Property rules, liability rules, and uncertainty about property rights.

• Author: Sterk, Stewart E.

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)

1. 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...