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A User Innovation Theory of the Numerus Clausus By Leah Marie Theriault A thesis submitted in conformity with the requirements for the degree of S.J.D. Graduate Faculty of Law University of Toronto © Copyright by Leah Marie Theriault, 2011 A User Innovation Theory of the Numerus Clausus Doctor of Juridical Science (S.J.D.) 2011 Leah Marie Theriault Faculty of Law University of Toronto Abstract Limitations on the customizability of property rights (the numerus clausus principle) are a puzzling feature of the common law conception of property. An economic rationale, built upon 1) the pivotal role that rules of exclusion play in fostering user innovation, and 2) the role that psychological ownership plays in preventing recontracting around governance rules, is offered to explain the modern persistence of the doctrine. Application of the numerus clausus principle limits the proliferation of governance rules in the economy (governance), replacing them with rules of exclusion (exclusion). Exclusion unifies rights of use and possession in assets, while governance separates, to a greater or lesser degree, possession from use rights. Full user, sale and the policy against restraints on alienation are the paradigmatic examples of exclusion; while governance is exemplified by servitudes and contractually-burdened assets. Exclusion plays a critical role in user innovation because it allows the possessors of assets to unilaterally seek out new uses of those assets. Whenever the law replaces governance with exclusion, user innovation is more likely to occur because the possessors of assets can apply their unique, rival and nontransferable human capital inputs to tangible assets, generating outputs (the new uses) that move resources to their ii higher-value uses. This is how all innovation, both high-tech and low-tech, occurs. In addition to negatively impacting user innovation, governance hinders recontracting because both possession and legal entitlements (rights of use in an asset) give rise to feelings of psychological ownership, and individuals will not recontract over uses that they feel they already ‘own’. The user innovation theory’s focus on search, innovation and human capital explains why the numerus clausus principle remains most robust in the areas of personal and intellectual property (where users generate a significant amount of innovation), and why it has been somewhat attenuated in the area of real property (where we restrict search in order to facilitate coordination of land uses). It also explains why the law enforces the principle even when the cost of providing notice of governance rules is low. iii Acknowledgments An S.J.D. thesis is not a joint work, but it is a joint effort. And so, there are far more people to thank than there are words adequate to thank them. To my supervisor, Bruce Chapman, whose clarity of thought and keenness of mind have made me a better scholar, and who has read through more discarded verbiage than perhaps any other supervisor in the history of the faculty. To Abraham Drassinower, who stayed on through my move from books and movies, to skateboards and baking soda. To Michael Trebilcock and Ariel Katz, who made it possible for me to finish, not just in time, but in time for my birthday. And to Peggy Radin, whose work was there at the beginning, and who was there in person at the end. You have all greatly improved not just this work, but the work that I will do in the future. To Julia Hall, who deserves roses every day. To the faculty, staff and students at the University of Toronto and Washington University in St. Louis, for showing me what an educational institution can and should be. To my family, who helped in so many ways over these long years. And finally, to Chuck McManis, who helped restore my faith, and to my Mother, who helped me cross the finish line. Without all of you, doing things the hard way would not have been possible, and the hard way is the only way I know. Together, you are all living proof of one simple fact: The only debts worth incurring are the debts you can never repay, from people who will never ask you to repay them. iv INTRODUCTION..................................................................................................................................................1 CHAPTER 1: THE NUMERUS CLAUSUS - THE LAW’S PREFERENCE FOR EXCLUSION.....................14 INTRODUCTION ...........................................................................................................................................15 PART 1 CURRENT THEORIES ...............................................................................................................17 PART 2 WHY WE NEED A NEW THEORY............................................................................................22 1) The ‘Third Party’ Problem......................................................................................................................23 2) The ‘Notice’ Problem .............................................................................................................................24 PART 3 CONSTRUCTING A NEW THEORY.........................................................................................27 1) An Alternate Definition: A Legal Preference for Rules of Exclusion ....................................................28 2) Why Is Prior In Time Not Always Prior In Right?.................................................................................32 CONCLUSION ...............................................................................................................................................36 CHAPTER 2: USER INNOVATION – WHY EXCLUSION IS IMPORTANT.................................................37 INTRODUCTION ...........................................................................................................................................38 PART 1 DEPARTURES FROM PREVIOUS THEORIES ........................................................................38 i) First Party Versus Third Party Effects.....................................................................................................39 ii) The Immediate Present Versus the Far Future .......................................................................................42 iii) The Impossibility of Ex Ante Contracting ............................................................................................43 Some Terminological Clarifications ....................................................................................................................... 45 PART 2 INTENTIONAL INNOVATION .................................................................................................48 Problem Finding and Problem Solving Contrasted.....................................................................................49 A) PROBLEM FINDING...........................................................................................................................52 B) PROBLEM SOLVING ..........................................................................................................................56 i) Asset Use Provides a Trial and Error Process...................................................................................................... 57 ii) Different Users Will Perceive Different Solutions ............................................................................................. 58 iii) Different Users Will Prefer Different Solutions ................................................................................................ 60 PART 3 THE ECONOMIC IMPORTANCE OF USER INNOVATION...................................................64 PART 4 ACCIDENTAL INNOVATION...................................................................................................68 i) How Can We Account For The Role Of Accident In The Innovative Process?......................................71 ii) Is Accidental Innovation Merely A Curiosity, Or Is It Something Worth Fostering?............................74 iii) How Do We Foster Accidental Innovation Among Users?...................................................................77 PART 5 USE, POSSESSION AND THE EMERGENT NATURE OF INNOVATION ............................78 PART 6 HUMAN CAPITAL: THE PRIMARY CONSTRAINT IN THE INNOVATION PROCESS......81 CONCLUSION ...............................................................................................................................................87 CHAPTER 3: PSYCHOLOGICAL OWNERSHIP AND BARRIERS TO RECONTRACTING.......................90 INTRODUCTION ...........................................................................................................................................91 PART 1 THE MOTIVATION TO ASK FOR PERMISSION/DISCLOSE ................................................92 A) THE MOTIVATION TO ASK FOR PERMISSION.............................................................................93 1) Psychological Ownership, Possession and Use................................................................................................... 93 2) Individuals Expect Use to Travel with Possession.............................................................................................. 96 i) Evidence of the Expectation........................................................................................................................... 97 a) Of DivX and DVDs.................................................................................................................................
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