The Creativity Effect

" The Creativity Effect ," 78 U. Chi. L. Rev. 31 (2011) (with Christopher Buccafusco) Abstract This Article reports the first experiment to demonstrate the existence of a valuation anomaly associated with the creation of new works. To date, a wealth of social science research has shown that the least amount of money that owners of goods are willing to accept to part with their possessions is often far greater than the amount that purchasers would be willing to pay to obtain them. This phenomenon, known as the endowment effect, may create substantial inefficiencies in many markets. Our experiment demonstrates the existence of a related "creativity effect." We show that creators of works value their creations substantially more than do both potential purchasers of their works and mere owners of the works. The creators in our study valued their works (in this case, paintings) more than four times higher than potential buyers did and almost twice as high as did owners of the works. Further, we provide evidence that these differences are the result of creators' irrational optimism about the quality of their works. We conclude by discussing the implications of these findings for intellectual property (IP) theory in general and IP licensing in particular. Our findings challenge the classical economic approach to IP rights, and they suggest that IP markets may be less efficient than previously recognized.

"The Creativity Effect," 78 *U. Chi. L. Rev.* 31 (2011) (with Christopher Buccafusco)

									Abstract

This Article reports the first experiment to demonstrate the existence of a valuation anomaly associated with the creation of new works. To date, a wealth of social science research has shown that the least amount of money that owners of goods are willing to accept to part with their possessions is often far greater than the amount that purchasers would be willing to pay to obtain them. This phenomenon, known as the endowment effect, may create substantial inefficiencies in many markets. Our experiment demonstrates the existence of a related "creativity effect." We show that creators of works value their creations substantially more than do both potential purchasers of their works and mere owners of the works. The creators in our study valued their works (in this case, paintings) more than four times higher than potential buyers did and almost twice as high as did owners of the works. Further, we provide evidence that these differences are the result of creators' irrational optimism about the quality of their works. We conclude by discussing the implications of these findings for intellectual property (IP) theory in general and IP licensing in particular. Our findings challenge the classical economic approach to IP rights, and they suggest that IP markets may be less efficient than previously recognized.

Christopher Buccafusco & Christopher Jon Sprigman, The Creativity Effect, 78 U. Chi. L. Rev. 31 (2011)

