COPYRIGHT, CONTRACT, AND TECHNOLOGY

                            David desJardins
                          SIMS 296A Section 2

1. Introduction.

A growing trend amongst owners of "intellectual property" is the
protection of their property not just through the legal mechanisms
specifically created for this purpose, such as copyright, but also
through contractual and technological means.  While the future is always
difficult to predict, many observers expect this practice to continue to
grow.  Jessica Litman reports that many industry representatives already
describe such means as far more important tools for their purposes than
copyright law provides (1).  Maureen O'Rourke writes of electronic
information providers continually turning to contract to supplement and
modify copyright (2).  And Mark Lemley concludes that intellectual
property is well on its way to becoming irrelevant in the computer
world, as it is supplanted by contract (3).

Any user of commercial software has been presented with "shrinkwrap"
licenses which purport to restrict how one may use the software that one
has ostensibly purchased.  Most have also been presented with on-screen
license agreements which they must explicitly "accept" in order to use
certain software products.  But these mechanisms are only the tip of the
iceberg.  A quantum change is ahead, when such restrictions or
"agreements" become not just a useless piece of paper that one discards
when one opens a box, or an annoying window that pops up when one
installs a piece of software, but a fundamental, technologically
enforced limitation on how one can access or interact with an
information resource, which may well be much more expensive to
circumvent than the value of the information itself.

Basic systems of this sort already exist, such as the serial copy
management system in digital audio tape recorders, which allows direct
reproduction of originals but prevents further copying of those copies
(4).  This restriction is already broader than that imposed by basic
copyright law---a DAT recorder has no notion of "fair use", and may
prevent copying even when such copying would be completely permissible
under the law.

But enthusiasts such as Mark Stefik dream of "usage rights" which go
much farther beyond copyright, to regulate essentially everything that a
user might do with a digital work: e.g., using or listening to the work,
transferring it to another party, extracting and embedding portions of
the work, upgrading to a newer version of the work, etc. (5).  And the
information industry is firmly behind this movement.  As Litman writes,
a major goal of the U.S. White Paper on copyright (6) seems to be to
help industry use contract law (and technology) to take away privileges
that current copyright law affords to users (7).

Why are these matters of public concern?  If the owners of digital
information wish to enter into voluntary contracts with the consumers of
such information over how the information can be used, is that not
inherently beneficial to both parties?  The fundamental justification of
contract law is that it is more efficient to allow individual parties to
bargain as to how to exchange rights or goods amongst themselves, than
it is for the government to decree how they may do so.  Farnsworth
writes, "From a utilitarian point of view, freedom to contract maximizes
the welfare of the parties and therefore the good of society as a
whole." (8) Indeed, the Coase Theorem states that in the absence of
transaction costs, bargaining achieves optimal outcomes (9).  And if
technology can be used to rigorously monitor and enforce such
agreements, is it not necessarily better to have agreements that are
enforceable than agreements that are not?

Of course, the answer to both questions is: not necessarily.  There are
several reasons why it may be preferable to enforce certain rights in
law rather than allow all exchanges to be determined by bargaining and
contract.  Lemley lists three: to establish legal rules when parties
cannot effectively bargain (e.g., because of transaction costs); when an
agreement between parties may produce "externalities" that affect other
parties not compensated by the contract; and when society finds certain
sorts of agreements to be morally unacceptable (10).  At least the first
two issues apply with great force to intellectual property "usage
rights", as we will discuss below.

In regard to enforcement, there may also be practical reasons why one
might desire that not all rights or obligations be strictly enforced at
all times.  For example, at least as some interpret the law, the present
functioning of the Internet relies on the continual infringement of
copyright (11).  While this might be regarded as an undesirable
situation, and one might wish to change the laws so that this is no
longer the case, in practice one might still rationally choose allowing
such violations to continue over shutting down the resource completely.

In fact, the entire existing copyright system works quite differently
than a literal reading of the law would suggest.  According to the law,
copyright owners have exclusive rights subject only to limited
exceptions which are for the average person confusing and mysterious.
As Litman writes, anyone who observes the behavior of users sees
repeated violations of the law (12).  Even to the extent that users do
understand the law, only a small minority even claim to refrain from
unauthorized copying of software (13).  John Perry Barlow even argues,
with others, that publishers frequently benefit from software piracy, by
increasing their market share (14).

Rights and obligations explicitly spelled out by licenses or contracts
have been no more systematically enforced.  And once again the
violations of users often end up working to the benefit of information
producers.  Netscape gained an enormous market share by distributing its
software to users for "evaluation purposes", who promptly ignored the
licensing terms and continued using the software beyond the evaluation
period.  The company may have lost millions of dollars in sales, but it
gained billions of dollars in market value.  In this case, the company
clearly did not really even want or expect the terms of its license to
be strictly enforced on most individual users---whatever its reasons for
writing its license as it did, the company knew realistically that the
actual conduct of users would not be as strictly spelled out in the
license.  The actions of all parties were based on unspoken
understanding about how individuals regard and respect such contracts,
and not on a literal reading or execution thereof.

In short, copyright and contract issues concerning intellectual
property, especially digital information, have historically been
conducted with a wink and a nod---with a certain level of understanding
that many restrictions are simply not enforceable against individual
users and that the actual behavior of users will be determined by a
mixture of pragmatism and morality.  Even if I were to reveal that I had
improperly installed my personal copy of Windows 95 on two different
computers (an act of unauthorized copying, under copyright law),
Microsoft could hardly benefit economically by taking legal action
against me.  Similarly, if I were to reveal that out of curiosity or
boredom or for some other reason of my own that I had disassembled a
part of the code and examined it (a violation of the license agreement),
Microsoft would have no economically viable way to enforce its rights.

