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III. THE ECONOMIC RATIONALE FOR COPYRIGHT LAW
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IV. COPYRIGHT LAW AND THE FREEDOM OF CONTRACT
A. Defining the BargainV. CONCLUSION
B. Should Parties be Allowed to Contract Around Copyright Provisions?
The Seventh Circuit Court of Appeals recently heard one of the most significant cases defining the proper scope of federal copyright law—ProCD, Inc. v. Zeidenberg.1 In this case, the court considered whether contractual restrictions that broaden the bundle of rights granted by copyright law are enforceable. Specifically, ProCD sought to limit contractually the right of users to distribute information contained in a database.2
The ProCD case was significant because information of all kinds (scientific data, educational texts, financial data, music, movies, and even legal opinions) is increasingly being licensed to users online. Because the Internet reduces transaction costs, it conceivably allows vendors to license every bit of information they control. In fact, licensing arrangements, supported by technological means of monitoring, may entirely replace the copyright regime with private contracts.3 While commentators generally assume that parties will reach an efficient bargain by freely negotiating their respective rights and obligations, private bargaining may sometimes produce inefficient outcomes.
This article revisits contractual relationships between copyright owners and users. It argues that contracts that attempt to expand federal copyright protection should not be enforceable. After briefly introducing the economic rationale for copyright law, this article reconsiders some of the controversial issues regarding contract formation that confronted the court in ProCD. The general validity of non-negotiated mass-market licenses is beyond the scope of this article; it does, however, touch upon questions of assent to the extent it affects copyright policy. In particular, this article argues that standard form contracts that require a very minimal level of assent for contract formation interferes with copyright policy. Finally, this article suggests several considerations that may affect freedom of contract in the context of copyrighted works.
Matthew Zeidenberg purchased copies of ProCD’s SelectPhone CD-ROM, which combined a database of telephone listings with a computer program for accessing the listings.4 Zeidenberg did not sign any contract, though the box containing ProCD’s database did indicate that the CD-ROM was subject to a licensing agreement.5 The terms of the license were given inside the box and also appeared on the user’s screen every time the user ran the software.6 The license provided that users could not make the software and listings available to other users.7 Zeidenberg uploaded the telephone listings stored on the CD-ROM discs to his computer, combined it with his own original search engine, and made the listings available to Internet users.8 ProCD filed suit, seeking an injunction against continued violations of the licensing agreement.9
The license at stake was a "shrinkwrap license." Shrinkwrap licenses are standard form contracts attached to mass-market software.10 The term "shrinkwrap" refers to the transparent plastic in which mass-market software is often sealed. Copies of mass-market copyrighted works were traditionally distributed without a license, simply carrying the familiar copyright notice.11 The rationale for this practice was that copyright law sufficiently protected the interests of the publisher in such transactions. As new distribution technologies arose, licenses became more prevalent in mass distribution markets. Uncertainty regarding computer program copyrightability, and the scope of such copyrights, led vendors to use shrinkwrap licenses with mass-market software.12
Book publishers have also begun to use licensing agreements. A purchaser of a book may expect to read it as many times as she wishes, to quote its text, or to use its excerpts. Some may also wish to reproduce a few pages from a book in a library for later reading or reference. These types of uses reflect our expectations when we purchase a book, and they are all considered "fair use" under copyright law.13 Yet books in recent years include statements that re-define the terms under which they are being purchased. For example, a book may include the following terms on its cover:
Except for the quotation of short passages for the purposes of criticism and review, no part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise without the prior permission of the publisher.Are we bound by such restrictions? When the terms on the book provide that "no part of this publication may be reproduced," are we obliged to obtain permission for every quote we wish to make, regardless of its scope, nature, or purpose? When the terms allow "quotation of short passages for the purposes of criticism and review," do we need permission for quoting a short passage for another purpose—say a birthday card? What if the inner cover of a cookbook provides that "no recipe in this book may be used unless royalties are paid to the publisher?" Is cooking subject to royalties? What is the legal status of publisher statements purporting to restrict use?
