Podcast: Brain Food for General Counsel

Matthew Magee:

Hello and welcome back to Brain Food For General Counsel, where we try to help you navigate the toughest challenges your organisation faces. My name’s Matthew Magee and I’m a journalist here at professional services firm Pinsent Masons and today we’re going to hear from two academics and writers who will upend your thinking on one of the most basic elements of a commercial lawyer’s life: property.

What is a career in business law but a decades-long wrestle with the idea of property. What do we have? How do we get or make more of it? Who else wants it? Do we have a right to do this or copy that? Do we own a building to put everything in? Who owns our company?

We very rarely stop to think about what property actually is and how it functions. To look at the philosophical underpinnings of the idea that I own something and therefore can charge you to gain possession or use of it.

But that is exactly what Michael Heller and Jim Salzman do in their book Mine! How the hidden rules of ownership control our lives, which the Financial Times named as one of its top Christmas reads last month. If you think property is stable, or that our attitudes and laws relating to it are based on reason or ethics, or that ownership is simply a fact out there in the world untouched by economic or political forces, then you might be in for a surprise.

I talked to Michael and Jim about everything from airplane seat struggles to which child owns a particular spade, via the strategic advantages of turning a blind eye to piracy or embracing ownership ambiguity. Their take on how a creative approach to property can generate business and income opportunities where none seemed to exist are fascinating, but we started with the basics, with Michael explaining why ownership is not nearly as stable as we think it is.

Michael Heller:

For us to get through our ordinary days, just to line up and get a cup of coffee or to find a parking space, we have to have a pretty clear understanding of what is mine and what is yours, and indeed that is something that kids know from the very earliest ages - they know, some of the very first words kids use are, "it’s mine", but what we show in the book is that "mine" is very much up for grabs. When people are saying that something is mine, what they are actually doing is choosing one of just six simple stories that helps them claim resources for themselves. And almost always there is another story, another version of mine, that is available that is just as basic and simple as the mine that kids shout in the playground. Part of how our understanding of ownership works today is understanding how those six simple stories get used by lawyers and businesspeople to make claims on scarce resources.

Matthew:

Michael and Jim have identified six kinds of ownership – they call them stories, ways people think to justify claiming an asset or right. They are:

• first come, first served – it’s yours because you were here first
• possession is nine-tenths of the law – it’s yours because it’s in your hand
• you reap what you sow – it’s yours because of the labour you put into it
• my home is my castle – it’s yours because it’s on your property
• our bodies, our selves – it’s yours because it’s part of you
• the meek shall inherit the earth – it’s yours because you have a moral right to it

These all seem reasonable, but things get interesting when these justifications clash. And this isn’t just about notional, intangible kinds of property like a trade mark or a non-fungible token – of which more later. No, these stories still govern one of the most fundamental kinds of possession humanity has developed: possession of land.

In their book they describe how someone might own a square patch of land, whether they put a fence around it or not. This is the ‘possession is nine tenths of the law’ story. But if townspeople take a diagonal short cut across it for seventy years they establish a right of way through use, through the ‘reap what you sow’ story usually attaching to labour. The owner of the land now cannot put a fence around it.

So ‘reap what you sow’ trumps ‘possession’ in this case. But there isn’t a clear hierarchy of stories. Apply the ‘possession’ and ‘reap what you sow’ stories to the Parthenon Marbles of Ancient Greece, controversially housed in the British Museum in London. The UK can claim rights due to the ‘possession’ story and the ‘reap what you sow’ story because of preservation work done on them and safe storage. But not many people would claim that these trump the ‘my home is my castle’ claim of Greece, that the marbles were part of the Parthenon. Not to mention the ‘reap what you sow’ labour story of sculptor Phidias who actually made the things.

These clashes are everywhere, including on airplanes over the few centimetres of space between you and the person in front, says Michael.

Michael:

Let us give you a very simple example. Many of your listeners fly a lot on airplanes, so when they get on a plane, they are on their laptop sitting down to work for a client, and the person in front of them leans the seat right into their lap, and they want to say no and push back. What is going on there? Who owns or who controls that wedge of space between the two seats? You are sitting there with your knees squished and your laptop literally in your lap you say, "no that space is mine the seat was up when the plan took off, I possessed it with my knees and with the laptop itself".

Those are actually two of the six simple stories. Possession: first in kind, what's mine. But the person in front is also asserting ownership, they are saying attachment: that wedge of space is attached to my seat, the little recline button moves the seat back. What you have there, on that airplane seat, is mine versus mine, first, and possession versus attachment, that is three of the six stories. That is fairly trivial example, but that same conflict between attachment and possession or first is also what is going on today with data ownership, who owns your click stream, who owns the records or your likes as you move online. All ownership conflicts reduce down to the same very few simple stories.

