Derek HanaphyProperty Rules, Liability Rules and the Protection of Dignity

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A critical aspect of the commitment to the rule of law is the definition and protection of property rights ie, rights to control, use, or transfer things including rights in intangibles such as intellectual property. The law reflects two general policies in its efforts to regulate conduct; one is a policy of simply not tolerating certain acts or types of conduct and the other is a policy of internalisation, which requires transgressors of the law to compensate victims for their injuries. Cooter (1984) has described the distinction as being between „sanctions“, which is a detriment imposed for doing what is forbidden and „prices“, which is an amount of money exacted for doing what is permitted. The distinction between these two general principles can be traced back to Calabresi and Melamed’s seminal article “Property Rules, Liability Rules and Inalienability: One View of the Cathedral” (1972) which coined the terminology property rules and liability rules. Property rules secure entitlements as property and prohibit non consensual transfers’ whereas liabilty rules while not seeking to provide the security of a property rule instead, require the injurer to pay a quantum of damages determined by a state body. Property rules seek, as Bentham stated, to secure and to settle expectations with respect to an entitlement whereas liability rules endeavour to reallocate, ex post, the burden of a loss.

Calabresi & Melamed provided a theory on the meaning of property rules, liability rules and inalienability as alternative mechanisms for protecting legal entitlements. They argued that legal rules may protect a legal entitlement in two main ways: by forbidding any taking without the owner’s prior consent (property rule) or by imposing on a taker the duty to compensate owners for an infringement (liability rules). They postulated the prescriptive view that property rules are preferred when transaction costs are low or when bargaining is possible while liability rules should be preferred when transaction costs are high or bargaining is not feasible. However, in recent years new articles, especially Kaplow and Shavell (1996), presenting a rigorous analysis of bargaining incentives has overturned some of the fundamental claims of Calabresi & Melamed and in particular, Calabresi & Melamed’s proposition that property rules are socially preferable in low transaction cost settings has been refuted. Despite this assertion, in this paper, I will defend Calabresi & Melamed and predicate my argument on the inappropriateness of the standard liability model with its inapplicability to illiquid markets and more specifically the importance of „subjective valuations“ in the analysis of property and liability rules. Consequently, if subjective valuations are not protected, as is the case in the liability model, social welfare will be reduced due to the occurrence of increased litigation and costly efforts to avoid expropriation: thus leading to an increase in rule enforcement and denormalisation costs which would not accrue under a property rule regime. Moreover, the measurement problem and the determination of the quantum of damages in dignatory torts is so complex because, in illiquid markets, we are faced with the difficulty of mapping normative judgements including those of outrage and punishment into monetary amounts, that the only option can be property rule protection.

This thesis commences with a look at property rules and liability rules and analyses the genesis of the concept of rights and how they are delineated. We will also look at the nature of entitlements and how they should be protected and will couch our analysis in terms of the findings of New Institutional Economics and Utilitarianism. The practical area of this thesis takes a comparative look at defamation law and specifically the US case of New York Times v Sullivan (1964)1 and the English case, Reynolds v. The Sunday Times (1999)2. The Sullivan case overturned the common law tort rule of strict liability for defamation and introduced a rule of malice which made the task of proving defamation for public figures very onerous whereas, in the UK3, a rule of strict liability still exists for defamation and the House of Lords in the Reynolds case declined to implement an American style Sullivan rule.

We shall, also, illustrate that the tort of defamation involves a clash between the societal interest in free speech and the individual interest in reputation. By analysing the aforementioned cases we hope to ascertain whether the UK or the US has implemented an efficient law and struck an appropriate balance between the human right to freedom of expression, guaranteed in UN and regional human rights instruments as well as nearly every national constitution, and the need to protect individual reputations, widely recognised by international human rights instruments and the law in countries around the world. While different jurisdictions have chosen to strike the balance between those conflicting interests differently, the balance a government strikes can have a major impact on the openness of a country’s press and on the amount of information available to the public. The dilemma seems to be, how to promote freedom of expression and at the same time identifying the restrictions which are fairly and reasonably necessary for the protection of reputation. What becomes apparent, though, is that freedom of speech does not embrace freedom to make defamatory statements motivated by personal spite, recklessness or without having a positive belief in their truth. Although the protection of reputation naturally involves a trade-off with freedom of expression, the chilling of free speech which may arise due to the presence of stringent defamation laws might not, under some conditions, be as cold as had been previously believed.

In Law and Economics one ought to ask, whether the cost of the diminution of freedom of expression is greater than the benefit of the protection of reputation? Is the chilling effect of a rigorous principle of reputation protection detrimental to free speech? Is it efficient? In all democracies freedom of speech and personal reputation should have equal status. Or should they? Should reputation protection which is so important for the functioning of the economic system not be trump? There is a fundamental premise extant in democratic societies that freedom of expression must be guaranteed and may be subject only to narrowly drawn restrictions which are necessary to protect legitimate interests, including reputations. More specifically, I will endeavour to explain why the US Supreme Court in Sullivan may have underestimated the cost of unfettered free speech and underestimated the benefit of reputation protection as a mechanism for ameliorating the ubiquitous free rider collective action problem in society.

Considering that false negative speech if it is not severely punished will lead to higher social costs in the form of norm erosion; in Sullivan by attempting to unchill free speech the court facilitated the subsidising of false speech to the detriment of reputation, by substituting actual malice for strict liability. Assuming that the economic and social norms that are constantly reinforced by the law of defamation affect every element of the modern social order, reputation is the fundamental foundation on which people are able to interact with each other in social environments. Further, it serves the equally important purpose of fostering our self-image and sense of self-esteem. Defamation causes decreased norm adherence which can have a pernicious effect on the normative behaviour of society in that the existence of false negative gossip will distort the provision of disesteem. Therefore, I propose that reputation protection should trump freedom of expression, which is consistent with UK defamation law. In justifying this theory I will look at the hold-out and externality problems and plead for property rule protection in defamation cases because the cost of the hold-out problem in reputation cases is less than the externality or undercompensation in the standard liability model.

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