Shrinkwrap licenses and book licenses are both contractual arrangements regarding the intellectual property aspects of goods. While the purchaser of a book or a CD-ROM may acquire ownership of the physical copy of the work she has purchased, she receives only limited use privileges in the copyrighted materials.14 Copyright law distinguishes between rights in a "work of authorship," the intangible aspect of a work, and rights in its tangible manifestations.15 A book purchaser becomes the owner of the book, but receives no copyright in it. The publisher remains the copyright owner, and copyright law prevents any unauthorized reproduction or public distribution of the work. The question is whether the bundle of rights retained by the copyright owner may be redefined by the parties to a contract. Under what circumstances must users of copyrighted works obey contract provisions that supplement or expand copyright protection? Are copyright owners free to expand their rights beyond those available under copyright law by imposing contractual restrictions on the use of their works? To what extent are such licenses binding?
The district court in ProCD I found no binding contract between the parties. The court determined that Zeidenberg did not accept the terms of the license.16 Furthermore, the district court decided the contract was unenforceable because it conflicted with copyright policy. Licenses that prohibit the distribution of public information, the court held, "step into territory already covered by copyright law."17 If such provisions were enforceable they "would alter the ‘delicate balance’ of copyright law" and "allow parties to avoid copyright law by contracting around it."18
The court of appeals disagreed. The appellate court found that the purchase of the software was subject to the license. The contract itself was formed when Zeidenberg accepted the terms of the license in the manner specified by ProCD—by using the software. In doing so, Zeidenberg was performing an act that ProCD (the offeror) proposed to treat as an act of acceptance.19 The court held that "[t]erms and conditions offered by contract reflect private ordering, essential to the efficient functioning of markets."20 The court recognized that "some applications of the law of contract could interfere with the attainment of national objectives," but concluded that the "general enforcement of shrinkwrap licenses of the kind before us does not create such interference."21 As a general matter, the court found any "simple two-party contract" (whether generous or restrictive in its terms) to be enforceable.22
The conflicting opinions by the two courts in the ProCD case demonstrate the potential conflict between copyright policy and freedom of contract. They reflect different approaches to the regulation of information. The approach taken by the district court perceives copyright law as a comprehensive, mandatory arrangement that restricts the freedom of the parties to contract around it. The opinion of the court of appeals, by contrast, reflects a perception of copyright law as a set of "default rules" that in most cases should allow the parties to replace the statutory scheme with a contractual arrangement of their choice.23 While the first approach is concerned with preserving the "social bargain" regarding the use of information as reflected by copyright law, the latter emphasizes "freedom of contract" as a means for reaching efficient functioning of the information market.
To understand better this controversy, an examination of the fundamental principles that govern copyright law and contract law is necessary.
III. THE ECONOMIC RATIONALE FOR COPYRIGHT LAW
Copyright law defines initial endowment in "original works of authorship"24 such as books and computer programs. The law specifies the respective rights of owners and users in copyrighted works. Copyright owners are provided with a set of exclusive rights to authorize the reproduction, adaptation, public distribution, public display, and performance of their works.25 They may sell these rights or license them to others for a fee. Users are free under the law to make any use of the work that copyright law does not otherwise exclude.
The economic rationale for copyright law is reasonably intuitive. Copyright law seeks to remedy a market failure in the dissemination of information,26 commonly referred to as the "public good" problem. Information is a "public good" in the sense that its creator cannot efficiently exclude its use.27 The costs of producing information—such as writing a book or developing a computer program—tend to be high, while the costs of copying—such as copying a program on a floppy disk—are often low. If creators must invest substantial money in producing a work but cannot efficiently exclude non-payers, they may not reap the value of their efforts.28 Free-riding may reduce incentives for investment in creation, and producers would under-supply information. Copyright law overcomes this difficulty and encourages creation by providing creators with a legal right to exclude others. It allows them to use the power of the federal government to exclude non-payers and to deter potential free-riders. By legally excluding non-payers, the law allows creators to collect fees for the use of their works and secure a return on their investment.29
However, copyright protection involves a deadweight loss: the owner’s ability to exercise monopoly power allows it to set the price for works at a level greater than the marginal cost of a copy.30 Consequently, potential purchasers who value the work at more than its marginal cost, but less than its monopoly price, will not purchase it, leading to the deadweight loss.31 In other words, while copyright law is designed to remedy the market failure of the "public good," it causes another type of a market failure by creating a monopoly.32
The deadweight loss is amplified by another aspect of information. Information is non-rivalrous in the sense that once a work is created, its use by one user does not detract from the use of the same information by others.33 This quality of information suggests that once producers create information, maximizing its use would be optimal. Thus, a monopoly granted under copyright law should be limited to the scope necessary to provide incentives to create and should minimize restrictions on access to works.
