Agenda for 9 th Class

1. Agenda for 9th Class • Admin stuff • Handouts • Slides • Restrictive Covenants • Lunch sign up • Negotiation Exercise • Nuisance (con’t) • Calabresi & Melamed • Easements

2. Assignment for Next Class • Review any questions we did not discuss in class today • Read Restrictive Covenants Handout • Questions to think about / writing assignments • Do you think the court reached the right decision in Neponsit as a matter of law and/or policy? What is the best argument for the contrary result? (WG1&2) • How would Neponsit be resolved if the Restatement (Third) were followed by New York in 1938 (WG3) • Do you think the court reached the right decision in Fong as a matter of law and/or policy? What is the best argument for the contrary result? (WG4 & 5) • How would Fong be resolved if the Restatement (Third) were followed by Hawaii in 2000?(WG3)

3. Negotiation Results • Two treatments (experimental conditions) • Sher is law (shading passive solar house is not nuisance) • Ambiguity as to nuisance w.r.t. solar panels, light, and privacy • Prah is law (shading solar panels is nuisance) • Sher treatment • 3 no settlement • 2 settlement in which Holly pays Sally compensation for loss of light and privacy -- 38K average payment from Holly to Sally • 1 settlement in which Holly pays Sally 55K for access to pool and Jacuzzi • So house built at back of lot 100% of time • Prah treatment • 2 no settlement. Unclear whether house will be built at back of lot • 2 settlements allowing house to be built at back of lot. 76K avg. payment • 1 settlement in which Sally pays 80K and gets covenant that Holly will not block light • So house built at back of lot 40-80% of time • Some who settled mentioned covenants/easements.

4. Negotiation Analysis • If Sher is law (nuisance action not likely to succeed) • No settlement. No litigation, b/c Sally has no plausible case. • House is built at back of lot • Max Sally would pay (60K) is less than Min Holly would accept (85K) • Maybe settlement and/or litigation, b/c Sher dealt with blocking passive solar - not solar panels, blocking light to swimming pool, privacy • If Prah is law (nuisance action likely to succeed) • If remedy is damages • No settlement is plausible outcome • Max Holly willing to pay 40K = 25K (comp.) + 15K litigation costs • Min Sally willing to accept: 45K = 60K (comp) – 15k litig. costs • But settlement is also possible • Holly might be convinced that damages>25K, so offer >40K • Sally might accept less (e.g. 40K), b/c doesn’t want to litigate • If remedy is injunction settlement is possible • Max Holly willing to pay 100K = 85K + 15K; Min Sally WTA=45K • Remedy uncertain. Settlement possible between 40K & 100K • Even if settlement possible, negotiations might break down

5. Negotiation Results II • Sher treatment • 3 no settlement. Consistent with predictions • 2 settlements in which Holly pays Sally compensation for loss of light and privacy -- 38K average payment from Holly to Sally • Not consistent with simple prediction. Why would Holly pay? • Perhaps explicable if plausible nuisance action for light and privacy • 1 settlement in which Holly pays Sally 55K for access to pool and Jacuzzi. Very creative • Prah treatment • 2 no settlement. Unclear whether house will be built at back of lot • Consistent with prediction, b/c negotiations can break down • 2 settlements allowing house to be built at back of lot. 76K avg. payment • Consistent with predictions • 1 settlement in which Sally pays 80K and gets covenant that Holly will not block light. Why???? • Consistent with Coase Theorem? • Sher is law. House built at back of lot 100% of time • Prah is law. house built at back of law 40-80% of time • Are transactions costs zero?

6. Calabresi & Melamed (1972) • Coase analysis is too simple • Because must analyze not just who gets rights • But how rights are protected • Ancient lights example • Implicitly assumed property rule • No violation of rights only with consent • But could also analyze using liability rule • Violation of right requires only compensation • Analysis is largely an application of Coase Theorem

7. Property Rules & Liability Rules • Property rule • If A has an entitlement protected by a property rule, then A can prevent B from violating it without A’s consent • E.g. A can get a court order forbidding B from violating the right, and if B violates it he goes to jail • Owner of land can usually get order forbidding or evicting trespasser • Owner of patent can usually get order forbidding future infringement • Liability rule • If A has an entitlement protected by a liability rule, then if B violates it, B must pay A compensation • usually determined by a court • Contracting party ordinarily only has right to compensation, not to court order requiring performance • “Entitlement” = “Right” = “Property”

