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A Purchaser of a Product v. an Owner of a Stolen Intellectual Property: The

Revival of the Accession Rule
Article · February 2007
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SHERSUBMBIT.DOC 11/3/2006 1:48 PM
A PURCHASER OF A PRODUCT
V. AN OWNER OF STOLEN
INTELLECTUAL PROPERTY:
THE REVIVAL OF THE
ACCESSION RULE
EREZ SHAHAM∗ AND NOAM SHER ∗∗
The present article deals with the question: Which is the

appropriate rule for deciding a dispute between the buyer of a product
and an owner of intellectual property whose right has been integrated
in the product by a producer, without her agreement. A legal suit
against the producer is impractical since he is insolvent or impossible
to locate without excessive cost while the question of product
ownership and the other rights of both parties has to be decided. The
present article examines three possible solution rules: A rule based on
intellectual property law, which favors, in principle, the intellectual
property owner, a rule based on good-faith purchase laws or the market
overt rule, which allows for property transfer to the buyer assuming he
meets, among others, the good-faith requirement, and, finally, a rule
based on accession law, wherein the newly created asset will be
transferred to the ownership of the owner of the majority share of the
new product (based on the value of chattel, rights and work invested in
∗ Radzyner School of Law, Interdisciplinary Center Herzliya (IDC). Erez

Shaham’s contact information is: Interdisciplinary Center Herzliya P.O. Box 167,
Herzliya 46150, Israel Tel.: 972-9-9602745; E-mail: eshacham@idc.ac.il
∗∗ Assistant Professor of Law (Lecturer), Radzyner School of Law,
Interdisciplinary Center Herzliya (IDC). J.S.D.; LL.M.; M.A. (Economics); LL.B.; and
B.A. (Economics), Tel-Aviv University. Professor Sher can be reached at the IDC,
P.O. Box 167, Herzliya 46150, Israel; Tel.: 972-9-9527315; E-mail: nsher@idc.ac.il
319
Electronic copy of this paper is available at: http://ssrn.com/abstract=964918

320 WHITTIER LAW REVIEW Vol. 28
creating the new asset). Accordingly, the majority owner compensates

the minority owner with the equivalent of the chattel, rights and work
invested by the latter in the product. The present analysis comprises
two main elements: An analysis of the effect of alternative legal rules
on welfare in the relevant intellectual property and product markets,
and an analysis within the framework of economic analysis of torts,
viewing the situation described herein as a “legal accident.”
Our main thesis is that an accession rule is preferable, both for
directing behavior and for achieving legal objectives in the area of
insurance and risk distribution, both out of efficiency considerations
and out of welfare distribution considerations. We argue that among
other things, the suggested rule: (1) Effectively distinguishes between
situations where performing title examination by the consumer is
efficient and situations where it is not; (2) involves relatively low costs
in terms of reduced product demand; (3) is easily applicable; (4)
ensures a higher degree of market certainty; and (5) does not involve
high legal costs. Furthermore, the suggested rule compensates the
intellectual property owner for all her losses, but not beyond, and
compensates the consumer almost for all his losses, while creating an
efficient and just mechanism of insurance and risk distribution
compared to the alternative rules.
I. INTRODUCTION
A producer produces a product while infringing on another’s
intellectual property rights. A buyer purchases the infringing product.
This case represents a unique situation in which chattel, rights and the
producer’s work have been mixed together with another’s intellectual
property right. The complete product, which contains those elements
in an undistinguishable mixture, has been purchased by a certain buyer.
Who should receive the right of ownership of the infringing product—
the buyer or the intellectual right owner? What rights do both parties
have? Which law should decide the dispute? Apparently, the solution
is simple: The intellectual property owner will sue the producer
demanding that ownership of the infringing products be transferred to
her, receive profits derived from unauthorized use of her rights, and
receive compensation for her damages. However, in many cases such a
legal suit is impractical since the producer is insolvent or impossible, or
too costly to locate.
The first example is F.W. Woolworth Co. v. Contemporary Arts,
Electronic copy of this paper is available at: http://ssrn.com/abstract=964918

2006 THE REVIVAL OF THE ACCESSION RULE 321
Inc. (hereinafter “re Woolworth I”).1 In this case, Woolworth

purchased in good faith 127 dozen “cocker-spaniel” statuettes from a
source other than the owner of the copyrights in the original statuette
called “Cocker-Spaniel in Show Position.” The Supreme Court of the
United States held that, unbeknown to Woolworth, these dogs had been
copied from respondents and by marketing them, it became an
infringer. The Court, having found infringement, accordingly allowed
recovery of statutory damages in the amount of $5000 as provided by
the Copyright Law of the United States, with an injunction and
attorneys’ fees. Although Woolworth acted in good faith, the Court did
not find it necessary in this circumstance to use an alternative way of
compensation, such as the admitted realization of gross profits from the
sale of replicas of the copyrighted objects in the amount of about $900.
The second example is a situation where an electronic goods
manufacturer independently develops components for his products. It
is later revealed that one of the components developed by his engineers
is an infringement of a registered patent. That component has been
inseparably integrated in the products, and many patent-infringing
electronic products have been sold to consumers. Is the patent owner
entitled to ownership in the electronic products that are now in the
consumers’ possession? Is she entitled to compensation thereby?
What should the compensation rate be?
Below, we examine three possible solutions for these situations.
The first is to apply intellectual property laws, as in re Woolworth I.
These laws seek to establish a legal arrangement that will ensure the
existence of incentives for investment in the production of intellectual
assets. Accordingly, the law must strike a balance between granting
exclusivity to inventors and creators and the need to distribute
information to the public in order to promote future creation and
invention. At the same time, the law allows for exceptions to
exclusivity rights mainly based on not-for-profit use. Therefore, even
good-faith unauthorized use of intellectual property rights will be
1. F. W. Woolworth Co. v. Contemporary Arts Inc., 344 U.S. 228, 229 (1952)
[hereinafter “re Woolworth I”]. In a latter identical case, also involving Woolworth,
(Harms, Inc. v. F. W. Woolworth Co., 163 F. Supp. 484 (1958) [hereinafter re
Woolworth II]), the court relates to re Woolworth I and emphasizes: “I can find no
validity in the argument that a distinction be drawn between the 'manufacturers' cases
and the 'sellers' cases, or that the trial of the 'sellers' cases be deferred until the
'manufacturers' cases are decided.” Id. at 486. For further discussion in those cases,
see infra section III.
considered a violation. The law shows consideration for the infringer’s

good faith mainly in assessing the owners’ compensation. The
difficulty in applying intellectual property laws in such situations is
manifested mainly in the second example of the electronics
manufacturer, in which granting the patent owner ownership in the
electronic products currently possessed by the consumer seems
problematic on the face of it, both for efficiency and for distributive
justice considerations. This is true even if the courts substitute
reestablishment of de jure ownership with product value reward and
even if they are authorized to apply other mitigating considerations,
which they do from time to time. In the present article, we denote the
solution rule relying on the application of intellectual property laws—
which, in principle, are in favor of the intellectual property owner—the
IP rule.2
The second solution examined here is applying the laws of
competition for property rights between distant parties. These laws
deal with the question of ownership and other rights of parties who
found themselves inadvertently competing for the same resource. In
this context, we examine two dichotomous rules. The first is the
Anglo-American rule wherein the original owner is entitled to trace her
asset and return it (or at least its value) to her possession independently
of who possesses it, unless the transferor has a voidable title and the
buyer has purchased the asset in good faith. The second is the market
overt rule wherein anyone who has bought an asset in good faith and
for consideration (some add that the asset needs to be purchased from a
party known to sell assets of the same kind) is entitled to complete
ownership of the asset. Below, we conjointly analyze the rules
according to which the buyer in good faith can acquire ownership of
the asset, both subject to the good-faith purchase rule and subject to
market overt. The rules allowing the property’s transfer to the buyer,
so long as he has bought in good faith, will be jointly dubbed GF rule.
The third solution examined is applying accession law.
Accession law, together with the law of confusion of goods (which are
both part of the unjust enrichment law), deals with situations where the
assets of one party are mixed with, added to, or merged with those of
another.3 Based on accession law, whose structure and reasoning will
2. Softman Prod. Co., LLC v. Adobe Sys. Inc., 171 F. Supp. 2d 1075, 1090-91
(C.D. Cal. 2001).
3. Raddatz v. Hedgpeth, 35 Cal. Rptr. 855, 858 (1963).
be discussed below, we offer a new solution to the problem described

above. According to the suggested accession rule, the newly created
asset will be transferred to the owner of the major part of the new asset
(based on the value of chattel, rights and work invested in creating the
new asset).4 Accordingly, the majority owner must compensate the
minority owner for the value of chattel, rights and work invested by the
latter in creating the new asset.5 This solution will be referred to as the
accession rule.
Our main thesis is that applying the accession rule constitutes an
efficient, and moreover just solution to the question of ownership and
other rights of parties in a new asset created as a result of assets
accession (unintended by the claimants of rights in the new asset). We
argue that this solution ensures the proper balance between the relevant
markets—for products and intellectual properties—and reduces their
employment costs. In terms of directing the parties’ behavior, the
suggested rule effectively distinguishes between situations where
performing title examination by the consumer is efficient and situations
where it is not. For instance, in our second example—that of the
electronics manufacturer—it is inefficient for the consumer to conduct
such an inquiry. Conversely, in cases where intellectual property rights
are the main portion, as it seems to be in our first example of re
Woolworth I, it may be that the consumer can tell that the product in
question is based on a certain copyright. Therefore, on the face of it,
having him shoulder the burden of proof in case it emerges that the
intellectual property is the main right, may set in motion an efficient
mechanism of title examination of the asset. This rule is preferable to
the other rules for various reasons. For example, it entails relatively
low costs of reduced product demand, ensures greater market certainty
and does not involve high legal costs. Based on this simple and
intuitive rule, the parties could easily identify the value of the
intellectual property portion of the asset and invest accordingly in costs
of insuring and inquiring into the sold asset. It seems that the wider the
distribution of the asset in question, the lower the value of its
intellectual property portion. In addition, the accession rule allows for
balancing the loss of value to the parties through a similar mechanism
as the restitution mechanism in the accession law that relies on the
unjust enrichment law. The minority owner receives the value of his
4. Id.
5. Id.
portion and is therefore not disenfranchised, as determined by the

dichotomous rules of intellectual property law, on the one hand, and
involuntary transfer law, on the other. In terms of insurance and
damage distribution, the suggested rule creates a relatively efficient
damage distribution mechanism, which even ensures a high degree of
distributive justice compared to the alternative rules.
Although we claim it applies to all intellectual properties, the
analysis presented here focuses on the intellectual properties patents
and copyrights as illustrative examples. On the one hand, a patent
conditions title on registration and therefore allegedly ensures certainty
in determining ownership; on the other hand, a copyright is not
registered and therefore involves an inherent difficulty in determining
ownership.
Our method of analysis comprises two main elements. First,
analysis of the effect of alternative legal rules on welfare in the relevant
markets for intellectual property and products, in which intellectual
property rights are used as raw materials. Second, economic analysis
of torts such that the situation described herein, in which the original
owner of the intellectual property right mixed within the new chattel
and the buyer in good faith compete for the chattel title, is viewed as a
“legal accident.” According to the method of economic analysis of
torts, we discuss each in turn, the various considerations deriving from
the main objectives of torts—directing behavior and damage
distribution—while differentiating between efficiency and welfare
distribution considerations. Finally, we discuss the objectives and
considerations combined.
The rest of the article is as follows: Section I reviews the
theoretical literature on justifications for intellectual property laws and
defenses therein (exceptions), in general, and on intellectual property
types—patents and copyrights—in particular. We then review the
justifications for involuntary transfers (purchase in good faith and
market overt), and finally, the justifications for accession law. Section
II examines the three possible laws suggested as solutions for the case
discussed herein: Intellectual property law, involuntary property
transfer law and accession law and their applicability to the case. In
this framework, we investigate whether a special law applies to the
case in question. In Section III, we discuss which of the three possible
rules best directs the major players’ behavior, both in terms of
efficiency and in terms of welfare distribution. Section IV examines
which of the rules optimally realizes the law’s objectives in terms of
insurance and damage distribution, again, both in terms of efficiency

and in terms of welfare distribution. Examples for applying the
suggested rules are suggested in Section V, which also discusses
whether a good faith or a lack-of-knowledge criterion is required for
the suggested rule. Finally, our conclusions are presented in Section
VI.
II. A REVIEW OF THE LITERATURE
A. THEORETICAL JUSTIFICATIONS FOR CREATING AND DEFENDING

INTELLECTUAL PROPERTY RIGHTS
1. General
In general, there are two main approaches to justifying the
defense of intellectual property:6 The economic-utilitarian approach
and the natural rights approach.7 According to the economic-
utilitarian approach, exclusive rights should be granted to creators and
inventors in order to serve the public interest in creating, promoting
and distributing inventions, expressions, creations and abstract
6. See Justin Hughes, The Philosophy of Intellectual Property, 77 Geo. L.J. 287
(1988).
7. According to the natural rights approach, intellectual property should be
viewed as the creator’s or inventor’s natural right to his creation, derived from his
moral right to the creation. Some base this approach on Locke's theory of work and
view the creator's right as a natural right to the fruit of his labor. John Locke, Two
Treatises of Government, The First Treatise §§ 138-140 (Peter Laslett ed., Cambridge
U. Press 1988). Many scholars have criticized and applied the theory of work in the
intellectual property context. See generally, regarding copyrights, Stewart E. Sterk,
Rhetoric and Reality in Copyright Law, 94 Mich. L. Rev. 1197 (1996), and regarding
patents, A. Samuel Oddi, Un-Unified Economic Theories of Patents—The Not-Quite-
Holy Grail, 71 Notre Dame L. Rev. 267 (1996). Conversely, others base the natural
rights approach on Hegel's personality theory (George W.F. Hegel, Philosophy of
Right, §§ 41-45 (T.M. Knox trans., Oxford U. Press 1967)) and view the creation as
part of the creator's personality (see generally Margaret Jane Radin, Property and
Personhood, 34 Stan L. Rev. 957 (1982); Justin Hughes, The Personality Interest of
Artists and Inventors in Intellectual Property, 16 Cardozo Arts & Ent. L.J. 81 (1998)).
Apart from the two main approaches, additional approaches can be found, including
distributive justice, communitarianism (sharing and societal responsibility), unjust
enrichment, libertarian theories and even democratic theories. For more on that,
including references on intellectual property theories, see Peter S. Menell, Intellectual
Property: General Theories, Ency. of L. & Econ. 158-61 (Boudewijn Bouckaert &
Gerrit De Geest eds., 1999) (available at http://users.ugent.be/~gdegeest/1600book.pdf
(last accessed Oct. 12, 2006)).
products. The assumption underlying this approach is that information

products protected by intellectual property laws (such as musical
compositions, medicines and computer programs) constitute a kind of
public good with all the classical economic problems involved, such as
free riding and monopoly.8 Therefore, the economic analysis of
intellectual property focuses on establishing a legal arrangement to
secure incentives for market investment in the production of
intellectual property (or of information). This is done by granting
exclusive rights to the invention to creators and inventors, balanced
with the need to distribute the information to the public, in order to
promote the creation of new works and inventions.9
2. Theoretical Justifications for Not Defending (Exceptions to)

Intellectual Property
The justifications for limiting intellectual property rights and
for exemption of liability for their infringement are generally derived
from the balancing formula underlying intellectual property laws. In
the area of patents, it could be said that in general, the patent
infringement defenses seek to strike a balance between the interests of
patent rights owners and those of other groups, such as competitors,
users, vendors, and NPO’s (mostly research and educational
organizations). In addition, the defenses act to allow socially beneficial
activity, which would not take place otherwise due to high transaction
costs.10 This rationale served the law in recognizing several main
defenses,11 including the following: (1) Private, non-commercial
use—according to which private actions for non-commercial purposes
will not be considered as infringing on patent rights. The basis for this
defense is that private uses, which add to human knowledge and are
therefore socially beneficial, would not otherwise take place, as they
involve high transaction costs. In addition, non-commercial private
8. Robert P. Merges, Peter S. Menell, Mark A. Lemley & Thomas M. Jorde,