Furthermore, because information is created incrementally, copyright protection increases the costs of creating new works.34 Information stimulates the creation of more information, as newly created works make use of prior art.35 Existing information becomes the building blocks of the information products of the future. A copyright monopoly may restrict further creation because royalties and transaction costs incurred in gaining access to prior art increase the cost of expression involved in producing new works. Limiting access to information may thus further inhibit innovation stimulated by existing works.
Given these basic qualities of information, copyright law seeks to balance the level of incentives to create and the interest in maximizing access to information once created. Finding the correct balance between access and incentives is the central task of copyright policy.36 Copyright monopoly induces production of information by allowing non-payers to be excluded and information to be marketed at a monopoly price. At the same time, however, copyright law limits this monopoly to serve the ultimate purpose of maximizing access to information. The law thus regulates access to information by balancing incentives to create and accessibility of information.37
These conflicting considerations under copyright law affect the nature of rights granted by the law. Copyright monopoly is contingent, instrumental, and limited to the level necessary to provide incentives. It is restricted under the statutory provisions and legal doctrines such as "fair use."38 This instrumental perception of copyright monopoly suggests that users are free to access any information that falls outside the scope of copyright monopoly. Copyright law does not simply define the copyright owners’ rights, but rather draws the boundaries between privately and publicly accessible information. It defines both owners’ exclusionary rights and users’ access rights. Users are allowed unrestricted use of any information that has not been explicitly excluded from the public domain.39
Copyright law includes many provisions that establish users’ rights. Some of these provisions define those rights explicitly, such as the right to receive a compulsory license40 or access privileges for libraries.41 Other access rights derive from restrictions on the scope of the exclusive rights granted to owners. The monopoly granted to copyright owners under the law is limited. It lasts for only a set period of time and is restricted by statutory provisions.42 Similarly, the fair use doctrine defines permissible usage. When a use is found to be "fair," the user is exempt from copyright liability, and this permissible usage provided by law thereby restricts the scope of the owner’s copyright.43
Let us now return to our question: to what extent may individual contract provisions supplement or expand federal copyright protection? We have seen that rights granted under copyright law reflect a delicate balance between an owner’s monopoly and a user’s privilege to access information. It follows that any attempt to change the balance struck by copyright law may distort federal policy. Contractual arrangements that provide owners with rights not granted to them under copyright law confine access to information in a way not intended by the law.
Two major objections may be raised against this argument, both essentially
claiming that the argument fails to acknowledge the difference between
contract law and copyright law. One possible objection is that a contractual
right differs from a copyright because it cannot constitute a right against
the world. Another objection is that copyright defines initial endowment
while contract law governs only transferability of entitlements already
determined. Therefore, a contractual claim may not change initial endowment.
A contract only reflects subsequent bargains.
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IV. COPYRIGHT LAW AND THE FREEDOM OF CONTRACT
While part III of this paper demonstrated that a very low standard of assent makes contractual provisions essentially equivalent to copyright protection, the following discussion examines whether society should allow parties to contract around copyright provisions. The ProCD II case demonstrated how copyright owners may expand their copyrights by using a license. The following discussion begins by analyzing such transactions and examines whether licenses which contract away users’ rights should be enforceable.
