[MUSIC] >> To really know the contours of legal right, you need to know not only the substantive content of the right, but also you need to know how the right is protected. In an immensely important article, Guido Calabrese, now a judge on the second circuit of the United States Court of Appeals, and Doug Melaned, who was a former head of the justice department's anti-trust division, they pointed out that legal entitlements tend to be protected in one of two distinctive ways. Some entitlements are produced by strong property rules which attempt to deter third parties from non-consentually taking the entitlement. Property rule protections are punitive in nature, often involving the threat of jail or super compensatory punitive fines. In contrast, other entitlements are protected by weaker liability rules which attempt to compensate an entitlement holder for the loss of an entitlement than is non-consensually taken. The rules are concerned with two different groups. Property rules are designed for deterrence of potential takers. Liability rules are designed for compensation of potential takees. So, a first task is that whenever you learn a new legal right is to ask yourself how is that right protected? Liability and property rules were given their names because the law of property tends to protect property rights with property rule protections. While the law of torts tend to provide liability rule protections. But what makes this task more difficult is that most areas of law, including property and tort law, have deployed mixtures of property and liability rules with regard to particular legal entitlements. Sometimes the extent of protection will turn on who is doing the taking. Your home is protected by a property rule, criminal trespass with regard to taking by a private citizen. But only a liability rule, that is, the Constitution's takings clause guarantee of just compensation with regard to taking by the government. Sometimes the extent of property protection turns on how the taking occurred. Intentional, and if you intentionally take my car, then the criminal law sends you to jail. But if you negligently destroy my car, the law of tort says that you merely have to compensate me. Calabrese and Melamed went on to suggest that property will protections were likely to be more efficient when transaction costs were low, and that liability rules were more likely to be efficient when transaction costs were high. If the parties can easily contract, agree to consensually transfer an entitlement, the law is likely to, and should, protect the entitlement with a strong property rule to induce the parties to expressly contract. The law's more likely to use liability rules when the parties don't have an opportunity to contract. For example, in the tort setting where it would be infeasible to contract with the myriad of drivers who might hit your car. Or consider the case of a dock owner who has the entitlement to exclusively use her dock. Under normal circumstances, where the third parties have an opportunity to bargain to rent dock use, the entitlement is protected by a property rule. But the tort doctrine of necessity says that under unusual exigencies of a severe storm, where third parties may not have the opportunity to contract, a ship owner can use your dock without your consent and only have to pay you reasonable compensation. This type of liability rule protection gives a new meaning to the phrase any port in a storm. This transaction cost theory says that property rules force takers to use market contracts when they can, and liability rules allow takers to mimic the market when the takers can't use the market. When transaction costs are low the threat of property rule punishment channels potential takers to consensual takings, that is, to contracts. When transaction costs are high, potential takers can emulate the results of contracting by taking non-consensually, docking during a storm, and then paying the compensation that might have been paid if the parties had had a chance to contract. A second task when you learn about a new legal right is to ask whether the law offers the right kind of protection. After you figure out how the legal right is protected, you should also ask yourself whether it should be protected by a property or a liability rule. One way to approach this normative inquiry is to follow Calabrese and Melamed and ask whether the parties had a sufficient opportunity to contract. If yes, the cathedral article would, of Calabrese and Melamed, would suggest the property protection is more appropriate. Pop quiz, is the takings clause consistent with Calabrese and Melamed? Curiously, however, Calabrese and Melamed, who surveyed vast portions of law, did not analyze how contractual entitlements should be protected. And we should forward it here. What about contractual rights? If Calabrese contracts to sing at Melamed's wedding, Melamed has a contractual entitlement to Calabrese's performance. How should Melamed's contractual right be protected? Calabrese and Melamed's theory might suggest that contractual entitlement should be protected by property rules such as court orders of specific performance. Perform or go to jail. After all, the parties were able to contract initially, Calabrese should be able to renegotiate if he doesn't want to perform. The singing Calabrese could buy back Melamed's contractual entitlement to hear Calabrese sing. But contractual law normally does not protect contractual entitlements with specific performance. It doesn't normally use property protections. Instead, the normal remedy is a liability rule protection. Expectation damages. We just try to compensate the non-breaching party. Still, there are several instances where contractual entitlements are protected by property rules. For example, in Jacob and Youngs versus Kent, the cost of replacement measure would have given future sellers strong incentives to perform. More generally, the cost of performance measure, which measures expectation damages by how much the promiser would have to pay to perform the promise, will tend to deter the promisor from breeching. Why breech if it doesn't save you any money? The tool of classifying legal rules as being protected by liability or property protections can be deployed in any legal subject, even constitutional law. The Constitution ordains that every state shall give full faith and credit to the public acts and records of every other state. But how should this entitlement be protected? Might a sibling state choose not to give credit to the public act of another state and merely pay liability rule damages? Does the Constitution always demand property rule protection? The take home lesson is that when you learn about legal rights and entitlements, you should ask how the right is protected by learning the consequences of various types, intentional versus negligent, of various types of takings by various types of people, public versus private actors. You don't really know the value of an entitlement until you know how it's protected. [MUSIC]