Intellectual Property in the New Technological Age, 12-18 (Aspen L. & Bus., 1997).
9. See supra n. 7; see also Gillian K. Hadfield, The Economics of Copyright Law:
An Historical Perspective, 38 Copy. L. Symposium 1, 40 (1992).
10. See generally Eyal H. Barash, Student Author, Experimental Uses, Patents, and
Scientific Progress, 91 Nw. U. L. Rev. 667 (1997); Jordan P. Karp, Student Author,
Experimental Use as Patent Infringement: The Impropriety of a Broad Exception, 100
Yale L.J. 2169, 2187 (1991).
11. See 35 U.S.C. § 271 (West 2001).
uses do not pose a significant threat to the patent owner’s monopoly;12

(2) Patent misuse—according to which the scope of the patent owner’s
use of rights deriving therefrom is limited solely to rights granted by
the patent registrar;13 (3) De minimus use—according to which, acts
designed for experimental purposes related to the invention will not be
considered as infringing on patent rights. The reason for that is that
patent defense must not prevent technological advance attained by way
of research and experimentation;14 (4) Good faith prior use—according
to which whoever made use of the invention in good faith, without
being aware that it is destined to be patented, will be allowed to
continue using it even after its registration. This defense is designed to
prevent situations in which the patent right is used to prevent another
person from proceeding with an activity begun before patent
registration.15
In the copyright area, the exceptions to the intellectual property
defense are designed to counterbalance the legally granted creators’
monopoly in those cases where it is necessary to promote creation.
When copyright conflicts with other rights (such as freedom of speech
and of occupation), the courts are required to strike a balance between
the contradictory rights and interests. Copyright law protects the users
in those situations where public interest dictates free access to the
creation and when no damage is done to the creation’s potential
market. Such use will enjoy legal protection when, on the one hand, it
may be beneficial, while on the other it constitutes no substitute to the
original creation and thus does not hamper the creator’s ability to sell
copies of his creations. Moreover, copyright law is designed to lay the
12. See Smithkline & French Laboratories Limited v. Evans Medical Limited, 1
F.S.R. 513, 518 (1988); McDonald v. Graham, 1 R.P.C. 407, 431 (1994).
13. In re Recombinant DNA Tech. Patent and Contract Litig., 850 F. Supp. 769,
773 (1994).
14. Roche Prod., Inc. v. Bolar Pharm. Co., Inc. 733 F.2d 858, 862 (1984); see also
Barash, supra n. 10, at 701-03.
15. This defense has been recognized in Australia and England, but has yet to be
adopted in the U.S. The Paris Convention left the matter to the decision of each of its
signatories. See Paris Convention for the Protection of Industrial Property, art. 4(B)
(signed June 2, 1934), 53 Stat. 1748; Robert L. Rohrback, Prior User Rights: Roses or
Thorns?, 2 U. Balt. Intell. Prop. L.J. 1 (1993). This defense counterbalances the policy
according to which the patent defense is granted to whoever submitted the registration
request first and was thus the first to reveal the information publicly, rather than to the
first inventor. See Ann Monotti, Balancing the Rights of the Patentee and Prior User
of an Invention: The Australian Experience, 19 E.I.P.R. 351, 351 (1997).
legal groundwork for creating a free market of creations. Thus,

according to the economic approach, there is ample justification for
exemption from authorization in cases of market failure or high
transaction costs, which prevent the conclusion of an efficient
transaction. The main legal defense is called the fair use doctrine,16
which is usually applied when copying the creation serves the public
interest, as in cases of news reports, instructional usage and parody.17
The idea behind this doctrine is to allow the creation to be copied based
on fair use only when either market failure, or high transaction costs,
do not allow the creation to be used by way of agreement
(authorization).18
B. THEORETICAL JUSTIFICATIONS FOR INVOLUNTARY PROPERTY

TRANSFERS
In the cases discussed herein, when intellectual property rights
are mixed with chattel and rights without the consent of the intellectual
property rights owner, and a new product is created which is
subsequently sold to the consumer, the question arises whether there
are justifications for changing the rules protecting intellectual
property—for example, as mentioned above, by applying good-faith
purchase or market overt rules.
There is substantial literature on the question whether, in the
case of competition between a rightful owner of chattel and a good
faith and for consideration buyer of that chattel, not from the rightful
owner, the latter should be granted property rights to the asset.19 Two
16. 17 U.S.C. § 107 (1994).

17. Wendy J. Gordon, Fair Use as Market Failure: A Structural and Economic
Analysis of the Betamax Case and its Predecessors, 82 Colum. L. Rev. 1600, 1614
(1982). Gordon suggests an accumulative triple test for determining fair use: (1) The
existence of market failure; (2) social desirability of authorizing use; and (3) no
fundamental infringement of copyright owner's title due to use authorization. Id.
18. See H.R. 94-1476, 94th Cong., § 107 (Sept. 3, 1976) (reprinted in 1976
U.S.C.C.A.N. at 65, 65-74); Richard A. Posner, When is Parody Fair Use?, 21 J. Leg.
Stud. 67 (1992).
19. This issue has attracted considerable attention in recent years, mainly with
respect to stolen works of art. See generally Andrea A. Hayworth, Stolen Artwork:
Deciding Ownership is No Pretty Picture, 43 Duke L.J. 337 (1993); William M.
Landes & Richard A. Posner, The Economics of Legal Disputes Over the Ownership of
Works of Art and Other Collectibles, in Economics of the Arts: Selected Essays 177
(Victor A. Ginsburg & Pierre-Michel Menger eds., 1996); Emily A. Maples, Student
Author, Holocaust Art: It Isn’t Always “Finders Keepers, Losers Weepers”: A Look
main schools of thought are discernable here.20 The first, or traditional

school,21 focuses on reducing the transaction costs, which impede
normal commercial life, while emphasizing the refinement of the
sellers’ and buyers’ market.22 It supports the application of a market
overt rule and claims that free and unhindered flow of commodities and
goods should be ensured, one that cannot and should not require many
investigations and examinations, when there is no prima facie evidence
for any legal flaw. The second school23 is based on viewing the
situation in which the original owner of chattel rights and the buyer in
good faith compete for the chattel title as an “accident.” The
discussion based on the second school weighs efficiency and equity
considerations in different aspects of directing the behavior and
distributing the damages of the market players and tries to estimate
which of the parties is the “least cost damage avoider,” who should
therefore be held liable for the legal accident.24 The underlying
assumption here is that the legal rule has no effect on the buyer’s
willingness to pay since any advantage to the buyer is a disadvantage to
the owner, where the buyer is also a future owner. One of this school’s
counterarguments to the first school focuses on markets in which goods
flow from legal owners to vendors. According to this argument, a
market overt rule is expected to make the buyers willing to purchase
at Art Stolen During the Third Reich, 9 Tulsa J. Comp. & Intl. L. 355 (2001); Patricia
Youngblood Reyhan, A Chaotic Palette: Conflict of Laws in Litigation Between
Original Owners and Good-Faith Purchasers of Stolen Art, 50 Duke L.J. 955 (2001).
20. For a distinction between the two major schools see Barak Medina, Augmenting
the Value of Ownership by Protecting it Only Partially: The “Market Overt” Rule
Revisited, 19 J. L. Econ. & Org. 343, 344 (2003).
21. See generally Daniel E. Murray, Sale in Market Overt, 9 Intl. & Comp. L. Q. 24
(1960); Curtis Nyquist, A Spectrum Theory of Negotiability, 78 Marquette L. Rev. 897
(1995).
22. Medina, supra n. 20, at 344.
23. See generally Saul Levmore, Variety and Uniformity in the Treatment of the
Good-Faith Purchaser, 16 J. Leg. Stud. 43 (1987); Menachem Mautner, “The Eternal
Triangles of the Law”: Toward a Theory of Priorities in Conflicts Involving Remote
Parties, 90 Mich. L. Rev. 95 (1991); Medina, supra n. 20, at 344; Harold R. Weinberg,
Sales Law, Economics, and the Negotiability of Goods, 9 J. Leg. Stud. 569 (1980).
24. For a presentation of the method of economic analysis of torts, see generally
Robert Cooter & Thomas Ulen, Law & Economics 287-371 (3d ed., Addison Wesley
Longman, Inc., 2000).] See generally William M. Landes & Richard A. Posner, The
Economic Structure of Tort Law (Harvard U. Press 1987); Richard A. Posner,
Economic Analysis of Law 179-235 (5th ed., Aspen L. & Bus. 1998); Steven Shavell,
Economic Analysis of Accident Law (Harvard U. Press 1987).
chattel at a higher price and to make the vendors easier to sell stolen
goods. Therefore, the rule is expected to promote trade in stolen
property and to make theft more profitable.25
Mautner argued that cases of competition for ownership
between unrelated parties should be analyzed analogously to
accidents.26 Accordingly, in his view, the issue of who should bear the
damage should be decided using the normative considerations relevant
to deciding the case of accidents. These common considerations
justify, discussing the various competition situations within a single
framework. Mautner suggests three main considerations that should
guide the determination of legal rules in situations of competition
between unrelated parties.27 The first refers to minimizing the costs of
preventing the legal accident. According to this ex ante or balance-of-
negligence consideration, liability should be imposed on the party that
could have prevented the accident at a lower cost. Mautner presents
this consideration also in terms of retributive justice: The party whose
behavior has not met the behavioral standard that could have been
expected of it is the punishable one.28 The second refers to minimizing
the losses resulting from the competition. This consideration would
require the courts to determine which party is the one which would
bear a smaller loss should the other party prevail. Imposing the
damages on this party ensures ex post efficiency. Mautner presents this
consideration also in terms of distributive justice: Assets under
competition should be allotted to those parties the damage to which
would be highest should they fail to win them (a balance of
disadvantage). The third and final consideration is minimizing
litigation costs. Litigation reviewing the balance of negligence (the
relative potential for preventing the accident) or of disadvantage (the
relative damage resulting from losing the competition) requires
complex and costly judicial assessment and also increases, due to its
inherent uncertainty, the very need for litigation. These costs may be
reduced by relying on typical-case categories subject to ad hoc review
of each case.
25. For different aspects of this claim see generally Landes & Posner, supra n. 24;
Posner, supra n. 24; Weinberg, supra n. 23, at 574.
26. Mautner, supra n. 23.
27. Id. at 100-02.
28. The essence of the concept of retributive justice is that wrongdoers deserve to
be punished for (and in proportion to) their wrongdoings. Id. at 103-04.
Mautner also argues that the typical requirements of

competition law, which condition the transfer of rights on good-faith
purchase (a requirement for subjective good faith designed to identify
the cases in which the buyer can prevent the accident with relative
ease) and actual consideration (or a worsening of the situation as an
approximation for assessing the parties’ balance of disadvantage), are
appropriately reflective of the ex post and ex ante efficiency
considerations. In addition, the legal treatment of cases of competition
for rights between unrelated parties is categorical and therefore
minimizes litigation costs.
According to Mautner, the “buyer in good faith and for
consideration” rule should be applied, by its very nature, only in those
cases of competition for which it cannot be assumed that the first
competitor, in time, could have efficiently prevented the competition
from starting in the first place. In these cases, it makes sense to allot
the asset competed for to the second competitor, so long as she acted in
good faith (in the above-mentioned sense) when contracting for the
asset competed for.
Dagan29 suggests adding three further property values to those
referred to by Mautner (efficiency and retributive justice): social
responsibility, distributive justice, and personality.30 Social
responsibility means that property owners who can prevent legal
accidents at minimal costs should do so (rather than the value of
retributive justice, which Mautner sees as justifying the balance-of-
disadvantage assessment). The value of distributive justice supports, as
in Mautner, giving considerable weight to the parties’ situation
(balance of disadvantage); only that, according to Dagan, the balance
of disadvantage should be assessed even when both parties are of equal
29. Hanoch Dagan, The Craft of Property, 91 Cal. L. Rev. 1517, 1544-45 (2003).
30. For a review of these values see generally Gregory S. Alexander, Takings and
the Post-Modern Dialectic of Property, 9 Const. Commentary 259, 263, 267-269, 272-
273, 275 (1992); Hegel, supra n. 7; Hughes, supra n. 7; Frank I. Michelman,
Possession vs. Distribution in the Constitutional Idea of Property, 72 Iowa L. Rev.
1319, 1320-1329 (1987); John Stuart Mill, Principles of Political Economy: With Some
of Their Applications (J.M. Robson ed., U. of Toronto Press 1965) (available at
http://olldownload.libertyfund.org/Texts/MillJS0172/Works/Vol02/0223.02.pdf)
(accessed on Oct. 12, 2006)); Radin, supra n. 7; Peter Singer, Animal Liberation: A
New Ethics for Our Treatment of Animals (Random House Inc. 1975); Joseph William
Singer & Jack M. Beermann, The Social Origins of Property, 6 Can. J. L. & Juris. 217,
246-247 (1993); Jeremy Waldron, Homelessness and the Issue of Freedom, in Liberal
Rights: Collected Papers 1981-1991 309 (Cambridge U. Press 1993).
economic status.31 The reason for that, in his opinion, is that such an
assessment may bring to light the fact that losers and winners belong to
certain societal groups, thus justifying a certain preference for a rule
benefiting disadvantaged groups.32 In his view, the personality value
calls for certain preference for the second party over the first, even
though this value is of relatively lesser weight.33
In addition to these values, which Dagan sees as relevant to all
competition situations, in the specific market overt situation we are
also called upon to consider the existence of third parties—vendors in
the open market. In his opinion, market overt can be justified in terms
of the incentive it gives to buyers to purchase only from vendors whose
involvement may insure the competing parties against future legal
accidents,34 while giving the vendors an incentive to refine their ability
to distinguish between goods of questionable versus legitimate
sources.35
Medina claims that the “least cost damage avoider” approach is
flawed in three respects. The first relates to the assumption that the
behavior of a party to an accident may be directed only by holding her
liable for that accident.36 In his opinion, that party’s behavior may be
directed also by means of exemption from liability (for example,
favoring the buyer in market overt conditions), similar to directing
behavior by means of a negligence rule in torts.37 The second respect
refers to the argument that the legal rule has no effect on commerce.38
31. Dagan, supra n. 29, at 1545.