Private exchange operates upon the initial endowment determined by copyright law. Owners are able to license their exclusive rights to willing users. Copyright owners of the cookbook discussed earlier may license the reproduction of the recipes for a fee or sell their exclusive right to make public distribution of the book to a publisher. However, copyright owners may not license a use that lies outside the scope of the monopoly granted under copyright law. Thus, the owner of the cookbook’s copyright is unable to license the right to cook according to the book’s recipes simply because he has no exclusive right over such cooking. In other words, he has no right to prevent others from doing so. Whether or not a copyright owner licenses readers to cook, everyone is free to use the recipes for cooking (although a person may not, without permission, distribute copies of the recipes).57 Copyright law provides owners with a monopoly over the copyrights in the work, namely, the exercise of rights that fall within the scope of the owners’ exclusive rights. It does not empower owners to control any use of their works.58
In ProCD, ProCD-licensed59 CD-ROMs included copyrighted software and telephone listings on which ProCD had no copyrights. The user agreement provided that:
You will not make the Software or the Listings in whole or in part available to any other user in any networked or time-shared environment, or transfer the Listings in whole or in part to any computer other than the computer used to access the Listings.60While ProCD had the legal power to authorize unilaterally the reproduction and distribution of the software, it had no such proprietary right in the telephone listings. The listings were not protected by copyright law since they were not sufficiently original.61 The listings were thus in the public domain and everyone was free to use them. The listings, however, were the only thing copied by Zeidenberg.62
As we have seen, seeking to control authorization for uses that fall beyond the monopoly of the copyright owner is in fact an attempt to make a bargain using legal rights which belong to someone else—the user. If users are free to use recipes in a cookbook, a copyright owner may not limit their right to do so. If users are free to reproduce or distribute telephone listings, since they are in the public domain, ProCD may not unilaterally restrict their rights by a license. Dissemination of information that society has chosen to make publicly accessible under copyright law cannot become restricted merely via a unilateral license imposed by the copyright owner.63
Nevertheless, ProCD may offer users a bargain in which users give up their use privileges, in return for access to the work. In such a transaction, ProCD does not license its copyright, but instead licenses the use of the listings. ProCD controlled access to the tangible medium that carried the listings and was therefore able to make access subject to restrictions. For such a bargain to be valid, it must be bilateral. As such, it is not merely an unwarranted exercise of power by the copyright owner, but rather an exchange of contractual obligations that creates rights and duties and requires the consent of both parties. Users are selling their use privileges to the copyright owner when they choose to use the CD-ROM.
No matter how we describe the transaction, the fact that ProCD sought to expand its copyright by contractual provisions is apparent. The question is therefore whether such contractual provisions are enforceable; that is, under what circumstances should parties be allowed to contract around copyright provisions?
B. Should Parties be Allowed to Contract Around Copyright Provisions?N67
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1. THE DANGERS OF USING CONTRACTUAL ARRANGEMENTS TO EXPAND COPYRIGHTS
Freedom of contract assumes that users are the best guardians of their own interests, and that if users did not believe that they would benefit from the transactions in which they waive their use privileges, they would not enter into such transactions. Thus, the court of appeals in ProCD II held that "[t]erms and conditions offered by contract reflect private ordering, essential to the efficient functioning of markets"68 and should therefore not be subject to preemption. Terms of the contract, the court held, should be determined by competition:
Terms of use are no less a part of "the product" than are the size of the database and the speed with which the software compiles listings. Competition among vendors, not judicial revision of a package’s contents, is how consumers are protected in a market economy.69However, users’ choices in transactions regarding copyrightable materials are very limited, because copyright law provides "legal fencing" for works that are non-excludable. It prevents strangers from making copies of the work, and thus forces them to enter into a contract with the copyright owner in order to gain access. The user must accept the owner’s demands or forego the product.