Matthew:

Interesting enough, but Jim says we can easily miss the most important element here, which is that the two passengers are fighting with each other, and not the airline which created the situation in which conflict was almost inevitable. The airline’s ambiguity about who owns those few centimetres allows it to effectively sell that space twice, and distract the buyers with intra-customer conflict.

Jim Salzman:

Let us say that you and Michael are having this tussle back and forth, when I say tussle, I am being modest because there are articles everywhere, if you look for them, of fights that break out mid-air over a reclining airline seat. You are getting angry at each other, but you are not getting angry at the real owner of the wedge which is the airline. Why are these fights are breaking out now? When I flew a decade or twenty years ago there were no fights I should say over reclining airline seats, what has happened is that the airlines have basically reduced what is called the pitch, which is the difference between the seats, and the space also is more valuable because we are now using laptops. We used to use that space simply for putting down the tray table and eating rubber chicken.

Here is what interesting: the airlines have created this conflict by making valuable area scarcer. They could make a rule - you have the right to recline, or they could say you have to ask before you recline. They do not do that and the reason they do not do that is because of the tool that Michael and I describe in our book called ownership ambiguity. They are deliberately making who owns that space ambiguous and they are doing it for a few reasons. The first is it basically shifts the anger and frustration away from them towards passengers, it makes the overall experience because it is less comfortable you are creating more demand for the economy plus, those never used to exist before. There is now this whole new class of seats that they can sell and to the beauty of this is essentially they are creating this whole new ownership conflict to benefit them. It could be different, but it is not they are being very clear that they are not defining ownership they benefit from uncertain ownership in this space.

Matthew:

The airline here has engaged in what Jim and Michael call ‘ownership design’ or ‘ownership engineering’. We’ve largely looked so far at ownership disputes that seem to arise naturally or through conflict between individuals.

But companies can – and do – make choices about how property operates for their own advantage, says Michael.

Michael:

This is not something that is taught in law schools, and it is also not something that lawyers know to advise their clients, which is that ownership can be engineered just like any other feature of a corporation's products. Where the buttons are, where the levers are, how the product works, all of those features are by design and have a component which is ownership design and how we structure ownership as a centre for profit within the corporation.

Many of the most cutting-edge tech companies today are surprisingly and counter-intuitively prefer to allow for theft of some of their product. Let me give you an example; we asked our students: how many of you stream your Netflix show or some other streaming content illegally? How many of you are using somebody else's password? All of the hands go up, they all do this they all stream content illegally, and we ask how many of you know it is illegal about half of them do. This is law students mind you. And HBO and Netflix, the big streaming companies, also know this. Netflix can find you; they can find the people who are illegally taking their content, it is not hard to do, the record companies did that a generation ago, so Napster was shut down. But Netflix learned from that. What Netflix learned is that it is more profitable to allow a certain amount of theft of their content. They view theft, in this context, as a customer acquisition process, it helps build their pipeline of future customers. So, tolerated theft which is a second strategy alongside strategic ambiguity turns out to be something that some of the most advanced tech companies are using to increase their revenue streams.

Matthew:

Ownership design is where Michael’s and Jim’s ideas go from interesting philosophical question to the kind of strategic insight you can act on. They have identified three strategies that depend on non-traditional views of property and ownership. First up: tolerating theft. Michael says that Netflix turning a blind eye to password sharing or Microsoft putting up with piracy of its software in developing markets are examples of theft toleration in the service of building market share and customer acquisition. But he had a more surprising example, from a company that had a change of heart on intellectual property protection.

Michael:

The Disney Corporation, historically one of the most aggressive intellectual property defenders, did a big pivot in recent years to actually tolerate quite a lot of theft of its IP, not as a customer acquisition strategy like Netflix, but as a product R&D strategy. What Disney does today is they look around at the web at all the pirate fan websites that are selling innovative Mickey Mouse gear, for example Bibbidi Bobbidi Brooke is a pirate website that came up with rose coloured, sparkly Mickey Mouse ears, and Disney rather than shut her down said; "hey that is a great idea" and Disney then started selling those same designs at the official Disney merchandise stores and it was a huge hit. What Disney has realised that tolerated theft is a way to do very cheap product R&D. Tolerated theft is a second example of how cutting edge corporations can rethink their IP strategy, their property right strategy, to engineer more value out of ownership itself.

Matthew:

The next ownership engineering strategy is forgoing ownership, which Michael says Tesla and IBM both embraced when they gave away their ideas or supported others’ platforms in a bid to create a new market that they could sell to.

Michael:

What he has done is he has made all of Tesla's patents, there they did patent the basis electric vehicle technology, but he makes all those patents openly accessible. His theory is that having more robust competitors, having a more robust eco-system of electric vehicles is actually more valuable ultimately to Tesla than protecting his patents. He wants his competitors at all the other big electric vehicle companies to adopt his technology, essentially for free, in order to make the electrical vehicles the dominant vehicle on the road. He wants all cars everywhere to be electric, so that there are more charging stations so that there is more infrastructure so that there is a more robust electric vehicle eco-system out there within which he can be a dominant part.