So, aside from the observation that intellectual property owners have
arguably benefited in the past from infringement of their apparent
rights under the law (which is itself enough reason to conclude that
enforcement of such rights is not always an unalloyed good), a more
fundamental reason for concern about universal enforcement comes from an
intellectual conservatism regarding copyright law.  The extension of
copyright protection into new domains opened up by technology has often
been justified by the notion that it is better to make evolutionary
changes in a system that works well, than it is to replace it with
something new and untested.  Indeed, the White Paper makes the
statement, "We are once again faced with significant changes in
technology that upset the balance that currently exists under the
Copyright Act.  Our goal is to maintain the existing balance." (15)
Whether it is good or bad to now enforce contractual "usage rights"
regarding every aspect of how a user may benefit from an information
resource, and preventing technical violations that have been routine in
the past, it is definitely a major change from the way people have
historically used books, documents, recordings, and digital information
resources, and not a continuation of historical precedent or the
"existing balance."

As mentioned above, the imposition of copyright laws or contract or
license terms which users then routinely ignore is nothing new.  By
itself, this is not a noteworthy trend.  What is so significant is the
realization that these previously unenforceable restrictions are in
process of becoming real, effectively enforceable restrictions, with the
advent of technological protection systems.  Such systems offer the
possibility of raising both copyright and contractual restrictions on
how users consume and interact with intellectual property to a new level
of seriousness---a world in which it may be effectively impossible to
(economically) circumvent such restrictions.  That world may look very
different than the world we are used to, and have significant new and
disturbing characteristics.  At the very least, such a substantial
change warrants our careful attention and concern, and should not be
automatically regarded as benign even to the extent that it simply
implies increased enforcement of existing law.

2. Contracts.

The freedom to enter into contracts and the enforcement of agreements
between private parties is a fundamental principle of our legal and
economic system.  It is natural, therefore, for owners of intellectual
property to consider entering into specific agreements with users
regarding the rights and privileges that those users acquire, rather
than simply transferring the package of rights afforded by copyright
law.

Indeed, copyright may be viewed as a package of "default rules"
providing a starting point for an agreement between the information
owner and the user, but subject to amendment by mutual consent.  There
are many reasons why the intellectual property owners might wish to
contract around these default rules.  For example, one of the original
reasons for the growth of "shrinkwrap licenses" for software was to
inhibit software rental, which was viewed as contributing to software
piracy (16).  More broadly, a contract may attempt to prevent a user
from selling or otherwise disposing of a copy, from modifying or
translating a copy, from "reverse engineering" of software, from making
additional copies even when such copying would be "fair use" or
otherwise permitted, or from exercising many other privileges normally
afforded by copyright law (17).  A contract might also distinguish
between different types of users for the purpose of price
discrimination: different types of buyers might pay different amounts
for different bundles of rights (18).

In general, it seems that two sorts of contractual agreements might be
associated with an information resource.  First, a contract might
authorize a user to exercise those rights (such as copying) exclusively
reserved to the copyright owner by copyright law.  Secondly, a contract
might, as a condition of acquiring or using an information resource,
require a user to refrain from actions which would not themselves
violate the exclusive rights of the copyright owner.  Some contract
provisions might be somewhat ambiguous between these two cases: if a
contract sets forth specific terms under which a copy may be made, then
that contract may be authorizing the user to exercise the copyright
owner's exclusive rights (if those rights exist and if they would
otherwise be infringed by the act of copying), or that contract may be
restricting the user from exercising rights not normally controlled by
the copyright owner (if no copyright protection exists, or if the act of
copying would otherwise be permitted under one of the exceptions to the
exclusive rights, such as "fair use").

While the freedom to contract is an important legal principle, it is not
absolute even in the United States, and it can also vary from nation to
nation.  "Allowing parties to enter into contracts is not synonymous
with granting them a license to enforce all of the terms of such
contracts, no matter how onerous or how much at odds with public policy
they may be." (19)  The European Community's Computer Programs Directive
sets forth specific public policy objectives which may not be altered by
contract: "The making of a back-up copy by a person having a right to
use the computer program may not be prevented by contract in so far as
it is necessary for that use", and, "The person having a right to use a
copy of a computer program shall be entitled ... to observe, study, or
test the functioning of the program." (20)

The question of enforcement becomes particularly relevant in regard to
so-called "contracts of adhesion."  Contract law is based on three
predicates: offer, acceptance, and consideration (21).  The bargain
involved in the making of a contract is often described as a "meeting of
the minds", where the parties negotiate and agree on the terms of a
contract (22).  But a "contract of adhesion" describes a contract which
is prepared by one party and submitted to the other on a "take it or
leave it" basis (23).  It would be unworkable to invalidate all such
contracts, due to their commercial necessity (24).  But due to the
imbalance of power in the preparation of such agreements, and the
recognition that the adhering party may not generally read or truly
assent to all of the terms of the contract, adhesion contracts are
generally enforced only after being reviewed for fairness and commercial
justification (25).  Significant portions of the U.C.C. are devoted to
the problem of accomodating such contracts (26).

Traditional contract law requires explicit assent to the terms of a
contract.  "If A offers land to B for a price, saying B may signify his
acceptance by eating his breakfast or by hanging out his flag on
Washington's birthday or by attending church on Sunday, he does not
thereby make such action by B operative as an acceptance against B's
will." (27)  However, the requirement for such explicit acceptance has
been greatly eroded in the case of contracts of adhesion.  The White
Paper explicitly promotes the use of such contracts and of implicit
acceptance in regard to intellectual property: "Providers may inform the
user that a certain action---the entering of a password, for instance,
to gain access to the service or a particular work, or merely the use of
the service---will be considered acceptance of the specified terms and
conditions of the electronic license." (28)  The most extreme example of
this is the "shrinkwrap license", which purports to bind the purchaser
who simply breaks the seal on a software package, perhaps before even
having had a chance to examine the contract (29).  While the current
legal status of such contracts is unclear, proposed revisions to the
U.C.C. would make them explicitly enforceable in most circumstances
(30), if still subject of course to judicial review of their terms.

An extreme point of view asserts that such contracting is inherently
more efficient than relying on state definitions of intellectual
property rights, because the parties would not have agreed to such an
arrangement if it were inefficient (31).  In practice, though, we
recognize that parties may often consent to such contracts not because
they rationally choose the terms of such contracts as promoting their
own interests, but because bargaining over the terms is effectively
impossible, or would cost far more than the potential gain.  These
issues will be discussed in more detail below.

