One Rule to Compensate Them All
75 Pages Posted: 18 Jun 2018
Date Written: February 1, 2018
The article claims that there is a unique compensation criterion that should be applied in all civil wrongs, inter alia, in tort, intellectual property and property law. Where an individual wrongfully infringes the right of another, the taker should be obliged to repay the victim her damages plus half the additional attributed net profits derived from the taking. This article names this criterion the Golden Rule. The suggested criterion contains three main components. If, for example, a firm increased manufacturing with profits of $1,000, acted wrongfully, and as a result, someone suffered damages of $600 — the taker should pay the victim $800 (600 ½(1,000-600)). This rule applies even where the victim suffered only negligible damages. In this case, the taker pays the victim $500 (0 ½(1,000-0)). Lastly, if the firm loses after paying the victim her damages, for example, where the total profits are $400 (before paying the victim’s damages) — the taker pays the victim only her damages ($600).
The article examines modern physics for an analogical exploration of the notion of phenomena that are hard to verify, and current laws for any existing application of the Golden Rule. It finds that patent law embraces major aspects of the rule, inter alia, in the US Supreme Court’s influential ruling in eBay Inc. v. MercExchange, L.L.C. that limits the automatic operation of injunctions and emphasizes the importance of the compensation scheme, and especially in reasonable royalty – the most common criterion of patent infringement compensation. The article claims that the reasonable royalty criterion that requires the court to perform “hypothetical bargaining” between the patent infringer and owner is theoretically equivalent to the Golden Rule.
The article shows that the Golden Rule is already in use and that it is the unique socially optimal rule of compensation for all civil wrongs. First, using law and economics methodology, the article claims as follows. (1) In bargaining settings, the Golden Rule fully protects the value of the victim’s entitlements by assigning the maximum value to her right to negotiate and sell her entitlement by herself; damages awards eliminate this value. (2) Where under-compensation may be expected, for example, due to asymmetric information, damages awards often lead to inefficient takings, while the Golden Rule ensures that only efficient takings occur. (3) In settings of competitive markets for victim entitlements, damages awards undermine the structure and operation of the markets by allowing potential takers to force a purchase of entitlements at their costs, which the Golden Rule may restore. Finally, (4) the Golden Rule may serve as a proper debiasing mechanism for correcting risks estimation errors caused by cognitive biases.
Second, the article claims that normative theories of both corrective and distributive justice lead to the same unique socially optimal Golden Rule compensation criterion.
The article further suggests rules to implement the Golden Rule, including ways to measure compensation by this criterion. Inter alia, where takers’ profits or victims’ damages are elusive, the court may use takers’ financial ratios to determine the Golden Rule compensation. Where measuring damages and gains is impractical, the article suggests that the court may apply, mutatis mutandis, its ex-ante equivalent, namely the hypothetical bargaining criterion of patent litigation.
Keywords: Remedies, Law and Economics, Compensation, Golden Rule, Hypothetical Bargaining, Damage Awards, Disgorgement, Restitution, Profits, Wrongs, Takings, Corrective Justice
JEL Classification: K00, K10, K11, K13, K20, K41, D03, D4, C7
Suggested Citation: Suggested Citation