Property Rights in the 21st Century

Following are excerpts from a panel discussion entitled "Property Rights in the 21st Century," which was part of the Federalist Society's 1998 National Lawyers Convention. The convention took place November 12-14, 1998, in Washington, D.C.

The comments below are a transcription of oral remarks by the Honorable Frank H. Easterbrook, United States Court of Appeals for the Seventh Circuit. In addition to his position on the federal bench, Judge Easterbrook is a noted scholar and a professor at the University of Chicago School of Law. Judge Easterbrook's remarks have been edited by the Federalist Society for publication in this newsletter. For other excerpts from the 1998 National Lawyers Convention, please see the upcoming issue of the Texas Review of Law and Politics (

JUDGE EASTERBROOK: The prospect of applying good solid 18th century intellectual property law to 21st century technology is bound to yield proposals for new and better law to match the new and better technology. Are you frightened by the idea of a patent on the human genome and products developed from that patent? Well, like the Supreme Court of California, you can just declare all of that information in the public domain. Or maybe you could amend the laws to create... mandatory low cost licensing. Do you get unsettled by the prospect that in the future [you will] get your books and articles via the Internet, and that they will come to you tagged or encrypted in such a way that the use you can make of it is limited, or that you have to pay for additional uses and dissemination? Well, you can forbid the encryption or tagging process. Does a software license forbid disassembly of the object code in search [of] the source code, and ideas about how to make similar or sometimes cooperating products? Tell the author that in the public interest, the law [will not] enforce onerous terms and then leave it to wise judges to determine which terms are onerous. [I have] come as a skeptic about the idea that new developments in technology imply the need for new laws or new rules. And [I am] skeptical for two fundamental reasons. One, we know so little about the effects of current laws of intellectual property that it is quite unrealistic to think that we would be able to know and choose intelligently for new technology. And second, it is much easier to design legal rules that hurt the process of the development of intellectual property than it is to design legal rules that help it. . . .

[C]onsider for a second a world in which the price of everything equals the marginal cost. But if so, given that intellectual property is costly to create and cheap to use, you [would not] be able to cover the cost of creation. . . . Patent, copyright, trademark, . . . trade secrets, [and] the rest of the law of intellectual property create property rights that elevate the price of use above marginal cost in order to allow the cost to be collected. And everybody can see that [that is] in many ways a terrible compromise. But, of course, is there anything better? To say improve is to suppose that we know what the optimal trade off is between the creation of new information and lower cost for using existing information. Well, we can test whether we know the optimal trade off for . . . new technologies by asking whether we know the optimal compromise for existing technologies. So, therefore, I would ask you why exactly is it that patents are 17 years long, whereas copyrights are the life of the author plus the future potential usefulness of Mickey Mouse? This is, I believe, the algorithm Congress chose to choose the length of the copyright period. Why is it? Well, it turns out that economists, people who have studied for their career, do not have any answers to the question: what is the optimal term? What is the proper extent of fair use? Same problem. We [do not] have an answer to that, and, therefore, one would be skeptical about our ability to improve.

Skeptical about that, one would ask who is the logical person to devise the improvement. Well, the Academy? You [cannot] even pick up a law journal these days . . . without it being full of proposals for new and better changes in the law of intellectual property, of compulsory licensing, of striking down foreign contracts, you can name it. These proposals are themselves intellectual property. And what do we know about intellectual property? Well, there have been very interesting academic studies of the returns for intellectual property. . . . Most patents are totally worthless. They never have any return, and [that is] the same for most books which [do not] pay off in royalties, and most songs which nobody ever sings. And if you look in the ASCAP repertory, there is no return. [There is] a small percentage of intellectual property that has some pay off and a tiny percentage of intellectual property with big pay offs. Ex ante, we [do not] know which of these it will be. . . . [For example], [a]mong the people to whom [Chester] Carlson tried to sell his Corona charging patent, which was the key to what he did, was IBM. [You would] think IBM would be very interested in this kind of technology. IBM commissioned a study from the very best business consultants that money could buy, and they determined that there would be no market for plain paper photocopying, and, therefore, they turned down the opportunity to buy this patent . . . . There was just no market for it. Ex ante, it turns out to be enormously hard to distinguish what will be useful ideas from what are useless ideas. And that proposition is as true of what [you will] read in the law reviews about useful ideas for intellectual property law as it is about Corona charging patents or which forms of biotechnology will be successful. So [there is] reason for skepticism about the Academy.

Now the legislature? Well, there [is not] any extra information there, and there are, of course, interest groups who are very interested in changing the law in a way that favors them at the expense of . . . the rest of us. That has largely been controlled historically because copyright and patent laws have been generic. And most of the people you think of as interest groups are both producers of intellectual property and consumers of intellectual property. But if you think about [the] proposals, [their proponents do not] want to exploit themselves as consumers. [So], many of the proposals for adapting intellectual property law for 21st century technologies would break down that organization of interest by having special rules for biotech, [or] special rules for [other industries]. And then you could be fairly sure that interest groups would dominate, and you [could not] trust [that] the outcome would be in the public interest.