3. Technological Protection Systems.

The primary function of a technological protection system is to protect
a digital work or information resource; that is, to restrict or limit
the ways in which it can be accessed or used, or to ensure compensation
to the owner of the work for such use.  In the language of the White
Paper, "technological solutions can be used to prevent or restrict
access to a work; limit or control access to the source of a work; limit
reproduction, adaptation, distribution, performance or display of the
work; identify attribution and ownership of a work; and manage or
facilitate copyright licensing." (32)

In order for a technological protection system to function, two elements
are necessary.  First of all, a system must exist which can inhibit or
prevent unauthorized access to or use of a work.  The White Paper refers
to such systems as "copyright protection systems" (33).  Secondly, the
system must have proper information regarding the work, so that it can
determine whether a given access is authorized or unauthorized, or
perhaps collect payment for such access.  The White Paper refers to such
information as "copyright management information" (34).

Mark Stefik refers to similar concepts, under the name of "trusted
systems" (35) and "attached usage rights" (36).  While the basic
concepts are the same, the White Paper's definitions of these concepts
are broader than Stefik's.  (Perhaps this simply represents the narrower
scope of Stefik's patents?)  Stefik expects a trusted system to "reliably
and infallibly" enforce its restrictions (37), while the White Paper
says that a copyright protection system need only "inhibit" violations
(38).  And Stefik's usage rights are necessarily attached to the work
(39), while the White Paper explicitly states that copyright management
information related to a work may not necessarily be included in or
digitally linked to that work (40).  In general, the definitions in the
White Paper seem well thought out to apply to the broadest possible
range of such systems, while Stefik's notions are more limited to his
particular vision of how such systems should be implemented.

In the context of this paper, it is important to note that the White
Paper does not limit technological systems to the protection of
copyright rights or even to restrictions agreed upon by contract between
the parties.  While a copyright protection system is defined as a system
which prevents or inhibits the violation of any of the exclusive rights
of a copyright owner, there is no requirement that the system be
strictly limited in this regard (41).  A system which restricts all
copying, both that which would be copyright violation and that which
would be fair use, qualifies as a copyright management system.  (A
system which solely restricts copying of a non-copyrightable work or
works would appear not to qualify, but a system which protects both
copyrightable and non-copyrightable works apparently would.)  The White
Paper is extremely clear that copyright owners are not to be expected to
make any special effort to "allow or facilitate" access which would be
fair use if it were feasible (42).  In other words, if they can get away
with obstructing fair use of their works, good for them.

Similarly, copyright management information includes both information
about the copyright status of a work, and information about the "terms
and conditions" that a copyright owner may impose on uses of that work
(43).  This would seem to include terms and conditions for uses which
are not restricted as a matter of copyright law but which may be
restricted by a contractual agreement between the owner and the user, or
even terms and conditions that the owner seeks to impose unilaterally
without a contract.  According to the language of the draft legislation
proposed in the White Paper, it would seem that even non-copyrightable
works can have associated "copyright management information", which
might state "terms and conditions" for their use (44).  (In this case,
perhaps Stefik's more general term "usage rights" would be more
descriptive.)

The fundamental public policy question associated with technological
protection systems is the extent to which they should be granted a
special legal status.  Stefik seems not particularly concerned with
legal protection for technological protection systems; his analysis
generally represents that the integrity of such systems can be assured
by private means based on public-key encryption (45).  The White Paper,
on the other hand, asserts that "it is clear that technology can be used
to defeat any protection that technology may provide." (46)  The truth
is probably somewhere in between.  While one can imagine technological
systems, based on public-key technology and trusted third parties, which
are in fact secure against the resources available to their adversaries,
it seems far easier to construct and deploy such systems if one has, in
addition, legal recourse against those who attempt to subvert the
systems, or to distribute mechanisms for doing so.  It is relatively
difficult to use the threat of legal action to stop a single individual
from privately subverting a protection system, but it is relatively easy
to use the same threat to stop a large corporation from building and
widely distributing systems which provide such subversion.  If the cost
of subverting a system is too high for a single individual but not too
high for a large organization, that is the case in which legal remedies
will likely be effective or at least helpful in preventing such
subversion.

The White Paper proposes strong legal protections both for copyright
protection systems and for copyright management information (47).  This
includes both civil and criminal penalties for subverting such systems.
The appropriateness of such a legal regime, and the question of how
broad it should be, is a major focus of this paper.

The draft legislation of the White Paper would prohibit any device or
service whose "primary purpose or effect" is to circumvent "without
authority of the copyright owner or the law" any system which "inhibits
the violation of any of the exclusive rights of the copyright owner
under section 106" of the copyright law (48).  The White Paper derides
as wildly implausible the notion that this will restrict the deployment
of systems intended solely for legal purposes, claiming that it would be
extremely rare for a system to be used, to the "surprise" of its maker,
primarily for a purpose different than that for which it was intended
(49).  However this seems neither unusual nor surprising.  Cheap
handguns may be intended by their makers primarily for self-defense, or
for protecting the populace against government tyranny, but in practice
they may primarily be used for criminal acts; the reason is that there
is no practical way to manufacture a handgun which can be used for the
intended purpose and not for unintended and improper purposes as well.
Analogously, the structure of proposed technological protection systems
would seem to make it difficult or impossible to manufacture
circumvention systems which perform such circumvention only in the case
of "fair use", even if it were not the case that an objective
determination of whether a particular use is "fair use" would require a
lengthy court proceeding.  And there is no incentive to information
providers to facilitate circumvention of the system for the purpose of
fair use; in fact, the opposite is true: if the system can be designed
so that circumvention is an "all or nothing" act, then the information
owner could render all access not directly authorized by the owner, even
that which would be "fair use", illegal under Federal law. 