32. See Richard Craswell, Passing on the Costs of Legal Rules: Efficiency and
Distribution in Buyer-Seller Relationships, 43 Stan. L. Rev. 361, 385-386 (1991);
Anthony T. Kronman, Wealth Maximization as a Normative Principle, 9 J. Leg. Stud.
227, 240 (1980); A. Mitchell Polinsky, An Introduction to Law and Economics 12-13
(Little, Brown & Co. (Canada) Ltd., 1983).
33. Mautner, supra n. 23, at 120-21.
34. Note that Dagan discusses market over of the kind where, in addition to the
good-faith and consideration requirements, the buyer is also required to show that he
has bought the asset from a person who is in the business of selling assets of the kind
sold (that is, from a chattel vendor). Dagan, supra, n.29, at 1545-46.
35. It should be noted that the merchant cannot profit from a quick sale of the stolen
goods, since the owner has a good claim against him in both tort and unjust enrichment
(in case he lost the title) and the purchaser has a good claim in both contract and tort (in
case he lost the title to the original owner). Id. at 1546.
36. Medina, supra n. 20, at 346-347.
37. See generally id.
Medina argues that the buyer’s willingness to pay for the sold good is
affected by the legal rule, and, in turn, affects the asset’s
negotiability.39 This effect on asset negotiability should be taken into
account in determining the legal rule. The third respect has to do with
viewing the effect of the legal rule on the buyer’s willingness to pay
exclusively through the prism of the incentives of prospective
infringer.40 Medina argues that a rule which reduces the buyer’s
willingness to pay (and thus reduces the risk of right infringement) has
social implications in that it reduces the title’s liquidation value and
may thus prevent efficient transactions from being executed. Medina’s
main argument is that:
the proper measure of the optimal rule must incorporate the rule’s
two effects—on trade and on the magnitude of the risk of right
violation. This goal is achieved by defining the optimal rule as the
one which maximizes the value of the ownership right. This value
is a weighted average of the right’s ‘reservation’ value and its
‘liquidation’ value. The first element is (negatively) correlated
with the magnitude of the risk of losing the right, while the second
resembles a potential buyer’s willingness to pay for it.41
Although Medina’s analysis does not support any rule as a
universally optimal one, it specifies the relevant parameters that define
which rule is optimal in given circumstances and shows that there are
cases in which the value of the ownership right is maximized if the
owner’s right is only partially protected against third parties.
Importantly, the case discussed herein—in which an owner of
an intellectual property right competes with an innocent purchaser for
ownership of an asset in which the former’s right was mixed—differs
from the usual case of open-market chattel sale in the following three
respects: First, ab initio, the buyer in this situation cannot later be
damaged by loss of rights in the same sense in which the owner loses
her own. It may be said that the asset’s value for each party is
different. For the owner, the relevant asset is the intellectual property
right and its value is the value of the right or its exercise; for the buyer,
the relevant asset is the newly mixed asset and its value is the value of
chattel. Second, in the case discussed herein, the value of each of those

40. See generally Landes & Posner, supra n. 24; Weinberg, supra n. 23.
41. Medina, supra n. 20, at 344.
rights depends on the applicable legal rule. Third, unlike in Medina’s

model, the value of rights does not provide a good estimate of the
social welfare implications involved.
C. JUSTIFICATIONS FOR PROPERTY TRANSFER RESULTING FROM

ACCESSION
It seems that the natural place to start establishing the
justifications for property transfer resulting from accession is the work
theory identified with Locke.42 The main question arising from this
theory is: Why should mixing work in a given resource generate
ownership thereof?43 According to one interpretation, the very
creation of an inseparable mixture of “something” that belongs to the
worker and “something” which belongs to the collective generates
ownership of the resource.44 The difficulty lies in defining that
“something.” In fact, that mixing “something” is the energy invested
by the worker, and is only remotely related, if at all, to aspects of that
worker’s personal autonomy, such as freedom of choice, the right to
work, the ability to work and personal identity. If this is indeed so, it
becomes difficult to justify granting full ownership of the mixture to
someone who has invested energy, invaluable as it may be, to that
resource. Dagan suggests that in such cases, confusion of goods and
accession rules be applied, so that the worker is allotted ownership in
proportion to his contribution to the final mixture.45
According to the second interpretation, the reason for granting
ownership is that work is a human good. Work is a rational, purposeful
and valuable activity whose products improve the human condition.46
Therefore, the worker should be rewarded.47 Accordingly, these are
42. See Locke, supra n. 7, at § 27. For discussion and criticism regarding Locke’s
theory, see Jeremy Waldron, The Right to Private Property 137-252 (1988).
43. The discussion of the accession issue, in the intellectual property context,
applies to the two basic accession situations: (1) Mixing the asset of one party (rights
to intellectual property) with the work of another; and (2) mixing the asset of one party
(rights to intellectual property) with the asset of another (rights to intellectual property
or a physical asset).
44. See Gopal Sreenivason, The Limits of Lockean Rights in Property 33 (Oxford U.
Press 1995); Waldron, supra n. 42, at 177-194.
45. For a discussion in these terms and the law governing them, see infra section
III.
46. Waldron, supra n. 38, at 147, 331-332.
47. See Locke, supra n. 7, at 286-87.
the conditions in which the worker is entitled to reward: (1) The

energy has been invested in activities conducive to the attainment of
objectives which necessarily constitute human good; (2) the return on
the investment is added value; and (3) the reward is proportional to the
added value of work.48
According to the third interpretation, the justification for
granting property right in the resource resulting from work is
economic-utilitarian: Giving incentives promoting the maximization
of aggregate social welfare. The basis for this argument is the inherent
inefficiency in communal situations. These are characterized by non-
cooperative behavior of overexploitation and underinvestment,49 and
even by suppression of attempts to prevent it.50 Only the creation of a
private property regime would lead to the internalization of the
negative and positive externalities of the decisions of people
concerning the resources at their disposal. Recognizing the property
right is justified when the cost to an individual (in the broad sense,
including loss of time, foregoing the opportunity do other things, etc.)
in a system which does not recognize private property, in order to
guarantee her use of scarce resources (by protection from trespassers,
thieves, etc.) is higher than the cost involved in a private property
regime.
Another argument raised in the same context is that granting
property rights to whoever invested work in a scarce resource will
promote increased utilization of resources. People would avoid
48. See Matthew H. Kramer, John Locke and the Origins of Private Property:
Philosophical Explorations of Individualism, Community, and Equality 170-171
(Cambridge U. Press 1997).
49. See generally Garret Hardin, The Tragedy of the Commons, 162 Science 1243
(1968) (available at
http://www.garretthardinsociety.org/articles/art_tragedy_of_the_commons.html) (last
accessed Oct. 12, 2006)).
50. See Harold Demsetz, Toward a Theory of Property Rights, 57 Am. Econ. Rev.
347, 354-356 (1967). Three accumulative reasons are usually suggested for a regime of
common ownership to suppress attempts to prevent non-cooperative conduct: (1) The
monitoring costs such a regime requires are higher than those of a private ownership
regime (information about who should be entitled to use the resource is required); also,
each partner would prefer another to bear these costs while action by another partner
would allow him to enjoy all the benefits of monitoring. (2) Each of the partners would
delay agreement for sharing monitoring costs in an attempt to bear minimal costs and
enjoy maximal benefits. (3) Should the arrangement hold, it would not hold for the next
generations, but only for the parties currently involved. See generally id.
investing work in and improving on existing resources if they are not

certain that their rights to those resources are guaranteed by the private
property defense. The purpose of recognizing and protecting property
is to develop private enterprise and the efficient utilization of
resources, as a value whose promotion benefits everyone.51
III. THE APPLICABLE LAW
A. INTELLECTUAL PROPERTY LAW
1. Copyright Law
American copyright law states that as a rule, the question of
whether a copyright has been infringed is independent of intent,52
knowledge53 or malice54 on the part of the infringer. Moreover, a
person would be considered an infringer even if she had acted in good
faith. Thus, in re Woolworth I, the U.S. Supreme Court ruled that
Woolworth was an infringer of copyright despite having acted in good
faith.55 An innocent infringer is not absolved of all liability for
copyright infringement; instead, the finding of innocence allows the
court to exercise its discretion to fashion the proper equitable remedy.
51. See generally e.g., Posner, supra n. 24, at 35-99; Thorstein Veblen, The
Beginning of Ownership, 4 Am. J. Soc. 352 (1898). “In the accepted economic
theories the ground of ownership is commonly conceived to be the productive labor of
the owner.” Id. at 352. (available at
http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/veblen/ownersh) (last accessed
Oct. 12, 2006)).
52. See Buck v. Jewell-LaSalle Realty Co., 283 U.S. 191, 198 (1931); Fitzgerald
Pub. Co., Inc. v. Baylor Pub. Co., Inc., 807 F.2d 1110, 1113 (2d Cir. 1986); Ford
Motor Co. v. B & H Supply, Inc., 646 F. Supp. 975, 989 (D. Minn. 1986); 18 C.J.S.
Copyrights § 43 (1990).
53. Fitzgerald, 807 F.2d at 1113; Albert E. Price, Inc. v. Metzner, 574 F. Supp. 281,
288 (E.D. Pa. 1983); Knickerbocker Toy Co., Inc. v. Genie Toys, Inc., 491 F. Supp.
526, 529 (E.D. Mo. 1980).
54. Midway Mfg. Co. v. Dirkschneider, 571 F. Supp. 282, 285 (D. Neb. 1983).
55. See supra n. 1 and accompanying text. See also Pye v. Mitchell, 574 F.2d 476,
481 (9th Cir. 1978); Roy Export Co. Estab. of Vaduz, Liechtenstein, Black Inc., A.G. v.
Columbia Broad. Sys., Inc., 503 F. Supp. 1137, 1151 (S.D.N.Y. 1980), aff’d, 672 F.2d
1095 (2d Cir. 1982), cert. denied, 459 U.S. 826 (1982): “The federal copyright statute
protects copyrighted works against mere copying, even when done in good faith and
even when not done to obtain competitive advantage over the owners of the copyrights
in the infringed works.” 503 F. Supp. at 1151.
In re Woolworth I, the Supreme Court even refused to reduce the

damages imposed on Woolworth and, among other things, charged it
with statutory compensation for the infringement.56
Regardless of what factors a court may use to determine
infringement or fair use, sections 501 through 510 of the Copyright Act
set forth the remedies available to a plaintiff when an infringement is
found:57 (1) Actual damages and any additional profits of the infringer
not taken into account in computing actual damages;58 (2) statutory
damages;59 or (3) a permanent injunction barring future
infringement,60 impoundment61 and destruction62 of the alleged
56. See supra n. 1 and accompanying text. See also Boisson v. Banian Ltd., 280 F.
Supp. 2d 10, 15 (E.D.N.Y. 2003). Courts may adjust the amount of such awards to
account for the infringer's culpability. Thus, courts can order a willful infringer to pay
as much as $100,000, or order an innocent infringer to pay as little as $200. The
court’s discretion derives from section 504(c)(2), the “innocent infringer” provision,
which allows reduction of minimum statutory damages to $200 where the infringer
“was not aware, and had no reason to believe that his or her act constituted an
infringement.” See 17 U.S.C.A. § 504(c)(2) (West Supp. 2005). For comparison see:
17 U.S.C.A. §§ 901, 907 (West Supp. 2005). “[A]n ‘innocent purchaser’ is a person
who purchases a semiconductor chip in good faith and without having notice of
protection with respect to the semiconductor chip product.” Id. at § 901(7). “[H]aving
‘notice of protection’ means having actual knowledge that, or reasonable grounds to
believe that, a mask work is protected.” Id. at § 901(8). “[A]n innocent purchaser of
an infringing semiconductor chip product shall or incur no liability under this chapter
with respect to the importation or distribution of units of the infringing semiconductor
chip product that occur before the innocent purchaser has notice of protection with
respect to the mark work embodied in the semiconductor chip product.” Id. at §
907(a)(1). A mask work notice constitutes prima facie evidence of notice of
protection. . . . “These provisions extend to any person who directly or indirectly
purchases an infringing semiconductor chip product from an innocent purchaser, and
apply only with respect to those units that an innocent purchaser purchased before
having notice of protection.” 18 C.J.S. Copyrights § 100 (1990).
57. 17 U.S.C. §§ 501-510 (2000). See also Jeff Toole, Student Author, Campbell v.
Acuff-Rose Music, Inc.: The Rap on Remedies, 29 Ind. L. Rev. 467, 472 (1995).
58. 17 U.S.C. § 504(b) (2000).
59. Id. at § 504(c).
60. Id. at § 502(a). "[A]ny court having jurisdiction of a civil action arising under
this title may . . . grant temporary and final injunctions on such terms as it may deem
reasonable to prevent or restrain infringement of a copyright.” Id.
61. Id. at § 503(a); Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417,
434 (1984).
62. 17 U.S.C.A. § 503(b) (West 2005).
infringing articles.63 The court may also order the turnover of items to
the plaintiff.64
2. Patent Law
Patent grants to its owner the right to exclude others from
“making, using, or selling” the patented invention for a term of
seventeen years.65 Actions predicated on direct patent infringement do
not require any showing of intent to infringe. An infringement may be
entirely inadvertent and unintentional and without knowledge of the
patent. “[I]nstead, knowledge and intent are considered only with
respect to damages.”66 The court in a patent infringement suit “may
increase the damages up to three times the amount found or
assessed.”67 An award of increased damages is proper for willful,
deliberate and intentional infringement.68
Patents may be enforced in federal court through injunctions
(preliminary or permanent) and awards of money damages.69
“Generally, the goal of patent infringement remedies is both to
compensate a patentee for losses that result from infringing activity,
and to deter future infringement.”70 A patent owner can recover losses
through compensatory damages, which are limited to amounts
“adequate to compensate for the infringement;” and awards of punitive
damages, attorney fees, and injunctions are remedies that are designed
63. Paul S. Owens, Impoundment Procedures Under the Copyright Act: The
Constitutional Infirmities, 14 Hofstra L. Rev. 211, 213 (1985).
64. See Ford Motor Co., Inc. v. B & H Supply, Inc., 646 F. Supp. 975, 997 (D.
Minn. 1986); Natl. Broad. Co. v. Sonneborn, 630 F. Supp. 524, 541 (D. Conn. 1985).
65. 35 U.S.C. § 154 (1982).
66. Fla. Prepaid Postsecondary Educ. Expense Bd. v. College Sav. Bank, 527 U.S.
627, 645 (1999).
67. 35 U.S.C.A. § 284 (West 2001). (“[T]he court shall award the claimant
damages adequate to compensate for the infringement, but in no event less than a
reasonable royalty for the use made of the invention by the infringer, together with
interest and costs as fixed by the court. . . . [T]he court may increase the damages up to
three times the amount found or assessed.”).
68. See Enterprise Mfg. Co. v. Shakespeare Co., 141 F.2d 916, 921 (6th Cir. 1944);
Remington Rand, Inc., v. Art Metal Const. Co., 34 F.2d 693, 698 (W.D.N.Y. 1929).
69. 35 U.S.C.A. §§ 281, 283-285 (West 2001).
70. See Ryan H. Coletti, Student Author, Neither Good Knorr Bad: The Federal
Circuit's Decision to Eliminate the “Adverse Inference” in Willful Infringement
Determinations Does Not Alleviate the Burden on Accused Patent Infringers, 1 Seton
Hall Cir. Rev. 269, 273 (2005).
to deter future infringement.71 In case of a finding of willful

infringement, courts are given the discretionary power to award
punitive damages by increasing compensatory damages or to award
reasonable attorneys’ fees.72
B. INVOLUNTARY TRANSFER LAW

Although the issue of stolen property is under the jurisdiction of
state law in the United States and each state legislates its own relevant
laws, it could be said that, essentially, state laws are in line with the
Uniform Commercial Code (hereinafter “UCC”).73 When an asset has
been taken from its owner without her consent, and the taker tries to
sell or mortgage it without the owner’s consent, as a rule, the owner is
entitled to follow the asset and demand its restitution regardless of who
possesses it at the time. This is true even if the person is innocent74
because theft is a criminal act and should not reward the thief with title
to the stolen property. Accordingly, the buyer, innocent as she may be,
will lose the competition with the original owner over the property
title.75
This is true so long as the transferor of rights owns a void title.
71. 35 U.S.C.A. §§ 284-285 (West 2001).