Christopher Buccafusco
Christopher Jon Sprigman

Lucent Technologies, Inc v. Gateway, Inc

In this Article, we report on the second installment in a planned series of experiments designed to determine whether transactions in intellectual property (IP) are subject to the valuation anomaly commonly referred to as the "endowment effect"-the empirical finding that owners of goods tend to value them substantially more than do purchasers. In previous work, we conducted experiments that demonstrated a substantial valuation asymmetry between authors of poems t Assistant Professor, Chicago-Kent College of Law. tt Professor, University of Virginia School of Law. price-setting is based on an even more fundamental presumption that underlies neoclassical economic theory in general-namely, that people act as rational agents who make choices based on their own stable and well-defined preferences. ' Over the past few decades, important new research in behavioral psychology and experimental economics has challenged fundamental social-scientific assumptions about individual rationality and the efficient functioning of markets.' The "rational actor" model of classical economics, which assumes that people have stable preferences and make decisions that maximize their utility, is being eroded in favor of a more nuanced and empirically robust view of human decisionmaking as "boundedly rational."' Perhaps the most important contribution of the behavioral economics research is the discovery that people's valuations of goods or states of affairs are highly dependent on the way those goods or states of affairs are framed.! Whereas neoclassical economic theory assumes that the value a person attaches to an item is endogenous (that is, based on the person's internal preferences), a mountain of survey and experimental data has shown that people attach substantially higher value to goods if they own them than if they are considering purchasing them.o People are reluctant to part with their property, and the amount that they are willing to accept (WTA) to sell it generally far exceeds the amount that others are willing to pay (WTP) for it. This WTA/WTP gap has been termed the "endowment effect," and it has been detected for an astounding variety of forms of property." The basic incentives for private economic activity and also the starting point for transactions whereby resources are shifted to their most valuable use."). 6 See Daniel Kahneman, Jack L. Knetsch, and Richard H. Thaler, Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, 5 J Econ Persp 193, 193 (1991). 7 See Russell B. Korobkin and Thomas S. Ulen, Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics, 88 Cal L Rev 1051, 1054-58 (2000). 8 For a primer on the origins and development of behavioral economics and its incorpora- tion into legal analysis, see generally Cass R. Sunstein, ed, Behavioral Law and Economics (Cambridge 2000). 9 See Russell B. Korobkin, The Endowment Effect and Legal Analysis, 97 Nw U L Rev 1227, 1229 (2003); Samuel Issacharoff, Can There Be a Behavioral Law and Economics?, 51 Vand L Rev 1729, 1735 (1998). to For a review, see Korobkin, 97 Nw U L Rev at 1230-42 (cited in note 9). 11 See id at 1232-34 (highlighting research demonstrating the endowment effect's influence on the valuation of property, ranging from wetlands to candy bars to coffee mugs). As Kathryn Zeiler notes, the use of the term "endowment effect" for the observation of a WTA/WTP gap can create biases of its own, as it imports an explanation of the gap into the description of the behavior-that is, that the valuation gap is due to sellers' attachment to the good based on their ownership of it. See Kathryn Zeiler, The Endowment Effect: Implications of Recent Empirical Developments for Legal Theory *8 n 32 (unpublished manuscript, Jan 2008), online at http://www.law.umich.edulcentersand programs/lawandeconomics/workshops/Documents/Winter2008/zeiler.pdf (visited Oct 15,2010). We choose to employ the term throughout this Article because it has been widely adopted by most valuation anomalies caused by the endowment effect threaten to generate considerable inefficiencies in a variety of markets, because initial property distributions will tend to be sticky, thereby impeding efficient transacting. The legal implications of this research have been traced in a number of fields including contract, tort, and property law. In previous work, we extended the endowment effect research to the realm of IP by studying goods that were not merely endowed but were instead created by our experimental subjects. Our goal was to create a market that represented the value of IP rights. To that end, we created a contest with a known payout and allowed subjects the opportunity to buy and sell their chances to win the contest." These chances would model the value of IP rights, which is primarily derived from rent-seeking opportunities." The experiment included three randomly assigned groups of subjects: "Authors," "Owners," and "Bidders." The Authors were instructed to write three-line haiku poems for entry into a $50 contest. They were then given the opportunity to sell their chances to win the prize to another subject-a Bidder-by indicating the least amount of money that they would be willing to accept to give up their chances. The Bidders were each shown a poem and asked to indicate how much money they would be willing to pay to obtain the poem's chance to win the $50 prize. Finally, the Owners were told that they owned one of the poems' chances to win the prize and were asked to indicate the least amount of money that they would be willing to accept to sell it to a Bidder. The subjects were reminded that they were exchanging only the chance to win the prize and not the poem itself., Our first experiment demonstrated a very substantial WTAIWTP gap, which our experimental protocol suggested stemmed from a mix of optimism bias and regret aversion. Our data revealed that Authors valued their work more than twice as high as Bidders ($20.05 versus $9.21)." The significant differences in valuation that we observed in commentators on the literature. Importantly, however, we join Zeiler in resisting the temptation to use the "endowment effect" as fully explanatory of the WTA/WTP gap. Instead, our experimental design inquires into the underlying psychological mechanisms that might be motivating the gap. 12 For a review, see sources cited in Buccafusco and Sprigman, 96 Cornell L Rev at 2 nn 3-8 (cited in note 1). 13 See id at 19-20. [78:31 our initial experiments suggest that "(1) the preferences of IP creators, owners, and purchasers are unstable and dependent on the initial distribution of property rights in creative works, and (2) large gaps arise between WTA and WTP even though the poems are nonrival property and the contemplated alienation of the property is therefore only partial."" Our results further indicate that IP licensing markets may be significantly less efficient than previously believed." Our first set of experiments answered one of our most fundamental questions: our results aligned with our hypothesis that the endowment effect extends to created goods. But the first set of data also produced an unexpected result that suggested this second study. We initially predicted that Authors would exhibit greater valuation biases than Owners-that is, that Authors' valuations of their works would produce a wider WTA/WTP gap than in the case of mere Owners. We anticipated that Authors would have a greater attachment to the poems they had written than Owners would to poems that had been given to them and that this attachment would result in higher WTA values. This result failed to materialize-our first set of experiments found no statistically significant differences in valuation between Authors and Owners. Both valued their poems at a level more than twice the WTP of the median Buyer but within the standard range of error of each other. So what happened? One possibility is that the lack of a difference is an artifact of our experimental design. In most real-world settings, creativity is primarily motivated internally by the desire to create (contrary to most economic accounts),' whereas in our experiment, Authors were told to write their poems and did so without the "spark" of creative motivation. 21 Additionally, the size of the creative effort in our study was quite small. The five to ten minutes that subjects took to write their three-line poems is not equivalent to the effort that goes into painting a portrait, writing a concerto, or filming a movie. At this level of creativity, we may simply have missed important aspects of real-life authors' preference functions that might distinguish them from thirdparty owners. The experiments reported in this Article are designed to determine whether creators who (1) are internally motivated, at least in part, and (2) expend significant creative effort on their works will in fact manifest a significantly larger WTA/WTP gap relative to that produced by transactions involving mere owners. If so, then this would be a distinctive valuation anomaly tied to creative authorship, one which we label the "creativity effect." We turn now to a description of our experimental protocol. In Valuing Intellectual Property, we created an informal model for establishing the economic value of IP rights.' Unlike rights in real or personal property that have value based on individual use and exchange, IP rights primarily derive their value through the statutory monopolies that enable rent-seeking from other users, licensors, and creators. As we argued previously, an IP right's economic value is based on its owner's ability to condition use of the underlying work or invention on the payment of fees over some period of time.n The value of any particular, individual IP right, then, can be thought of as simply the probabilistic value of the rents that can be obtained from holding the right to a given work.' For example, the ex ante value of a copyright in a newly created work can be estimated by multiplying the amount of money that the copyright holder could obtain through using, selling, or licensing the work in the market by the probability that it will succeed in generating that money. Of course, creators may value IP rights for reasons beyond mere rent-seeking. They may value the social recognition associated with being awarded a patent, for example. Or the IP right may serve to protect other personal or moral interests that creators have in their works. Although we are interested in these "intrinsic" values, we have decided to bracket them for purposes of this research for two reasons. First, we wanted to create a simple and reliable method for testing economic value and were concerned that other factors would unduly complicate our results. Second, most judicial and academic writing on IP focuses primarily on economic value at the expense of intrinsic value.' Accordingly, our initial experimental designs have attempted to isolate the economic value of IP rights.' To model the rent-seeking nature of IP transactions, we established a contest with a payout of known value. As noted above, we hypothesized that our failure to find a difference between creators of works and mere owners of them in our first experiment was based on the small creative endowment associated with haikus. Moreover, the motivation for creating the haikus was purely external. In this experiment, we used student "Painters" who had invested substantially in their works and who were primarily internally motivated to create them. We solicited undergraduate and graduate painting students from the School of the Art Institute of Chicago (SAIC) as subjects. The subjects were invited to choose a medium-sized painting for entry into a contest for a $100 prize. We received twenty submissions and held two contests of ten paintings each. Each of the Painters was paid $15 for participating. The contest was hosted in an exhibition space at SAIC, and the paintings were judged by a faculty member at SAIC. When the Painters arrived at the exhibition space, they mounted their works in two groups of ten. They were then given sheets of paper describing the contest. They were told that they would be competing with the nine other Painters in their group for a $100 prize based on the quality of the paintings as judged by an expert. They were next told that they would be matched with one of ten additional subjects, known as "Buyers," who would make them a cash offer for their chance to win the prize. The Painters were told to indicate the least amount of money that they would be willing to accept to sell their chances to win. If the Buyer's amount was equal to or higher than the amount indicated by the Painter, the Buyer would pay the Painter the amount of the Buyer's offer and receive the chance to win the $100 prize. If the Buyer's offer did not meet the Painter's WTA price, the Painter would retain her chance to win the prize. Neither party would know the other party's offer before responding. The Painters were reminded in bold that they were not transferring the paintings themselves or any rights in them other than the chance at the prize awarded to the winning painting. After viewing all ten paintings and indicating the lowest amount that they would be willing to accept, each Painter answered some additional questions about her painting. She was asked to estimate the probability that her painting would be chosen as the winner, the quality of the painting, the number of hours she spent on the work, the amount of personal or emotional attachment she felt toward the work,' and the amount of regret she would feel if she sold the painting's chance and it won in another's hands.' In addition to the Painters, we recruited forty students from Chicago-Kent College of Law to be subjects in the experiment. As these subjects arrived, they were randomly assigned to the role of either Buyer or Owner. They were each paid $15 for participating. Each Buyer was told that she would be matched with one of ten Painters who had entered paintings into a $100 contest. The Buyer would be able to make an offer to purchase the Painter's chance to win the prize. She was told to indicate the most she would be willing to pay to buy the Painter's chance to win. After viewing the paintings and indicating a WTP amount, the Buyers were asked the same questions about probability, quality, and regret. 