The draft legislation would also prohibit removing or altering copyright
management information, which is defined to include "terms and
conditions for uses of the work", and, in case that is not broad enough,
"such other information as the Register of Copyright may prescribe by
regulation." (50)  There is no requirement that the terms and conditions
be reasonable or appropriate, or even that they be terms that the
copyright holder is legally permitted to impose.  Unlike the case for
contracts of adhesion as discussed above, there is no promise of
judicial review to ensure that the offered terms meet the test of
fairness and commercial justification.  With a traditional contract of
adhesion, the burden is on the writer of the contract: to enforce the
contract requires legal action, which incurs costs and also subjects the
terms of the contract to judicial review.  With copyright management
systems and the draft legislation, owners of intellectual property can
hope to reverse this situation: they can offer whatever terms they
choose; the terms cannot be altered or removed without violating Federal
law; the terms can be enforced by their own copyright protection
systems; and those systems cannot be circumvented without violating
Federal law.  In theory the user might take legal action to invalidate
such terms, but the onus for such action is shifted from the owner to
the user of the information resource, and the cost of such action will
often exceed any possible benefit to be derived.  And it is not clear
that even if the terms proposed would be invalid within a contract of
adhesion, that that would be sufficient basis for requiring the
copyright owner to modify the protection system to cease enforcing such
terms.  There is simply no requirement in the law that the terms be
reasonable, or be agreed to by the parties, or be consistent with the
public interest.  These concerns are a major focus of this paper.

There appears to be only one sentence in the White Paper expressing any
concern for the scope of such technological protection systems: "Such
security measures must be carefully designed and implemented to ensure
that they not only effectively protect the owner's interests in the
works but also do not unduly burden use of the work by consumers or
compromise their privacy." (51)  It is not clear, though, how the
authors of the White Paper expect to ensure that such systems are so
constructed, or what incentives they think information providers will
have to do as they suggest.  Perhaps they feel that competition will
suffice; this seems to me extremely optimistic.

4. Transaction Costs.

We will now examine in detail various areas of concern regarding the
ability of information resource owners to impose arbitrary terms and
conditions for the use of their works, both for the exercise of their
exclusive rights under copyright law (such as the right to copy), and
for the exercise of rights not normally restricted by copyright law
(such as the right to read).  If we accept the principle that in the
absence of transaction costs or other barriers to effective bargaining,
that bargaining generally results in optimal, efficient exchanges, then
we can look for problems with that conclusion by examining the
assumptions.  The first assumption is that transaction costs are
negligible, so that users dissatisfied with proposed terms can
renegotiate them or seek out a competing provider at little cost.

The White Paper takes the point of view that technological protection
systems, as described above, reduce transaction costs: "Reliable
information will also facilitate efficient licensing and reduce
transaction costs for licensable uses of copyrighted works (both
fee-based and royalty-free)." (52)  This position certainly has some
merit: it is difficult to disagree that access to reliable information
makes bargaining easier and more efficient.  However, this
self-congratulatory stance regarding the reduction of transaction costs
also overlooks some important considerations.

The entire reason that contracts of adhesion exist is that transaction
costs for traditional contracts are very high.  For traditional matters
governed by contract, such as the purchase of real property, the amounts
at stake justify a serious effort to negotiate terms, to retain legal
counsel for advice, and so on.  But even so, transaction costs for the
transfer of real property are quite high.  Applying the same system to
the purchase of a book or the viewing of a film would clearly be
impractical in the extreme.

This is a major benefit that the public has derived from the "bundle of
rights" provided by copyright law.  Although copyright law is certainly
confusing to the typical user, and a definitive determination as to what
is and is not permitted by under exemptions such as "fair use" can be
complex and expensive, consumers at least benefit from having the same
rules apply to many transactions.  Under copyright law the typical
consumer considering the purchase of a music CD has a reasonable idea of
what one will or will not be able to do with the CD, and thus can fairly
quickly evaluate whether the purchase price is fair.  Once the CD is
purchased, the consumer has few further decisions to make; thus the
total transaction costs over the lifetime of the CD can be relatively
low.

On the contrary, consider a hypothethical music CD of the future,
licensed using the technologies generally promoted by Mark Stefik as
"drastically reducing" the "costs" associated with publishing (53).
Instead of going to a store to purchase a music CD, one might shop from
home over the Internet, and download it as a bitstream: definitely a
reduction in transaction costs, assuming universal and inexpensive
access to the Internet.  On the other hand, instead of buying a music CD
for a fixed price with a fixed bundle of rights associated with it, one
might be presented with a collection of rights presented in Stefik's
"usage rights language" (54):

    Right Code:   Play Player: Musica-13B
    Copy Count:   1
    Time-Spec:    From 95/02/14 Until: 96/02/14
    Access-Spec:  Security-Level: 3
    Fee-Spec:     Fee: Metered $0.01 per 0:1:0
                  Min: $0.05 per 0/1/0
    Account:      1997-200-567131
    
Is this a good deal, or not?  In this case, it appears to be worthless,
because the authorization to actually play the music has expired (at the
time of writing of this paper).  How long does it take the user to
determine this?  Supposing the authorization had not expired, suppose
the user steps out of the room for a few minutes.  Is it worth the
trouble to walk over to the player and turn the music off, to save the
cost of playing it?  These are decisions that users have not previously
had to contemplate.  It is disingenuous to ignore them as elements of
the "transaction cost", just as much as the cost of driving to the store
or of using an electronic payment system (e.g., a credit card) to make a
purchase.  As Esther Dyson writes, one of the most valuable resources in
the information age is people's "presence, time, and attention" (55).
If our time and attention is consumed with figuring out what to buy, or
pondering lengthy contracts, the efficiency of transactions cannot be
said to be increased.  Or, if we enter into agreements without having
sufficient time to study and understand those agreements, then we are
clearly worse off than if we were to have a thorough understanding of
the agreements.

The above example by Stefik represents an extremely simple pricing
model.  There is no obvious reason to believe that practical systems
would not have more complex terms requiring much more analysis:
different prices for different songs, perhaps some fixed cost up front,
perhaps a sliding scale on which repeated playings become cheaper,
possibly different prices for playing the music on different equipment
with different levels of fidelity, and so on.  Abstractly, the
possibility of such flexible terms makes possible a mutually beneficial
bargain between owner and user.  But in practice, that potential gain
has to be balanced against the transaction cost of evaluating each
purchasing decision.