72. Id. at § 284. See Knorr-Bremse Systeme Fuer Nutzfahrzeuge Gmbh v. Dana
Corp., 383 F.3d 1337, 1347 (Fed. Cir. 2004); William F. Lee & Lawrence P. Cogswell,
III, Understanding and Addressing the Unfair Dilemma Created by the Doctrine of
Willful Patent Infringement, 41 Hous. L. Rev. 393, 422 (2004). Bad faith may also
serve as a basis for enhanced damages. But as the Federal Circuit has noted, the notion
of "bad faith" with respect to increased damages under § 284 “is sometimes
misunderstood because the term ‘bad faith’ has numerous patent law applications.”
Jurgens v. CBK, Ltd., 80 F.3d 1566, 1570 (1996). Because "bad faith" in this context
“properly refers to an infringer's failure to meet his affirmative duty to use due care in
avoiding infringement of another's patent rights,” (citing Underwater Devices Inc. v.
Morrison-Knudsen Co., 717 F.2d 1380, 1389-90 (Fed. Cir. 1983)), the court noted, “
‘bad faith’ is more correctly called ‘bad faith infringement,’ and it is merely a type of
willful infringement.” Jurgens, 80 F.3d at 1571.
73. U.C.C. § 2-403 (West 2005). Power to Transfer; Good Faith Purchase of
Goods; "Entrusting": “[a] purchaser of goods acquires all title that the purchaser’s
transferor had or had power to transfer except that a purchaser of a limited interest
acquires rights only to the extent of the interest purchased.” Id. at § 2-403(1).
74. See Karen Theresa Burke, International Transfers of Stolen Cultural Property:
Should Thieves Continue to Benefit From Domestic Laws Favoring Bona Fide
Purchasers?, 13 Loy. L.A. Intl. & Comp. L.J. 427, 446 (1990); 77A C.J.S. § 232 (West
1994).
75. Levmore, supra n. 23, at 57-58.
The UCC76 continues to state that a person with a voidable title—such

as one who possesses the original owner’s power of attorney to execute
the sale—is empowered to transfer valid title to a buyer in good faith
and for consideration.77 Thus, under the UCC, when goods have been
delivered under a transaction of purchase, the purchaser has power to
transfer a good title to a good-faith purchaser even though the
transferor was deceived as to the identity of the purchaser,78 the
delivery was in exchange for a check which is later dishonored,79 it
was agreed that the transaction was to be a “cash sale,”80 or the
delivery was procured through fraud punishable as larcenous under the
criminal law.81
76. Am. Stand. Credit, Inc. v. Natl. Cement Co., 643 F.2d 248, 268 (5th Cir. 1981);
Suburban Motors, Inc. v. St. Farm Mut. Auto. Ins. Co., 268 Cal. Rptr. 16, 18 (Cal. App.
3d Dist. 1990); Dan Pilson Auto Center, Inc. v. DeMarco, 509 N.E.2d 159, 162 (Ill.
App. 4th Dist. 1987); Touch of Class Leasing v. Mercedes-Benz Credit of Canada, Inc.,
591 A.2d 661, 666-67 (N.J. App. 1991); Everett v. U.S. Fire Ins. Co., 653 S.W.2d 948,
950 (Tex. App. 2d Dist. 1983); Welch v. Cayton, 395 S.E.2d 496, 500 (W.Va. App.
1990).
77. U.C.C. § 2-403(1) (West 2005). A person with voidable title has power to
transfer a good title to a good faith purchaser for value. If goods have been delivered
under a transaction of purchase, the purchaser has such power even if: (a) The
transferor was deceived as to the identity of the purchaser; (b) the delivery was in
exchange for a check that is later dishonored; (c) it was agreed that the transaction was
to be a 'cash sale;' or (d) the delivery was procured through criminal fraud. Id. See In
re Coast Trading Co., Inc., 744 F.2d 686, 690 (9th Cir. 1984); Am. Stand. Credit Inc.,
643 F.2d at 268 ; In re Wathen's Elevators, Inc., 32 B.R. 912, 919 (W.D. Bankr. Ky.
1983); Ledbetter v. Darwin Dobbs Co., Inc., 473 So. 2d 197, 200 (Ala. App. 1985);
Touch of Class Leasing, 591 A.2d at 667.
78. Charles Evans BMW, Inc. v. Williams, 395 S.E.2d 650, 651 (Ga. App. 1990);
United Road Machinery Co. v. Jasper, 568 S.W.2d 242, 244 (Ky. App. 1978).
79. Brumley Estate v. Iowa Beef Processors, Inc., 704 F.2d 1351, 1362 (5th Cir.
1983).
80. In re Coast Trading Co., Inc., 744 F.2d at 690.
81. Suburban Motors, Inc., 268 Cal. Rptr. at 18.
C. ACCESSION LAW
1. Accession and Confusion of Goods: General82

Accession law, together with the law of confusion of goods,
establishes decision rules regarding title and other rights in privately
owned assets, in situations where the assets of one party are mixed
with, added to, or merged with those of another, including situations
where the assets of one party have been changed due to the work of
another.83 In the United States, these laws are grouped into two main
categories: accession and confusion of goods.84 The two terms are
82. “The concepts of accession and confusion of goods are legal concepts known to
United States jurisprudence. In other nations (both common law and civil law), these
American concepts of accession and confusion of goods may be embedded
conceptually in what is known as the law of admixture.” Drew L. Kershen, Of Straying
Crops and Patent Rights, 43 Washburn L.J. 575, 610 n. 56 (2004) (emphasis added).
83. Bozeman Mortuary Assn v. Fairchild, 68 S.W.2d 756, 757 (Ky. App. 1934).
The law of accession, or acquisition of property by addition, had
its origin in the civil law or Code of Justinian. From the beginning it
has been regarded as the common law of England and so was
transplanted into our jurisprudence. With the changing conceptions
of justice and the growth of modern conditions, the original arbitrary
rule has been ameliorated and made more varied in its meaning and
application. This applicability to complex conditions renders
hazardous any attempt to give a comprehensive definition.
A pioneer and perhaps the leading case in America is Chief Justice
Robertson's opinion in Lampton's Ex'rs v. Preston's Ex'rs, 24 Ky. (1
J. J. Marsh.) 454, 19 Am. Dec. 104. The facts were that when Preston
recovered possession of Lampton of a certain lot there was in the
yard a quantity of unburnt and burnt bricks. The perplexing question
was as to whom the bricks belonged, whether to Lampton, who did
not own the soil out of which they were made but of which he was
possessed at the time when he made the bricks, or to Preston, who
was the true owner of the soil but who had no hand in making the
bricks. . . . It was held that the unburnt brick belonged to Preston as
the owner of the clay on payment for the molding, for although in the
form of brick, and strictly speaking they could not be called clay, yet
the material was still clay and might be combined in the common
mass and constitute again a substratum for the soil, possessing all its
previous qualities, so that the owner of the soil could identify the clay
in the artificial form of soft brick and could recover it. But the burnt
brick were held to belong to the manufacturer, Lampton, personally,
because there had been an essential and radical change in the quality
of the native clay through his labors. Id.
84. Whether the concepts of accession and confusion of goods should be treated as
one or as separate may best be illustrated by how the two major American legal
closely linked, and the courts use them to establish the parties’ rights in
situations where their title has been inseparably mixed or merged.
Accession law deals with situations where private ownership of an asset
has been acquired by turning the asset into something new, either
through work or by mixing or merging it with something else.85
Confusion of goods refers to situations where private ownership has
been acquired in an asset composed of two assets inseparably mixed or
merged.86 Importantly, we believe that the cases discussed herein
represent instances of mixing of the accession type, and accordingly,
the discussion will focus on this legal category.
2. Confusion of Goods
According to the applicable law in cases of confusion of goods,
in certain circumstances, a party whose asset has been inseparably
mixed with that of another may receive title to both assets. The parties’
rights in confusion of goods cases are considerably dependent on the
circumstances in which the mixing has taken place. Four basic
situations may be discerned in this context.87 First, the mixture is
made by the parties’ consent—the relationship to the goods, after
confusion, would rest upon the contract between the parties involved in
the consent.88 In this case, the presumption would be that they were
tenants in common, and each party will be entitled to her own
encyclopedias handle these concepts: American Jurisprudence, Second combines

these concepts into one entry. 1 Am. Jur. 2d Accession and Confusion §§ 1-25 (2005).
By contrast, Corpus Juris Secundum separates them into two entries. 1 C.J.S. Accession
§§ 1-16 (2005); 15A C.J.S. Confusion of Goods §§ 1-12 (2005).
85. Omaha Stand., Inc. v. Nissen, 187 N.W.2d 721, 724 (Iowa 1971); IDS Leasing
Corp. v. Leasing Assocs., Inc., 590 S.W.2d 607, 609 (Tex. Civ. App. 1st Dist. 1979).
The pre-revision Uniform Commercial Code defines accessions as goods that are
installed in or affixed to other goods. U.C.C. § 9-314(1) (1999) (“A security interest in
goods which attaches before they are installed in or affixed to other goods takes
priority as to the goods installed or affixed (called in this section ‘accessions’) over the
claims of all persons to the whole except as stated in subsection (3) and subject to
Section 9-315(1).”). See 1 Am. Jur. 2d, § 1 (“Accession generally signifies the
acquisition of title to personal property by its conversion into an entirely different thing
by labor bestowed on it or by its incorporation into a union with other property”).
86. 1 Am. Jur. 2d, § 2 (Confusion of goods is such intermixture of different persons'
goods that the property of each cannot be distinguished.).
87. In re Thompson, 145 N.W. 76, 79 (Iowa 1914).
88. See Kinney v. Cullman County Farm Bureau, 117 So. 189, 190 (Ala. 1928); In
re Thompson, 145 N.W. at 79; DeGaugh v. Jamison, 419 S.W.2d 389, 395 (Tex. Civ.
App. 1st Dist. 1967).
proportion.89 Second, the mixture arises from the willful or tortious

conduct of one of the parties—the party whose wrongful conduct
created the confusion forfeits all of her interest in the mixture to the
other party.90 In other words, the entire property vests in the party
whose right is invaded.91 This rule has been modified in cases where
all parts of the property are of equal value. In those cases, the parties
will become tenants in common, and each will be entitled to her own
proportion. Nevertheless, every presumption and intendment is against
the wrongdoer, and the burden would rest upon her to distinguish her
property, if possible, from that with which it has been intermingled.
Third, the mixture is innocent, or by mistake, or even negligently done,
where there is no willful fraud involved.92 In this case, the party
causing the confusion would not lose her property, but would
nevertheless not gain anything. To protect herself, the party will be
required to point out and designate her property, or else lose the whole
to the party with whom it has been intermingled.93 Fourth, the mixture
is the result of inevitable accident—the parties become tenants in
common in proportion to their respective interests sharing
proportionately any loss.94
3. Accession Law
The law applying to cases of accession states that the party who
has changed the property through work, or by merging the asset with
another in her possession, is able to acquire title in the newly created
asset with the following provisos: (1) The identity of the original asset
has merged with a new asset, which is significantly different from the
original asset;95 (2) the asset’s value has increased significantly96 (so
89. In re Thompson, 145 N.W. at 80.

90. See Evans v. Robbins, 897 F.2d 966, 969-70 (8th Cir. 1990); Great Northern St.
Bank v. Ryan, 292 F. 10, 13-14 (8th Cir. 1923).
91. Gilberton Contracting Co., Inc. v. Hook, 267 F. Supp. 393, 395 (E.D. Pa. 1967).
92. In re Thompson, 145 N.W. at 79.
93. See Basin Elec. Power Co-op. v. ANR Western Coal Dev. Co., 105 F.3d 417,
424 (8th Cir. 1997), rev’d in part and aff’d in part, ANR Western Coal Dev. Co. v.
Basic Elec. Power Co-op, 276 F.3d 957, 969 (8th Cir. 2002); Sullivan v. Murphy, 478
F.2d 938, 975 (D.C. Cir. 1973).
94. Hobbs v. Monarch Refrigerating Co., 115 N.E. 534, 536 (Ill. 1917).
95. See Eaton v. Langley, 47 S.W. 123, 124 (Ark. 1898); Austrian Motors, Ltd. v.
Travelers Ins. Co., 275 S.E.2d 702, 704 (Ga. App. 1980); Gaskins v. Davis, 20 S.E.
188, 189 (N.C. App. 1894).
that it may be said that the majority portion of the property belongs to
the party causing the change); (3) she is obliged to compensate the
original owner with the value of the changed (original) asset.97
Allowing for title acquisition by the party responsible for the
change is usually subject to an additional judicial distinction: Between
the case where the changes in question have been carried out
inadvertently and, generally speaking, in good faith, and the case where
they have been carried out maliciously or by way of deliberate
trespassing. A malicious converter is completely disentitled to any
right in the new asset, the value of the change being completely
irrelevant, since the fundamental rule is that wrongdoing must not be
rewarded.98 This is the case so long as the original owner can prove
that her own asset has been used to create the new asset, even if the
original asset cannot be precisely identified within the new one.99 On
the other hand, an innocent converter is normally entitled to ownership
of the newly created asset (provided that the new asset has been
fundamentally changed, that its value has increased significantly, and
that the converter will compensate the original owner with her asset’s
value).100
The above distinctions between a malicious and an innocent
converter constitute the basis for the judicial discussion of the question
which is the subject of the present article—What are the parties’ rights
96. 1 Am. Jur. 2d Accession and Confusion § 4 (“The ordinary repairs upon a
chattel by the addition of materials furnished by the person making the repairs or
owned by a third person become accessions to and merge in the article repaired, which,
provided it remains substantially the same thing, belongs, together with the additional
materials, to the owner of the original article. This rule has been applied even though
the materials added in making repairs are of greater value than the original article in its
defective condition. There is, however, authority to the contrary.”).
97. See Mack v. Snell, 35 N.E. 493, 494 (N.Y. 1893); Pulcifer v. Page, 32 Me. 404,
405-06 (Me. 1851); Isle Royal Min. Co. v. Hertin, 37 Mich. 332, 336 (Mich. 1877);
Dunn v. Oneal, 33 Tenn. 106, 111 (Tenn. 1853); Kirby Lumber Co. v. Temple Lumber
Co., 83 S.W.2d 638, 647-48 (Tex. 1935) .
98. See Burroughs v. Garrett, 352 P.2d 644, 648 (N.M. 1960); Kirby Lumber Co.,
83 S.W.2d at 647.
99. See Union Naval Stores Co. v. U.S., 240 U.S. 284, 292 (1916); Bozeman
Mortuary Assn. v. Fairchild, 68 S.W.2d 756, 757 (Ky. 1934); Lamoreaux v. Randall,
208 N.W. 104, 105-07 (N.D. 1926); Blackwood Tire & Vulcanizing Co. v. Auto
Storage Co., 182 S.W. 576 (Tenn. 1915).
100. See Eaton, 47 S.W. at 124; Austrian Motors Ltd., 275 S.E.2d at 705; Lampton's
Executors v. Preston's Executors, 1829 WL 1248, 1248 (Ky. App. 1829); Gaskins, 20
S.E. at 188.
in case of a good-faith purchase of the new asset from the converter?

In general, the same rights and remedies available to the original owner
against the converter are available against the buyer, since a person
cannot transfer more than she already has. Therefore, the American
courts have ruled that, in general, an innocent buyer from a malicious
converter does not acquire any title in the asset, while the original
owner is entitled to claim title to the new asset or receive its equivalent
value (as she is entitled to claim it from the willful converter).101 An
exception to this rule is the situation where the innocent buyer has
changed the asset so that its identity no longer exists.102 In that case,
the original owner can claim restitution of value, rather than the asset
itself. In these situations, as in others where the original owner cannot
recover the asset, the measure of damages recoverable from a bona fide
purchaser depends upon whether the original taking was innocent or
willful. If the original conversion was inadvertent or in good faith,
such a purchaser from a wrongdoer is allowed to deduct for the work
and expenditure made by his or her vendor.103 The measure of
damages is the value of the chattels when first taken from the owner.104
However, in the case of a purchaser from a willful trespasser, even
though such purchaser is without notice of wrong, the measure of
damages is the value at the time of such purchase, without deductions
for the labor or expenditure of the person guilty of the conversion.105
Nevertheless, there is also “evidence to the contrary” in
American rulings. In Railway Co. v. Hutchins, an important precedent
was set (which is an exception to the above rule and represents a
different approach to the bona fide purchaser’s rights), according to
which, in situations where the original owner cannot accept the good
itself, the latter may recover from the bona fide purchaser the complete
101. Wooden-Ware Co. v. U.S., 106 U.S. 432, 434 (1882).

