Unifying remedies: property rules, liability rules, and startling rules.

• Author: Levmore, Saul
• Position: Property Rules, Liability Rules, and Inalienability: A Twenty-Five Year Retrospective

Imagine that B complains about pollution spewing forth from a factory owned by her neighbor, A. A generation of law students has now learned that B's possible remedies traverse the boundaries normally drawn between legal subject areas, much as the previous generation of lawyers learned to lower the divide between law and equity. The educational watershed was surely Calabresi and Melamed's justly celebrated article of twenty-five years ago, suggesting a grand theory of remedies and concentrating on what it called property rules and tort liability rules.' By focusing on (and moving between) property rights, damage awards, and private bargains around these rights and awards, Calabresi and Melamed vaporized the inherited barriers between private law rights and remedies.

In retrospect, that article is at least as interesting for what it missed as for what it wrought. Readers of law reviews know that a good deal of attention had been paid to the question of when judges should assign property rights or liability awards, and Calabresi and Melamed can be said to have anticipated and initiated that inquiry -- which I largely avoid in the present Essay.(2) Some readers also know that Calabresi and Melamed might be described as having produced something less than a grand theory of remedies -- if "grand" implies completeness -- because subsequent innovators have shown remedies not anticipated twenty-five years ago. My aim here is, first, to learn about remedies by exploring the nature of these renovations to the Calabresi-Melamed framework, and second, to build on this, framework in a way that yields substantial payoffs. I explore ways in which rights, remedies, and bargains can be combined to serve a variety of new tasks even while carrying on traditional efficiency, fairness, and redistributive functions. One particular finding is that rules that startle because they break a sensible convention -- not asking those in the right to pay when they are wronged -- can serve the interesting function of encouraging honest claims in the first place. The larger practical goal is to develop a more unified theory of remedies by showing how substantive and procedural considerations might be integrated.

Part I reviews the Calabresi-Melamed framework with a focus on the gaps it left unfilled. I explore in some detail a startling recent addition to the property and liability rules literature, authored by Professors Krier and Schwab. Calabresi and Melamed attracted attention, in large part, because they "found" a new and startling remedy in front of their readers' collective eyes; when A's behavior is a nuisance to B, a court might give B the power to enjoin A, but it might require B to pay A. Something about this split decision captivated most audiences even as it infuriated others, who found it too unusual to be of note. Krier and Schwab deepened the wedge by suggesting that there may be occasions when courts should decide that A can choose to stop and collect damages (that B would have suffered had A not stopped) from B. Part II identifies the singularly startling quality found in this work and, by implication, in their predecessors' work a quarter century earlier. Part III argues that the real contribution of the more recent work to die development of a unified theory of remedies may be something quite unanticipated. Along the way, I develop some ideas about the arrows of time associated with various remedies and about the content of (surprisingly ambiguous) familiar remedies. Finally, in a way that might be said to echo Calabresi and Melamed's work, I suggest that the more complete framework we can construct today reveals yet more rules that may be of some use to courts.

1. Property Rights and Liability Rules Once More

   1. The Four-Rule Framework

      Calabresi and Melamed were plainly not seeking to specify all of the remedial choices available to courts. Their exploration did include criminal law,(3) and was therefore not limited to tort damages ("liability rules") and to (the issuance or denial of) injunctions regarding property rights ("property rules"); it did not, however, include remedies for breach of contract, burdensome unconstitutional statutes, or violations of international law. It is somewhat more difficult to specify the terrain that Calabresi and Melamed did intend to cover in their work. It seems a bit circular (and insufficiently appreciative of the genius of their framework) to take them almost at their word and say that their target included (only) all the disputes we normally think of as contained in property and tort law.(4) Not only is property an elastic and ill-defined subject, but some of the value of the Calabresi-Melamed framework lies in its ability to illuminate fields outside of traditional property and tort law.(5) Nevertheless, inasmuch as the implicit collaborative goal of all who write on this matter is to develop a more complete framework, or a grander theory of remedies, it seems useful to take aim at the same target as one's predecessors. It may well be the case that an expanded set of remedies also covers a greater range of disputes, but I begin by returning to the very dispute Calabresi and Melamed brought on stage, a conflict among neighbors regarding an alleged nuisance.