In general, the smaller the individual transaction, the higher the
transaction costs become relative to that transaction.  A transaction
cost that is negligible relative to the purchase of a home may not be
negligible if applied to the purchase of a music CD.  And a transaction
cost that is negligible relative to the purchase of a music CD may not
be negligible if applied to every playing of a single song.  This is the
main reason why the individual marketing of smaller and smaller units of
intellectual property rights is of concern: as the unit of purchase
becomes smaller, the problem of making intelligent buying decisions
becomes more and more difficult.  This is a trend which goes wholly
unremarked both by Stefik and within the White Paper.

Certainly this problem is not necessarily insurmountable.  One possible
type of solution, somewhat surprisingly not discussed by Stefik, would
be for individuals to have automated "negotiating agents" which they can
program with their buying preferences and authorize to negotiate on
their behalf for various small purchases.

Another possibility is that competition will force information sellers
to converge on simple and uniform terms in order to gain market
advantage---since buyers will prefer to purchase on terms that they
understand.  O'Rourke writes that "the market helps to ensure that the
provisions of even standard form contracts are reasonable" (56),
although she doesn't mention that the courts play a big role by not
enforcing unreasonable provisions of adhesion contracts!  And this seems
far from assured to operate as efficiently as a true market believer
would predict.  The market has not operated, for example, to ensure that
the prices charged for long-distance calls from different pay-telephone
providers are always reasonable or consistent---some providers make
money by exploiting consumers' lack of information, and the
inconvenience of price comparison.  Or to prevent phone sex operators
from misleading people into making expensive overseas calls.  It's hard
to believe that similar exploitations won't develop in a market where
everyone is making an enormous number of small transactions each day, in
the absence of technological or regulatory solutions.  As long as it is
more expensive for consumers to seek out competitors or analyze terms of
payment than to simply pay, competition is not very effective in
maintaining equity between buyer and seller.

A traditional benefit of contracts of adhesion is that they increase
efficiency by standardizing the terms of agreement (57).  But it is
not clear that such benefits will necessarily carry over to online
information transactions.  Intellectual property owners may well want to
offer different terms to different consumers for the purpose of price
discrimination.  Unlike a printed form contract, an electronic
transaction offers, at least theoretically, the potential of offering
different terms and conditions to every customer.  While efficient from
an abstract economic point of view, this can also increase inefficiency
in practice by complicating purchasing decisions.

5. Bargaining Power.

As Julie Cohen writes, "If the argument that individual readers can
influence copyright management decisions by withholding their business
is implausible, the argument that they may seek such changes by
bargaining with copyright owners one-on-one is, quite simply, absurd."
(58)

In the ideal world of contract, parties come together, negotiate over
terms, and strike a mutually satisfactory bargain.  Both parties have
equal bargaining power: either can decline the proposed arrangement and
seek out another buyer or seller.  The sale of intellectual property
doesn't resemble this fictional economic model much at all.  In the
first place, the marginal cost to the seller of intellectual property is
essentially zero, so that party should never walk away from any
transaction.  Yet if that were really the case, economic theory would
predict that the market price would approach zero, and there would be no
incentive to create intellectual property (59).  The fundamental purpose
of copyright is generally described as providing an incentive for the
creation of intellectual property, by affording the copyright owner
"exclusive" rights and therefore inhibiting ("unfair") competition.  In
other words, to increase the bargaining power of the seller relative to
the consumer.

Once an information provider has been afforded a monopoly over the sale
of a particular information resource, the logic of competition no longer
applies.  (This also holds if competition is infeasible for other
reasons than copyright; for example, if seeking out a competing vendor
would be more costly than simply paying the asking price.)  There are
then many possible prices at which a mutually satisfactory
(Pareto-optimal) bargain between buyer and seller may be struck.

Game theorists understand the value of commitment in such a situation.
If the seller can commit to a set of terms, so that the only option to
the buyer is to accept or reject those terms, then the buyer will prefer
accepting to rejecting (if the terms are appropriately chosen), and thus
from among the possible bargains the seller can, through commitment,
control which outcome occurs.  Thus sellers, especially in relatively
uncompetitive markets, often have little incentive to negotiate: they
gain the power to dictate terms.  Furthermore, negotiation is just as
expensive for sellers as for buyers, giving them another reason to avoid
it.

Is the information marketplace a highly competitive or an uncompetitive
world?  It depends on your point of view.  From a purely mechanical
point of view, explicit transaction costs for the sale of informational
goods can be made quite low.  But, as discussed above, if the unit of
merchandise is sufficiently small, then other kinds of transaction
costs, such as the cost of decision-making or of negotiating, can become
very significant and inhibit competition.  Furthermore, there are
paradoxes associated with competition in information markets: models of
competition generally assume that all parties have perfect information
at no cost, but that makes little sense when information itself is what
is being bought or sold.

Even when negotiation is possible, effective negotiation and
price-setting can require a lot of information not generally available
to users.  Online transactions, such as those contemplated by Stefik and
the White Paper for the use of intellectual property, potentially reveal
a great deal of information about the consumer to the seller.  Joel
Reidenberg writes that consumers are generally unaware of the extent of
transaction record keeping about their purchases, and that when
customers do become aware of the uses of this information, they become
angry and react negatively (60).  No doubt for this reason, companies do
not generally disclose their information practices (61).  Presumably,
customers who don't like the way that information about their
transactions is used would pay more to have that information not used in
that way.  But how can customers possibly be expected to negotiate
intelligently and effectively regarding their transactions information
provider when companies don't even reveal how they use the information?
Or, as Cohen writes, a reader might wish to read anonymously, and how
can one obtain such a right if one must first reveal one's identity to
bargain for it (62)?

In a truly competitive marketplace, it would be as easy and natural for
a potential consumer to present an information owner with that user's
"terms and conditions" for accessing a work, as it would be for the
owner to state its own terms.  The fact that neither Stefik nor the
White Paper seems to remotely consider such a possibility reveals the
asymmetry that we all implicitly assume and accept in such transactions.
There doesn't seem to be any immediate prospect of reducing that
asymmetry, but we can keep it in mind in deciding whether proposed legal
systems treat both providers and consumers of information equitably.  If
providers are to have more power to dictate terms than they would have
in an ideal market, then it is not illogical for society to react to
that by regulating such terms to some extent (much as the courts
regulate the terms of contracts of adhesion).