0 The Owners were placed in a similar position to the Painters with respect to the contest. They were told that ten paintings had been entered into a contest for $100 and that each had been assigned to be the owner of one of the paintings. If "her" painting were chosen as the winner, she would receive $100.o The Owners were then told that a Buyer would make them a cash offer for their chance to win the prize, and that if the Buyer's offer exceeded the least amount that they would be willing to accept, they would receive the cash offer in exchange for the chance to win. After viewing the paintings and indicating a WTA amount, the Owners were asked the same questions about probability, quality, and regret. This question read, "How would you rate your level of personal and emotional investment or attachment to the painting?" It was followed by a scale from 1 to 10, with 1 labeled "Not at all" and 10 labeled "Very Much." This question read, "Imagine that your painting sells for the amount you indicated and that it goes on to win the prize. How much regret do you anticipate feeling about another person winning with your painting?" It was followed by a scale from 1 to 10, with 1 labeled "Not at all" and 10 labeled "Very Much." 29 The Buyers' question about regret was somewhat different. It read, "Imagine that you fail to purchase the painting for the amount you indicated and that it ends up winning the prize. How much regret do you anticipate feeling?" It was followed by a scale from 1 to 10, with 1 labeled "Not at all" and 10 labeled "Very Much." Our "Owners" were not perfect models of real-world owners. Unlike real owners of IP who presumably own the IP because they purchased it, our owners were simply gifted the chance to win the prize. We hope to study this difference in future experiments. In order to facilitate administration, we were given permission by the Institutional Review Board to make only the transactions between buyers and sellers that would have affected the distribution of the final prize. No such transactions occurred (Painter and Owner WTA exceeded Buyer WTP), and the winning Painters and Owners were given their prizes. Neoclassical economic theory dictates that our subjects should have assigned values to the paintings by treating them as weighted lottery tickets, with the weights determined by the respective quality of the paintings. Each painting's value could be determined by multiplying its weighted chance to win the prize by the total prize. Thus, if all of the paintings were equally good and equally likely to win the prize, then each painting should have a value of $10 (0.1 x $100 = $10). Of course, some paintings might be more likely to win than others, and their values should increase proportionately. Importantly, we find that subjects' predictions of their paintings' probabilities of winning significantly predicted their valuations." This suggests that they understood the task. It does not, however, mean that they always behaved rationally. Although some paintings might be more likely to win, others would necessarily have to be less likely to win. Thus, because the contest is a zero-sum game, the mean valuation' of the paintings should remain $10." This, however, is not what we saw. The Painters' mean WTA was $74.53, while the Buyers' mean WTP was only $17.88.' Also, the Owners' mean WTA was $40.67. Both the Painters' and Owners' values differed significantly from the Buyers', and, unlike in our We note here that there might be a valid distinction to be made between a subject's "valuation" of the chance to win and her "pricing" of that chance. Consider, for example, Ward Farnsworth, Do Parties to Nuisance Cases Bargain after Judgment? A Glimpse Inside the Cathedral, 66 U Chi L Rev 373, 399 (1999). Although subjects might not have perfect knowledge about their weighted chances to win, any errors should be randomly distributed around the mean. 3 As with our previous experiment, Buyers' mean WTP was slightly higher than rational probability theory would predict. See Buccafusco and Sprigman, 96 Cornell L Rev at 26 (cited in note 1). One possible explanation is that the nature of the scale resulted in a few high bids shifting the mean higher than expected. Another possibility is that Buyers may have attached some significance to the fact that they were being asked to bid on only one painting-and this may have raised their estimation of that painting's chance of winning the contest. Finally, having been told that this was the only painting that she could bid on, it is also possible that each Buyer developed a sense of attachment to her painting even though she did not own it. previous experiment, the Painters' values differed significantly from the Owners'. 3 ' These results are strongly suggestive of the existence of a creativity effect. When internally motivated and engaged in considerable creative effort, creators seem to value their works substantially more than do potential buyers or mere owners. The follow-up questions that we asked the participants can help explain some of the psychological mechanisms responsible for these valuation asymmetries. We focused on three possible explanations: emotional attachment to the work, biased estimates of the likelihood 35 All of these differences are statistically significant at p < .01. Similarly, in ANCOVA analysis with role as a fixed factor and quality, regret, and predicted probability of winning as covariates, the effect of role was highly significant. F(2, 47) = 18.13, p < .0005. All of the groups differ significantly from one another. Painters assign higher values than both Owners (t(33) = 4.11, p < .0005) and Buyers (t(37) = 7.75, p < .0005), and Owners assign higher values than Buyers (t(38) = 3.17, p < .005 of winning the contest, and anticipated regret at having sold the winning painting. We focused on creators' emotional attachment to their paintings for two reasons. First, some explanations of the endowment effect posit that it results from owners' feelings of attachment to the owned object leading to greater unwillingness to give it up.' Second, the creator's sense of attachment to her work is central to most theories of IP based on so-called moral rights, and we wanted to examine whether attachment seemed to be contributing to the value that creators assigned to their works." A moral rights theorist might interpret the valuation asymmetries in our experiment as evidence of the creator's enhanced connection to the work. If so, the moral rights theorist may further assert that even though the WTA/WTP gap may result in what, from a purely economic point of view, would be a suboptimal level of transacting, the law should nonetheless recognize and give effect to authors' special attachment to their work and should make no attempt at "debiasing" authors. Somewhat surprisingly, however, creators' ratings of emotional attachment to their paintings did not predict their valuations. Painters who felt strongly attached to their works were no more likely to assign high values to them than were those who felt less attached to their works. Relatedly, the number of hours that the Painter spent on the painting was also uncorrelated with the Painter's valuation. These results suggest that emotional attachment or labor may not be playing a particularly strong role in creators' valuations of their work; however, forthcoming experimental research suggests that investing certain kinds of labor in objects may make people value them more.' See Michael I. Norton, Daniel Mochon, and Dan Ariely, The "IKEA Effect": When Labor Leads to Love (unpublished manuscript, 2010) (on file with authors). We did not collect data on the emotional attachment of Owners or Buyers on the assumption that they would feel little of it. Accordingly, this leaves open that possibility that even though relatively more attachment did not result in higher values within the class of Painters, overall differences in emotional attachment between Painters and Owners or Buyers may be related to valuation. Of course, even if we did know that Painters claimed higher levels of attachment and higher values, we could not declare that the former was causing the latter. It may simply be the case that creators have stronger attachments to their work but that these attachments do not affect valuation. 2011]1 2. Optimism. As noted above, because of the zero-sum nature of the contest, the mean response to the question about the painting's probability of winning the contest should have been 10 percent. A considerable body of research, however, has shown that people have a strong tendency to overestimate their chances of success, especially when asked questions related to personal qualities." For example, most students predict that they will finish in the top half of a curved class.' Similarly, the subjects in our study significantly overestimated their chances of winning the prize, with Painters' estimates higher than Owners' and both higher than Buyers' (52.8, 41.9, and 31.8 percent, respectively)." Accordingly, it appears that creators' overvaluations are in part logically derived from their assessments of how likely their works are to win the prize. The assessments themselves, however, appear to be considerably irrational. Creators are overly optimistic about their chances of winning and thus each is unwilling to sell her chance for anything close to its objective probabilistic value. This is consistent with our findings from earlier research. 42 A final possible explanation of the higher WTA amounts of Painters and Owners is that these subjects anticipated feeling regret if they sold what turned out to be the winning painting. 43 If so, they might rationally conclude that receiving the probabilistic value of the painting would be insufficient to compensate them for the negative We are uncertain why Buyers exhibited substantially higher probability estimates than would be predicted by classical economics. One possibility is that because they were assigned to an individual painting, they immediately felt a sense of attachment to it even though they did not "own" it. See note 34. It is also possible that the subjects did not understand probability estimates perfectly. Even if this is true, the relative differences between the groups still support our results. See Buccafusco and Sprigman, 96 Cornell L Rev at 26 (cited in note 1). 