picker.uchicago.edu

Class 1GSB 42201: The Legal Infrastructure of Business

Introduction: Property and Contracts

Randal C. PickerLeffmann Professor of Commercial Law

The Law SchoolThe University of Chicago

773.702.0864/[email protected] © 2001-09 Randal C. Picker. All Rights Reserved.

Class Organization Syllabus

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August 19, 2010 The Legal Infrastructure of Business. Copyright © 2001-08 Randal C. Picker. 2

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Class Organization

You need to do five posts between tonight and the start of the 10th class (11/30)

You need to do at least one comment each week

Posts will be graded, comments will not, but I will take off points if you don’t do comments


Class Organization Exam

Take home exam handed out at last substantive class (11/30)

One week to do it, returned via email to me5 questions, max of 300 words each


The United States Constitution

http://picker.uchicago.edu/GSBOnline/USConstitution.doc


http://picker.uchicago.edu/GSBOnline/USConstitution.doc


Sources of Law Lawmaking

Federal Law Copyright Law, Bankruptcy Code www.senate.gov www.house.gov www.whitehouse.gov

State Law Uniform Commercial Code: www.nccusl.org Delaware Corporate Law:

http://corp.delaware.gov/DElaw.shtml

http://www.senate.gov/

http://www.house.gov/

http://www.whitehouse.gov/

http://www.nccusl.org/

http://corp.delaware.gov/DElaw.shtml

Sources of Law

Local Law Chicago Big Box Ordinance

Treaties NAFTA Berne Convention



The Court System Federal Courts

www.uscourts.gov State Courts

www.state.il.us/court/

http://www.uscourts.gov/

http://www.state.il.us/court/

The Federal Court System

Supreme CourtAppellate jurisdiction from federal courts of

appeal and state supreme courtsCourt chooses cases presented through writ

of certiorariwww.supremecourtus.gov


http://www.supremecourtus.gov/



Courts of AppealMandatory appellate jurisdiction from

federal district courts, and in some cases, from federal agencies (e.g., FTC and FCC decisions)



Federal district courtsCourt of general, original jurisdiction

Specialized CourtsTax CourtBankruptcy CourtsInternational Trade


Geographic Organization

http://www.uscourts.gov/allinks.html
















Allocating Cases Between Federal and

State Courts We Call this Jurisdiction

Federal Jurisdiction: Two Paths Federal question jurisdiction Diversity jurisdiction: citizens of different

states and $75,000 in issue


Production of Property: The Great American

Novel Supply

Novelist-wannabe contemplates writing book. It will cost her $12 to do so

Once written, each copy of the book can be produced for $1

DemandTwo consumers: One would value the book

at 10, the second at 5


What happens? Possibilities with Single Price

Private Values Price of 10, sells one copy at total cost of 13 Price of 5, sells two copies, for revenues of

10 and costs of 14 The book will not be produced

FC = 12, MC = 1VC1 = 10, VC2 = 5


What happens?

Social Values One copy: Cost of 13, value of 10, net loss

of 3 Two copies: cost of 14, value of 15, social

gain of 1 Two copies should be produced, but won’t

be Price Discrimination Would Solve

Selling in Separate Markets

HypoSame cost structure as before: fixed costs

$12, per copy cost of $1Two markets separate by time and distance

Consumer in East values at $10 Consumer in West values at $5

Monopolist and can sell in both markets What happens?


Selling in Separate Markets

AnswerSame hypo as beforeM should sell at $10 in the East and $5 in

the West and product will be producedSocial welfare rises by 1 ($15 in value

created against $14 in costs)


Entry in the West Hypo Again

Suppose that distribution in the East makes possible entry in the West

Entrant faces zero fixed costs but same marginal cost

Pricing M charges $10 in East; sssume for now that

both M and E charge $5 in West What happens?


Entry in the West Hypo Again

Suppose that distribution in the East makes possible entry in the West

Entrant faces zero fixed costs but same marginal cost

Pricing M charges $10 in East; sssume for now that

both M and E charge $5 in West What happens?


Entry in the West Answer

M sells in East and collects $10M sells 50% of the time in West and collects

$2.50 in expectationE sells 50% of the time in West and also

collects $2.50 on averageM now incurs expected costs of 12 + 1 + .

5*1 = 13.50 against expected revenues of 12.50


Entry in the West Conclusion

E’s free-riding entry in the West means that M can’t make the product profitably

M won’t produce, so E can’t free ride Extra social value lost Is this AP v. INS?