6. Externalities.

Since the fundamental motivation of the copyright law under the
U.S. Constitution is to "promote the Progress of Science and useful
Arts" (63), it is natural to consider the effects of copyright and
intellectual property law as they affect society.  Robert Kreiss makes a
fundamental point about intellectual property: "There is a quid pro quo
at the heart of the copyright system: if an author seeks benefits by
commercializing a work, then the public should be able to benefit by
having access to the work." (64)  This principle should apply no less to
the protection of intellectual property by other means, such as contract
or technology, than to copyright, particularly when information
providers seek the aid of the legal system in defending their contracts
or technology against subversion.

For example, many innovators have questioned for some time whether
patents aid or retard progress in the software industry, although that
topic is too far afield from the subject of this paper to explore
further (65).  Unlike patents, copyright cannot normally (when applied
properly) prevent people from using their own ideas, so there is
somewhat less concern about directly stifling innovation.  But patents
and copyright (as well as contract law, and technological protections)
raise similar concerns regarding the public domain.  It is a truism that
the "original works of authorship" protected by copyright law are rarely
wholly novel, that every work is to some extent based on those that came
before (66).  "Composers recombine sounds they have heard before;
playwrights base their characters on bits and pieces drawn from real
human beings and other playwrights' characters; novelists draw their
plots from lives and other plots within their experience; software
writers use the logic they find in other software; lawyers transform old
arguments to fit new facts; cinematographers, actors, choreographers,
architects, and sculptors all engage in the process of adapting,
transforming, and recombining what is already 'out there' in some other
form." (67)  Without such creation there would be no new works for
society to benefit from.

Clearly, all else being equal, society benefits from placing works into
the public domain, for they form the basis for new creations.  A strong
and healthy public domain protects authors from risking liability for
copying which they cannot avoid, and from the burden of proving
originality for every element of their works in order to benefit from
copyright protection (68).  We must therefore view copyright as a
balance, between the need to provide incentives to authors to create new
works, and the need to bring those works into the public domain to
enable future works.  This is, no doubt, why the Constitution provides
only for "securing for limited Times" the exclusive rights of authors to
their writings (69); reserving those rights indefinitely could
ultimately be counterproductive.

From this point of view, the concerns raised by contract or
technological protection of intellectual property are obvious.  Contract
law contains no provision limiting the length of contracts regarding the
use of intellectual property.  Copyright protection systems, at least as
envisioned by the White Paper, must protect works still covered by
copyright to attain legally protected status, but they can wall off
other works as well, and so long as such works are not a majority or the
most sought-after of the contents, it would seem difficult to build
circumvention systems to extract that public domain information without
violating the proposed law.  (There seems to be little doubt that
intellectual property owners will want to use technological systems to
protect noncopyrightable resources such as databases or collections of
facts, as well as copyrighted information.  Why not, if they can?)

Time is not the real issue, though.  With the steady expansion of
copyright terms, one might well view copyright today as being
effectively infinite in duration, certainly when compared to the pace of
change on the Internet and the growth of the information society.  The
more important issue is not the movement of works wholesale into the
public domain (although that is certainly desirable), but the right to
extract, through "fair use" or otherwise, elements of existing
protected works for the creation of new works.

With regard to a contract between two or more parties, an "externality"
is a positive or negative effect on other parties not compensated by the
contract.  In general, when parties bargain amongst themselves, they may
reach a mutually satisfactory outcome which is not optimal for society
as a whole, because they disregard the effects of their bargain on
others.  These issues, of the "public domain" and "fair use", arise in
our discussion of externalities precisely because they are of this
nature.

Suppose, hypothetically, that an information consumer could purchase one
of two forms of access to an information resource: "standard access" at
a given price, which affords the same bundle of rights currently
permitted by copyright law, or "limited access" at a lower price, in
which the consumer sacrifices the right to "fair use" of the material.
From the consumer's point of view, fair use is largely an externality;
the benefit of fair use to society comes when the consumer uses it to
advance the "useful Arts" by producing new works.  Only a part of the
benefit to society of such creation is transferred back to the consumer
(as payment for those new works); thus, the consumer will tend to value
the fair use privilege less than its value to society as a whole.  So
the consumer might choose to purchase "limited access" when "full
access" would be more beneficial to society as a whole.  This
illustrates how contract can fail to achieve the optimal outcome.

In such a situation, economic theory tells us that society can gain by
subsidizing the purchase of the fair use right---by contributing enough
of the external value that it expects to gain from the potential
creation of future works to tip the balance and encourage the consumer
to purchase "full access" rather than "limited access."  The practical
obstacles to this approach (e.g., how does one figure out how to value
"full access" and "limited access" in lieu of a market for both) lead
society to achieve a similar effect by simply stipulating fair use for
consumers, and compensating copyright holders in other ways (for
example, by extending the term of their copyrights, or granting them
additional rights they desire).  From the premise that copyright is not
a "natural right" but a right created by society, there is no specific
level of compensation or rights that society must be naturally obliged
to confer on copyright holders; rather, the appropriate level remains a
balance to be determined by consensus and experience, and considerations
like the "value of fair use" are just one factor that should then be
taken into account in that determination.  And of course one can also
recall that creators of intellectual property invariably benefited
the creation of their own works from the public domain.

The logic of such externalities, as it applies to copyright law in
creating the privilege of "fair use", is no less applicable to
contractually or technologically protected intellectual property.  If it
is in society's interest to encourage the growth of the public domain,
then society has a legitimate reason to act to encourage or impose a
right to "fair use" even in those situations where the parties at stake
(information owner and information consumer) might individually choose
to negotiate it away.

7. Systematic Enforcement.

A major difference between the regime of intellectual property
protection envisioned by the White Paper or by Stefik, and the present
regime, is the prospect of systematic and effective enforcement.
Observers of the present system understand that the typical consumer of
information products neither understands the law very well, nor feels a
strong moral obligation to follow it precisely.  Individuals tend to
think that commercial use of other people's intellectual property is
improper, but their own private non-commercial uses are generally okay
(70).