43 Several commenters suggested to us that the Painters' regret aversion could also be characterized as a propensity to seek risk. Whether the trait is labeled as an aversion to anticipated regret or an attraction to risk, the result is to drive Painter valuations higher than either Owners' or Buyers'. Our questions about regret aversion did not focus on attraction to risk unlinked to anticipated regret following potential loss. We may consider broadening our questions in future studies to capture all facets of regret aversion and risk attraction. feelings associated with regret. Our previous research suggested, but did not directly test, the possibility that such regret aversion was driving our results. Our results in this study are somewhat mixed. On the one hand, across all roles, subjects' regret was very close to being a significant predictor of valuation when controlling for variance in role." This suggests that subjects' valuation decisions might have been informed by their predictions of how much regret they would feel at giving up the winning painting. On the other hand we detected no difference in predicted regret based on subjects' roles. Thus, Painters did not anticipate feeling more regret than did Owners or Buyers. Accordingly, we are hesitant to ascribe too much weight to the effect of regret on the creativity effect. Although fear of regret may be playing some role in the heightened valuations of creators, the largest effect appears to come from their markedly over-optimistic assessments of their chances to win. Accordingly, we believe that IP law may have a considerable role to play in mitigating creativity effects. While there might be good reasons to credit creators' valuations if they are the result of regret aversion or enhanced feelings of emotional attachment, we can see no valid reason for respecting pricing decisions that are driven almost exclusively by irrational biases. For these reasons, our results suggest that debiasing, if it is possible at a reasonably low cost, is an appropriate task for IP law. 5 Accordingly, the next Part turns to legal solutions for diminishing the creativity effect. Relatedly, we should note one potential confounding variable in our study. Prior research has shown that the strength of the endowment effect is positively correlated with length of ownership. Michal A. Strahilevitz and George Loewenstein, The Effect of Ownership History on the Valuation of Objects, 25 J Consumer Rsrch 276, 285 (1998). In our study, the Painters obviously had spent much more time with their works than had the Owners. Thus, it is impossible for us to isolate the amount of the valuation difference attributable to creativity from that attributable to length of ownership. (We are indebted to Orly Lobel for this observation.) Although identification of the precise source of the creativity effect awaits further elucidation, we have two observations that suggest that our results from this experiment are nonetheless valuable. First, length of ownership will tend to differ in the real world; in the usual course, creators will possess their works for some time before licensing or transferring them to intermediaries, and even after license or transfer, creators are often likely to continue to think of their work as "theirs." For this reason, it seems to us that differing length of ownership is an ecologically valid feature of our experiment-that is, it likely reflects real-world conditions. Second, and importantly, we believe that the effect, if any, of differing length of ownership is testable empirically. And even if length of tenure accounts for a substantial portion of the creativity effect (which we doubt, at least as an initial hypothesis) we are still faced with creators' tendency to manifest higher WTA, which results in a suboptimal level of contracting compared with deals involving mere owners. Our study revealed significant valuation asymmetries that created large gaps between (1) Buyers' WTP and the WTA of both Painters and Owners, and, importantly, (2) the WTA of Painters compared to Owners. The first asymmetry-that is, the one between the Buyers and the two types of subjects on the sell-side of the market (Painters and Owners)-is a replication of the results of our first study, and it represents an extension into the domain of IP of the standard endowment effect literature. The new finding in this study is the gap in the WTA amounts of Painters versus Owners. This "creativity effect" is distinctive to creative authorship and inventorship, suggesting that valuation anomalies affecting transactions in creative goods are likely to be especially severe when the seller or licensor in an IP transaction is the creator. The valuation anomalies that we find have significant implications for IP law and policy. The gap between the amount that creators are willing to accept to sell their rights and the amount that buyers are willing to pay to obtain them could pose substantial difficulties for the efficient allocation of resources. Accordingly, we discuss a variety of potential tools for mitigating the creativity effect, some of which merely require different mechanisms for structuring IP transactions between private parties and others that require substantial government intervention. What we do not know about IP markets is at least as great as what we do know.' At this point, we cannot determine whether the benefits of these solutions will be outweighed by their costs. Nonetheless, we suggest that a variety of solutions may be available and that decisions about their desirability should be based on empirical assessments of their respective costs and benefits. The results that we present here expand considerably on our findings in Valuing Intellectual Property. Our new data demonstrate a gap not just between creators' and buyers' valuations but also between creators' and mere owners' valuations. We discussed the legal implications of the standard endowment effect valuation gap in our earlier paper. 47 Those implications have become more significant in light of our new findings. Space limitations prevent us from reexamining those issues in great depth here. Instead, we briefly discuss them in the context of the creativity effect and encourage readers to consult the earlier paper for more detailed analysis. We also explore a series of newly raised implications. Before we discuss methods for mitigating the creativity effect, it is worth exploring the effect's implications for incentivizing creative effort. The chief goal of IP law is to establish appropriate incentives for authors and inventors,' and it is important to understand how successful the law is at achieving this goal. Recent research has begun to explore these issues,' and our experiment offers additional insights. Our data suggest that creators overvalue their work in large part because they are over-optimistic about its chances of success. If the creativity effect arises early enough in the creative process, then it may affect incentives to create. That is, if the effect arises as early as the creator's contemplation of creation, or even, when the creative project requires sustained effort, at some early stage of the work, then the creator's tendency to overvalue the contemplated creative good is a factor in the calculation of optimal scope and duration of IP. Because creators subject to the creativity effect will-if the effect arises early enough-tend to overestimate the expected return from their creative efforts, the duration or scope of IP rights can be reduced relative to the optimal duration and scope if creators were rational evaluators of the expected value of their work. Although our experiment does not reveal the point in the creative process at which the creativity effect arises, we can imagine experiments structured to illuminate that question. To date, discussion of IP scope and duration has proceeded-to the extent that it relies on any rational basis at all other than industry rent-seeking-upon the (largely implicit) assumption that creators reckon up the costs and likely returns of their creative efforts according to what the rational choice model would predict.' Our study suggests that more work is needed to better understand whether this is in fact true. Just as the creativity effect may have an unforeseen impact on incentives, removing the effect entirely might produce incentive and motivation issues of its own. In many cases, the willingness to engage in creative tasks may itself be a function of individuals' excessive optimism about their likelihoods of success." After all, what rational person would leave a stable, well-paying job to attempt to write the Great American Novel or develop a car powered solely by trash? Given the incredibly long odds of success in these enterprises, people might need to be a little irrational to be willing to attempt them. Yet society needs some people occasionally to take those odds. Thus, we need to be careful when contemplating debiasing creators by making them more rational calculators of probabilities. Although the world might be better off with fewer coffeehouse poets and crackpot inventors, it would be a shame to discourage the future Joyces and Edisons. The creativity effect reported in this Article represents a substantial and previously unrecognized hurdle to efficient allocation of IP rights. Our previous research suggests that significant bargaining gaps are likely to appear between the creators of works and potential buyers. The data we present in this Article suggest that when creators are engaged in more substantial and intrinsically motivated creative effort those gaps expand greatly. Whereas our earlier work indicated a 2-to-1 ratio between creators' and buyers' valuations, this experiment suggests a ratio on the order of 4-to-1. Moreover, and importantly, the additional creative effort associated with the paintings in this study compared to the haikus of the previous study opened up a gap between creators' valuations and those of mere owners. These diverging assessments of value increase the transaction costs associated with IP bargaining over those associated with bargaining over ordinary property. The discovery of new and more significant transaction costs associated with bargaining over IP is especially troubling because, unlike rights in real or personal property, IP rights are rarely given initially to the party best able to exploit them.' Under these circumstances, the overall social utility of IP law depends on a reasonably efficient mechanism for transferring rights from initial rightsholders to ultimate exploiters. If the creativity effect adds to the costs of contracting, then a number of otherwise valuable transactions will not occur, and the social utility of an IP law structured around strong property rules (that is, rights to exclude) will be lower than we might expect. It is important to emphasize that the questions that our research presents about the efficiency of IP law are matters of degree. The valuation gaps that we demonstrate do not mean that IP transactions will not take place; obviously, they do every day. Our results suggest, however, that valuation gaps may create substantial inefficiencies in IP markets that lead these markets to produce a suboptimal level of transactions. Recent empirical research has shown that wider bargaining zones result in substantially fewer agreements being reached." Given the 4-to-1 ratio that we show between creators' and buyers' valuations, there is good reason to fear that parties to at least some IP transactions -most likely those involving highly differentiated creative goods and not involving a transaction intermediary such as an agent or publisher-will manifest particularly wide gaps and, therefore, that a number of welfare-enhancing IP transactions may not occur. Importantly, the results of this study also present the disturbing possibility that overvaluation might grow, and a greater number of IP transactions fail, as the quantum of creativity involved in the production of a particular work increases. The data reported in this Article suggest, when assessed in light of the data from our prior experiments, that works embodying more creativity are likely to be particularly overvalued by their creators. Our first study demonstrated a 2-to-1 valuation gap when the creators were externally motivated and produced only a three-line poem. Here, the creators produced a substantial creative work and were, like real-world creators, in part internally motivated, and we observed a 4-to-1 valuation gap. Further research is needed to parse these results, but our data have introduced the possibility of a "dose-response curve" associated with creativity and value such that the more creativity that authors and inventors invest in their works, the greater the valuation anomaly. This possibility awaits further testing, but even the prospect of a dose-response relationship between creativity and overvaluation is especially troubling for IP law. The most creative works are likely to be the ones with the highest social value. They are also, in general, the works most likely to be created by individual authors (motion pictures are, of course, an exception) and thus subject to the fullest extent to the creativity effect. The data we report in this Article show that it is creator valuations, and not the valuations given by mere owners, that increase markedly when the traded good embodies substantial creativity. The potential inefficiencies generated by the creativity effect result from drastically different assessments of a work's likelihood of success and, thus, its value. The contracting parties in IP transactions may be able to minimize the effects of this valuation gap by structuring deals in terms of running royalties that may include a lump sum payment to the author followed by subsequent payments determined by market success. Such contracts theoretically enable the parties to agree to disagree about the value of the underlying work. As yet, little empirical or theoretical work has been conducted on the economics of royalty contracts, but we are skeptical of their ability to bridge bargaining gaps of the magnitude exhibited by the subjects in this study. First, royalty contracts require continuing accounting and monitoring, are therefore relatively expensive to implement, and as a result are unsuited for a large number of smaller IP transactions. Second, and more seriously, royalty contracts still require bargaining about the terms of the payments and the size of the lump sum. If creators are over-optimistic about the chances of their works' success, they may insist on a disproportionate share of the total profit. The creators in this study were supremely confident in their chances of winning the prize, and it is difficult to imagine them settling for a small share of the prize if they feel optimistic about winning the entire thing.' 