Law and

Markets
Chapter 14

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Topics Covered
 Introduction
 The common law
 Property
 Intellectual property
 Contracts
 Torts
 The product safety problem and social efficiency
 Entitlements, liability, and social efficiency
 Products liability
 Imperfections in the liability system

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Introduction
 Markets are the cornerstone of a free enterprise system
 The law plays a principal role in:
 Reducing uncertainties
 Supporting exchange in markets

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Common Law

 Used in the United Kingdom, the United States, and most of the other former English
colonies

 Common law countries typically have an adversarial system of litigation in which:

 Each party advocates its side of the dispute
 Judges and juries render decisions based on the evidence, the arguments provided, and
precedents

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Copyright © 2013 Pearson Education, Inc. publishing as Prentice Hall
Intellectual Property

 The basic trade-off in the protection of intellectual property is between:

 Benefits to society from the use of ideas and inventions and the incentives for their creation

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Information and Incentives

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Intellectual Property

 The appropriability of the returns from a discovery depends on two principal factors:
 How easy it is for others to replicate the discovery
 Strength of the public protection for the discovery

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Appropriability of Returns

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Appropriability of Returns and Peer-to-Peer Systems

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Intellectual Property Protection

 Patents
 Copyright
 Trademarks and trade secrets

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Contracts

 Governed by:
 Common law
 Statutes pertaining to particular types of contracts and transactions

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Enforceability

 Central issues in contracts are:

 Which contracts are enforceable
 When can they be breached
 What damages are due in the event of a breach

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Breach

 Breaches are allowed because:

 Under some circumstances it is economically efficient not to fulfill the conditions of the contract

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Remedies

 Courts use two basic types of remedies in the event of breach:

 Damages
 Specific performance

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Torts

 Civil wrongs - Wrongs done by one person to another

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The Product Safety Problem

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Social Costs of Injuries Prevented

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Entitlements and Their Protection

 Rules for protecting entitlements

 Property rule
 Liability rule

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The Assignment of Social Costs and the Choice
Between Liability and Regulation

 There are five principles for the assignment of costs and the choice
between the institutions of liability and regulation

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Products Liability

 A branch of the common law of torts

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Allowable Defenses under Strict Liability

 Some defenses are allowed under strict liability but:

 They vary among the states
 In all of these defenses, the burden of proof is on the defendant

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Preemption

 Some federal legislation preempts states from adding requirements beyond those stated in the federal law
 Could be explicit or implicit in the law

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Damages

 Principal form of damages awarded in liability cases is compensatory

 Compensation for the loss incurred

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The Politics of Products Liability

 Strong incentives to take liability issues into the legislative arena are provided by:
 The costs and consequences of liability cases
 The proportion of awards that go to trial lawyers

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Imperfections In the Liability System

 Liability system has been criticized on:

 Equity grounds
 Distributive grounds
 Efficiency grounds

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Cases - California Space Heaters, Inc.

 Developed a line of unvented, convection kerosene space heaters using a new technology
 Although the heaters were very economical, there were safety hazards associated with their use, ranging from
the risk of fire to adverse health effects from their emissions
 The design alternatives available to California Space Heaters centered on the safety features that could be
incorporated into the heaters
 The company consulted a lawyer who indicated that products liability lawsuits were probable should there be
injuries or adverse health consequences associated with the use of the heaters

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Cases - Patent Games: Plavix
 In 2002 Sanofi-Aventis filed a patent infringement lawsuit in federal court, claiming that the patent
provided it with exclusive rights to produce and market Plavix
 The approval by FDA allowed Apotex to market the Plavix at its own risk
 Surprised by Apotex’s flooding the market, Sanofi- Aventis responded by filing a lawsuit in federal court
seeking an injunction to halt the sales
 At the hearing on the lawsuit seeking an injunction, attorneys for Bristol-Myers Squibb claimed that failure
to issue an injunction would “kill future clinical efforts.”

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Cases - Obesity and McLawsuits

 To deal with the McLawsuits, McDonald’s and other restaurants could continue to defend themselves in court on a
case-by- case basis
 McDonald’s could also seek legislation to shield restaurants and food processors from liability
 The public attention to the obesity issue led to the introduction of the Menu Education and Labeling Act (MEAL)
 The fast-food industry also faced the possibility that state attorneys would file lawsuits seeking reimbursement for
Medicare costs of obese people

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Cases - Spectrum for Wireless Broadband: Old Media
versus New Media

 In 2009 Congress passed a law directing the FCC to develop a plan to make broadband accessible nationwide
 Government policymakers sought to create a nationwide, interoperable broadband network for public safety and personal
security
 Broadcasters argued that the wireless carriers were not efficiently using the spectrum they already had and that they had
alternatives to increase the capacity of their spectrum
 The NAB study pointed to increased use of femtocells, better receiver standards, and spectrum sharing

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