Working Paper No. 09-17:
Infringement as Nuisance

Author(s):

Christopher Newman

Date Posted: March 2009

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Abstract:

When should we grant injunctions against infringers of intellectual property?  Before the Supreme Court's decision in eBay v. MercExchange, the presumptive answer used to be "always," on the grounds that property consists of a right to exclude, and infringement - like trespass - is a direct negation of that right.  As property scholars Richard Epstein and Henry Smith have argued, this traditional dominance of property rules serves important purposes, reducing information costs and preventing the systematic undercompensation of rightsholders endemic to a liability rule regime.  Nevertheless, there are other common law doctrines-notably accession and nuisance-that sometimes countenance use of liability rules to rescue from holdout certain investors who create value without securing in advance all the property rights needed to realize it. Withholding injunctive relief for nuisance-as Epstein urges we do when there is a large disparity of value between the spillover-creating activity and the damaged one-is tantamount to allowing the acquisition of non-possessory use privileges via accession. This article seeks to explain why these limited departures from strict property rules make sense in the realm of tangible property, and argues that those reasons are particularly salient in the realm of IP.  The key insight is that sometimes information as to what property rights will be needed by a productive enterprise can only be generated by making the sorts of investments that give rise to holdout.  Moreover, the arguments for applying strict property rules to IP overlook the fact that doing so creates the very sort of liability rule regime with regard to tangible property that Epstein and Smith warn against.  While this analysis justifies the denial of injunctive relief in some cases of holdout however, there is an important caveat.  Accession doctrine only justifies the use of liability rules where there is great disparity in value, and IP rights lack the sort of fungibility that facilitates such a comparison.  Where a patent has been licensed only exclusively or not at all, injunctions may remain the only way to protect entrepreneurial value.