2. Intermediaries and works made for hire. Our new data suggest that, as the amount of creativity incorporated into a work increases, creators' valuations will begin to diverge from owners'. Accordingly, it seems likely that the use of transaction intermediaries may mitigate some (but not all) of the creativity effect. The valuation gap in our study between Painters and Buyers is substantially larger than that between Owners and Buyers. This is not to say that Owner-Buyer transactions are proceeding according to the rational actor model-these transactions are subject to a substantial pricing anomaly, but they are closer than Painter-Buyer transactions to efficient outcomes." Our data suggest that, on average, we can expect that transacting will be more efficient when rights to creative goods are 54 For a fuller discussion, see Buccafusco and Sprigman, 96 Cornell L Rev at 36-38 (cited in note 1). In addition, the effectiveness and availability of royalty contracts is limited by both industry norms and costs. See Lucent Technologies, Inc v Gateway, Inc, 580 F3d 1301, 1326 (Fed Cir 2009) (discussing the "[s]ignificant differences" between running royalty and lump sum licenses, including the ongoing "administrative burdens of monitoring usage of the invention" and risk of renegotiation due to "a subsequent decision not to use the patented technology"). 55 See notes 34-35 and accompanying text. in the hands of intermediaries rather than authors (in the case of copyrighted works) or inventors (in the case of patented inventions). Our data are only a first cut, but they suggest that we should think further about the value, in both the copyright and patent contexts, of encouraging initial ownership of IP rights in some person or firm other than the creator. In the copyright context, this means revisiting the scope of the rules governing whether a particular work is treated as a "work made for hire" (WMFH). In the patent context, we may wish similarly to reconsider the current law's very strict "inventorship" requirement. And with respect to both patent and copyright, we might also restructure the current rules requiring that assignments and exclusive licenses be in writing. We should make clear that we cannot, based on the experiments that we have completed and in the space allotted us here, give full consideration to whether any of these doctrines should be modified to account for the creativity effect and the special pricing anomalies that may follow from creative authorship and inventorship. We can, however, briefly describe the elements of copyright and patent law that we should consider changing if future work makes clear that we should be deeply concerned about the efficiency of IP transactions. Under current law, initial ownership of a copyrighted work vests in the work's actual author, unless that work is denominated a WMFH.' The WMFH doctrine has two prongs. A work is a WMFH if either (a) it is created by an employee within the scope of his or her employment, or (b) it falls within a narrow list of enumerated types of work that may be treated as works made for hire even in the absence of an employment relationship if the author and the sponsor agree in a written instrument that the work will be so treated." If, as our results suggest, copyright transactions are less inefficient when the seller is a mere owner rather than an author, then there are several ways in which we might expand the current WMFH doctrine. Most dramatically, where an act of authorship involves some non-de minimis element of sponsorship, we might restructure the doctrine as a default rule favoring initial ownership by the sponsor in the absence of a written agreement providing otherwise. Alternatively, we might achieve a less sweeping but nonetheless significant expansion of WMFH by adding additional categories of work to the current law's second prong or by allowing WMFH by written agreement for all works. The case with patent law's inventorship requirement is starker. Under current law, a patent application may be filed only in the name of the actual inventor or inventors, in whom initial ownership will vest.' Although inventorship arguably has constitutional implications," as a policy matter, a strict inventorship requirement is nowhere entailed in the structure of patent law. We may choose to define circumstances in which a sponsoring entity gains initial ownership-for example, where the parties agree beforehand in a written instrument or, even, were we to favor a more aggressive expansion of sponsor ownership of patented inventions, wherever there is sponsorship and the parties fail to agree beforehand that ownership will not vest in the sponsor. Our data on the creativity effect deepen the concern first noted in our prior article that the tendency of creators and owners to overvalue their work will impose previously unanticipated inefficiencies on markets in IP structured according to the current law's strong property rules. IP law could employ an expanded system of IP formalities to diminish the impact of creativity and endowment effects by restricting property-rule remedies to works that meet some substantial valuation threshold.0 Because negotiations involving works with substantial commercial value offer the promise of significant private gains, these negotiations will be, on average, better able to withstand the costs of negotiation arising from endowment and creativity effects. These observations suggest that it may make sense to employ IP law's property rules only in cases where owners send some signal that a work is likely to trade above a certain minimum value. As we described in our previous article, patent law already does this through its examination procedure and maintenance fees. 6 In contrast to patent law, copyright law has largely discarded the formalities that formerly worked to focus the copyright system on works of significant commercial value.' The Copyright Act of 1976 created a modern regime that lacks any internal defense against endowment and creativity effects. While the United States cannot reimplement formalities due to its obligations under the Berne Convention,' we can obtain many of the benefits of the traditional formalities without offending Berne. As we described in our previous work, copyright's remedies regime could move closer to a liability rule, conditioning the availability of injunctive relief and disgorgement of profits on prior registration of a work in the same way that registration is currently used as a condition for statutory damages and attorneys' fees.' Such a rule would be particularly beneficial in light of the creativity effect that we demonstrate here, because low-value works will less often be worth the added costs associated with other creativity effect mitigators such as intermediaries or royalty contracts. The broadest and ultimately most important implications of our study relate to issues about the fundamental structure of IP rights and remedies. IP law is presently structured around property rules. But if the wide disparities between Buyers' WTP and Painters' WTA that we found in our study characterize a range of IP transactions, then parties seeking to license or otherwise transfer ownership of creative works will face substantial negotiation costs arising from the need to bridge wide differences in valuation.' The data we report in this Article sharpen this concern relative to the findings reported from our previous experiments. The costs and benefits of liability rules and property rules, which we outlined in our Cornell Law Review article, require careful comparison when selecting the appropriate standard for IP law.' Importantly, however, in the IP context, property rules and liability rules may create different inefficiencies: those created by property rules may tend toward overvaluation and failed bargains, while the valuation errors created by liability rules will tend to be distributed symmetrically on both sides of the optimal price. Moreover, our latest data show that transactions in creative work are subject not simply to endowment effects but also to special pricing anomalies that appear to be related to creators' engagement in creative work. These findings are particularly significant in the IP context not only because they suggest that markets in IP may be less efficient than heretofore presumed. They also undermine the normative justification for an IP law structured around strong property rules. The pricing anomalies we see in this experiment will not necessarily suppress creators' ex ante incentives more than they would under rational choice assumptions. If creativity effects arise early enough in the creative process, then it may be that they act as enough of a spur to creative effort (by virtue of the creator's early over-estimation of the ultimate return that the work will bring) such that creator incentives will strengthen overall. We cannot yet say whether this is true, but we can imagine ways to test it. Additionally, if creativity effects arise early enough in the creative process to meaningfully affect creator incentives, then it is not clear whether these effects would vary based on the type of legal rule that governs transactions in the particular form of IP at issue. That is, we know that liability rules shrink the role of endowment effects in transacting, but we do not know whether, in a regime where markets in a particular type of IP are governed by a liability rule, early-arising creativity effects still drive up creator incentives. This is an important question that needs to be answered if we are to undertake a careful reassessment of the relative values of property and liability rules in IP law, and again, we can imagine experiments designed to illuminate this issue. This Article has presented evidence that is suggestive of the existence of a creativity effect that distorts the valuations that creators attach to their work. Creators are likely to overvalue works that they were internally motivated to create and that required substantial creative effort compared with both potential purchasers and mere owners of the works. Our data suggest that this valuation anomaly is driven primarily by creators' irrational optimism about their works' likelihoods of success. Accordingly, we have suggested possible legal solutions that might diminish the inefficiencies associated with the creativity effect either by debiasing creators or by altering the legal mechanisms for owning, transferring, and using IP rights. In order to know which solutions are likely to be most successful, future research is needed to understand more fully the nature of the creativity effect. J.Gordon, A Property Right in Self-Expression: Equality and Individualism in the Natural Law of Intellectual Property, 102 Yale L J 1533, 1540-75 (1993).26We are currently modifying the experiment to evaluate the way creators may derive value from attribution and publication in addition to licensing and rent-seeking.2011] Assigned value was significantly correlated with probability (r = .44, p < .01). Additionally, in ANCOVA analysis with role as a fixed factor and quality, regret, and predicted probability of winning as covariates, predicted probability of winning significantly predicted the value assigned to the poem, F(1, 47) = 6.93, p < .05. In ANCOVA analysis of value, with role as a fixed factor and quality, regret, and predicted probability of winning as covariates, regret is very close to being significant (p = .057). For example, very little is known about the effects of group decisionmaking on valuing goods. See Buccafusco and Sprigman, 96 Cornell L Rev at 31-44 (cited in note 1). The US Constitution empowers Congress "[t]o promote the Progress of Science and the useful Arts, by securing for limited Times to Authors and inventors the exclusive Right to their respective Writings and Discoveries." US Const Art I, § 8, cl 8. We thank Oskar Liivak, John Duffy, and Ed Kitch for encouraging us to think more about this point. See Buccafusco and Sprigman, 96 Cornell L Rev at 34 (cited in note 1). See Russell B. Korobkin and Joseph Doherty, Who Wins in Settlement Negotiations?, 11 Am L & Econ Rev 162, 196 (2009). 20 See Rebecca Tushnet, Economies of Desire: Fair Use and Marketplace Assumptions,

