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Suneal Bedi

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Who Owns the Air? The Sriracha Factory Injunction

Posted: 12/11/2013 10:55 am

On October 21st the city of Irwindale, California filed an injunction against Huy Fong Foods, which operates a Sriracha factory in the city. The city residents complained about the pungent odor the factory emits. They claimed the odors have caused headaches and irritation of the eyes, nose, and throat among the local population. On November 27th, Judge Robert O'Brien ruled in favor of the city and issued a partial closure on the factory's activities.

Judge O'Brien was a bit lucky because although he made the right decision, he didn't do it for the right reason. The legal issues in this case are extremely simple. They boil down to one question: Who has the right to the air in the city of Irwindale? Do the residents have a right to air that is void of odors that irritate the senses, or does the Sriracha factory have the right to put those odors in the air? The answer: no one at all. There is no real law (statutory or constitutional) that clearly indicates who should own this right or that anyone should own air at all. Therefore, O'Brien's attempt to determine whose right is being violated was not the correct method of deliberation.

Ronald Coase received a Nobel Prize for his intuitive solution to a very similar dilemma that Judge O'Brien faced. This intuition has become known as the Coase Theorem: as long as parties are able to easily bargain and speak with each other, Coase argues that it doesn't matter which side O'Brien finds in favor of, because the party who wants the right the most will eventually obtain the right.

For example, if the judge ruled in favor of the city (as he did), the Sriracha factory could pay each resident some monetary amount to compensate them for the unpleasant odor the factory emits. At some point the residents, if they are paid enough, will reach a threshold where they will tolerate the smell. As long as the judge would allow the parties to negotiate around a ruling, Sriracha could then produce the odor, and all parties would be content. Vice versa, if the judge ruled in favor of the Sriracha factory, the residents could come together and raise enough funds to convince the factory to stop producing Sriracha in that location. Presumably, the factory would be willing to stop production if they received adequate compensation.

As long as we allow the parties to pay, talk, and negotiate with each other, a judge is not necessary. And neither is the determination of who should control the air rights. At the end of the day, a simple coin flip is needed to arbitrarily give one party the rights to the air. Eventually, the party who values the air the most will be the party that has control of it.

When we actually ponder this scenario in context, it's clear that it would be very difficult for the parties to negotiate. Negotiations of this kind are easy when there are only two parties (one vs. one). Unfortunately this case is especially challenging and unrealistic because several hundred residents must speak as one to bargain with the Sriracha factory.

With this extra wrinkle in the problem, Judge O'Brien cannot arbitrarily rule in favor of either party. He must take into consideration the difficulty of the parties' ability to bargain.

If he did this, he would understand that the only way the parties could realistically negotiate would be if the city negotiated on behalf of all the residents. For example the city could increase the property tax on the factory and then give some of that surplus revenue to the residents to compensate them for the odor. The most efficient way for the parties to bargain then is for the right to be given to the residents (an injunction on the factory) and then have the city bargain on behalf of the residents. If the factory and the city can come to an agreement, then the factory should be allowed to put the stench in the air despite the judge's injunction.

In effect, the judge should not be the final decision maker on who has the right to the air. Nobody really has a right to the air and neither party's rights are being infringed. Instead, the judge's role here should be to produce a ruling that will allow the parties to negotiate with ease, because only the involved parties themselves can truly value and understand how they are effected by the odors.

Judge O'Brien made the right decision by instituting an injunction against the Sriracha factory, but for the wrong reason. O'Brien incorrectly attempted to determine whose rights were being violated and who really owns the right to the air, because legally, neither party really has that right. It doesn't matter that odors affect the residents or that a lot of people in the United Stated love to have Sriracha with their eggs in the morning. Judge O'Brien should have simply instituted the injunction for the reason that it will allow the parties to bargain most easily.

In the end, there are two possible scenarios. The first is that the Sriracha factory might be willing to pay the city enough to continue making that great chili sauce, in which case it should be allowed to operate. Conversely, the factory might not be able to afford what the residents deem to be the value of clean odor free air, in which case the injunction should stay in place. Either way, the legal system and Judge O'Brien should not be opining on any law, legal reasoning, or creating any artificial legal justifications regarding who actually has the legal right to the air. Instead it should be as simple as a coin flip.

Suneal Bedi is a graduate of Harvard Law School.

 

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