102. Silsbury v. McCoon, 3 N.Y. 379, 385-86 (N.Y. 1850); Meyers v. Gerhart, 103
P. 1114, 1117 (Wash. 1909).
103. See Omaha & Grant Smelting & Refining Co. v. Tabor, 21 P. 925, 930-31
(Colo. 1889); Wing v. Milliken, 40 A. 138, 141 (Me. 1898); Powers v. Tilley, 32 A.
714, 848 (Me. 1894) .
104. See J. Oswald Boyd, 53 F. Supp. 103, 105 (E.D. Mich. 1943); Birmingham
Mineral R. Co. v. Tenn. Coal, Iron & R. Co., 28 So. 679, 681 (Ala. 1899); Shaw v.
Saunders, 85 So. 162, 163 (Fla. 1920); Jones Lumber Co. v. Gatliff, 82 S.W. 295, 296
(Ky. App. 1904); Hoxsie v. Empire Lumber Co., 43 N.W. 476, 476-77 (Minn. 1889).
105. See generally Union Naval Stores Co. v. U.S., 240 U.S. 284 (1916); Shaw, 85
So. at 163; J. Oswald Boyd, 53 F. Supp. at 105.
value of the new asset, deducted for the work and materials added by
the willful converter.106 In this case, the court held that in an action for
the conversion of chattels against an innocent purchaser from a person
who had previously converted the property to his own use and had
afterward added to its value by his own labor, the measure of the
damages is the value of the chattels when first taken from the owner,
whether the first taker was a willful or an involuntary trespasser.107
The court distinguished between the two types of
relationships—that between the original owner and the converter and
that between the original owner and the innocent purchaser.108 In the
first relationship, the original owner has a cause of action against the
willful converter on account of his property rights and on account of
the principle that wrongdoing cannot entitle the wrongdoer.109
Therefore, the original owner is entitled to the newly created asset or,
alternatively, to its equivalent value.110 This rule does not apply,
however, in the second relationship where the wrongdoing was not by
the party claiming title:
It may be that if these owners had found their wood in the
hands of the trespassers, it might have been retaken, or its value as
cord wood recovered; . . . the thief could gain nothing by his own
wrong, and therefore the results of his labor go to the owner of the
property. But this principle can not [sic] apply where an innocent
purchaser, comes into the case, for the simple reason that he has
done no wrong.
It is very true that the willful trespasser or thief can convey no
title to one to whom he sells, however innocent the purchaser may
be. But the question right here is, what does ‘title’ in this
connection mean? The original owner has the ‘title’ to his timber,
106. Railway Co. v. Hutchins, 32 Ohio St. 571, 580-81 (Ohio 1877). The facts in
this case are the following: “Timber was cut from lands of B. by trespassers, who, by
their labor, converted it into cord wood and railroad ties, thus increasing its value three-
fold. It was then sold to an innocent purchaser who was sued by B. for the value of the
wood and ties. Whatever might be the rule of damages, as against innocent purchasers,
B. can not recover the value of the timber as enhanced by the labor of the wrong-doers,
after it was severed from the realty.” Id. at 571-573.
107. Id. at 584-85.
108. See id. at 571.
109. Id. at 575.
110. Id. at 575-76.
and, as against the thief, the title to the results of the thief’s labor.
The wrong-doer, as it were, being estopped from setting up any
claim by virtue of the wrong he has done. Against the innocent
purchaser from the thief, the original owner still has the ‘title’ to
his timber, but by virtue of what does he now have ‘title’ to the
thief’s labor? The estoppel, so to call it, being created by fraud or
wrong, exists only against the one guilty of that fraud or wrong,
which the purchaser is not, and while it is effectual against the
wrong-doer, the reason of it does not exist as against the innocent
man, as to whom it therefore fails. As Judge Cooley says, it does
not comport with notions of justice and equity, that against those
who have done no wrong, these owners should recover three times
the value of what they have lost. They have never spent one cent
of money, nor one hour of labor, in changing this timber worth
one dollar, into cord wood worth three. All this was done by some
one [sic] else, and why should the owners recover for it? If they
are compensated for what they have lost, and all they have lost,
they are certainly fully paid. . . . And this is all they should be
allowed to recover.111
IV. DISCUSSION—DIRECTING BEHAVIOR
A. THE QUESTION OF DIRECTING BEHAVIOR —EFFICIENCY ASPECTS
1. The Initial Situation

This discussion deals with two types of markets. The first is the
product market, where a producer sells a product wherein an element of
an intellectual property right has been intermingled, such as a patent on
the production of the product as a whole or one or some of its
components. The second is the market for intellectual property rights,
where the owner of such a right sells it. The second market is related
to the first in being a market for supplying it with raw materials, and
whoever acquires the intellectual property right in the first market
becomes the producer in the second. When the producer fails to
acquire the intellectual property right in the raw-materials market, and
steals it, obtains it from an unauthorized vendor, or uses it negligently
111. Id. at 584-585 (citations omitted).

or by mistake, intellectual property law comes into force.

Our initial assumption is that intellectual property law, as it
applies to the relationship between the owner of the intellectual
property right and the producer, imposes an optimal rule system. The
problem discussed herein concerns the situation where the producer
uses the intellectual property right, in violation of intellectual property
law, in order to create a new product. This is done through research
and development relying on the intellectual property right, investing
labor and capital in integrating the right in the product, and investing
research, development, labor, and capital in producing other product
components. More importantly, the new product incorporates the
intellectual property right inseparably. Moreover, the product is not
only kept in the producer’s inventory but also actually sold to
consumers.
When the owner of an intellectual property right sues the
producer, the latter pays the full value of his infringement. Our
question here is how can there be any competition between the owner
and the consumer? The answer is when the producer becomes
insolvent and is unable to pay the full value of his infringement, when
he is untraceable or when the cost of a legal suit against her is
forbiddingly high, the intellectual property right owner and the
consumer who bought the product and is using it begin competing.
Below, we examine several possible legal rules for settling the
competition between those two parties in a situation such as this.
2. The IP Rule: Allotting Title to the Intellectual Property Right

Owner
From the point of view of directing the players’ behavior, a rule
allowing for legal action against the consumers in case of producer
bankruptcy—or the IP rule112— can affect the players’ behavior. A
rule allowing for recovering the property from the consumer provides
the owner of the intellectual property right with a formidable defense.
The more effective it is (it is reasonable for it to be more effective vis-
à-vis commercial consumers), the more it can reduce the costs of
protecting intellectual property rights. Reducing the costs of protecting
a patent can lead to a new equilibrium in the patent markets, with
112. For a description of the IP Rule meaning, see supra section II. For a description
of the law in this field, see supra section III.
greater use of less costly patents, compared to a situation where no

action against the consumer is possible. This result can promote the
investment in developing intellectual property rights.113
In the product market, reducing the costs of using intellectual
property rights will reduce production costs. This may lead to new
market equilibrium with increased production and lower prices.
Nevertheless, these market effects are somewhat ambiguous
and the rule’s implications for social welfare are far from clear.
Exposing the buyers to the option of losing the products they have
purchased might also affect the product market equilibrium. The
resulting uncertainty might reduce the demand for such products. If the
consumers can invest in increasing certainty by gathering information
and learning about the producer’s rights, the costs of such activities
will lead to the same result—reduced demand. This effect will in turn
lead to reduced production and lower prices. Even when the producers
can invest in increasing certainty by presenting information or through
insurance, the costs of such additional investment will lead to reduced
production, but also higher prices. We are therefore unable to
determine whether the effect of such improved defense on the
intellectual property market would necessarily lead to equilibrium in
the product market, such that more products are produced and sold for
a lower price. The additional effects might lead to reduced production
or even higher prices.
The market for intellectual property rights will be affected by
the equilibrium obtained in the market for products.114 Reduced
product prices could lead to reduced demand for intellectual property
rights, leading in turn to reduced incentives to invest in developing
such rights in the first place.
We cannot determine whether the hypothesized changes in
equilibrium in both markets would lead to improve efficiency. Can the
“least cost avoider” or “best risk bearer” approach be used to show that
the IP rule can minimize transaction costs? As mentioned above, this
part of the discussion asks whether it can be shown from an efficiency
perspective that the rule allowing the intellectual property right owner
to sue the consumers would lead to optimal direction of the various
players’ behavior. The answer is: Not necessarily.
113. Particularly in patents where it is relatively clear that granting a monopoly by

means of patent protection may provide an efficient incentive for producing them.
114. Simultaneous equilibrium exists between the two markets.
The effect on consumer behavior. Reducing the burden on

owners of intellectual property rights and increasing the burden on the
consumers would not necessarily improve efficiency. In product
markets, it is far from obvious that the consumers would change their
behavior in a socially desirable direction. Even if consumers know
there is a greater chance for the product to be taken away from them, it
is unclear whether passing the burden onto them would make them
invest, or optimally invest in title examination. In many cases, this
would not be worth their while—for example, due to the high costs of
obtaining information about the types of intellectual property rights
inherent in the product, this makes such a course of action too
expensive or ineffective. Therefore, increasing the buyers’ risk by
applying the rule according to which product ownership belongs to the
intellectual property right owner may have no effect at all on buyers’
behavior. Such a result may seem advantageous, because if title
examination is not socially desirable we would like the buyers to
choose not to go through with it. However, imposing the risk on the
buyers is not without its costs, in terms of reduced demand for a
product that might be taken away from them.
In addition, it may be that the buyers cannot distinguish ex ante
between a situation where title examination is worthwhile and a
situation where it is not, or that the cost of making such a distinction is
high in itself. This adverse selection problem115 might motivate the
buyers to invest in title examination uniformly, without distinguishing
between situations in which it is worth their while, or not. Thus, in
some cases, it becomes apparent ex post that the level of investment
has been too high, or in other cases, too low. The utility of such a
uniform level of title examinations must be weighed against the
additional costs involved in reduced product demand.
Another problem focuses on the distinction between the social
utility and the buyer’s private utility of title examinations. Even if title
examinations are socially efficient, it may be that the buyers would
invest in them suboptimally. This is because investing in title
examinations at the time of purchase will serve their interests only
partially. Some of that investment will benefit others, but it will not
115. One of the ways to describe the adverse selection problem has been suggested
by Kreps: “[A]dverse selection [is] where one party to a transaction knows things
pertaining to the transaction that are relevant to but unknown by the second party.”
David. M. Kreps, A Course in Microeconomic Theory 577 (Princeton U. Press, 1990).
benefit the examiner should the purchase deal not be concluded or due
to the examination’s effect of increasing the probability for the
intellectual property right owner to be protected in the future against
forfeiting her right. This is a free riding problem,116 which might lead
to underinvestment by the buyers. It is also possible that even if title
examinations are socially inefficient, the buyers will still carry them
out, for various reasons, such as high-risk aversion. Thus, even if a
title examination on their part is relatively expensive, having no
information available to the rest of the public, such as information
about the producer’s financial robustness, causes them to suffer from a
relative disadvantage in terms of examination and analysis capabilities.
The effect on producer behavior. The producers are active both
in the product and in the intellectual property rights markets. When the
probability that the product will be taken away from the consumers is
higher, the additional costs entailed will be divided between the
consumers and the producers. In such a situation, the IP rule could be
advantageous in terms of efficiency, provided that the producers are the
“least cost damage avoiders,” or at least good damage avoiders.
However, it is far from evident that the producers would redouble their
efforts to prevent any unauthorized use of intellectual property rights. It
could be that the cost of title examinations is forbiddingly high, or that
they are ineffective. Thus, it is difficult to ensure that each part of the
production plan developed by the producer’s employee is unprotected
by any intellectual property rights. It may also be possible that despite
thorough title examinations by the producer, the consumers are
incapable of ensuring that they have indeed been executed. This is an
adverse selection, or a moral hazard problem,117 which might affect the
producers’ incentive to perform the title examination in the first place,
efficient though it may be. The reason for that is that in such cases, the
consumers have no efficient tools for verifying the producers’
116. A free riding problem is created when buyers can benefit from others'
investments in title examinations without having to invest themselves. It can also be
viewed as a public goods problem, the public good being such information about the
intellectual property title inherent in the product. For a basic description of the free
riding problem and how it relates to the public goods problem, see Cooter & Ulen,
supra n. 24, at 42-43.
117. One of the ways to describe the moral hazard problem has been suggested by
Kreps: “[M]oral hazard, [is] where one party to a transaction may undertake certain
actions that (a) affect the other party's valuation of the transaction but that (b) the
second party cannot monitor/enforce perfectly.” Kreps, supra n. 115, at 577.
statement that they have indeed performed the examinations.

Therefore, the consumers will not agree to pay the added value
resulting from the reduced risk following the producer’s title
examination. Consequently, it will not be worth the producers’ while
to invest in title examinations not leading to the desirable results in the
first place. The solution of producer liability is inefficient in this case,
since the risk to the consumers inheres in situations where the producer
cannot be sued.
The effect on the intellectual property rights owner. Directing
the behavior of intellectual property right owners by means of the IP
rule would also not necessarily lead to improved efficiency. It is
believed that reducing the burden on the owners might lead to
suboptimal investment in defending their rights. Moreover, the rule
granting the title rights in the new asset to the owners of intellectual
property rights might provide them with excessive incentives to
discover infringements and lead to overinvestment in infringement
suits. Given that the applicable rule is that which favors the owners of
intellectual property rights, there may be situations in which the latter
would find it worthwhile to divert their efforts from investing in
protecting their rights in the first place to discovering infringements
and filing suits. This would enable them to take advantage of the
bargaining power this legal rule provides them vis-à-vis the consumers.
Moreover, absolute favoring of the owner of an intellectual
property right does not take into account the existence of situations in
which she is the “best damage avoider.” One such typical situation is
where a patent owner negotiates a patent sale to a large company
through a legal representative, and it is subsequently revealed that the
representative has concluded the transaction without proper authority
and without the patent owner’s consent, and kept the consideration to
himself. On the face of it, it seems that in this case, the intellectual
property right owner possesses better means of avoiding the accident
than in cases where her right is stolen, whether willfully, neglectfully
or due to producer error, with no involvement on her part.118
118. For the distinction in U.S. law between chattel theft which does not allow for
transfer of ownership to whoever purchased it in good faith and for consideration, and
situations where the transferor's title is voidable, for example, the transferor possesses
the original owner's power of attorney to complete the sale and he commits fraud
(situations which allow transferring chattel title to a good-faith and for-consideration
purchaser), see supra section III.
Regarding the effect of the attempt to direct the consumers’

behavior, also in the context of attempting to affect the producer’s and
the intellectual property right owner’s behavior, and despite the
efficiency advantages of the IP rule under certain circumstances, the
additional utility against the additional costs of reduced product
demand, increased product cost or reduced demand for intellectual
property rights which constitute a production factor in the product
market must be weighed.
More importantly, the above description applies to a situation
where the legal rule allows the owner of the intellectual property right
to take possession of the product in which her title has been mixed.
However, when discussing a new product in which the intellectual
property right has been inseparably mixed, and the asset is then sold to
a consumer, this rule cannot be taken for granted. When the new
product is created and sold, a crucial question arises, which is the focus
of this article: To whom does the law allot the title in the new product
and in what way? According to the above rule, in a competition
between an intellectual property right owner and a consumer, the law
allots the new right to the intellectual property right owner and thus
resolves the conflict. In addition, the above rule protects the intellectual
property right owner given possession of the new product using a rule
that may allow her to take possession of the product. Note that
granting the title in the mixed asset to the intellectual property right
owner does not necessarily imply that she would be able to recover it
from the consumer.
After the title in the mixed asset has been allotted to the
intellectual property right owner, an additional question arises: What
is the best way to protect that right? Here we must distinguish between
a property rule (like the above rule allowing the intellectual property
rights owner to recover the new product from the consumer) and a
liability rule, which does not allow her to recover the mixed asset, but
entitles her to be compensated in proportion to the extent of
infringement. The choice between protecting title, after its allotment,
by means of a property rule and protecting it by means of a liability
rule has efficiency implications. First, defense by means of a property
rule allows the intellectual property rights owner to reduce her
investment in defending her title compared to a situation where the
liability rule applies and increases the probability for the consumers to
lose the asset. Second, according to the economic analysis of law

literature,119 the differences between protection of the property right
(after having been allotted) are in terms of transaction costs in the
“narrow” sense (bargaining and enforcement costs). Both rules will be
efficient when the costs of bargaining between the intellectual property
rights owner and the consumer are not high and the bargaining can be
expected to be concluded successfully. A liability rule will be efficient
also when litigation costs, including the costs of estimating the value of
title infringement, are not high. More importantly, a property defense
rule provides the owner of intellectual property rights with relatively
considerable bargaining power.
It is believed that in the case discussed herein, the bargaining
costs would sometimes be high—as when the products in question are
sold to multiple consumers—when all products are sold to a single
commercial consumer. Usually, the infringement evaluation costs are
expected to be relatively high, due to the complexity of pricing
infringement in cases of unauthorized usage of intellectual property,
especially when such pricing has to consider the mixing of title with
the contribution of additional production factors. The expected results
of bargaining between the parties will also affect the probability of
discovering the infringement and filing a suit in the matter. A property
protection rule, ensuring that the intellectual property rights owner
recovers higher value, will give her an incentive to invest in exposing
infringements of her rights and in suits against consumers. These
incentives may exacerbate a potential problem of excessive incentives
for the intellectual property rights owner to invest in discovering
infringements, file a suit or create it in the first place.
3. The GF Rule: Good-faith Purchase or Market Overt