to For a review, see Korobkin, 97 Nw U L Rev at 1230-42 (cited in note 9).

Although subjects might not have perfect knowledge about their weighted chances to win, any errors should be randomly distributed around the mean.

III. LEGAL IMPLICATIONS OF THE CREATIVITY EFFECT

B. The Costs of IP Bargaining and Some Possible Solutions

in the hands of intermediaries rather than authors (in the case of copyrighted works) or inventors (in the case of patented inventions).

In ANCOVA analysis of value, with role as a fixed factor and quality, regret, and predicted probability of winning as covariates, regret is very close to being significant (p = .057).

For example, very little is known about the effects of group decisionmaking on valuing goods.

See Buccafusco and Sprigman, 96 Cornell L Rev at 31-44 (cited in note 1).

We thank Oskar Liivak, John Duffy, and Ed Kitch for encouraging us to think more about this point.

See Buccafusco and Sprigman, 96 Cornell L Rev at 34 (cited in note 1).

See Russell B. Korobkin and Joseph Doherty, Who Wins in Settlement Negotiations?, 11 Am L & Econ Rev 162, 196 (2009).

20 See Rebecca Tushnet, Economies of Desire: Fair Use and Marketplace Assumptions,


" The Debate Over § 1367: Defining the Power to Define Federal Judicial Power ," 41 Emory L.J. 13 (1992)

"The Debate Over § 1367: Defining the Power to Define Federal Judicial Power," 41 *Emory L.J.* 13 (1992)

Rochelle C. Dreyfuss, The Debate Over § 1367: Defining the Power to Define Federal Judicial Power, 41 Emory L.J. 13 (1992)

