The shadow of 'The Cathedral.'(Property Rules, Liability Rules, and Inalienability: A Twenty-Five Year Retrospective)

• Author: Rose, Carol M.

One View of the Cathedral(1) is now so much a part of the legal canon that it is widely known simply by the joined names of its two authors, "Calabresi and Melamed." In turn, "Calabresi and Melamed" has become a shorthand name for the article's most famous legacy: the distinction between "property rules" and "liability rules" as means of protecting entitlements.

Although The Cathedral has been widely cited over its venerable history,(2) academic interest in its basic analytic categories has come and gone in waves.(3) As this classic piece now approaches its twenty-fifth anniversary, however, a number of new articles have reignited the scholarly discussion of "property rules" and "liability rules" as analytic categories.(4) In several of these scholarly ventures, beginning with The Cathedral itself, a particular explanatory example looms in the foreground: It is an instance of environmental pollution, grounded on a classic nuisance case, Boomer v. Atlantic Cement Co.,(5) in which a cement factory polluted the air so as to damage a number of nearby residential properties.(6)

This Essay explores the choice of Boomer-like examples in Calabresi and Melamed's The Cathedral. More precisely, it focuses on an odd disjunct between foreground examples like Boomer and the background intuitions that actually seem to motivate the distinction between property rules and liability rules. In spite of Boomer's quite visible appearance in The Cathedral, a rather different example lurks in the shadows -- something I will call a "shadow example" -- that actually drives the analysis. Part I of this Essay will argue that the driving example in The Cathedral is not environmental nuisance at all, but rather the law of accidents, an example that barely makes an appearance in the article itself.

Interestingly enough, this same rhetorical pattern quite strikingly recurs in two of the most recent intellectual progeny of Calabresi and Melamed's famous article: Ian Ayres and Eric Talley's Solomonic Bargaining,(7) and Louis Kaplow and Steven Shavell's Property Rules Versus Liability Rules.(8) Although each substantially revised the original analysis of Calabresi and Melamed, each nevertheless continues the pattern of shadow example: Each work showcases property examples, notably the ever-handy Boomer, while relegating to the shadows the quite differ-ent paradigm that actually dominates the analysis. Parts II and III of this Essay respectively will argue, in the case of Ayres and Talley, that the shadow example is contract law; and in the case of Kaplow and Shavell, that the shadow example returns to the law of accidents.

The shadow example is an intriguing rhetorical turn -- intriguing in that it appears in The Cathedral, and even more intriguing in that it reemerges in these two important recent contributions to the scholarship of property rules and liability rules. To some degree the rhetorical pattern emerges from the very ambitiousness of the subject that all these writers address. Despite the becoming modesty of their title ("one view"), Calabresi and Melamed put forth a synoptic view of common law entitlements arguably not seen since Wesley Newcomb Hohfeld's turn-of-the-century general categorization of legal rights.(9) In turn, Ayres and Talley, as well as Kaplow and Shavell, are ambitious and able scholars in their own right, and they are interested in reconceptualizing these same large legal problems. It is not just any doctrine that all of these authors attack; it is the Cathedral, the structure of entitlements throughout the entire common law. If any of these authors' respective comprehensive analyses of property rules and liability rules are correct, then presumably the choice of specific examples should not matter: Property rules and liability rules should cut through them all.

But the position of this Essay is that the choice of examples does matter after all, and indeed it matters most in the very enterprise that Calabresi and Melamed so imaginatively opened up: delineating the underlying structur-e of common law entitlements. In the Conclusion of this Essay, I will argue that by inattentiveness to the examples they used, these authors not only claimed too much but also blurred what may be the distinctive characteristics of the various parts of our common law regimes. I will suggest that a closer attention to examples could lead to a deeper understanding of the common law -- one in which the conventional categories of tort, contract, and property reveal quite different dominating concerns.