Growing the market by abandoning IP turns out to be part of what makes Tesla perhaps the most viable car company in the world. IBM does the same thing it turns out; IBM basically gave away a billion dollars of engineers’ time to grow Linux which is an open source software which many of its competitors use. IBM realised that like Tesla if they could grow the market for Linux, they could then sell IBM services on top of that open network.

Matthew:

The third strategy is one we have touched on already, leaning into ambiguity. This is what the airlines we talked do this when they refuse to clarify who controls that space between seats. The passengers argue amongst themselves, and the airline gets to ever increase the capacity and profit of their aircraft.

This strategy might culturally be the hardest for lawyers to embrace as it goes against so much of what we understand about what good legal advice is. Certainty is what our clients and stakeholders crave and is so hard to deliver. But we strive for it. The ambiguity strategy demands that we just … let go, as Michael says AirBnb does.

Michael:

When Airbnb, for example, moves into a new country or city, the ownership regime around what they have created, the short-term rental market, was absolutely ambiguous and rather than clarify that ambiguity they simply moved into those markets ahead of any ownership clarity. General counsel might say that before we create a company like Airbnb, we need to know what the regulatory environment is that we are going to be operating in because otherwise, we basically create a company and get shut down. Airbnb, and Uber after them, they said just the opposite, they said we are going to embrace ownership ambiguity, we are going to use ownership ambiguity as the tool that is going to jump-start our company. They move in, ownership is ambiguous, they create a market, in Airbnb's case thousands or tens of thousands of flat owners who are suddenly getting a second income from Airbnb, or drivers are gaining a second income, or first income, from Uber, and then those drivers or flat owners or home owners become the advocates for actually dis-ambiguating or creating a property regime which then incorporates Airbnb and Uber into that local regulatory regime. But the method is one of starting from and embracing tolerating ambiguity and working forward from there.

Matthew:

This kind of thinking will be real challenge to many people working in business law. It simply turns our assumptions about what ownership is on their head. But thinking creatively and laterally about property can open up unimagined opportunities say Michael, then Jim.

Michael:

It goes against all of your training, it goes against all of your professional instincts as counsel and as a lawyer. It certainly goes against my background as a property theorist, because all that I think about and work on is how do we design ownership. When I first started working in this area, many decades ago, some of my earliest work was in socialist countries that were making the transition to capitalism, for the World Bank in the ‘90s into these countries, and our overwhelming concern was to create clarity of property rights, that is what lawyers do we want to have clear, well defined private property rights and in many cases that turned out to be a disastrous approach. The clarity that we were seeking was the opposite, not wealth creating, which we thought it was, it was wealth destroying.

Jim:

Prior to going into academia I was the European environmental manager for Johnson's Wax, and I was constantly butting heads with general counsel's office because their view, from my perspective, was what we call CYA, in the United States, was basically a cover yourself, avoid any possible risk and you can understand that, if the company gets into trouble a finger is going to point immediately at the general counsel’s office.

What Michael and I are suggesting is that is fine, that is an important role, but realise also that perhaps surprisingly legal strategies over how things are owned can actually be revenue-generating. The expertise of lawyers simply has to be to protect the client against any and all possibilities and it can also lead to insights on how new profit streams can be generated.

What we are saying is: think strategically. We do not generally think of ownership engineering and what we are saying is lawyers actually may be well placed to be entrepreneurs to be, sort of, ownership engineers. We are not saying forget about ownership it does not matter, we are saying actually quite the opposite, ownership matters even more than you may realise because it is not simply the sort of binary, we-must-protect-ownership-at-all-costs, or wily-nilly. No. It is that you can craft the different ways that we own things to actually work to the companies benefit.

If there was one message that we want to share with your listeners, it is for them to ask themselves what are the different ways our assets could be owned. Which is not something that general counsel asks but we think that they should as Michael said, they most innovative savvy companies they very much are asking these questions.

Matthew:

We’ve restricted ourselves so far to pretty concrete examples. But we live in a time when whole new classes of resources are being created all around us. Cryptocurrencies; DNA sequences; behavioural data. And the current big thing in alternative assets NFTs. Non-fungible tokens are a highly controversial kind of asset that are subject to the kind of price inflation that would make the tulips of 17^th century Amsterdam blush. NFTs give you rights over a particular digital asset, usually an image, and control some of the future economic behaviour of that asset.

Lots of people tied to normal supply and demand economics just don’t understand why people are flocking to pay huge sums for digital copies of a file that is usually otherwise freely available. So is this an example of creative ownership? Jim doesn’t think so.