National Org.  Women v. Operation Rescue

ground that this was a change that needed to be made. And since it would be a mistake to join issue with any of these five (Professors Arthur, Burbank, Freer, Mengler, and Rowe) on the specifics of § 1367's operation, I will instead comment on the general questions raised by the very existence and intensityof their Debate. First, I will discuss the contemporary significance of the diversity docket. Second, I will raise some questions concerning the judiciary's inherent authority to define its jurisdiction and deal with cases that are not expressly controlled by the new statute. Finally, I will consider briefly what the § 1367 experience suggests about methods of statutory interpretation in an era of strict construction. In a sense, this is the easy question since so much of the spade work has already been done. Thus, the claim of the Trio (Professors Burbank, Mengler, and Rowe) that § 1367 is not controversial rests on the notion that, at least since Judge Friendly's time, there is general agreement that the need for general diversity jurisdiction has subsided." State courts are no longer suspected of preferring in-state litigants, nor are federal tribunals necessary to attract foreign and domestic investors to participate in the nation's economic development. Since § 1367 limits the availability and utility of diversity jurisdiction, it seems to be a step in the right direction. The only problem here is that this question appears to be well settled only in the eyes of academics. Despite the longstanding practice of civil procedure professors to stress the importance of dedicating the federal docket to issues of federal importance, students seem to join the vociferous pro-diversity lobby as soon as they enter into practice. 5 Many efforts have been made to abolish general diversity jurisdiction and they have all ended, as the Federal Courts Study Committee anticipated its recommendation would end, in failure. 6 Thus, a major part of the dissatisfaction of the Duo (Professors Arthur and Freer) with the statute is that it moves beyond the Finley problem, creating new limits on supplemental jurisdiction. Moreover, by codifying Owen Equipment & Erection Co. v. Kroger,' § 1367 prevents the lower courts from avoiding the limitations that Kroger placed on supplemental jurisdiction in diversity cases through analogy to Congress' rejection of the limits that Finley imposed on such jurisdiction in federal question cases. Given the history of failed attempts to eliminate diversity jurisdiction, it is difficult to believe that the sheer joy of manipulating filings is all that sustains the bar's position. 8 Rather, the debate over § 1367 demonstrates that it is time to investigate seriously the enduring call for a federal pres-CASES AND MATERIALS at 237-45 (4th ed. 1985). Interestingly, the current edition retrenches, devoting only 31 pages to the issue. See id. at 260-64 (5th ed. 1989). a See generally ERWIN CHEMERINSKY, FEDERAL JURISDICTION 243 (1989); REPORT OF THE FEDERAL COURTS STUDY COMMITTEE 39-42 (1990) [hereinafter FCSC REPORT] (recommending the elimination of general diversity jurisdiction, but providing, as a backup proposal, that in-state plaintiffs be prohibited from invoking diversity jurisdiction, that corporations be deemed citizens of every state in which they do business, that non-economic damages be excluded from calculating the jurisdictional amount, and that the jurisdictional amount be increased). 7 437 U.S. 365 (1978). The new limit is the retraction of supplemental jurisdiction over claims by intervenors as-of-right. [Vol. 41 ence in traditional state-law fields. Toward that end, it is helpful to couple the desire for federal articulation of state law with other moves to federally supervise the enforcement of law. In this category, I would include expanding the reach of the civil rights acts, 9 federal habeas jurisdiction, 10 Congress' creation of federal claims by reference to state-law predicates, 11 and its utilization of so-called protective jurisdiction. 2 What accounts for the persisting preference for federal justice? One possibility is that the federal system is valued now for many of the same reasons that it was valued by the original supporters of diversity, albeit on different facts. Thus, while out-of-staters may no longer fear hostility from state judges, the current emphasis on multiculturalism ("diversity") enhances the perceived benefits of Article III's antimajoritarian features and procedural protections. Similarly, local businesses facing increased competition from abroad and looking to the benefits of an emerging international marketplace may have a new appreciation for mechanisms that facilitate interstate transactions and for the broader perspective that federal courts bring to their problems. In addition, recent events in both Western and Eastern Europe have brought home the importanceand fragility -of federation. Conversely, it may also be that the population's confidence in the states and in state courts has diminished. The intractability of problems traditionally handled by the statescrime, illiteracy, and unemployment - focuses attention on national intervention. Technical developments -nu- As in prior times, monopolization of the law by federal courts is not required to meet these needs. But a federal presence, in the form of concurrent jurisdiction over precisely the same claims as state courts entertain (as in diversity jurisdiction) or jurisdiction over actions aimed at redressing injuries similar to those presented in state fora (as often occurs in civil rights cases), can play an important role in placing the problems of individual states within a larger context and in keeping the state courts faithful to a national vision of justice. In addition, joint articulation of the same law by both federal and state tribunals creates a dialogue that improves the quality of decisionmaking within both systems. Under this broad federalist perspective, diversity jurisdiction represents a benign approach relative to the alternative of enacting substantive federal law, especially governing law that preempts state legislation. Rather than see diversity as an interference by federal courts in state law, as an occasion for "mischievous results,"' 4 or as a costly exercise in requiring federal judges to figure out the laws of the states, diversity can be viewed as an opportunity for the federal system to contribute to the development of state law in precisely the situations in which federal capabilities are likely to exceed those of the statesin cases involving multistate and multinational elements. Moreover, for those who value the common law, a continued hand in adjudication through the mechanism of diversity jurisdiction is superior to chronic congressional intervention in the form of federalization of state law. And for those who prefer legislative solutions, federal judicial involvement in these multistate and multinational cases creates opportunities to signal Congress about problems that require its " See, e.g., National Org. of Women v. Operation Rescue, 914 F.2d 582 (4"th Cir. 1990), cert. [Vol. 41 attention. The question then becomes how should the federal docket be structured to respond to these considerations and yet conserve judicial resources for the federal question cases that are, despite these remarks, surely the federal system's first priority. Not surprisingly, in light of the obstacles to a major revision of § 1332, the dominant strategy for distinguishing between diversity cases that receive federal attention and those that do not is to manipulate the federal court's supplemental jurisdiction. As Zahn v. International Paper Co., 15 Kroger, Aldinger v. Howard," 6 and Finley demonstrate, the Supreme Court's idea here is to make federal adjudication so unattractive that plaintiffs will take cases out of the federal courts and litigate them fully in state systems. This tactic has some merit. Cases requiring supplemental jurisdiction are those of greater complexity, so. that eliminating them from the federal docket is the most helpful in terms of resource conservation. And since plaintiffs can usually pursue the federal part of their cases in federal court, issues of genuine national significance are likely to remaifi within federal purview. At the same time, however, this approach is risky: plaintiffs may bifurcate their cases even when the federal issues are not of great importance. Indeed, as ih Finley, there are circumstances in which the plaintiff is required to do so. This multiplies the number of cases in the judicial system as a whole without producing any real benefit. Furthermore, the technique is sometimes counterproductive. Since it applies to both federal question and diversity cases, it tends to eliminate cases from federal court that involve federal issues; questions that all agree are especially worthy of federal involvement. Section 1367 therefore adopts a somewhat different scheme. Because it relies heavily on Kroger, § 1367 also has a plaintiff orientation. It picks out those cases that do not merit federal attention according to whether the non-federal claims in the case are asserted by parties aligned as plaintiffs. But it differs from the Kroger Court's approach in important ways. By reversing the results in Finley and Aldinger, § 1367 retains all federal question cases and eliminates from the federal docket only diversity cases. Furthermore, the statute may be less risky than the Supreme Court's strategy because principles of issue and claim preclusion are more likely to prevent the plaintiff from bifurcating.foot_2 Finally, this regime can more easily be justified than Finley because, for the most part, its concern is with a kind of antisocial behavior, the evasion of the complete diversity rule through the subterfuge of withholding part of a case. The scheme would thus seem perfect; it even has an impeccable pedigree.' But it has one difficulty. Differentiating on the basis of whether the claims are those of the plaintiff does not, in any interesting-or important sense, distinguish between the cases that should be in federal court from those that should not.' 9 Indeed, in light of the trends discussed above, one could easily argue that cases involving impleaded, intervening, and necessary parties are precisely the state-law cases that should be within federal reach, if diversity cases are going to remain on the docket at all. 20 They not only involve litigants from more than one state or nation; they also align the parties against each other in complicated ways. Admittedly, these are resource-intensive cases, but the complex alignment gives the federal court an especially rich opportunity to examine how state law works in the multistate and multinational context. In addition to the role that these cases can play in giving a national and international perspective to the development of state law, the necessary party and impleader cases excluded by § 1367 also present questions of special interest to the federal system. Some of these cases contain jurisdictional issues involving the interaction between state long-arm statutes and constitutional limitations and raise federalism and comity concerns along with familiar due process issues. 21 Other cases require consideration of the special problems created when rules originally developed in the bipolar contextto play fair'between plaintiff and defendantare applied to interests aligned with neither the plaintiff nor defendant, or to parties whose presence affects the plaintiff and defendant asymmetrically. Because these cases hale into court entities whose presence is needed to provide others with an efficient and satisfactory means of dispute resolution, they present the most dramatic clash between the plaintiff's desire to vindicate an interest in court and the right of others to be sued at home. 22 Given the" broad reach of state long-arm statutes, these, again, are usually problems of constitutional interpretation rather than construction of state law. Similar remarks can be made about choice of law issues. Rule 14, 19, and 2423 cases often involve parties from several states or countries. Since the parties' relationship to the transaction and each other is complex, the conflicts questions are likely to be especially difficult. Providing a federal voice in the debate over state choice of law rules makes sense because of the federalism and comity concerns raised. Indeed, loading the federal docket with diversity cases of this complexity may lead the federal courts or Congress to consider overruling Klaxon Co. v. Stentor Electric Manufacturing Co. 24 and utilizing Article IV powers to create federal choice of law rules binding on the states. Personal jurisdiction and choice of law rules present the system with two different tools for accommodating the various due process interests of participants in litigation. 2 5 Complex cases of the type at issue here offer the court an array of circumstances and therefore present a unique opportunity to shape these rules in a careful There is a another set of reasons why the cases excluded by § 1367 are valuable to the federal docket. These stem from a notionpropounded by the Federal Courts Study Committee, the American Law Institute, as well as by both the Duo and the Triothat the federal and state courts are best viewed as two components in a unitary system of justice; that litigants whose cases are constitutionally capable of being heard in either tribunal should be encouraged to pursue their claims in the forum most able to adjudicate their disputes efficiently. Thus, it would be useful to know whether the ratio of bipolar to complex disputes is higher in state than in federal fora. If so, then despite the costs these complex cases impose on either tribunal, they would be best channelled to the federal system. And to the extent that it is true that litigants are especially interested in a federal articulation of the law, federal adjudication is likely to attract more intervenors than a similar action in state court. Federal jurisdiction would therefore carry the potential for resolving in a single forum disputes that might otherwise be litigated more than one time and in more than one place. In many ways, the cases eliminated by § 1367 are similar to other categories of cases that have been placed on, or are proposed for, the federal docket by virtue of minimal diversity. Interpleader actions have long brought state-law cases to federal court on the theory that the multistate nature of these disputes makes them especially suitable to federal adjudication. 2 6 Other examples include the multistate, multiforum bill undergoing congressional scrutiny and the proposals of the American Law Institute's Complex Litigation Project. 2 " Granted, these provisions are usually accompanied by statutes providing for nationwide service of process and they also generally envision cases more complex than those discussed here. But these are not dispositive differences. As noted above, reliance on state [Vol. 41 bases of personal jurisdiction means that federalism issues are sometimes at stake in these disputes. Besides, revisions to Rule 4 are currently under discussion. Although it is not contemplated that nationwide jurisdiction would be provided for diversity cases, it could be considered for Rule 14, 19, and 24 parties. 2 8 The lesser complexity of these cases is also desirable. Because they would require the federal court to articulate state law in cases fairly similar to those adjudicated by the states, the benefits of concurrent jurisdiction may be more fully realized here than in the interpleader and multiparty, multiforum disputes. And if the benefits of diversity can be fully captured in these "simple complex cases," it may become politically feasible to relinquish other parts of the § 1332 docket. Instead of determining the worthiness of federal adjudication according to "the accident that one plaintiff happens to have a citizenship different from that of all the other parties," 2 9 or by who is asserting the claim, perhaps the time will come when the relationship between the national interest and the substance of the dispute will control the allocation of judicial resources. 30 One of the most interesting questions highlighted by the Debate concerns the role that the federal judiciary can play in determining the scope of its supplemental adjudicatory authority. Both sides seemingly agree that Congress has plenary control in this area, but then qualify their statements in ways indicating that they recognize certain areas as problematic. ). There may be some question as to the constitutionality of such a provision, but the same comment could be made about § 2361, which provides for nationwide service in interpleader cases. "s Friendly, supra note 4, at 509. Thus, I would advocate retaining the complete diversity requirement of Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806). I would deal with the plaintiff bent at evading this limitation by elaborating, either judicially or legislatively, on the anticollusion statute, 28 U.S.C. § 1359 (1988). "0 The subject-matter approach is already utilized and its expansion is under further consideration. For example, routine insurance cases are now excluded from federal court through the device of defining the citizenship of an insurance company as the citizenship of the insured for purposes of direct actions on the policy. 28 U.S.C. § 1332(c)(1). Similarly, the Federal Courts Study Committee back-up proposal on diversity jurisdiction would eliminate routine corporate matters through its citizenship definition, and cases mainly directed at non-economic harms by virtue of its amount in controversy requirement. FCSC REPORT, supra note 6, at 42. Thus, Professor Freer initially raised the issue of authority over supplemental jurisdiction in an article written before Finley was decided, where he labelled the idea of a common law of supplemental jurisdiction as an "oxymoron." ' 31 Similarly, the Trio recognizes that the Supreme Court strictly construes jurisdictional statutes, making legislative action necessary to legitimate any exercise of supplemental adjudicatory power. 