Contracting Around Liability Rules
In his influential paper “Contracting Into Liability Rules: Intellectual Property Rights and Collective Rights Organizations,” Rob Merges makes the case that intellectual property (IP) owners vested with property entitlements can and do contract away their right to an injunction when it is efficient for them to do so. The result was to cement for many the superiority of property over liability rules, since Merges demonstrated a seemingly critical asymmetry between the two. Merges’s evidence suggested that if a judge or a legislature gets the damages calculation wrong, we are stuck with an inefficient liability rule, but that we weren’t similarly stuck with an inefficiently-allocated property rule.
The evidence Merges brought to bear in his path-breaking article is extremely important. But it is incomplete. True, parties can contract around inefficient property rules in IP cases. But as I show in this paper, they can - and do - contract around inefficient liability rules as well. The result does not prove the superiority of liability rules over property rules, but it does undermine a major premise that has been used to support the claim that IP rights must be protected by property rules.