1. Calabresi and Melamed's Liability Rule "Protections":

   The Shadow of Accidents

   In their analysis of property rules and liability rules, Calabresi and Melamed made at least two widely cited analytical contributions. The first was to illustrate a pattern of entitlement enforcement that might be dubbed "bilateral symmetry." That is, in a legal conflict, no matter which party wins, the prevailing party's entitlement may be vindicated in one of two ways, either through a "property rule" or through a "liability rule."(10) Calabresi and Melamed's chief example of these remedies and their symmetric relation came from nuisance law, notably a simplified variation on the Boomer case, in which they cast a single residence owner in confrontation with the polluting factory.(11) On their account, the example generates four "rules," two favoring the residence owner and two favoring the factory. If the homeowner has the entitlement to be free of pollution, [Property] Rule 1 permits her to enjoin the factory's pollution; but if her right is protected only by [Liability] Rule 2, she has to endure pollution so long as the factory pays damages. On the other hand, if the factory owner has the entitlement to pollute, protection through [Property] Rule 3 would allow him to do so freely. Finally, by the famous and hitherto unexplored [Liability] Rule 4, Calabresi and Melamed opined that the factory may be entitled to pollute, but the entitlement may be protected only by a liability rule -- so that the pollution entitlement can be bought by the resident at some measure of just compensation. Calabresi and Melamed's novel discussion of Rule 4 completed their bilaterally symmetric analysis of two Property Rules and two Liability Rules; indeed, it seemed even more significant when an Arizona judge arrived at a close-approximation of Rule 4, just as The Cathedral was appearing.(12)

   The Cathedral's second and more normative contribution has been a constant refrain in subsequent legal literature.(13 This is Calabresi and Melamed's claim about the appropriate deployment of the different rules. Liability rules, they argued, are best applied in situations with high transaction costs, where the parties cannot easily find or bargain with one another. Property rules, on the other hand, are best applied in situations where rights and rights-holders are known and transactions costs are low, so that the parties can presumably organize a trade for themselves.(14)

   For all its richly deserved fame, however, The Cathedral presents a few rhetorical puzzles. One of these occurs in a peculiar choice of language about the ways that the different rules "protect" entitlements. The protection of entitlements through "property rules" seems intuitively obvious, and hence this choice of language strikes a reader as unproblematic. But the phrase that sounds strange is that of an entitlement "protected by" a liability rule.(15)

   Consider the example for the liability rule's "protection" of an entitlement. In the garden-variety liability rule case, Calabresi and Melamed's Rule 2, the factory owner receives the right to pollute the nearby resident's air, but must pay damages. Yet in this case, an observer n-fight not think that the resident has an "entitlement protected by a liability rule" at all. Instead, she might think that the liability rule simply divides the entitlement differently and that the liability rule yields a different and diminished entitlement for the homeowner. Compare the liability rule regime with either property rule: In the latter, the entitlement holder has the whole meatball, so to speak, and the other party has nothing -- one has property, the other has zip. Under either of the two liability rules, on the other hand, the meatball gets split: The factory has an option to pollute (or once exercised, an easement), while the homeowner has a property right subject to an option (or easement). For the sake of simplicity, I will refer to this latter kind of right as a PRSTO (or PRSTE), for "property right subject to an option (or easement)."

   Thus the choice of rules affects the content of entitlements, a point that scholars have noticed for some time.(16) Mitchell Polinsky has remarked on the reasons why the PRSTO is not the same or as capacious as the property rule entitlement: When the option is exercised, the PRSTO holder receives none of the gains from trade.(17) In Ayres and Talley's more recent analysis, the authors simply assume that liability rules split the whole meatball into an option and what I am calling a PRSTO.(18)

   Why, then, did Calabresi and Melamed use this peculiar elocution of entitlements "protected by a liability rule," instead of just noting the different division of the meatball into alternative classes of entitlements? I think the answer lies in a shadow example, but the reason becomes clearer when one considers a second rhetorical puzzle in The Cathedral. This puzzle is about the famous Rule 4. Rule 4 seemed quite novel in The Cathedral, but once one looks at liability rules simply as dividing rights differently -- moving from the all-or-nothing, property/zip combination to the PRSTO/option combination -- then Rule 4 no longer looks in the least bit odd, or really very different from Rule 2. Looking at these arrangements as redefined entitlements, each of the liability rules delineates a combination of: (a) an option in one party; and (b) a...