A license that expands the creator’s rights in copyrighted subject matter is tied to a product that is already protected under copyright law. The copyright monopoly is thus being used to expand market power and prevent competition. The copyright owner in ProCD, for instance, used the licenses to reduce competition. A provision in the user agreement prohibited making the listings, or any part of them, available to any other users. The restrictions were broad enough to cover any distribution of the listings, either for free or for a fee.70 The license thus limited ProCD’s competition in the market for electronic telephone databases. It reduced the ability of users to access freely any data that was explicitly held by the Supreme Court to be in the public domain,71 even though the free availability of this data is what enabled ProCD to develop its database in the first place.
Users are arguably always subject to restrictions when they use a copyrighted work. But restrictions imposed by copyright law are limited and reflect the balance between the need to induce creation and the need to guarantee public access to information. If copyright owners are free to use contractual arrangements to restrict use, and are then able to use copyright to prevent any use that is not subject to these restrictions, owners are gaining absolute monopoly over their works.72
When owners exercise absolute monopoly, users’ choices become very limited. Users must either accept the contractual restrictions or relinquish access to the work altogether. Although some works of authorship may have perfect substitutes, many works do not.73 Even when substitutes are available, such as in the case of telephone listings, the likelihood of competition over the terms of the license is low. Terms that restrict users’ privileges under copyright law, such as publishers’ statements on books and shrinkwrap licenses, tend to be uniform. This uniformity may reflect the fact that many users do not value these privileges; for example, they do not want to reproduce a book other than for critical review or to reverse engineer a computer program.74 Even valuable uses, for which some users may be willing to pay a special fee, may not be licensed. Owners may not license a use—such as reverse engineering a video game console—that may threaten their market for other products.75 Owners may also refrain from licensing uses that are critical of their works, such as parodies.76 Such valuable uses are privileged under copyright law, but they may not occur under a contractual regime.
Finally, the low standard of assent that ProCD II held to be sufficient for contract formation does not promote competition over the terms. When validating a transaction does not require informing users of the terms of the license prior to the completion of the transaction, owners have no incentive to reveal the license restrictions in advance. Indeed, in ProCD II, the court emphasized that users are able to reject the terms after purchasing the software and before beginning to use it.77 Yet at this stage users have already incurred various costs such as search costs, loss of other transactions, and costs of delivery and adaptation to the users’ environment; consequently, users may be reluctant at this point to reject the terms knowing that they would not be able to recover these costs. By enforcing licenses that were not bargained for, the court may have reduced incentives for competition over the terms of the transaction.
2. CONTRACTUAL ARRANGEMENTS THAT EXPAND COPYRIGHTS IN MASS- MARKET DISTRIBUTION MAY CONFLICT WITH GOALS OF PUBLIC POLICY
We have seen that the combination of copyright law and the legal power to restrict the use of information by standard form contracts expands owners’ monopolies far beyond those intended under copyright policy. However, the shift to on-line dissemination suggests that the role of copyright law in securing owners’ interests may be dispensable. As noted above, on-line dissemination not only facilitates licensing, but also enhances the ability of owners to exclude physically non-payers. The prospects of replacing a copyright system with a contract-based system are improving.
The question is whether this system will leave any information for free bargaining between owners and users.
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Information is not a typical commodity. Its commodification was enabled, in fact, by copyright law. As noted above, information is non-rivalrous and its use by one does not detract from the ability of another to use it. Thus, once information is produced, it is socially optimal to maximize its use by the public. To the extent that on-line dissemination replaces current distribution channels such as books, television, and radio, this information could become subject to license restrictions. In the absence of alternatives to current channels for distributing free information (such as television or public libraries78), our current capacity to access information at low cost will be restricted.79
Furthermore, the creation of new information, to a large extent, depends on exposure to existing information.
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Random access to information is essential not only for stimulating further creation, but also for individuals’ ability to shape their preferences. If every use of information involves a fee, users are required to choose in advance what information they seek to access. But how could we know in what we are interested before we even know what is available? How can our expectations be shaped in the absence of random observation of what is available to us? The need to choose our areas of interest in advance may narrow our experience of the world and of ourselves. Information is essential for self-actualization. Political opinions and preferences depend upon our ideas and understandings about the world, upon our values and our concept of the good. Preferences are affected by information about what is available to us and to others. The type of information we are able to access will determine the options we perceive as available to us. Therefore, our ability to access information (surveys, movies, historical texts, legal opinions) and to use it when interacting with others is crucial for self-actualization.