8. Same Entitlement / Different Protection I • Real property • Usually protected by property rule • But liability rule protection in some circumstances • In emergencies • Individuals have a right to go on another’s land without permission and only to pay damages • E.g. ship in storm has right to dock without permission of owner, paying only fair rental value and damage to dock • “liability rule” protection • Under “eminent domain power” • Government can take property for public purposes, without consent, and only pay fair market value’ • Liabilty Rule protection

9. Same Entitlement / Different Rules II • Intellectual property • Usually protected by property rule • Patent owner can get injunction against infringement • Can bar sale of infringing product • Sometimes protected by liability rule • Patent owner can only get damages • “reasonable royalty” remedy if infringer had innocently incorporated technology into its own product and removal would be extremely costly and disruptive • Ebay v Merck, US Supreme Court (2006)

10. How Choose Property or Liability Rule? • If transactions costs are low • Efficiency will result either way • Other considerations may be paramount • Distributional concerns, justice • If transactions costs are high • If court can determine efficient outcome • Give right to party that values it most • b/c can’t be sure that negotiation will reassign right • Doesn’t much matter if protected by property or liability rule • Compensation required by liability rule may be more just • If court cannot determine efficient outcome • Use liability rule • Internalizes costs of violation, leads to efficient action • Assign right to minimize collective action problems • Neighbors have right protect by liability rule. Neighbors can easily bring class action • Polluter has right protected liability rule. Hard to organize neighbors to pay

11. Last Question on Boomer • 6. Suppose that, when Atlantic built its factory, the surrounding land was completely undeveloped. Over time, however, the nearby city grew and very expensive homes were built closer and closer to the factory. The value of these homes was dramatically reduced by the pollution, and the total diminution in property values far outweighed the factory’s profits. Would that change the legal analysis in Boomer? Does it change your view of the fair and just outcome? In analyzing possible legal or equitable solutions to the dispute, consider the four rules set out by Calabresi and Melamed and discussed in the last three pages of this handout.

12. Easements • Easement is right to use property of another for specific purpose • Rights of way (e.g. driveway) • Utilities (water, sewer, electricity) • Negative easements • View easements (not to block view) • Solar easement (not to block solar panels) • Conservation easements (to prevent development) • Lateral easement (not to remove support for house on neighboring property) • Creation • By grant or reservation in deed • By necessity • Right of way for landlocked parcel • By prescription • Actual, open & notorious, hostile & adverse, continuous & uninterrupted use for prescriptive period (usually same as statute of limitations for adverse possession) • Easement appurtenant • Runs with land. Binds/benefits later holders of property • Easement in gross does not run with land. Disfavored. Must be clear.

13. Thomas • Martha Thomas subdivided land and conveyed landlocked parcel to Arthur Primus • Thomas and Primus agreed that access would be through passway across Thomas’s land • Defendant took possession from Arthur Primus (by inheritance?) • Plaintiffs took possession from Martha Thomas (by inheritance?) • Plaintiffs wanted to sell, but deal fell through because of passway • Plaintiffs brought quiet title action • To prove that no easement • Court of appeals • Defendants had easement by necessity • Even though • Arthur Primus could have purchased access through another property • No evidence of intent to create easement

14. Questions on Thomas • Do you think the court reached the right decision in Thomas? What is the best argument for the contrary result? • How would the Coase Theorem apply to Thomas? What is the efficient result? Would/could the parties have bargained to it even if the court had ruled there was no easement? If the parties could/would have bargained to the efficient solution, why does it matter which way the court ruled?

15. Felgenhauer • 1971 Felgenhauers purchased lot • In 1974-78 Felgenhauers operated restaurant • Deliveries made through back over lot owned by bank • 1982. Felgenhauers reopened restaurant • Deliveries through back lot resumed • 1984. Restaurant leased to Enloes (who sold to others) • Deliveries through back lot continued, even though Enloes did not think had right to do so • 1988. Bank constructs fence with gate for Enloes’ access • 1998. Sonis purchased bank property • 1999. Sonis told Felgenauer tenant that planned to cut off acces • Felgenauer sues to quiet title • Court holds that Felgenauer had acquired easement by prescription • 1982-1988 • Even though Enloes never claimed right to use bank property • “claim of right” means “without permission” e.g. without license or lease (same as “hostile”) • Construction of gate in 1988 does not show permission • B/c after prescriptive period

16. Felgenhauer • Do you think the court reached the right decision in Felgenhauer? What is the best argument for the contrary result? • How would the Coase Theorem apply to Felgenhauer? What is the efficient result? Would/could the parties have bargained to it even if the court had ruled there was no easement? If the parties could/would have bargained to the efficient solution, why does it matter which way the court ruled?