Is there a rule that allots title in the new product and protects it in
another, more efficient way? One such possible rule is the good-faith
purchase or market overt (“GF Rule”).120 Assume that in a
119. The discussion of and distinction between (first-order) allotment rules and
(second-order) allotment defence rules is based on Calabresi and Melamed (who
classified the rights protection rules to property, liability and inalienability rules); see
generally Guido Calabresi & A. Douglas Melamed, Property Rules, Liability Rules,
and Inalienability: One View of the Cathedral, 85 Harv. L. Rev. 1089 (1972).
120. For a detailed explanation of the GF rule, see supra section II. For a description
competition between an owner of intellectual property rights and a

producer, the latter would prevail. She now seeks to recover the new
products, but it appears these have been sold by the producer to a
consumer, or consumers, for substantial consideration. It also appears
that the infringing producer is insolvent, or untraceable except at a
forbiddingly high cost, so that the owner cannot recover damages. In
this case, whether the consumers have bought in good faith will
determine whether she could recover the new products.
An investigation of the effect of the GF rule on the relevant
markets—the product and the intellectual property rights markets—
reveals that we cannot determine the overall effect of the rule on their
efficiency. In markets for intellectual property rights, such a rule can
lead to increased costs of investing in means of protecting those rights.
This, in turn, may lead to reduced production and higher prices,
compared to a situation where the intellectual property rights’ owners
are always able to recover the new product wherein their title is
intermingled from the consumers. Such a result could then lead to
increased costs of using intellectual property rights in the product
market, making production more costly. In the resulting new
equilibrium in the product market, production will be reduced while the
products’ prices will rise. Nevertheless, as shown by the above
analysis regarding the relative effect of the IP rule, reducing the
buyers’ risk of losing possession of the products bought may increase
their demand. This effect will lead to increased production and higher
prices. If producers are forced to invest less in presenting information
about intellectual property rights to consumers or insurance, this would
lead to increased production, but also to lower prices. It is thus
difficult to determine the dominant market effect in each situation.
Furthermore, as already mentioned, the market for intellectual property
rights will be affected by the equilibrium obtained in the product
market. Thus, higher product prices may lead to increased demand for
creating intellectual property rights. In turn, this could lead to yet
higher prices, but also to increased production of intellectual property
rights.
More importantly, such market effects may also result from other
rules. For example, a rule foregoing some of the market avert
requirements—such as a rule requiring good faith as the sole condition
for the consumer’s continued possession of the product in question—
will somewhat enhance the effects described above. A rule allotting
title to the consumers unconditionally, on the other hand, will enhance
them considerably. Therefore, what is the desirable market

equilibrium? Can the “least cost avoider” or “best risk bearer”
approaches be used to determine the most efficient rule?
The effect on consumer behavior. As argued above, the IP rule
is sometimes advantageous in terms of the reduced burden on the
owners of intellectual property rights and the increased burden on the
consumers. In some situations, it is undesirable to increase the
consumers’ burden. The question is therefore, is there a rule that can
distinguish between those situations and grant title in the product to the
owner of intellectual property rights only in socially desirable
circumstances, and is the GF rule such a rule?
It is believed that the good-faith requirement underlying the GF
rule may often lead to directing both the consumer and the owner of
intellectual property rights’ behavior to invest optimally in means to
prevent the legal accident.121 In the case discussed herein, these means
include mainly collecting information about the rights inherent in the
product. Here, the good-faith requirement may have the effect
described above if its legal implication would be that the consumer
would be exempt from the need to return the product only if he invests
optimally in precautions designed to prevent the legal accident. The
required optimal level of investment is the socially desirable level, and
not the one desirable from the consumer’s point of view. Should such
a legal mechanism capable of determining and enforcing the socially
optimal level of investment truly exist, theoretically, the consumer
would invest optimally and be relieved of the risk of forfeiting the
asset. The owner of the intellectual property right, knowing that given
the consumer’s optimal behavior she will be unable to recover the
asset, will internalize the remaining portion of the risk and thus invest
optimally in avoiding it.
What can cause such a legal mechanism not to function
efficiently? As mentioned above,122 in many cases title examination is
not worthwhile, for example, due to the high cost of obtaining
121. For a similar approach, regarding the comparison between applying the rule of
favoring the original owner versus market overt, in a situation of open-market sale of
chattel lost to its original owner, suggesting that in most cases, both the original
owner's and the buyer's behavior can be optimally directed, see Medina, supra n. 20, at
354. For the basic tortuous approach, suggesting that both the injurer's and the victim's
behavior can be directed, see Cooter & Ulen, supra n. 24, at 304-08.
122. Supra section IV.
information about the types of intellectual property rights inherent in

the product, rendering them costly or ineffective. The GF rule, as well
as the IP rule, could prevent such inefficient examinations. On the
other hand, the GF rule generates costs due to reduced product
demand, but these are moderate compared to the costs entailed with the
IP rule. We have argued that in some circumstances, the buyers are
unable to distinguish ex ante between situations where performing title
examinations is or is not worthwhile, or that the cost of making this
distinction is high. This problem, described above as an adverse
selection problem, may cause the buyers to invest in the examinations
uniformly, so that in some cases it becomes apparent, ex post, that the
level of investment has been either too high or too low. In this case,
too, the GF rule—assuming the courts are able to determine that title
examination has not been efficient—will operate similarly to the IP
rule, and prevent the inefficient examinations from taking place. We
have claimed that the efficiency ensured by this uniform level of title
examinations should be weighed against the additional costs resulting
from reduced market demand, which are relatively low in this case.
Nevertheless, applying the GF rule—an allotment rule relying on
a determination of an optimal investment level by the courts—is not
without its costs. First, it creates considerable market uncertainty.
Second, it exposes the vulnerability of the allotment mechanism to
judicial errors in determining the appropriate standard. Particularly,
the consumer’s optimal level of investment is derived from several
parameters which are difficult to quantify, such as the producer’s
quality, the product type and the type of intellectual property rights that
can be mixed in it, and finally, the type of consumer purchasing the
products. Consequently, the cost of estimating the consumer’s optimal
level of investment by the courts is high. This results in an inefficient
mechanism of allotting the title in the product and protecting it by
means of the GF rule.
Third, in view of the fact that there are various types of
producers, products and intellectual property rights and various types
of consumers, it is difficult to determine criteria ensuring that the
consumers’ behavior is directed so that they invest optimally. It may
be that, in themselves, multiple criteria do not obstruct the application
of a liability standard. However, in view of the fact that in the case
discussed herein, the various consumers are very different from one
another, both in terms of expertise and in terms of knowledge, it is
doubtful whether such use of various judicially determined standards to
direct behavior is indeed efficient. Judicial determination of an optimal

investment standard represents an efficient mechanism when designed
to direct the behavior of experts and knowledgeable parties. For
example, when determining the standard of care required of doctors or
directors in public corporations. In such cases, the courts may rely on
the modus operandi of “reasonable” professionals to overcome
coordination problems, including free-riding problems, in determining
the appropriate level of investment in each case, based on a judicially
determined standard. In fact, the court can give those experts an
opportunity to discuss the optimal level of investment in each case and
act as a sort of coordination mechanism between professional parties.
Moreover, such a mechanism is more efficient when it harnesses the
professional reputation of those parties. All these conditions are
lacking in the present case.
Fourth, an additional problem is related to the distinction between
the social utility of title examinations and the buyer’s individual utility.
As already mentioned,123 it may be that even if performing the
examinations were socially efficient, the buyers would opt for
suboptimal investment, because investing in examinations performed at
the time of purchase would serve them only partially. Conversely, it
may be that even if title examinations were socially inefficient the
buyers would perform them because they expect a high personal risk
due to high-risk aversion. Ostensibly, the GF rule could help solving
those problems by determining an investment standard reflective of
social desirability. However, in view of the fact that in the present case
the various consumers are very different from one another, we very
much doubt the efficiency of using a judicially determined standard to
bridge this gap.
The effect on producer behavior. Should the GF rule be applied,
the chances for the product to be taken away from the consumer are
lower than when applying the rule favoring the owner of intellectual
property rights. It is reasonable to expect that reducing the risk would
generate profits that would be shared between the producers and the
consumers. On the other hand, reducing the risk for the consumers,
will reduce the producers’ incentive to invest in avoiding the legal
accident. We have argued that sometimes, the consumers are most
appropriately positioned to prevent the accident, or that at least, they

are good damage avoiders. The GF rule may indeed reduce the costs
of inefficient title examinations by the producers, but at the same time
might prevent them from performing efficient examinations. The fact
that the consumers may retain possession of the product by means of
independent title examinations may cause the producers to avoid a
double investment, which cannot substantially increase the consumers’
chances of winning. In other words, there are situations in which it
would be efficient for the producers to perform title examinations
because the relevant information required for that purpose is obtainable
at a low cost and is within the producers’ area of expertise. Moreover,
in some of those situations, the producers would have performed the
appropriate title examination had the legal rule favored the owner of
intellectual property rights. However, applying the GF rule may cause
the consumers to perform title examinations exempting them from
having to restitute the asset. In such cases, the title examinations that
the producers can perform are either unnecessary or of low utility for
the consumers, so that they are not worth the producers’ while.
The effect on the owners of intellectual property rights. In this
context, we have argued that favoring the owners absolutely might, in
some cases, lead to suboptimal investment in protecting their rights,
and in others, provide them with excessive incentives to reveal
infringements of intellectual property rights and make them over-invest
in infringement suits. On the other hand, applying the GF rule may
lead them, in some cases, to over-invest in defending their rights.
We believe that in some circumstances, the IP rule would impose
the legal accident burden on the “least cost damage avoider” or the
“best risk bearer,” while in others, it is the GF rule that will ensure
such a result.
In our opinion, applying the American good-faith purchase rules,
which are relevant only to cases of voidable title, when for example,
the transferor is the one possessing the original owner’s power of
attorney to complete the sale and he is fraudulent (but not to cases of
void title such as theft124) can allow, in some of the cases, for a
distinction between situations where the owner of intellectual property
rights is the “least cost damage avoider” or the “best risk bearer” and
situations where others, namely the producer and the consumer, are
favorable in those aspects. Nevertheless we believe that in many
124. See supra section III.

situations, the various parameters outlined here will have a stronger

effect, such that imposing the risk on the owner of intellectual property
rights in voidable title cases would not be worthwhile, while favoring
the consumer in void title cases would. In our opinion, an accession
rule will better determine when it would be desirable or undesirable to
impose the risk on the owner of intellectual property rights.
4. The Accession Rule

In situations of competition between an intellectual property
owner whose title has been used to produce a new product, without her
authorization, and the purchaser of the new product, we suggest to
apply an accession rule.125 When the value of the intellectual property
right is the major part of the new product’s value (based on the value of
chattel, rights and work invested in creating the new asset), its owner
will be entitled to complete ownership of the product. However, when
the value of the producer’s investment in the new product is its major
part, the consumer will be the one entitled to complete ownership
thereof. In addition, whoever gains possession of the product will be
required to compensate her competitor for the relative portion in the
product’s value which is not his or her own. Whoever gains possession
of the product will have, in this case, a cause of action against the
producer to restitute the value paid out to the loser in the competition
for title.126
In intellectual property rights markets, the rule can lead to
increased investment in means of defending such rights, but this effect
is expected to be relatively moderate. The reason for this is two-fold:
First, the owner of intellectual property rights can identify ex ante cases
where her rights might be transferred to consumers without her
authorization. For a right to be transferred this way, it must constitute
the relatively smaller portion of the products’ value. Such situations
are only a part of the existing situations, while in other situations, the
consumer will be unable to gain possession of the product, even should
she adopt proper standards of investment in title examination.
125. For a description of the Accession Rule, see supra section II. For a description
126. Both the owner of intellectual property rights and the consumer have, in many
cases, additional causes of action against the producer and they will be able to sue for
them as well. Our discussion is focused, however, on situations where the producer
cannot be sued.
Therefore, in situations where it is clear ex ante that the intellectual

property right is expected to constitute the majority portion, such as in
patents for the production of new products which is always or mostly a
finished good, we can expect a moderate increase in the intellectual
property rights owner’s investment in defending it. This, solely as a
consequence of the possibility that she would be forced to compensate
the end user for that portion of the product which does not derive from
her intellectual property right. This portion is small in comparison to
the value of the intellectual property right, and therefore it is expected
that the risk anticipated by the intellectual property right owner would
be relatively small, as would her increased investment. Second, in
those cases where the intellectual property right is expected to
constitute a relatively small portion of the product, such as a patent
intended to be used in a car system, this risk is partially neutralized by
her right to compensation by the consumers, although it is expected
that the risk bourn by the owner of intellectual property right will
increase her investment in precautions. Thus, the expected change in
the market for intellectual property rights would be small in
comparison to the situation where owners of intellectual property rights
can always recover the new product in which their rights has been
mixed from the consumers.
Hence, the changed equilibrium in the product market is also
expected to be moderate in comparison to a situation where owners of
intellectual property rights can always recover the new product from
the consumers. On the one hand, no significant change in production
costs is expected. On the other, the change in consumer demand is also
expected to be relatively small (compared to the abovementioned
alternative situation), for considerations similar to those outlined
above: First, in situations where it is clear ex ante that it is expected
for the intellectual property right to constitute the majority portion, the
increased risk imposed on the consumers will be mitigated by the
intellectual property right owner’s obligation to compensate them.
Second, in situations where the intellectual property right is expected to
constitute a minority portion, reducing the buyers’ risk of losing
purchased products may increase their demand for such products.
However, the change will be moderate as a result of their obligation to
compensate the intellectual property right owner. Moreover, it should
be stressed that the rebound effect of the change in the product market
on the market for intellectual property rights is also expected to be
small compared to the situation where the intellectual property right
owner is always able to recover the newly mixed product from the
consumers. At any rate, in this case as well, it is difficult to predict the
overall welfare effects of applying the suggested rule.
However, we argue that the accession rule is the most efficient
according to the “least cost damage avoider” or “best risk bearer”
approach, for the following reasons: (1) The effect on consumer
behavior; (2) the effect on producer behavior; and (3) the effect on the
behavior of the intellectual property right owner.
a. The Effect on Consumer Behavior