Well, how about the courts as sources of these rules? There still [is not] very much information about what optimal rules look like. And I think judges are particularly bad at making legal rules for four basic reasons. First, [they are] judges. Second, [they are] lawyers. Third, [they are] ignorant and that is not redundant with being lawyers. And fourth, they are incoherent. Briefly, [what is] wrong with being judges? Well, IBM [did not] get xerography, [did not] understand it even though its executives are highly compensated for success and highly penalized for failure. If you fail in the business world, you get kicked out. And even if you [do not] get kicked out, your income from stock options and so on goes way down. We think that in business, in trying to make these assessments, these interest alignment devices and the possibility of being removed for failure are terribly important. What we think in business is terribly important is absolutely precluded in the judiciary. Judges [do not] get any reward for better rules. And if they prove real bad at devising rules, they [are not] fired. The second problem is one of being a lawyer. . . . [L]awyers scarcely have social science training, let alone technical training. . . . [W]hat a scientist brings to a problem is we formulate a hypothesis, we figure out how to test it empirically, we verify it or falsify it, and move on. The standard drill in law school is people are asked to make arguments . . . [b]ut talk is cheap. The question is: can you evaluate what [you are] doing? And judges, as lawyers, are not trained to do evaluation of the rules they make. [As for] [i]gnorance, I think you can see the point about ignorance: if IBM is in trouble, so are the rest of us. And incoherent? Well, one basic problem about judges is that there are just too many of them. There are 650-odd federal district judges, some of them more odd than others. . . . And even [for ]168 people, [ the] appellate federal judges, it is extremely difficult to get coherent policy out of a judiciary that large.

Well, if we [do not] really have an optimal system, where are we going to go? There are lots of things about which we [do not] know what the right outcome is. [What is] the right price of wheat? What is the right balance between, say, computers and movies in your consumption mix? These turn out to be enormously complex questions, but [they are] handled altogether without rules. When there [is not] any universally right approach, we rely on the affected people to make their own decisions through contract. You can have a series of Pareto-superior bargains that people believe make them all better off as they search for ways to improve themselves, lower their costs, and so on. And, indeed, systemically, the more complex the problem, the more ignorant we are, the better off we are avoiding rules and letting people solve the problem by contract. Now I can remind you of the Coase theorem, Ronald Coase's famous work, . . . which [postulates] that in a world of free contracting, if there are no costs to forming contracts, contracts will lead to the optimal outcome. And, indeed, the rule of law just [will not] matter. People will contract around it if need be.

We [do not] have a world of free contracting — the standard response to somebody who invokes the Coase theorem. We [do not] have it. [We are] not close to it. But the one thing we know about technology is that we are moving in that direction. . . . [H]aving people be able to communicate with one another cheaply and easily and often automatically through their computer, the prospect that Netscape Navigator or Microsoft Internet Explorer will be able to make a deal for you quickly and easily between you and an author about what terms you will have the latest article or book on, moves us toward the world of zero transaction [costs]. And, therefore, one would think [we are moving] toward a world in which it is relatively more attractive to resolve [these issues] by contract and not worry altogether about legal rules.

But I am after all a lawyer and a judge. And, therefore, I do want to say a few things about what we can do with our current stock of legal rules. [We are] obviously going to have legal rules; the most important of them defining the property rights that people can then trade. . . . It seems to me that the best thing we can do is not worry so much about what those rights are as to make them perfectly clear and straightforward, to have some intellectual property right in every piece of intellectual property, and then let people trade for it. [W]e should have some property rights in each piece of intellectual property, whether it be a human genome or an article or object code or whatever. I understand [this is] controversial. But it seems to me that if you [do not] know what the optimal compensation package for inventors or authors is, you have to have some kind of property rights to facilitate the transactions. If the best arrangement turns out to be one of free distribution of something, and ready access, if you start with a world of property rights, it is very easy to transact in such a way that there will be free distribution.

Let me make another point based on the law review literature. . . . [There is] a copyright in every law review article. In principle, the author could insist that the law review pay him or her $5,000 for the right to publish it, plus a reproduction fee for all the . . . prints. What you discover is that the authors of law review articles do all of this for free. Now one inference one can draw is [they are] saying something about the value of the intellectual property. But another inference one could draw is that when free distribution is socially optimal, people will not enforce their property rights in such a way that they try to hold up other people for money. If you start from property rights, you can negotiate for distribution at zero cost. If you start from a world of no property rights, it is extremely difficult, if indeed it is possible at all, to work to a world of compensation for intellectual property.

My second proposition is quite related. You want to create property rights where now there are none to make bargains possible. And my third proposition is that you want to create bargaining institutions. These kinds of things are actually going on all around you behind your back. [For example], [w]hen you use your browser to bring something online, what's going on behind your back is that they negotiate a protocol, they negotiate a key, they deal with who is holding the key for how long, [and] for how many sessions the key works. [It is] all done completely behind your back. [There is] a standard about how this negotiation occurs. It seems to me we should be encouraging other standards of that kind. You can have a negotiation that works behind your back so that when you go to LEXIS and download a chapter of Moore's Federal Practice, it comes tagged in such a way that it tells you whether you can redistribute it, and your computer will burp if you try to redistribute it without approval or without having paid. But those kinds of things exist in large numbers, are being formed in more, and they manage to reduce the cost of contracting.

So there are my propositions. We live in a world of ignorance. We can expect ignorance to be as prevalent in the 21st century as it has been in our past. We can expect lawyers and judges to be as afflicted by it in the 21st century as they were in their past. And in a world of ignorance, you want clear rules, property rights and negotiation institutions. [It is] all that simple. . . .


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