INS v. AP: New Terms 248 U.S. 215 (1918)

Volume Reporter Page (Court Year)Standard Reporters: U.S. (Suprme Court);

F.3d (courts of appeal); F. Supp. 2d (federal district courts)

ComplainantPerson bringing a lawsuit (see also plaintiff)


INS v. AP: New Terms Bill

Filing used to initiate lawsuit (old, usually today a complaint)

AffidavitA statement of facts made under oath

Preliminary InjunctionAn injunction—bar on action—issued by a

court before the final resolution of a lawsuit


INS v. AP: New Terms Remanded

Returned to a lower court after action in an appellate court

Writ of certiorariA statement by the Supreme Court about

whether it will hear a case Federal jurisdiction

Cases that can be heard in federal courts


INS v. AP: New Terms Diversity of citizenship

A basis for federal jurisdiction when parties are citizens of different states

Jurisdiction of equityOlder courts were split along lines of law

and equity Publici juris

Of public right


INS v. AP: New Terms Plaintiff

Person bringing a lawsuit Defendant

Target of the lawsuit Common law

Judge-made law (as opposed to statutory law)


INS v. AP: New Terms Sic utere tuo

Sic utere tuo ut alienum non laedas: use your property in a manner not to injure others

Doctrine of unclean handsAn equitable doctrine; one who seeks equity

must do equity, and if you have not done equity—if you have unclean hands—you will be denied the benefits of equity


INS v. AP: New Terms Assignee

A person to whom something was assigned


Starting Questions What is going on here? Why does this litigation arise? What is the procedural posture of this

case? Does that matter here?


Facts of the Case Three Key Allegations

1: Bribing employees of AP-member newspapers

2: Inducing members to violate AP bylaws3: Transmitting info from legally-obtained

newspapers


Facts of the Case Procedural History

District Court: Prelim Injunction on 1 and 2Court of Appeals: PI on 1, 2 and 3, barring

using until commercial value as news lost


What should we protect? Stories word for word?

Hypo: Take any randomly-chosen story from a paper

QuestionsDoes the publisher own the story, as a word

for word creation?Put differently, can another paper copy the

story word for word?

Word for Word? Answer

Under current US federal copyright law, copyright arises in original works of authorship at the moment they are fixed in a tangible medium of expression

No word by word copying of newspaper storiesSubject to fair use: wait for that.



What should we protect? Facts in stories?

Get Me RewriteLet the rival rewrite the story but use all of

the facts from the story.How does that alter the law or economics of

the situation?


What should we protect? Facts in stories?

The Court’s Analysis“It is not to be supposed that the framers of

the Constitution … intended to confer upon anyone who might happen to be the first to report a historic event the exclusive right for any period to spread the knowledge of it.”

Current US Copyright LawFeist: No protection for facts and not

allowed as a constitutional matter


Nonetheless Says the Court

“Stripped of all disguises, the process amounts to an unauthorized interference with the normal operation of complainant’s legitimate business precisely at the point where the profit is to be reaped, in order to divert a material portion of the profit from those who have earned it to those who have not; with special advantage to defendant in the competition because of the fact that it is not burdened with any part of the expense of gathering the news. The transaction speaks for itself and a court of equity ought not to hesitate long in characterizing it as unfair competition in business.”


What should we protect? Uses of stories?

Tip Use of News StoriesBoth the AP and INS used wire service

stories for leads on stories


What should we protect? Uses of stories?

The Court’s Analysis“The Circuit Court of Appeals found that the

tip habit … was ‘incurably journalistic’ …. [B]oth parties avowedly recognize the practice of taking tips, and neither party alleges it to be unlawful or to amount to unfair competition in business.”


Why Isn’t this a Contracts Case?

Allegation 1: Bribing Employees Allegation 2: Members Violating Bylaws

“Under complainant’s by-laws, each member agrees upon assuming membership that news received through complainant’s service is received exclusively for publication in a particular newspaper . . . [and] no other use of it shall be permitted . . . .”



Allegation 3: Free Ride on Purchased NewspapersSuppose each newspaper was enclosed in

a wrapper including the following disclaimer: “The news contained herein is for the sole

benefit of our subscribers and may not be reproduced for commercial use without the express written consent of the AP.”