In some cases, the accession rule transfers the main risk to the
intellectual property right owner, while in others, to the consumers.
Thus, a mechanism is created which efficiently distinguishes between
situations where title examination by the consumer is efficient versus
inefficient. In cases of the first kind, when the intellectual property
right constitutes the relatively smaller portion, the consumer is not the
“least cost avoider.” When the product in question is a potential
mixture of various intellectual property rights, it is inefficient for the
consumer to perform title examination. For example, when buying a
vehicle, a television or a microwave oven, the consumer cannot be
aware of the various technologies involved, and is certainly unable to
determine which components of the finished good might contain
technology which is a potential object of intellectual property rights.
She also has no effective way of completing such an examination.
Imposing the risk on her cannot therefore direct her behavior to
performing the title examination. The result in which the consumer
does not bear the risk in such cases, and such cases carry no further
costs stemming from reduced demand for products of this kind, is thus
an efficient one.
In cases of the second kind, however—when the intellectual
property right is the comparatively larger portion—having the
consumer bear the risk may generate an effective title examination
mechanism. When the product is based on one major invention, on a
single major artwork or on one major production model, the consumer
has a good chance of observing whether it is based on a patent or a
copyright. In many cases, the consumer performs the title examination
anyway, because in such cases the product’s value is dependent mainly
on the intellectual property right value. However, consumers do not
perform the title examination in all cases where the intellectual
property right represents the major value. In some product categories,

they tend not to do so, for various reasons. For example, when buying
a lock from one company, based on a registered patent of another, will
the consumers make sure that such a patent exists and that the rights to
it have been legally bought by the company marketing the lock? A
mechanism that transfers the risk to the consumers in such cases
encourages them to perform title examination where it is efficient.
We argue that the accession rule ensures a very high rate of
correlation with the situations where it is efficient versus inefficient for
the consumers to perform the title examination. Moreover, the
mechanism described herein also has additional efficiency-improving
tools. First, the courts may affect the point of equilibrium (in which
the consumers are no longer required to perform the title examinations)
by influencing the degree of majority which transfers the right to the
consumers in those types of products for which it is revealed that a
problematic gap exists such that it is efficient for the consumers to
perform the examination despite the relative portion of the intellectual
property right being lower than the fifty-percent threshold. Second,
even when the courts determine the degree of majority such that the
title is sometimes transferred to the buyers, some of the buyers will
realize that the title examinations are still worth their while,
economically speaking, and carry them out. Such tools will also help
solve the adverse selection problem, which might cause the buyers to
invest in the examinations uniformly—sometimes too much and
sometimes too little—in circumstances where they cannot distinguish
ex ante between situations where doing so is efficient versus
inefficient, or that such a distinction is forbiddingly costly. This
solution is dependent, of course on the courts’ ability to determine that
performing the examination was not efficient and can affect the level of
investment in performing the examination by influencing the degree of
majority that transfers the title to the consumers.
However, as argued above, when the title examinations are either
costly or ineffective, both the GF and the IP rules can act to prevent
them from being performed. We have also argued that both rules are
capable of dealing with the adverse selection problem in a similar way.
We believe, however, that the accession rule offers the following
efficiency advantages compared to the IP rule. First, as already
mentioned, the suggested rule involves relatively low costs of reduced
product demand. On the other hand, the IP rule carries a significant
disadvantage in that it reduces product demand quite substantially. The
risk of forfeiting the asset affects product markets similarly to taxing

the products. Second, the accession rule will ensure grater certainty in
market activity because the IP rule exposes the consumers to the risk of
forfeiting the products in situations where they are unable to ascertain
title. Third, we have argued that the IP rule does not overcome the gap
resulting from the distinction between the social utility of performing
title examinations—a criterion used to determine the socially optimal
level of investment—and the buyer’s individual utility—used to
determine her own level of investment. The accession rule may help
solve this problem through the courts’ influence on the degree of
majority that transfers the title to the consumers in those product
categories for which such a problem is discovered.
We also believe the accession rule offers efficiency advantages
compared to the GF rule. First, the accession rule is much less
dependent on court rulings compared to a rule based on the good-faith
requirement. Therefore, the suggested rule will ensure much higher
market certainty. Second, the accession rule does not require costly
litigation as in the GF rule, and the exposure of efficiency of the
allotment mechanism to judicial errors in determining the appropriate
standard is smaller. Third, we have argued that in view of the
complexity of the cases and in view of the fact that in the case
discussed herein, the various consumers differ greatly from one another
both in level of expertise and in knowledge, the efficiency of using
various judicially determined standards as means of behavior direction
is doubtful. The accession rule is much easier to apply by the buyers.
It requires hardly any knowledge or expertise. Fourth, we have argued
that the GF rule does not efficiently overcome the gap resulting from
the distinction between the title examinations’ social utility and the
buyer’s own utility. As already mentioned, the accession rule can help
solve this problem through the courts’ influence on the degree of
majority which transfers the title to the consumers in those types of
products for which such a problem is found to exist. In sum, the
accession rule is preferable to the GF rule, even if it does not resolve
this issue completely, because it is simple and highly applicable.
b. The Effect on Producer Behavior
We believe the accession rule offers a good potential of causing

producers to efficiently invest in performing title examinations. We
have argued that the producers are often best placed to prevent the
accident, or at least, that they are good damage avoiders. The
accession and GF rules are both preferable to the IP rule, in that they
may reduce the costs of inefficient title examinations by the producers.
The accession rule is superior to the GF rule in that the latter might
prevent efficient title examinations from being performed by the
producers. We have argued that in some situations, title examinations
by the producers, though efficient, will not take place—for example, in
those situations where the consumers can perform low-cost title
examinations that would exempt them from the requirement to forfeit
the asset. In such cases, any title examination by the producers is
unnecessary for, or at least of little use to the consumers, so that they
are not worth the producers’ while. Conversely, the accession rule
does not create such an obstacle dissuading producers from completing
title examinations.
c. The Effect on the Behavior of the Intellectual Property Right Owner
We have argued that absolute favoring of intellectual property

right owners might lead, in some cases, to suboptimal investment in
defending their rights, and in others, to excessive incentives for
discovering title infringements and overinvestment in defending their
rights. On the other hand, adopting the GF rule might lead them, in
some cases, to over-invest in defending their rights. We believe the
accession rule creates incentives for overinvestment or
underinvestment in defending their rights. As already mentioned, in
situations where their rights are expected to constitute the majority
portion of the mixed product, the consumers and producers are the
“least cost damage avoiders.” In such situations, it is relatively easy to
identify the products wherein intellectual property rights have been
mixed, and there is no need for considerable additional investment by
the intellectual property right owners in defending their rights.
Imposing the burden on the consumers and producers, with no obstacle
preventing the title examinations from being performed by the
producers, will therefore be efficient. On the other hand, in situations
where there is a high probability for the intellectual property right
owners to be mixed in the product without constituting the major
portion, as in patents designed to be used in a car system or in an
electronic gadget, the suggested accession rule will impose the burden
on the owners of intellectual property rights. In these situations, it is

the latter who are the “least cost damage avoiders,” or at least good
damage avoiders.
First, prior to any negotiation with the producers, they are aware
of the title’s existence and are therefore best placed to take
precautionary measures. These will focus on defending the specific
rights without any need for overall investment in identifying protected
titles—as required when it is the producer who performs the title
examination. In these situations, it is very difficult to ascertain whether
an intellectual property right has indeed been mixed in a finished good,
so that refocusing the efforts of preventing the legal accident on the
immediate stage before it is liable to occur is efficient.
Second, as argued above, it is inefficient for the consumers to
implement an independent examination mechanism in this case. Since
in these situations the accession rule does not prevent title
examinations from being performed by the producers, they would
operate the mechanism only in some of the cases. In other cases, title
examinations would not be worth their while, including cases in which
they have decided to steal the title; in such cases, there is a point to
redoubling the efforts of intellectual property rights owners’ to defend
their right. Given the accession rule, the owners of intellectual
property rights will be able to foresee situations in which it is feared
that the producers would not perform the required examinations
properly, and it is therefore, when it is efficient for them to redouble
their efforts to defend their rights it is expected that they will do so.
B. THE QUESTION OF DIRECTING BEHAVIOR —DISTRIBUTION OF

WELFARE ASPECTS
An efficient rule can also have a positive effect on the chances of
securing distributive justice. Enlarging the cake makes it easier to
divide it equitably. Nevertheless, this is obviously not enough, and it is
also appropriate to examine the distributive effects of the rules in
question.
The IP rule distributes the social utility of market activity so that
greater utility is transferred to the owners of intellectual property
rights. In addition, they are encouraged to invest less in means to
defend their title, which would lead to cost savings on their part.
However, the consumers’ utility will be reduced as a result of the fact
that, at a certain probability, they would forfeit the product bought. In
addition, they have an incentive to invest more in precautions, which

would force them to spend more when buying the product. We believe
that such sweeping preference of intellectual property rights owners is
unjustified. Although they do possess titles which are worthy of
defense, the legal accident that takes place here creates two parties
whose property rights have been infringed upon: The consumers’
title—gained through purchasing a new product from its producer—is
also worthy of defense. Why, then, favor the intellectual property
rights owners over the consumers? Particularly when the competition
is between an intellectual property rights owner and an individual, non-
commercial consumer, it is arguable that the suggested rule will lead to
unjust preference of a relatively advantageous sector.
It would seem as thought the GF rule constitutes a just decision
mechanism in this case. This claim is based on the fact that both
parties have the same legal status—property rights that are worthy of
defense. In addition, the two parties, or either one of them, are able to
take precautions to prevent the legal accident. In this situation,
granting title to the party who acted to prevent the legal accident may
seem justified—whoever showed social responsibility will gain the
disputed title. We argue that in this case, the GF rule cannot act as a
just decision mechanism. First, it is doubtful whether taking
precautions can constitute a title-allotment criterion in all cases. Thus,
in some situations, both parties are able to take effective precautions to
prevent the accident. Ruling that if one of them, the last buyer, has
acted in good faith she will win the title does not take into due
consideration the fact that the first has no way of winning the title, even
had she fulfilled her social obligations, unless the latter has been
negligent. Assuming, then, that both parties have taken the appropriate
social actions, why should the latter win the title? Why should we not
look into the relative good faith of the parties? Such a decision will
also not take into due consideration the possibility for both parties to
fail to carry out their social obligations. Why should the title be won
by the first party in such a case? Moreover, in some situations, only
one of the parties is actually able to prevent the accident. Does the
mere fact that one of the parties is the “least cost avoider” of the
accident leading to the competition for title justify, from the point of
view of distributive justice, allowing him to receive title? The GF rule
means that the buyer has a call to buy the product for the price of
performing title examination when it is revealed that its title is under
competition vis-à-vis the owner of the intellectual property right to the
product. We believe that there are no distributive justice

considerations justifying granting that call to the buyer. However, in
situations with an allotment rule with an external criterion, granting
title for which two parties are competing to one of them, it is
reasonable to consider good-faith requirements as additional
conditions. In other words, whomever won title based on an external
criterion, but has not taken the proper precautions in dereliction of his
social responsibilities, might lose her title in favor of whoever acted out
of consideration for other parties’ interests.
In our opinion, the accession rule meets the distributive justice
requirement well. The criterion of distributing rights in proportion to
their relative size is objective and symmetrical. While the intellectual
property right owner loses her title to the product when her relative
portion is not the major one, she is comprehensively defended in terms
of the value of using the intellectual property right. In fact, she only
loses her right to conduct the negotiations herself and the value added
thereby.
On the other hand, the consumers are only slightly disadvantaged
by the accession rule. When they gain title to the product, they are also
required to pay the intellectual property right owner for the value of
using her title. Such value transfer may be justified in view of the
many situations in which the consumers gained from the fact that the
producer had not paid the intellectual property right owner her due.
Thus, if the producer neglected to perform title examinations, and, for
example, independently developed a patent registered on somebody
else’s name, the costs of producing the product can be expected to be
lower than in a situation where she would have been forced to pay for
the title’s monopolistic value. Thus, in cases where the producer steals
the rights, she may compete in the markets through attractive prices.
To a certain extent, having the consumers pay the intellectual property
right owner represents a reimbursement of their profits as a result of
failing to pay the title owner for her loss of the intellectual property
right’s monopolistic value.
When the consumers do not gain possession of the product, they
are entitled to be compensated by the intellectual property right owner
for the value of the product that is unrelated to the use of her right. The
value they receive is identical to the value they receive in a situation
where they win the competition, apart from the value loss resulting
from the intellectual property right owner’s increased bargaining
power, due to the fact that the rule allots the title to her. In practice, in
both cases the two parties are expected to negotiate and to agree to a
similar result: The product will remain in the end user’s possession,
who will pay the intellectual property right owner her due, as
determined in their negotiation. The justification for such a value
transfer is not different from the justification in the case where the
consumers win the competition and have to compensate the intellectual
property right owner for the value of using her right. In this case, too,
the damage to the consumers is relatively small and justified in terms
of reimbursing the intellectual property right owner for losing her
potential profits lost as a consequence of not being paid for the
intellectual property right’s monopolistic value. This value has been
invested in the product, in many cases without being represented in the
price paid by the consumer, or at least without being represented fully.
All this is subject to an insignificant increase, in this case, of the
intellectual property right owner’s bargaining power.
To conclude this section, we believe that applying the “least
cost damage avoider” or “best risk bearer” tests demonstrates, that
from the point of view of the legal objective of directing the behavior
of the relevant players’—intellectual property rights owners, producers
and consumers—both efficiency and distributive justice considerations
suggest that the accession rule is the best maximizer of social welfare.
Although there are many cases where these two types of considerations
are in conflict, this is not such a case.
V. FURTHER DISCUSSION: DAMAGE DISTRIBUTION AND INSURANCE

A.THE QUESTION OF DAMAGE DISTRIBUTION AND INSURANCE:
EFFICIENCY ASPECTS
In this section, we discuss efficiency and welfare distribution

considerations of the question of damage distribution and insurance
(risk spreading).127 First, we discuss the impact of the three debated
rules, IP rule, GF rule, and accession rule, on the efficiency of damage
distribution and insurance mechanisms.
The IP rule transfers the risk to the consumer public, and does not
operate as an efficient damage distribution mechanism. The owners of
intellectual property rights are being compensated at a rate higher than
127. For an examination of the social welfare effects of insurance, see e.g. Shavell,
supra n. 24, at 186-281.
their actual damages, with a potentially negative effect on their

willingness to invest in precautions and in identifying cases of
infringement. In this case, it is improbable that an insurance
mechanism be found which would insure the risk efficiently: The
producer liability solution is inefficient, since the major problem here
emerges when the producers cannot be sued in the first place.
Insurance against the legal accident discussed herein, for either the
consumers or the producers, is uncommon in product markets.128
There can be many reasons for that. Among other things, risk
quantification by the insurance company would seem to be a complex
and costly affair. Insurance in these areas might run into severe
adverse selection or moral hazard problems. Producer self-insurance
would also seem ineffective, because the legal accident usually occurs
in the context of producer insolvency.
The GF rule is also an ineffective damage distribution
mechanism. When the title is granted to the intellectual property rights
owner, the latter is being compensated at a rate higher than her actual
damage. In the other cases, when title is granted to the consumers, she
bears the whole damage caused. Moreover, unlike a good-faith
purchase rule, a market overt rule sometimes requires the consumers—
as a condition for being favored over the original owner—to purchase
the product from a vendor who is in the business of trading in products
of this kind.129 Ostensibly, giving incentives to purchase the product
from those in the business of selling it can promote the development of
an efficient damage distribution and insurance mechanism. It is
reasonable to assume that the producer has a relatively deep pocket and
that she can act as an efficient self-insurer against the accident.130
However, at least in the case discussed herein, the producer has clear
competitive advantages and there is no need for external incentives to
convince the consumers to buy from her. Such incentives to buy from
the big and well-known producer also exist when the applicable rule is
either the IP Rule or the accession rule. The disadvantages, detailed
128. Insurance against the legal accident discussed herein may be practicable where
a commercial consumer receives expert opinion regarding the status of intellectual
property rights inherent in the product, through the expert's own liability insurance.
129. See supra section III.
130. Dagan argued that market overt can be justified in that it gives the buyers an
incentive to purchase all of their products from vendors whose involvement may
provide the competing parties with insurance against future legal accidents. See supra
n. 29 and accompanying text.
above, of providing such incentives through a market overt rule are

many, while the added value from increasing the rate of market
transactions completed with a producer of a certain kind is low, if
anything.
Assuming some products may be insured, either now or in the
future, against the legal accident caused by mixing intellectual property
rights in them without their owner’s authorization, we believe that it is
the GF rule that might prevent a title examination insurance from
developing. We have already argued131 that in some situations, title
examinations are efficient, but would not take place because this rule
allows the consumers to gain title in the product by performing title
examinations of their own. They would not appreciate additional and
costly examinations, which are unnecessary for them. They would also
not appreciate the insurance costs, while it would not be worth the
producers’ while to invest in such insurance. Thus, self-insurance is
forced upon the producers, which is inefficient, as already argued, in
case of bankruptcy.
The accession rule, on the other hand, creates a relatively
efficient damage distribution mechanism. As argued above,132 both
when the owner of intellectual property right and when the consumer
win the competition, the former is fully compensated for the use of her
title (apart from losing the right to conduct the negotiations herself and
the value involved, in the case where the title in the product is
transferred to the consumer while she is compensated). The accession
rule also means that consumers are not fully compensated. They lose
the value of using intellectual property rights. In addition, when they
do not win the product they also lose the value derived from the
intellectual property right owner’s increased bargaining power. We
have argued that this consumer under-compensation can be justified
given the fact that in many cases, this damage has not actually been
caused to them, either completely or partially, given the fact that they
do not pay fully for the product’s “real” prices (i.e., for the price
including the cost of the intellectual property right’s monopolistic
value).
Damage distribution, as suggested here, fully compensates the
owners of intellectual property rights and almost fully compensates the
consumers. Any under-compensation of consumers may be justified in

terms of insurance: The accession rule imposes the burden of

distributing the remainder of uncovered damage, whose scope is
relatively low, and the burden of its insurance on the consumers. It is
probably impossible to insure against the remaining risk. However,
that portion of the damage the consumers are not compensated for can
be seen as a sort of consumer deductible. This rate, which is relatively
low and sometimes even nonexistent, will give the consumers incentive
to perform title examinations and not to ignore the fact that a
straightforward and low-cost examination can often prevent the
accident. Moreover, this is done without any recourse to other more
costly mechanisms.
The remaining exposure of the consumers to a relatively small
portion of the expected damages will be distributed through product
markets between the producers and the consumers. The producers will
benefit from convincing consumers that their exposure rate is low, and
that therefore, should the accession rule be applied, nothing will
prevent the producers from performing title examinations. Nothing
will prevent contractual distribution of risk and insurance between the
consumers and the producers, or any future development of a title
examination market.
Importantly, the rate of damage not covered by the damage
distribution mechanism suggested here can be completely covered.
The intellectual property rights owners’ damages are negligible, but
regarding a more comprehensive compensation of consumers, this can
be secured, for example, through a fund or by favoring the consumers,
regarding the remaining sum alone, in participation suits against
insolvent producers.133 Nevertheless, we do not suggest taking such
measures as these would burden the markets with unnecessary costs.
B. THE QUESTION OF DAMAGE DISTRIBUTION AND INSURANCE:

DISTRIBUTION OF WELFARE ASPECTS
The accession rule’s effectiveness in realizing the law’s
objective in the area of damage distribution and insurance is highly
conducive to distributive justice. On the face of it, the damage
133. For justifications for favoring involuntary creditors in bankruptcy proceedings,

see Hanoch Dagan, Restitution in Bankruptcy: Why All Involuntary Creditors Should
be Preferred, 78 Am. Bankr. L.J. 247, 275-76 (2004). In the present context, the
producers and consumers are contractually related, including through marketers, and
we do not suggest viewing them as involuntary creditors.
distribution mechanism created through that rule also meets distributive

justice criteria. It prevents over-compensation or under-compensation
of owners of intellectual property rights and compensates them for their
damages, apart from loss of value due to reduced bargaining power, but
only in some of the cases. It prevents under-compensation of the
consumers and compensates them almost for their entire damages. The
remaining, uncompensated-for portion, at a relatively low rate, was
justified based on considerations of preventing unjust enrichment,
because sometimes, the consumers have not paid the full price of the
product—including the monopolistic value of intellectual property
rights—and of a sort of deductible, a rule which solves inefficiency in
directing the parties’ behavior. As already mentioned, the losses by
owners of intellectual property rights are negligible, and as for the
consumer, an even more complete distribution of their damages may be
achieved by different means (such as a fund or priority in cases of
bankruptcy). Nevertheless, we believe using such means will burden
the markets with unnecessary costs, which will be imposed mainly on
the consumers and damage them more than the utility achieved.
Moreover, we argue against a system of rules attempting to
distribute the remainder of the uncompensated-for damage between the
owners of intellectual property rights and the consumers. Such a
system would be complex and costly and will go against the
straightforward applicability of the accession rule and its relatively low
cost, creating additional costs to be borne by the parties. Such a
conceivable system, shifting some of the uncompensated-for damage
from the consumers to the owners of intellectual property rights (when
these cannot be compensated by the producer), might also be unfair.
Such transfer is possible only where rate of uncompensated-for damage
can be ascertained; it is very doubtful whether this can be done in all
cases, at least at a reasonable cost. We have argued that the
monopolistic price of the intellectual property right is often not
reflected by the product’s price, so that the consumers’ compensation is
either complete or almost complete, with a negligible difference. Such
shifting rules might be inequitable and lead to under-compensation of
owners of intellectual property rights, in tandem with consumer over-
compensation.
To conclude this section, we believe the accession rule will best
realize the law’s objective in the area of damage distribution and
insurance of the legal accident discussed herein, both in terms of
efficiency and distributive justice.
VI. IMPLEMENTATION AND THE ISSUE OF PRODUCER AND CONSUMER

GOOD FAITH AND KNOWLEDGE
A. IMPLEMENTATION
We suggest to apply the accession rule to cases of competition

between an intellectual property rights owner and a consumer, who has
purchased a good produced by a producer by way of infringing on the
owner’s title—the good being newly produced and composed of an
inseparable mixture of the producer’s chattel, rights and work with the
intellectual property right. Moreover, in the relevant case, suing the
infringing producer is impractical since she is insolvent, untraceable or
too costly to trace. In this section, we seek to illustrate our position
regarding the resolution of such situations.
The decision criterion we suggest here is the ratio between the
value of using the intellectual property right inherent in the product and
the value of the producer’s investment in producing it. Thus, in the
pharmaceutical industry, for example, in many cases where a producer
uses a patent belonging to its developer, the value of this patent is
relatively high and it is expected to constitute the major portion of the
new product, while the producer’s own investment is relatively low and
expected to constitute the minority portion. The legal position is
represented by the approach described in re Woolworth I134 according
to which the court is expected, among other things, to allow recovery
of statutory damages as provided by the Patent Law of the United
States.135 According to the accession rule suggested here, the outcome
will be different: The patent owner, which owns the majority portion
of the new product, will be granted title in the medicine. However,
despite the fact that she owns a registered patent, she will have to pay
the marketer for the value of the producer’s relative investment in
producing the medicine in the former’s possession. We believe that in
most cases, the practical result would be a settlement in which the
medicines will be transferred to the marketer’s ownership, for
consideration representative of the infringed patent’s value and the
patent owner’s relatively high bargaining power. We also expect such
a settlement to include conditions that will adequately protect both
134. Supra n. 1 and accompanying text.

135. For a review of the law on expected remedies in patent infringement cases, see
supra section III.
parties’ business interests, such as the patent owner’s and the

marketer’s interest in building reputation.
Re Woolworth I is concerned with a similar case. As stated,
Woolworth, a commercial consumer, purchased in good faith 127
dozen “Cocker-Spaniel” statuettes from another source than the owner
of the copyright in the original statuette. Therefore, the Supreme Court
of the United States held that Woolworth became an infringer and
should pay statutory damages in the amount of $5000 as provided by
the Copyright Law of the United States, with an injunction and
attorneys’ fee. According to the accession rule we suggest here, the
result would be different. The question of ownership will be decided
based on the ratio between the value of using the copyright inherent in
the statuettes and the value of the producer’s investment in producing
them. Thus, if the first value is the higher one, the copyright owner
will gain possession of the statuettes. In this situation, she would
compensate Woolworth for the cost of the producer’s investment in
those statuettes. This is at the price ceiling paid by Woolworth to the
producer. On the other hand, if the second value is the higher one, then
Woolworth, the commercial consumer, will gain possession of the
statuettes and compensate the copyright owner for the value of using
her right. As already stated, even in the first situation (copyright
owner’s ownership of the new product) we expect that in most cases,
the two parties would reach a settlement in which the product is handed
over to the commercial consumer for consideration, with contractual
protection of all parties’ business interests.
The other example presented in the beginning of this article136
is that of the electronics producer who independently develops
components for her products. It is revealed that one of the components
developed by her engineers is in infringement of a registered patent. In
this case, it would seem that transferring the product to the patent
owner’s ownership is an extreme solution. According to the suggested
accession rule, if it is indeed revealed that the value of the patent is
smaller than the value of the producer’s investment in the new product,
ownership of the electronic product will be granted to the consumer,
who will then be required to pay the patent owner for the value of using
the intellectual property right inherent in the product.
The present article does not deal with the important and
136. See supra section I.

difficult question of the proper methods of evaluating the competing

portions—the value of the intellectual property right inherent in the
product versus the value of the producer’s investment therein.
Nevertheless, note that when the value of the producer’s investment in
the new product is the smaller of the two, we believe the consumer’s
compensation for the producer’s investment should be limited to a
ceiling, which is the price paid by the consumer for the new product.
This should be done in order to prevent unjust enrichment by the
consumer and incentives for criminal collaboration between the
producer and the consumer.137
B. GOOD FAITH AND CONSUMER AND PRODUCER KNOWLEDGE

We have argued that in the situations discussed herein, the GF
rule is not a just decision mechanism. We have also argued that in
situations where an allotment rule with an external criterion grants a
right that two parties compete for to one of them, it makes sense to talk
about good-faith rules as additional conditions. In other words,
whoever won the right based on an external criterion and took no
appropriate precautions in dereliction of his social responsibilities is
liable to lose her right to whoever acted out of consideration for the
interests of others.138 We believe the accession rule establishes such a
criterion, which is efficient and just. It would seem that a good-faith
requirement of both parties can be added to this rule without
compromising the objective of attaining distributive justice. This
additional rule means that once title has been allotted to one of the
parties according to the accession rule, this party might lose all or
some of her title should she not apply an appropriate standard, showing
due consideration to other parties.
We believe, however, that adding a good-faith criterion as a
condition for a party winning the competition is too strict a limitation,
while determining a different standard imposing a requirement of lack
of subjective knowledge is preferable, both for efficiency and for
distributive justice considerations. From the point of view of directing
the parties’ behavior, this negative good-faith criterion suffers from the
137. The consumer's purchase price can be of help, in the appropriate cases—such as
when the purchase has been concluded in market conditions and the producer's
investment value is known—when estimating the value of using the intellectual
property right.
138. See supra section IV.
same problems inherent in using good faith as a positive decision rule,

such as inefficiency due to the uncertainty created because of its
considerable dependence on court rulings, higher litigation costs and
the exposure of the court’s decision to legal errors, inefficiency in
applying the standard of care to the diverse and unprofessional
consumer public, and finally, the difficulty of efficiently overcoming
the gap created by the distinction between the title examinations’ social
utility versus their private utility for the consumers.
From the point of view of damage distribution and insurance,
adding the good-faith criterion might compromise the damage
distribution mechanism under the accession rule. Use of the good-faith
criterion may be limited, for example, by determining that its relevance
would be limited to a reversion of order between the owner of
intellectual property right and the producer. Thus, should the owner be
socially responsible while the producer is in dereliction, the rule would
be that the product is transferred to the owner of the intellectual
property right, even if the producer’s portion is the major one. This is
subject, of course, to compensating the consumer for his portion of the
product. In this case, adding the good-faith condition would be costly,
but will have less negative effect on the parties’ behavior or on the
damage distribution mechanism. On the other hand, extensive
application of the good-faith condition might compromise the
efficiency of the accession rule’s damage distribution mechanism and
the distributive justice it ensures.
We suggest applying a limitation which is less strict than any
good-faith criterion, a negative criterion of lack of subjective
knowledge of the accession by the parties as a condition for their
ownership of the product under the accession rule, and as a condition
for winning complete compensation in case the other party wins the
product. Thus, the owner of an intellectual property right who knows
her right has been mixed in the product but fails to act against the
producer would not be able to profit from complete application of the
accession rule against the consumer. Conversely, a consumer who
knows that the product includes an intellectual property right taken
from its owner without authorization would also be unable to profit
from complete application of the accession rule against the intellectual
property right owner. The justifications for that are from the area of
intentional torts, and discussing them comprehensively—including the
various intention levels and the changes in the accession rule required
in each and every case—is beyond the scope of the present article.139
It should be emphasized, for now, that a party’s knowledge of the fact
that product in which an illegally acquired intellectual property right
has been mixed is about to be sold means that the appropriate legal
framework for discussing such a case is no longer that of “accidents.”
An accident is characterized by very high transaction costs. In other
words, the parties to the accident are unable to negotiate, prior to the
accident, in order to discuss its efficient and just avoidance. On the
other hand, once one of the parties is aware of the fact that the product
is about to be sold, the negotiation costs become very low. Although
the parties do not know each other, the owner of an intellectual
property right can contact the producer, at very low cost, and demand
that the sale transaction be concluded through the markets. That is, the
producer will be required—and the courts will protect such a
demand—to purchase the intellectual property right. When the
consumer is aware of an illegally acquired intellectual property right,
she can avoid such a transaction at very low cost, or complete it
through the legitimate markets. This law promotes the conclusion of
transactions through the relevant markets, thus preventing theft of
intellectual property rights.
VII. CONCLUSION
In conclusion, we believe that in order to solve the problem
discussed herein, it is appropriate to adopt the accession rule, a rule
which is similar to that established by the court in Railway Co. v.
Hutchins,140 and which relies on the same mixture rationale. This rule
is preferable to the IP rule, which is similar to that established by the
court in re Woolworth I, and which relies mainly on the rationale of
protecting intellectual property rights, and is also preferable to the GF
rule. The accession rule will best achieve the legal objectives in the
areas of directing the relevant market players’ behavior and damage
distribution and insurance against the legal accident discussed herein,
both for efficiency and for distributive justice considerations.
139. For a review of justifications for intentional torts, see Posner, supra n. 24, at
224-229.
140. Railway Co. v. Hutchins, 32 Ohio St. 571, 580-81 (Ohio 1877).
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A Purchaser of a Product v. an Owner of a Stolen Intellectual Property: The

Article · February 2007

Noam Sher Erez Shaham

SEE PROFILE SEE PROFILE

The user has requested enhancement of the downloaded file.

EREZ SHAHAM∗ AND NOAM SHER ∗∗

The present article deals with the question: Which is the

∗ Radzyner School of Law, Interdisciplinary Center Herzliya (IDC). Erez

Electronic copy of this paper is available at: http://ssrn.com/abstract=964918

320 WHITTIER LAW REVIEW Vol. 28

creating the new asset). Accordingly, the majority owner compensates

Electronic copy of this paper is available at: http://ssrn.com/abstract=964918

2006 THE REVIVAL OF THE ACCESSION RULE 321

Inc. (hereinafter “re Woolworth I”).1 In this case, Woolworth

322 WHITTIER LAW REVIEW Vol. 28

considered a violation. The law shows consideration for the infringer’s

2006 THE REVIVAL OF THE ACCESSION RULE 323

be discussed below, we offer a new solution to the problem described

324 WHITTIER LAW REVIEW Vol. 28

portion and is therefore not disenfranchised, as determined by the

2006 THE REVIVAL OF THE ACCESSION RULE 325

insurance and damage distribution, again, both in terms of efficiency

A. THEORETICAL JUSTIFICATIONS FOR CREATING AND DEFENDING

326 WHITTIER LAW REVIEW Vol. 28

products. The assumption underlying this approach is that information

2. Theoretical Justifications for Not Defending (Exceptions to)

8. Robert P. Merges, Peter S. Menell, Mark A. Lemley & Thomas M. Jorde,

2006 THE REVIVAL OF THE ACCESSION RULE 327

uses do not pose a significant threat to the patent owner’s monopoly;12

328 WHITTIER LAW REVIEW Vol. 28

legal groundwork for creating a free market of creations. Thus,

B. THEORETICAL JUSTIFICATIONS FOR INVOLUNTARY PROPERTY

16. 17 U.S.C. § 107 (1994).

2006 THE REVIVAL OF THE ACCESSION RULE 329

main schools of thought are discernable here.20 The first, or traditional

330 WHITTIER LAW REVIEW Vol. 28

2006 THE REVIVAL OF THE ACCESSION RULE 331

Mautner also argues that the typical requirements of

332 WHITTIER LAW REVIEW Vol. 28

31. Dagan, supra n. 29, at 1545.

2006 THE REVIVAL OF THE ACCESSION RULE 333

39. See generally id.

334 WHITTIER LAW REVIEW Vol. 28

rights depends on the applicable legal rule. Third, unlike in Medina’s

C. JUSTIFICATIONS FOR PROPERTY TRANSFER RESULTING FROM

2006 THE REVIVAL OF THE ACCESSION RULE 335

the conditions in which the worker is entitled to reward: (1) The

336 WHITTIER LAW REVIEW Vol. 28

investing work in and improving on existing resources if they are not

III. THE APPLICABLE LAW

A. INTELLECTUAL PROPERTY LAW

2006 THE REVIVAL OF THE ACCESSION RULE 337

In re Woolworth I, the Supreme Court even refused to reduce the

338 WHITTIER LAW REVIEW Vol. 28

2006 THE REVIVAL OF THE ACCESSION RULE 339

to deter future infringement.71 In case of a finding of willful

B. INVOLUNTARY TRANSFER LAW

71. 35 U.S.C.A. §§ 284-285 (West 2001).

340 WHITTIER LAW REVIEW Vol. 28

The UCC76 continues to state that a person with a voidable title—such

2006 THE REVIVAL OF THE ACCESSION RULE 341

1. Accession and Confusion of Goods: General82