There are two possible reactions to this observation.  If one generally
feels that the present copyright system works fairly well, one can take
this "flexibility" on the part of individuals as to how strictly they
follow the letter of the law as an integral aspect of that working
system.  Ejan Mackaay quotes David Vaver: "Copyright was never meant to
stop people from repairing or reselling or using material in customary
ways" (71)---even when a literal interpretation of the law would so
imply.

This is the viewpoint that I would call "intellectually conservative."
If we have a working copyright system, and our goal is to have that
system evolve in a gradual and incremental way to handle new technology
and new types of information resources, then one might seek to preserve
the practical aspects of how the present system works, either by writing
into law some of the flexibility that individuals now generally assume
for themselves, or by legal mechanisms that encourage information
providers to continue to allow users that level of flexibility.

On the other hand, one can view the prevalance of casual non-commercial
copyright violations by individual users as a terrible flaw in the
present system, which we may at last have the opportunity to rectify.
In this more "activist" view, one might write stronger restrictions into
law about how users can behave, launch educational efforts to convince
users to obey the letter of the law more closely, and encourage the
development of technological systems that can force users to obey
restrictions that the law itself cannot effectively enforce.  In short,
one might follow exactly the path of the White Paper---even though the
White Paper describes its own recommendations as simply maintaining the
existing balance.

Activism is not necessarily bad, nor is it necessarily bad to want to
bring the actual way that people behave and their legal obligations in
line with one another.  But it should be recognized for the change that
it is, rather than preserving the status quo.  As Jessica Litman says,
"Extending the prescriptions and proscriptions of the current copyright
law to govern the everyday acts of non-commercial, non-institutional
users is a fundamental change." (72)  Without necessarily endorsing
Litman's own radical approach to revising copyright, one can question
whether there is adequate basis or public support for seeking to extend
the practical application of copyright so far as the White Paper would.

What Joel Reidenberg calls "Lex Informatica"---the rules for information
policy imposed by technology rather than by law---operates in a
fundamentally different manner than the legal regime.  "Legal regulation
depends primarily on judicial authorities for rule enforcement.  Rule
violations are pursued on an ex post basis before the courts.  Lex
Informatica, however, allows for automated and self-executing rule
enforcement." (73)  Taking the same set of rules, and enforcing them
technologically rather than through the legal regime, can amount to an
immense change in the practical import of those rules, not just a benign
continuation of the status quo as the White Paper might make it seem.
Preserving the status quo might in fact require relaxing the rules as
enforcement is improved, so that the net effect on typical users is
balanced out.

This is not just a question of the interests of intellectual property
owners vs. those of consumers.  As mentioned earlier, many present uses
of information technology arguably depend on the lack of strict and
literal enforcement of copyright law in every instance (particularly if
one accepts the White Paper's characterization of even ephemeral copying
as infringement).  It's not at all clear that intellectual property
owners would benefit any more than consumers, certainly not in the long
run, from a strict enforcement of such provisions, which could
eviscerate precisely the information systems, such as the Internet, from
which they hope to profit.  Litman goes so far as to suggest that it
might not be bad for all concerned to recognize the benefits to society
of "illicit" copying, and make the Internet into a temporary
copyright-free zone (74).  Without going to that extreme, one can
question whether shutting down all "illicit" copying immediately would
necessarily be a good thing for anyone.

8. Conclusions.

The main targets of this paper are the default assumptions that the
objective of copyright is necessarily to emulate the agreements that
parties would naturally make amongst themselves, that complete freedom
of contract in intellectual property transactions is necessarily
desirable and benign, and that measures that society can take to improve
the ability of parties to enter into agreements and enforce restrictions
on the use of intellectual property (whether based on copyright law, on
contract, or unilaterally imposed) must be entirely beneficial.  These
are all superficially appealing concepts, but none of them bears up to
close scrutiny as an unquestionable truth.

The most direct relevance of these issues in the policy domain is to the
question of what protections should be afforded to technological
protection systems under the law, and conversely, what responsibilities
should be imposed upon makers of such systems.  There is no logical
necessity of a quid pro quo here: even if Mark Stefik can build an
effective technological protection system without any special legal
status or protection, it might be in the public interest to impose
certain regulations on the use of such a system.  And conversely, it
might be desirable to provide some legal protections for such systems if
their efficient functioning is in the public interest, even if no
corresponding restrictions are imposed upon how they may be used.  But
it is natural to think of tying the two together: to ask both what legal
protections against circumvention of such systems are in the public
interest, as well as what legal restrictions on how they may be used.

I believe that some legal protections for technological protection
systems are desirable.  The White Paper and the Agenda for Action (75)
make some good arguments about the ways in which technology can benefit
information providers and consumers alike.  I can see the advantages for
myself of being able to purchase usage rights to individual articles,
songs, or other information resources cheaply and easily.

But this paper raises many concerns about how such systems might be
deployed and operate in practice, and the extent to which government
regulation of such systems may be in the public interest.  In no
particular order:

  * To reduce transaction costs for consumers by systematizing or
    regulating the bundles of rights transferred to information
    consumers.

  * To require that terms and conditions for use of information
    resources meet basic standards of fairness and commercial
    justification.

  * To ensure adequate disclosure of such terms and to ensure real
    assent on the part of the consumer, to the extent practical.

  * To limit the extent to which technological protection systems
    used for copyrighted information can also be used to restrict
    access to material in the public domain.

  * To ensure that technological protection systems do not unduly
    infringe the privacy of consumers.

  * To encourage or require compatibility between systems in order
    to increase competition.

  * To require companies to divulge necessary information for consumers
    to make an informed bargain, such as how the company might use
    personal information about the consumer gathered from his or her
    transactions.

  * To directly regulate the use of personal transaction information.

  * To encourage the development of systems that really do permit
    effective bargaining between provider and consumer, and not just
    one-sided "take it or leave it" offers.

  * To permit but regulate differential pricing and terms.

  * To limit the extent to which consumers can contract away certain
    rights, such as fair use.