32 Both groups realize, however, that this creates a problem. Since § 1367 fails to address every possible permutation of the supplemental jurisdiction question, if federal courts lack all power in this area, all unaddressed variations must necessarily be decided against the assertion of federal authority. This would alter existing law and create substantial (or at least, unintended) difficulties for parties who find themselves in the situations that are omitted by the statute. For example, because the statute does not mention class actions under Rule 23, it could be viewed as overruling the law as it has been understood since Zahn was decided. Even unnamed class members would then have to meet both the diversity and amount in controversy requirements, instead of only the latter." 3 Both sides have a solution. According to Freer, the courts have a free hand here because Congress delegated to them the authority to construe the term "civil action" as it appears in the jurisdictional statutes. 3 4 In contrast, the Trio would rely on the final clause of § 1367(b) 35 and the legislative history they created. 36 But both solutions are flawed. The Finley majority, the supplemental jurisdiction statute, and the courts that have considered the issue do not view the term "civil action" as amenable [Vol. '41 to the Freer interpretation." 7 With respect to the Trio's solution, the last clause of § 1367 is one of the most confusing aspects of the statute and reliance on legislative history is under considerable attack." If, as both sides seem to agree, jurisdiction over the cases omitted by § 1367 does remain open for judicial interpretation, then perhaps it is, in part, because the Finley, Aldinger, Zahn, and Kroger Courts overstated the extent to which supplemental jurisdiction should be considered solely a matter' of legislative grace. Thus, while it is indisputable that the Constitution delegates to Congress the authority to decide whether to establish lower federal courts, once these courts are created, it can be argued that they necessarily assume the power to be courtsto construe the rules of court and the definitions of operational terms such as "case," "controversy," and "civil action" to assure that justice is administered between the parties. 3 9 This is clearly not the place to consider the questions whether or how Congress can expressly limit federal court jurisdiction. 40 But it is important to see that such consideration is not required; that defining the scope of supplemental authority is a conceptually different matter. In supplemental jurisdiction cases, Congress has made the decision to place a dispute within the reach of the judiciary. In other words, the judiciary has already been given the power to decide the facts and determine what rights and liabilities arise out of them. The only remaining issue is whether it can resolve all the questions that the parties wish to have judicially determined. Since the judiciary has the expertise and information needed to assess the effect on the parties of deciding only parts of their dispute, it is in the best position to know what reach it needs in order to assure that justice is done. Since the judiciary also understands how the docket would suffer under a broad construction of jurisdiction, it is well positioned to weigh the costs and benefits of extending this authority. Not surprisingly, therefore, early Courts reasoned that a court obtaining proper authority over a question in a case had "the right to decide all the questions in the case." ' 41 Indeed, one might have expected the current Supreme Court to see this issue as little different from a decision to defer to the expertise that an administrative agency brings to the construction of legislation relevant to its responsibilities." 2 Furthermore, one of the more curious aspects of the supplemental jurisdiction cases, and of Finley in particular, is that they were decided at a time when doctrines of issue and claim preclusion were undergoing considerable common law expansion. 4 If the Court believes that the judiciary has the power to define operative wordssuch as "case," "controversy," and "transaction"for the purpose of determining res judicata law, it is odd that it cannot do the same in the context of joinder. After all, in some sense, res judicata law and supplemental jurisdiction rules are opposite sides of the same cointhe latter determine whether a court can judge a case; the former, whether it has prejudged it. Bifurcating responsibility can create nothing but mischief, for if conceptions of the adjudication's role in the dispute do not mesh, the parties' abilities to pursue their rights efficiently and effectively can be undermined. 4 Even Henry Hart, who [Vol. 41 regarded the general jurisdiction of the state courts as the ultimate guar-. antor of constitutional rights, conceded that federal courts may have some power to prevent Congress from manipulating judicial jurisdiction in a manner that impinges upon important interests. 5 Of course, this reasoning is-best directed at cases like Finley (where it is now unnecessary), in Which the value of a claim within the exclusive jurisdiction of the federal courts is diminished when the plaintiff is forced to pursue a remedy in two judicial systems. 46 But the argument may pertain to some of the situations omitted by § 1367. If, for example, it can be said that the class action rule represents a strong federal policy to allow litigants nationwide to pool their resources to vindicate their rights, then perhaps federal courts retain the power to hear diversity class actions even when unnamed class members share the citizenship of the class' adversary. 47 Furthermore, a federal court may reasonably be more generous to a plaintiff's nonfederal claims when the case was removed from state court by a defendant who then adds parties the plaintiff cannot reach. Or, the exercise of supplemental jurisdiction may be appropriate when issue or claim preclusion would distort later (state court) resolution of the claims that could not have been asserted in federal court by virtue of the express language of § 1367. What Happens When Congress Doesn't Do Its Job, 40 EMORY L.J. 1007, 1010-11 (1991). But hypotheticals based on cases like Martin neatly illustrate my point: there is a paradox when a court lacks power to decide whether it can hear the claims of those in the position of the absentees, yet possesses the authority to decide whether these absentees can undermine the judgment. It is also worth noting that in many instances the court deciding the res judicata effect of the judgment will be a state court. Federal res judicata law should probably control the decision (although there is nothing in the Full Faith and Credit Act, 28 U.S.C. § 1738 (1988), that so requires), but the content of the law will be determined by the second forum. That second court may fail to understand the nuances that arise where the plaintiff cannot assert a claim against a defendant, or it may decide that federal preclusion law should be construed to force the plaintiff into state court in the first place. The court's decision, although theoretically reviewable in the Supreme Court, is unlikely to be reexamined within the federal system. See Parsons Steel, Inc. v. First Ala. Bank, 474 U.S. 518 (1986). "' Henry H. Hart, Jr., The Power of Congress to Limit the Jurisdiction of Federal Courts: An Exercise in Dialectic, 66 HARV. L. REV. 1362 (1953). 4' This is the example given in FEDERAL COuRTS, supra note 41, at 1045-46. Aside from the cost of bifurcating, the plaintiff could lose both adjudications even though in each case the factfinder thought the party should be made wholebut by the defendant not before the court. 47 This would be an especially forceful argument in the event that the states in which plaintiffs can sue refuse to entertain nationwide class actions on the ground that these needs are being met by the federal courts. The vision of diversity jurisdiction propounded here could not be easily legislated. For one, its definition of "simple complexity" is not carefully thought out. This is partly a function of timethis Essay had to be written in a single month and other matters intruded. But, of course, the drafters of § 1367 encountered a similar deadline, and they also faced the political reality that a major revision of § 1332 was not in the cards. Nevertheless, the Trio saw that Congress had grasped the importance of the Finley problem and was poised to overrule it. Anyone would be "insane" 4 to pass up this chance, and, along the way, to straighten out some convoluted law and rid the jurisdictional rules of an anomaly that was, if nothing else, embarrassing to teach. Given these-constraints, the statute is a fine effort and a valuable piece of legislation. At the same time, however, it is hard to entirely disregard the problems of the omitted cases and, for those who did not like Kroger, rejoice in its codification and extension. After all, the fire that inspired Congress to act is quenched, making it unlikely that the diversity jurisdiction problem will be revisited any time soon. And so to the final question: is there a better way for the legislative and judicial branches to interact? It is worth noting that this is an especially serious issue during times like the present, when the Congress differs politically and philosophically from both the Judiciary and the Executive. History has demonstrated that in such situations, the number of occasions for legislative overrule increases. As a result, the tension between the branches of government escalates, producing considerable fallouta politicized process of judicial selection, poorly considered legislative responses, and disrespect for court decisions. 49 (1991). The authors note that between 1982 and 1986 Congress overruled at least 23 Supreme Court decisions (half, as here, within two years of the date of decision), more than twice as many as in the decade preceding President Reagan's election. Id. at-748-49. Arguing that this creates tensions similar to those experienced during the time of the New Deal, they predict that similar political repercussions are likely to be felt. Of course, there are two important differences. First, during the [Vol. 41 with regard to a jurisdictional provision like § 1367 may be a matter of considerable national significance. 50 Several vehicles have been proposed to regularize the relationship between the Judiciary and Congress. The Federal Courts Study Committee is itself one model for this kind of interaction. However, this device did not prove to be an ideal solution because the flow of information from the Committee to Congress was discontinuous and one-sided. Since Congress could not return to the Committee for amplification and further suggestions, it could not easily utilize the Committee members' talents to conform legislative proposals to unaccounted for political realities.. Thus, it was unclear to Congress what the Committee's position on codifying Kroger would have been if its proposal to abolish diversity was rejected. 51 Yet, the formal participation of a principal draftsman of the Committee's Report was apparently reduced to letter writing. 52 Other proposals lack this defect. The Committee suggested that an Office of Judicial Impact Assessment be created as a standing body to forecast the resource needs of the Judiciary and to advise Congress on the impact of proposed legislation. 53 The Committee also recommended that bills be reviewed with an eye to the problems that tend to breed litigable issues. 5 4 Others argue that judicial mores should be reexamined so that judges can feel free to testify before Congress and engage in other forms of communication with legislators.1 5 Indeed, judges themselves are beginning to innovate. For example, the D.C. Circuit is engaged in an experiment to circulate statutory opinions to relevant congressional committees." 6 The Debate over § 1367 demonstrates why these alternatives should be considered with dispatch. Additionally, perhaps more can be done within the context of decisionwriting. As noted above, one justification for retaining a federal role in state law adjudication is to provide a window on problems that may ultimately require federal legislative, solutions. Opening that window demands that courts pay some attention to the kinds of messages they are sending. Thus, while Finley called for legislative action, its invitation - "whatever we say regarding the scope of jurisdiction conferred by a particular statute can be changed by Congress" 51 -was entirely unfocused. Surely the Court has greater expertise than Congress about the docket. Even if it did lack power to determine jurisdiction, the Finley Court might have explained the pressures the judicial system is under and stressed the paradox of denying convenient access to a plaintiff with a federal question in order to accommodate diversity cases. Adding its voice to those of academics and the Federal Courts Study Committee may have persuaded Congress to take the time to examine the § 1332 caseload critically instead of applying a bandaid in the shape of § 1367. There are other possibilities, but these are more controversial than simply suggesting that more time be devoted to dicta. In the last decade, considerable academic attention has been paid to public choice theory and the lawmaking process. As the Court engages in statutory interpretation, it could make better use of this knowledge. When determining the appropriate disposition, the Court could, at the very least, consider the speed with which Congress will be forced to take corrective action. Greater deliberation over § 1367 may have produced a more far-reaching solution to the diversity problem. Similarly, the Court could consider whether its disposition will impose the costs of error on the side best situated to mobilize a legislative effort and whether "quibbl[ing] with the language of Congress"" in a manner that increases the workload of the legislative branch is any different from Congress' failure to consider the impact of legislation on the Judiciary. 56 Id. at 47. In any event, it will certainly be, if not delicious, then fascinating, to watch what happens to these omitted cases. Common law courts will be grappling with a problem in an area traditionally within their control and in which they have special expertise, but where the Supreme Court has announced, and Congress has seemingly codified, a ban on judge-made law. 414 U.S. 291 (1973). 427 U.S. 1 (1976).1992] For example, consider what happens in Kroger when the plaintiff stays in federal court and loses against the original defendant on a finding of contributory negligence. If she later sues the impleaded party in state court, she will probably be issue precluded on the question of freedom from contributory negligence, and lose again. In contrast, the precise issues adjudicated in federal court in Aldinger are unlikely to arise again in the state court action on the state claims. Even when they do, as they might in Finley, the second court may take the position that there is no preclusion when a party has been forced to bifurcate."' The well-pleaded complaint rule, which is the front line in the defense of the federal docket in federal question cases, is also plaintiff-oriented. So is the amount in controversy limitation and the American Law Institute's suggestion that diversity jurisdiction be made available only to out-of-state plaintiffs. AMERICAN LAW INST., STUDY OF THE DIVISION OF JURISDICTION BETWEEN STATE AND FEDERAL COURTS 10-14 (1969).19 Similar comments have been made about the plaintiff orientation of federal question jurisprudence. See Mishkin, supra note 12. Indeed, one could view diversity jurisdiction as a corrective on the problems that plaintiff-orientation presents in the federal question setting. That is, federal question issues that are systematically excluded from the court's jurisdiction because they arise chiefly as defenses to nonfederal claims can nonetheless be sampled by the federal courts because of diversity jurisdiction." As noted below, supra note 29 and accompanying text, in purely bipolar cases, I favor retention of the complete diversity requirement of Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806). Accordingly, I do not address the Rule 20 cases eliminated by § 1367. Siler v. Louisville & Nashville R.R. Co., 213 U.S. 175, 191 (1909). See also Osborn v. Bank of the United States, 22 U.S. (9 Wheat.) 738 (1824); cases cited supra note 31; PAUL M. BATOR, 8 The accepted view is that attorneys favor diversity because it offers them a choice of fora " The Racketeering Influenced Corrupt Organization Act, 18 U.S.C. § §1961-1968 (1988), is a prime example. " That is, the use of federal jurisdiction to achieve congressional goals without the enactment of governing law. See, e.g., Foreign Sovereign Immunities Act, 28 U.S.C. § § 1330, 1332(a)(2)- 1332(a)(4), 1391(0, 1441(d), and 1602-1611 (1988), discussed in Verlinden B.V. v. Central Bank of Nigeria, 461 U.S. 480 (1983); 29 U.S.C. § 185 (1988), discussed in Textile Workers Union v. Lincoln Mills, 353 U.S. 448 (1957); 28 U.S.C. § 1350 (1988). See also Price-Anderson Act, 42 U.S.C. § § 2014(hh), 2210(n)(2) (1988) (creating federal jurisdiction even in nuclear accident cases that rely entirely on state law), discussed in In re TMI Litig. Cases Consol. II, 21 See, e.g.,22 It is important to note that parties can apparently fall short of being so necessary to an adjudication that the court cannot proceed in their absence under Rule 19(b), and yet be needed to resolve a dispute for all time. See, e.g., Martin v. Wilks, 490 U.S. 755 (1989).2s FED. R. Civ. P. 14, 19, 24. 24 313 U.S. 487(1941).25 Cf Linda J. Silberman, Shaffer v. Heitner: The End of an Era, 53 N.Y.U. L. "8 See Rowe, Burbank & Mengler, supra note 36, at 960 n.90. 30 Cf 28 U.S.C.A. § 453 (West Supp. 1991) (oath of judicial office). '0 ' See Abner J. Mikva & Jeff Bleich, When Congress Overrules the Court, 79 CAL. L. REv. 729

I. THE CONTEMPORARY SIGNIFICANCE OF DIVERSITY JURISDICTION

II. THE OMITTED CASES: JUDICIAL POWER TO DEFINE SUPPLEMENTAL JURISDICTION

2' See REPORT OF THE JUDICIAL CONFERENCE COMMITTEE ON RULES OF PRACTICE (Sept. 1990

414 U.S. 291 (1973).

427 U.S. 1 (1976).1992]