however, decided to permit the plant to continue operations, subject to its payment of permanent damages to the homeowners. Calabresi and Melamed viewed the case as presenting a choice between enforcing property rule protection, as the homeowners demanded, or liability rule protection, as the court eventually ruled. Calabresi and Melamed believed these to be the two basic options (14) because they--like the theorists that followed them--focused on discrete moments of legal protection in isolation. In reality, though, the court could have chosen a pliability rule. For example, the court might have allowed Atlantic Cement to pay damages and continue operating for five years to avoid immediate and massive layoffs at the plant, but also decree that at the end of the five years, the injunction would become absolute to enable homeowners' quiet and clean use of their realty. (15) This pliable rule--a five-year liability rule, followed by indefinite property rule protection--would permit the court to combine the features of liability and property rules over the course of time.

While the term "pliability rule" is original, this mode of legal entitlement has long existed in our legal system. The legal protection of share ownership in mergers is a classic example of a positive pliability rule. Consider the case of a corporate takeover succeeded by a freezeout. The minority shareholders can either accept the price offered by the acquirer or exercise their appraisal right, in which case a court will determine the appropriate compensation. In either case, the minority shareholders lose the ability to refuse to part with their shares. In other words, their initial property rule protection changes into a liability rule. As in other liability rules, the price they will receive is not determined by them; it is set by a third party.

Likewise, a real property owner may lose her property right if she allows adverse possessors to take hold of her land and use it openly for a statutorily specified period. The property rule protection of the landowner is conditional since it depends on her vigilance in safeguarding her land against potential takers. Failure to perform this duty erases the original protection of the land and transfers it to the adverse possessor. Adverse possession thus creates a "title shifting pliability rule," that is, a combination of property rules in which the triggering of a condition transfers property rule protection from the original entitlement holder to another.

Another pervasive kind of pliability rule in the law is "the zero order pliability rule." In fact, zero order pliability rules are the organizing principle of much of our intellectual property law. In zero order pliability rules, property rule protection is succeeded by a no liability rule. Specifically, upon a triggering event, the initial entitlement holder loses the ability to exercise property rule protection, such as the right to exclude, over her property. Instead the entitlement holder must allow all comers to use the property free of charge--that is, with zero order liability. Importantly, the subject item has not been abandoned. Notwithstanding the zero order liability, no third party may gain a superior right to that of the original entitlement holder. Rather, zero order pliability rules create anti-exclusion, or open access regimes. Consider, for example, a patent. A patent confers upon the patentee property rule protection for twenty years, but, upon the expiration of that term, the nature of protection changes from a property rule to a zero order liability rule since she can no longer refuse others the right to use her patent. (16) Copyright law provides a similar example.

These examples, and others, show the attractiveness of pliability rules...