  * To limit the extent to which technological protection systems can
    interfere with usage which would qualify as fair use, or with the
    extraction of noncopyrightable elements such as facts into the
    public domain.

  * To limit universal enforcement of copying and use restrictions by
    technological means, in cases where such strict enforcement might
    interfere with working systems or accepted behavior, at least until
    workable alternatives have been developed.

Not all of these measures may be necessary, practical, or desirable.
But they are all supportable by public policy arguments which are worthy
of consideration.

----------------

NOTES

(1) Jessica Litman, "Revising Copyright Law for the Information Age", 75
Oregon L. Rev. 45 n100 (1996).

(2) Maureen A. O'Rourke, "Copyright Preemption After the ProCD Case: A
Market-Based Approach", 12 Berkeley Tech. L. J. 53 (1997).

(3) Mark A. Lemley, "Intellectual Property and Shrinkwrap Licenses",
68 S. Cal. L. Rev. 1239 (1995).

(4) H.R. Rep. No. 102-873(I), 102nd Cong., 2d Sess., reprinted in 1992
U.S.C.C.A.N. 3578, 3579-80, 3583 n15.

(5) Mark Stefik, "Letting Loose the Light: Igniting Commerce in
Electronic Publication", in Mark Stefik, _Internet Dreams: Archetypes,
Myths, and Metaphors_ (MIT Press, 1996), at 228-38.

(6) "Intellectual Property and the National Information Infrastructure:
The Report of the Working Group on Intellectual Property Rights" (1995).

(7) Litman, at 45.

(8) E. Allan Farnsworth, _Contracts_ (Little, Brown, 1982), at 21.

(9) R. H. Coase, "The Problem of Social Cost", 3 J. L. & Econ. 1 (1960).

(10) Lemley, at 1285-86.

(11) Eric Schlachter, "The Intellectual Property Renaissance in
Cyberspace: Why Copyright Law Could be Unimportant on the Internet", 12
Berkeley Tech. L. J. 49 (1997); also Litman, at 20.

(12) Litman, at 38.

(13) John Perry Barlow, "The Economy of Ideas: A Framework for
Rethinking Patents and Copyrights in the Digital Age (Everything You
Know About Intellectual Property is Wrong)", 2(3) WIRED 88 (March 1994).

(14) Ibid, at 126.

(15) White Paper, supra note 6, at 14.

(16) Notes, "Offers Users Can't Refuse: Shrink-Wrap License Agreements
as Enforceable Adhesion Contracts", 10 Cardozo L. Rev. 2105 (1989).

(17) Lemley, at 1246-48.

(18) O'Rourke, at 62.

(19) Ibid, at 91.

(20) Commission of the European Communities, "Green Paper on Copyright
and Related Rights in the Information Society" (1995).

(21) Restatement (Second) of Contracts Sect. 17 (1988).

(22) Lemley, at 1248-49 n36.

(23) Notes, supra note 16, at 2108 n14.

(24) Ibid, at 2122 n83.

(25) Ibid, at 2123.

(26) Lemley, at 1287 n211.

(27) A. Corbin, _Corbin on Contracts_ Sect. 73, at 310 (1963).

(28) White Paper, supra note 6, at 192.

(29) Notes, supra note 16, at 2108; Lemley, at 1241.

(30) Lemley, at 1248-53, 1240.

(31) Neil Weinstock Netanel, "Copyright and a Democratic Civil Society",
106 Yale L. J. 323 (1996).

(32) Ibid, at 178.

(33) Ibid, at 230.

(34) Ibid, supra note 6, at 235.

(35) Stefik, at 226.

(36) Ibid, at 228.

(37) Ibid, at 226.

(38) White Paper, supra note 6, at 230.

(39) Stefik, at 229.

(40) White Paper, supra note 6, at 236.

(41) Ibid, at 230.

(42) Ibid, at 231.

(43) Ibid, at 235.

(44) Ibid, Appendix I, at 7.

(45) Stefik, at 238-240.

(46) White Paper, supra note 6, at 230.

(47) Ibid, Appendix I, at 5-12.

(48) Ibid, Appendix I, at 6.

(49) Ibid, at 233 n569.

(50) Ibid, Appendix I, at 7.

(51) Ibid, at 191.

(52) Ibid, at 235.

(53) Stefik, at 220.

(54) Ibid, at 229.

(55) Esther Dyson, "Intellectual Value", 3.07 WIRED 182 (July 1995).

(56) O'Rourke, at 83.

(57) Notes, supra note 16, at 2104-05.

(58) Julie E. Cohen, "A Right to Read Anonymously: A Closer Look at
'Copyright Management' in Cyberspace", 28 Conn. L. Rev. 999 (1996).

(59) Schlachter, at 22-23.

(60) Joel R. Reidenberg, "Information Flows on the Global Infobahn:
Toward New U.S. Policies", in _The New Information Infrastructure:
Strategies for U.S. Policy_ (1995), at 253.

(61) Ibid, at 256.

(62) Cohen, at 1000.

(63) U.S. Constitution, Art. I, Sect. 8, cl. 8.

(64) Robert A. Kreiss, "Accessibility and Commercialization in Copyright
Theory", 43 UCLA L. Rev. 5 (1995).

(65) Simson L. Garfinkel, Richard M. Stallman, and Mitchell Kapor, "Why
Patents are Bad for Software", 8 Issues in Science and Technology 50
(Fall 1991).

(66) Jessica Litman, "The Public Domain", 39 Emory L. J. 966 (1990).

(67) Ibid, at 966-67.

(68) Ibid, at 969.

(69) U.S. Constitution, Art. I, Sect. 8, cl. 8.

(70) Litman, supra note 1, at 40.

(71) Ejan Mackaay, "The Economics of Emergent Property Rights on the
Internet", in _The Future of Copyright in a Digital Environment_
(P. Bernt Hugenholtz ed., 1996), at 19.

(72) Litman, supra note 1, at 48.

(73) Joel R. Reidenberg, "Lex Informatica: The Formulation of
Information Policy Rules through Technology", forthcoming in Texas
L. Rev., at 23.

(74) Litman, supra note 1, at 30.

(75) The National Information Infrastructure: An Agenda for Action
(1997).