Saturday, January 10, 2009

Watchmen, Fox, WB, and Adverse Possession

There is a process in the common law known as adverse possession, under which a person may come to own another's plot of land by simply using it for a long period of time. The requisite period is determined by local common law or statutory law, and so it varies by jurisdiction (it's usually something like fifteen to thirty years). Surprisingly, economists tend to think that this legal rule is efficient. This is suprising because economists are normally big fans of secure private property rights (for example, economists are generally skeptical of the Kelo vs. New London decision). 

The efficiency justification for adverse possession is that land should be put to its highest-valued use. If an owner is neglecting land, and someone else can use it in a productive way, then the land should eventually be allowed to transfer to the productive user, whether the original owner likes it or not. The long time interval is desireable because it gives the original land owner plenty of time to wisen up and use the land in a productive fashion. He or she can, at any point, kick off the trespasser and make use of the land. If the land owner does not, however, and the trespasser makes use of the land, then courts give the land to the interloper. 

This brings me to a recent dispute over distribution rights between Fox and Warner Brothers over the movie version of the Watchmen graphic novel. Fox argues, apparently correctly, that it still owns some of the distribution rights for a Watchmen movie, as a result of its 1986 purchase of all the movie rights, and a 1994 agreement with the current producer. During this entire time Fox did nothing with these rights; they have been squandered. Eventually Warner Brothers decided to make what looks to be a pretty faithful adaptation of the graphic novel, to much nerd acclaim. Last February, as production finished up, Fox filed a suit to delay the release and eventually receive some of the profits. 

This has understandably angered many people. Fox could have tried to make a movie at some point, but did not, and now they are trying to free-ride off of the work of WB. On the other hand, they are within their rights, if these contracts are real. 

Watchmen started movie development several years ago, and was picked up by Warner Brothers in 2005. Fox could have put in its claim for distribution rights at any point during these years of negotiations. It could have said something during the past three years of active movie production. Instead, Fox waited until the very last minute--until most of the film was completed--to make its claim. This strikes me as opportunistic, to say the least. 

Here's where the adverse possession argument comes in.  Perhaps distribution rights should be treated the same way as property rights in land. I think a court would be entirely justified in saying that Fox let its rights lie unexercised for too long; Warner Brothers has gained them by adverse possession. Granted, thirty years haven't gone by, but the entertainment world moves much more quickly than the land development world, so a shorter time period is probably reasonable. Finally, this is exactly the situation that adverse possession is intended to address: The original rights-holder is not making productive use of his rights, so they should move on to someone who will. A last-minute grab at those rights by the original holder should be denied on the grounds that the original holder has allowed them to go unused for too long. If Fox wanted to maintain its rights, it should have acted in a timely manner. 

The common law is very slow to change (with good reason) and I doubt that this argument would persuade a judge. Nonetheless, I think it makes some sense. 

UPDATE: Matt Freeman informs me that this is called a laches defense; the argument would be that Fox "slept on its rights". It's not clear if Fox actually did this, however. In this article Fox is quoted as claiming that they did in fact notify the producers before production began. Maybe one could still make the argument that they should have begun legal proceedings earlier, but maybe Fox is in the right after all. 

2 comments:

Matt F. said...

I don't see any good economic reason for encouraging holders of rights in intellectual property to silently sit on those rights while knowing that another party is developing some other good through reference to or use of that intellectual property. I would think the way to maximize utility of the intellectual property would be to set up rules requiring some type of action in a reasonable time period where a violation of those IP interests is known to the holder of the IP.

If Fox notified WB of its rights and WB proceeded anyway, I don't have a problem with Fox now filing suit. It seems to me that the critical issue is whether the WB is in a position to knowingly assess its risk before it invests a significant amount of resources. If Fox is permitted to silently wait in the background while aware of WB's actions, that will encourage people to purchase interests in IP and wait for a third party to use them in a way that gives the holder the right to come in and profit from the third party's investment. Since we want to encourage maximum use and development of IP, forcing the holder of those rights to assert them early on will (a) protect and encourage investment where the holder is silent; (b) promote early negotiation over those rights where the holder asserts them; (c) promote transfer of those interests to the party that can gain the largest return from them; and (d) decrease transaction costs arising from delay, litigation costs, etc. that will predictably result from this type of dispute.

If this requirement for reasonably prompt action from the holder of an interest in IP is triggered by actual notice of the potential infringement to the holder, that would seem to also protect the initial investment in those IP rights. I would have some worry about discouraging investment in IP if the duty was triggered simply by constructive knowledge.

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