Jim:

Here is an example of where people are selling things that are not only sort of the same but are quite literally identical in terms of ones and zeros but they have somehow arbitrarily said that they are going to identify one of these identical copies as the first the original the NFT. They are totally creating artificial scarcity and Michael and I, to our amazement, keep saying how can this generate value, and yet some of these keep selling for tens of thousands of pounds and more. It is a totally artificial sense of scarcity as the NFT's they are purchasing, in terms of ones and zeros it is totally identical to all the others. I remain befuddled but I am also a professor instead of a financial whiz so, maybe it is not surprising that I am befuddled.

Matthew:

But the rest of those intangible assets – biological or behavioural data; cryptocurrencies; highly engineered financial products – they are potentially highly susceptible to imaginative thinking about ownership.

Jim:

If I look at my smart phone, what do I actually own of value? What I own of value is a plastic brick. What gives the cell phone actual value; it is the operating system, I do not own that; the data on it, I actually do not own the data on that phone, and we do not think about it that way. There was a study that was done where people were asked if you buy a book or a song on the internet, digitally, is it the same as sort of owning an LP or owing a CD or owning an actual hardcover book? 80% said yes, it is. They are wrong, you do not own it in the same way. Amazon cannot walk into your study or living room and say I will take that book back, thank you very much, they would not even say thank you very much they would just say I will take it back. They can and have actually taken ebooks and iTunes off of people's devices for various reasons. It does not happen often, but it can happen.

It is really a fundamental shift that has not taken place yet, in terms of how we just assume that we own certain things. When you for instance say that you want to fly for a weekend to Berlin or something, you go on the search engine and you look for flights to Berlin the most bizarre thing happens, every other website you go to suddenly these ads pop-up about hotels in Berlin and restaurants in Berlin. It is not a coincidence; the search engines are selling your clickstream to advertisers. These transactions power much of the internet economy and as Michael was saying, "well who owns the fact that you typed that search in?". You could say that it is mine; and there is another story here which is labour, I typed it in there; you could say it is mine because of self ownership, my clickstream is part of me. The web producers say well it is labour, we put in the effort to build this cool app that you went to and so you reap what you sow, we made the effort to build, we get the click stream data, your click stream is attached to our website. The key point in that story is this is up in the air; in Europe, in California, there is more interest in having the individual own that information. In other parts of the world, it goes the other way, in much of the US frankly it is unsettled.

Matthew:

Michael and Jim think that creative uses of ownership can help solve the world’s biggest social problems too. Giving people who live in or near massive forests ownership of the carbon-soaking capacity of those forests gives them an income that means they are less likely to engage in logging. Understanding the quite deliberate ownership rules that increasingly allow staggering wealth to travel between generations with minimal taxation will help tackle poverty and lack of social mobility.

And understanding that ownership is never absolute and unchallenged, and that those six stories can unlock the power dynamics which are always at play is a lesson that they would like each of us to learn, as Michael explains.

Michael:

Well this goes back to how personal property is. You watch your kid in the playground, and they are fighting another kid over a shovel. They are both shouting ‘mine’, and as you dig into it a little bit deeper you realise one of the kids is saying I had it first, one of the six simple stories, and the other kid is saying I am holding onto it, possession is nine-tenths of the law.

One of our hopes for citizens is that they take one of the simple intuitions that we all share about ownership and begin to see that those intuitions that they have can be simplified down to a very small handful of stories that we all know and realise that many of the ownership conflicts that really do matter to them around gender inequality; or wealth inequality; or climate change.

Many of the most important political and social issues of our day are actually battles over which of those simple stories is going to dominate, and once you as a citizen or consumer realise airlines are selling the same space twice; or that Facebook and Google are asserting a labour story against your self-ownership story; once you realise that ownership is not a given, that it is not natural, that it is not timeless, that ownership is always constantly a choice among a very small handful of competing stories.

Once you realise that then our hope is that with that vision with that clarity, you begin to see the world around you in a very different way. You realise that you are a fish swimming in water, fish do not realise that they are in water, and water in this context is the ownership tools and ownership design that governments and businesses are using to steer you to do what they want. What you think of as a natural simple story is actually a choice by a business to extract value from you, or a government to steer you one way versus another then you can begin to make some changes you can begin to pressure people that are the decision makers, hey we think the rules should be this instead that. We should control our online data we will then have the intellectual tools to push back.

Matthew:

Thank you for joining us for the latest Brain Food for General Counsel podcast. Remember you can keep up to date wit hour-by-hour coverage of Business Law news by the outlaw reporting team at pinsentmasons.com. Do not forget to subscribe to us wherever you get your podcasts, and if you have enjoyed this or past programs, please do link them. It helps us to reach other people who might also be interested. Until next time, goodbye.