AnalysisIs this Board of Trade v. Christie?Brandeis addresses this, and suggests

license would be ineffective if publication was truly general


How should we slice property rights?

Approaches “Full” Property Rights

I have the power to exclude anyone“Partial” Property Rights

I have the power to exclude only a particular group


How should we slice property rights?

What rights must we convey for the activity to take place?

How lumpy are the rights? How thin can the rights be sliced?Direct use vs. tip use

Unfair competition as a partial property right?


Information Essentials First Copy Costs High

Expensive to create/learn of the info Second Copy Costs Low

Additional copies can be created for very little


Information Essentials Public Good Quality

Competing Uses I eat the banana; you can’t

Non-Competing Uses I read the story; you can too Of course: Can’t read the same paper but

different scale of marginal costs


Information Trade-Offs Creation Incentives v. Optimal Use

Given public-good character, positive price for use results in waste It costs next-to-nothing for the next person

to use, so a positive price results in too little use


Information Trade-Offs

Zero Price = Zero Creation? How many stories will be written if they must

be given away? Empirical question ultimately

Incremental property rights calibrate this trade-off


Trade-Offs in INS Gains

Full property rights would maximize returns to AP

Rich licensing would be the means to achieve this

LossesBut, as before, positive price results in too

little use


Trade-Offs in INS Unfair competition approach targets ability

to recover costs of gathering news while permitting maximum use consistent with cost recovery?


Why focus on the fact that INS and AP

Compete? Property v. Unfair Competition

This is not just an IP case, it’s also about “unfair competition.”

The statement of facts emphasizes that the parties are in “keenest competition”

Unfair Competition in INS v AP

Says the Court“The parties are competitors in this field;

and, on fundamental principles, applicable here as elsewhere, when the rights or privileges of the one are liable to conflict with those of the other, each party is under a duty so to conduct its own business as not unnecessarily or unfairly to injure that of the other.”

What does this mean?August 19, 2010 The Legal Infrastructure of Business. Copyright © 2001-08 Randal C. Picker. 52

Unfair Competition Says the Court

“Stripped of all disguises, the process amounts to an unauthorized interference with the normal operation of complainant’s legitimate business precisely at the point where the profit is to be reaped, in order to divert a material portion of the profit from those who have earned it to those who have not;


Unfair Competition Says the Court

“with special advantage to defendant in the competition because of the fact that it is not burdened with any part of the expense of gathering the news. The transaction speaks for itself and a court of equity ought not to hesitate long in characterizing it as unfair competition in business.”


One More Says the Court

“It has all the attributes of property necessary for determining that a misappropriation of it by a competitor is unfair competition because contrary to good conscience.”


Justice Holmes Dissenting

The Holmes Dissent (Joined by McKenna)What is Holmes worried about?Could INS modify its business practices to

solve his problems?What would that mean for AP?


Justice Brandeis Dissenting

The Brandeis DissentHe disagrees with the Court’s resultWhy?


The State of the Newspaper Business

Advertising StatisticsNewspaper Ass’n of America

http://www.naa.org/TrendsandNumbers/Advertising-Expenditures.aspx


http://www.naa.org/TrendsandNumbers/Advertising-Expenditures.aspx

August 19, 2010 Copyright © 2005 Randal C. Picker 59

Screen Capture Slide








Contracts


Locating the Law of Contracts

UCC Article 2Created by NCCUSL and ALIState law for the sale of goodsCurrently under revision

Uniform Computer Information Transactions ActIssued in 1999Enacted so far in only Maryland and Virginia

http://www.nccusl.org/


Locating the Law of Contracts

State Common Law Many Others


Questions Was a contract formed? When? On what terms?


2-204. Formation in General

(1)A contract for sale of goods may be made in

any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

(2)An agreement sufficient to constitute a

contract for sale may be found even then the moment of its making is undetermined.


2-204. Formation in General

(3)Even though one or more terms are left

open a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.


2-206. Offer and Acceptance in Formation

of Contract. (1) Unless otherwise unambiguously

indicated by the language or circumstances(a) an offer to make a contract shall be

construed as inviting acceptance in any manner and by any medium reasonable in the circumstances;


2-207. Additional Terms in Acceptance or Confirmation.

(1)A definite and seasonable expression of

acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.



(2)The additional terms are to be construed as

proposals for addition to the contract. Between merchants such terms become part of the contract unless: (a) the offer expressly limits acceptance to

the terms of the offer;



(b) they materially alter it; or (c) notification of objection to them has

already been given or is given within a reasonable time after notice of them is received.