      By way of quick review, imagine that B's injuries could be avoided by A shutting down its neighboring factory or, perhaps, installing a much taller smokestack to redirect its wastes.(6) Calabresi and Melamed organized the remedial world we know by describing three possible "rules," and then observing that their description suggested the emergence of a fourth, previously unappreciated remedial possibility. Rule 1: B might successfully enjoin A from operating (or from operating without the more formidable smokestack). A might, of course, negotiate with B after losing in court in this manner but, with this Rule 1, the court will have established die starting point for such bargains.(7) Rule 2: A can be required to pay damages for injuries that B has absorbed.(8) Rule 3: A can be permitted to continue as before -- the inverse of Rule 1. After describing these three rules, Calabresi and Melamed sought to demonstrate the value of this categorization by suggesting that the inverse of Rule 2 might also be used even though it was apparently unknown. The scheme was thus rounded out with Rule 4: B stops A but compensates A for A's damages (such as relocation costs).(9)

      Table 1. Summary of Calabresi-Melamed Framework

      RULE Description FRAMEWORK COMMENTS BUILDER 1 B stops A Calabresi-Melamed Classic injunction or (C-M) "property rule" 2 A pays B C-M Classic damages or "liability rule" 3 A can continue as C-M Reverse of Rule 1; B before loses to A's property right 4 B stops A, but pays C-M and Atwood; Analogous to eminent A's damages see note 9 domain, but likely to involve low damages; see note 9

      Every reader of this Essay already knows that this four-rule framework revealed the ability of courts to choose among endowments, whether in the form of property rights (as in Rules 1 and 3) or liability rules (as in Rules 2 and 4), in order to balance considerations of fairness and efficiency. One strategy or the other might be favored because of the likelihood of judicial error in assessing costs and benefits, because of intuitions about parties' (and judges') abilities to overcome collective action and strategic behavior problems and other transaction costs associated with bargaining, because of the likely redistributive or wealth consequences for bargaining itself, and because of sensibilities about the question of whether ex post payments legitimate (or grudgingly compensate) forced private transfers.(10) My focus here, however, is on the framework itself, and on the range of possible rules or remedies that may be found.

      It may be useful to comment on die role of Rule 4 (B stops A but compensates A) in the Calabresi-Melamed framework, because of both its notoriety over the last twenty-five years and its importance in the discussion below.(11) One of the novel characteristics of the Calabresi-Melamed work was its trans-substantive character. Other scholars had enumerated, classified, compared, and even invented remedies, but the new approach was radical in its sweep across takings law, property rights, and tort damages with as broad (and confident) a brush as had been seen before. Conventional readers required a payoff from this reconceptualization. Rule 4 provided a kind of evidence that a new view of the cathedral would, as the exquisite tide promised, reveal something not seen before. Another novelty was that the Calabresi-Melamed work showed that law and economics was something more than a taste for markets (and prices) and the worship of efficiency. Indeed, the article might be credited with making private law scholarship and judging respectable, economically sophisticated, and politically correct ventures. Judges could use property and liability rules to do what they thought efficient, fair, and even sensitive to concerns about wealth distribution. Rule 4 was instrumental in this regard inasmuch as it offered a remedy that shut down one party's operation in the interest of efficiency but then required compensation of die apparent winner. This sort of "separation" of remedial tools promised maneuvering space for judges.

   2. Other Property and Liability Rules

1. Filling in the Gaps

   One example of the genius of the early law and economics movement was its ability to conceptualize Rule 4 where thousands of lawyers had not seen it before.(12) It Was perhaps easier for later commentators, empowered by the Calabresi-Melamed framework, to find other rules that were omitted twenty-five years ago. The best known of these additions is probably the idea that a court may sometimes wish to do something between Rule I (B can enjoin A) and Rule 2 (A pays B's damages). For instance, a court could enjoin A from engaging in some level of...