Contracting Around Liability Rules

01 Apr 2012 11:39am Mark A. Lemley 



In his influential article Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, Robert Merges made the case that intellectual property (IP) owners vested with property entitlements can and do contract away their right to an injunction when it is efficient for them to do so.1 Merges’s article was a huge step forward in the sophistication of entitlement theory, which had previously focused on the efficiency of the initial allocation of entitlements.2 Merges’s key insight was that repeat players can contract around inefficient property rules and into more efficient transactions by forming collective rights organizations, a process that “significantly reduces state involvement in the creation of efficient entitlements.”3 Merges demonstrated a seemingly critical asymmetry between property rules and liability rules, thus cementing for many the superiority of property rules over liability rules. Merges’s evidence suggested that if a judge or a legislature gets the damages calculation wrong, we are stuck with an inefficient liability rule, but that we aren’t similarly stuck with an inefficiently-allocated property rule.

The evidence Merges brought to bear in his pathbreaking article is extremely important. By providing empirical evidence from various patent pools and copyright collectives, Merges enriched our consideration of how entitlement schemes will play out in the real world. But the picture Merges painted was incomplete. True, parties can contract around inefficient property rules in IP cases. But, as I show in this Essay, they can—and do—contract around inefficient liability rules as well. This is an important adjunct to Merges’s key insight. My evidence does not prove the superiority of liability rules over property rules,5 but it does undermine a major premise that has been used to support the claim that IP rights must be protected by property rules. 

In Part I, I discuss the background for the debate over property rules and liability rules in IP, and how Merges’s article made the case for the superiority of property rules by showing that parties will contract around property rules to avoid the problems of holdup. In Part II, I show that parties contract around liability rules at least as often as they bargain around property rules. I discuss bargaining around a variety of liability rules in IP, including settlements, suits against the government, and International Trade Commission (ITC) actions in patent cases, and compulsory licenses and “zero-price” liability rules in copyright cases. Finally, in Part III, I consider how parties’ willingness to contract around liability rules affects the overall debate in IP regarding the desirability of property rules versus liability rules. 



To see the full article, click the PDF button below.




1.Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 CALIF. L.REV. 1293 (1996) [hereinafter Merges, Contracting]. 

2.See, e.g., Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85HARV. L.REV. 1089, 1123–24, 1128 (1972). 

3.Id. at 1297. 



5.For a more detailed discussion of that question, see Mark A. Lemley & Philip J. Weiser, Should Property or Liability Rules Govern Information?, 85 TEX. L. REV. 783 (2007); Richard A. Epstein & F. Scott Kieff, Questioning the Frequency and Wisdom of Compulsory Licensing for Pharmaceutical Patents, 78 U. CHI. L. REV. 71 (2011); Jerome H. Reichman, Compulsory Licensing of Patented Pharmaceutical Inventions: Evaluating the Options, 37 J.L.MED.&ETHICS 247 (2009).  



  |   VIEW PDF


The California Law Review is the preeminent legal publication at the UC Berkeley School of Law.
Founded in 1912, CLR publishes six times per year on a variety of engaging topics in legal scholarship.
The law review is edited and published entirely by students at Berkeley Law.