(3)Conduct by both parties which recognizes

the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract.



(3)In such case the terms of the particular

contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of the Act.


2-209. Modification, Rescission and Waiver.

(1)An agreement modifying a contract within

this Article needs no consideration to be binding.


2-209. Modification, Rescission and Waiver.

(2)A signed agreement which excludes

modification or rescission except by a signed writing cannot be otherwise modified or rescinded, but except as between merchants such a requirement on a form supplied by the merchant must be separately signed by the other party.


Hypo 1: Click-Thru Contracts

FactsHome page of website sets forth contract

for use of websiteSurfer can get inside website only through

clicking-thru acceptance of contractValid contract?


Answer UCC 2-204 does not apply directly, as

limited to sales of goods Under analogous doctrine, should be valid

contract Contracts can be formed in many ways


Hypo 2: Box of Cereal with More

FactsOpen box of cerealFind paper with terms of contractOpening sealed bag constitutes acceptanceValid contract?


Answer UCC 2-204 should apply Possible question about actually seeing the

contract (click-thru is cleaner) Otherwise contract should be effective


Hypo 3: Box of Cereal with More More

Facts“You owe us an additional $10,000.”Opening sealed bag constitutes acceptanceValid contract?


Answer ??? See Easterbrook in ProCD


Hypo 4: Deal Closes, Followed by More Docs

FactsClosing takes places; documents signedOne week later, one side sends the other a

new document with “additional terms for the contract”

Does UCC 2-207 apply?


Answer Answer

2-207 covers situations in which new terms are set forth as part of “acceptance” of offer

Separation here: accepted, and then suggested more terms

The new document as an attempt at modification under 2-209


Hypo 5: Acceptance with More Terms

FactsOffer extendedReply: “Yes, but add terms x, y and z.”Contract? What terms?


Answer UCC 2–207 says acceptance and therefore

contract unless “acceptance is expressly made conditional on assent to the additional or different terms”

Between merchants, become terms unless offer bars more terms or material change or rejected within reasonable time


Hypo 6: ProCD? Facts

Z. buys the shrink-wrapped boxBox states: “Unwrapping constitutes

agreement to additional terms set forth inside the box.”

ProCD itself? Contract? On what terms?


Answer Not ProCD, which was click-thru, so

chance to read all terms before agreeing But terms need not be complete to have

contract, see UCC 2-204(3)


Hypo 7: ProCD with Hackers?

FactsZ. buys the boxed CDRuns it and finds click-through license with

termsFaxes letter to ProCD: “I reject your offer of

additional terms of the contract. My on-staff hackers will get beyond the license and I will use the software.”

Contract? What terms apply?


Answer


ProCD: New Terms Amici curiae

Friends of the court: non-parties who file a brief in a lawsuit to express their views on the issues

UnconscionableTypically contracts that will not be enforced

for public policy reasons


ProCD

86 F.3d 1447 (7th Cir. 1996) Basic Facts

CD of 3000 telephone directoriesAssumed not copyrightable after FeistLicense attempted to segregate users into

serious business users and casual consumer users


Basic Structure of Interaction

ProCD sells CD Box states software comes with license Running software triggers appearance of

license In normal course, must click “yes” to get

access to the software Disagree? Return software for full refund


Possible Views Z. and the Lower Court

CD in box on shelf constitutes offerPurchase constitutes acceptanceLicense irrelevant?

7th Circuit ViewOffer not made at store, rather made at

point of click-throughClick-through constitutes acceptance


The Value of Price Discrimination in IP

Goods Cost Structure of IP Goods

Substantial fixed costs, here more than $10 million to create database

Next to zero marginal costs Need Pricing Mechanism to Cover Fixed

Costs


Interaction of Copyright and Contract

Copyright StatusNo copyright under Feist


Interaction of Copyright and Contract

Preemption under Sec. 301? On and after January 1, 1978, all legal or equitable

rights that are equivalent to any of the exclusive rights within the general scope of copyright as specified by section 106 in works of authorship that are fixed in a tangible medium of expression and come within the subject matter of copyright as specified by sections 102 and 103, whether created before or after that date and whether published or unpublished, are governed exclusively by this title. Thereafter, no person is entitled to any such right or equivalent right in any such work under the common law or statutes of any State.

Documents

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