Finally, a licensing regime may have social and political consequences by causing information deprivation and information inequality. Collecting fees for each and every use means that some people will be deprived of information because they cannot afford it.
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The special nature of information that allows it to be shared at minimal cost and makes existing information essential for future creation suggests that information dissemination and use should be maximized. A contractual regime that allows owners to commodify information may raise use barriers to an extent that would be socially undesirable.
Today, more than ever before, we need a theory that defines the boundaries of the freedom of contract in the context of copyright law. In the past, copyright law was limited to contexts in which contracting was impossible or was prohibitively expensive; in fact, copyright law arose to address the inability of contractual means of exclusion. On-line dissemination and other technological methods of licensing allow the replacement of copyright law by a contractual regime, which suggests that copyright may no longer play a central role in protecting owners’ rights.80 However, copyright may now become crucial for defining the balance between owners and users. Just as legal intervention in the market for information was originally necessary to allow the exclusion of non-payers, legal intervention in the market is now necessary to allow the inclusion of non-payers. The need to secure general access to information will require maintaining copyright schemes in contractual regimes.
†. Niva Elkin-Koren is a Lecturer at Haifa University School of Law. J.S.D., 1995, Stanford Law School; LL.M., 1991, Harvard Law School; LL.B., 1989, Tel-Aviv University. I wish to thank Zipora Dekel, Sandy Kadar, Guy Mundlak, and Steve Wiezner for their helpful comments on earlier drafts. I also wish to thank the participants of the 13th annual conference of the European Association of Law and Economics, Haifa, August 1996, and the University of Amsterdam Institute for Information Law Colloquim at which I presented earlier drafts of this paper. I am grateful to Ariel Olsewer for his valuable research assistance.
B1B1B1B1B11. 86 F.3d 1447 (7th Cir. 1996) [hereinafter "ProCD II"].
B2B2B2B2B22. Databases cannot be protected by copyright law unless the database is sufficiently creative to meet constitutional standards. See Feist Publications, Inc. v. Rural Tel. Serv. Co., Inc., 499 U.S. 340, 344-61 (1991). In essence, copyright law protects the creator’s original and creative contributions, such as selection, coordination, and arrangement, but not the underlying facts. See id. at 358-59.
B3B3B3B3B33. See Pamuela Samuelson, Will the Copyright Office Be Obsolete in the Twenty-First Century? 13 CARDOZO ARTS & ENT. L.J. 55, 60-61 (1994); see also, Maureen A. O’Rourke, Copyright Preemption After the ProCD Case: A Market-Based Approach, 12 BERKELEY TECH. L.J. 53, 53- 56 (1997).
B4B4B4B4B44. ProCD II, 86 F.3d at 1449-50.
B5B5B5B5B55. See id. at 1450.
B6B6B6B6B66. See id.
B7B7B7B7B77. See id.
B8B8B8B8B88. See ProCD, Inc. v. Zeidenberg, 908 F. Supp. 640, 645 (W.D. Wis. 1996), rev’d, 86 F.3d 1447 (7th Cir. 1996) [hereinafter "ProCD I"].
B9B9B9B9B99. See ProCD II, 86 F.3d at 1450.
B10B10B10B10B1010. Shrinkwrap licenses would normally include provisions regarding proprietary rights, warranties, and limitations on users' rights. See generally Mark A. Lemley, Intellectual Property and Shrinkwrap Licenses, 68 S. CAL. L. REV. 1239 (1995).
B11B11B11B11B1111. For example, "Copyright © 1970 by Publishing House Inc. All rights reserved."
B12B12B12B12B1212. See Lemley, supra note 10, at 1241.
B13B13B13B13B1313. See 17 U.S.C. § 107 (1994).
B14B14B14B14B1414. See 17 U.S.C. §§ 106, 106A (1994). Note that some software vendors seek to avoid the provisions of section 117 of the 1976 Copyright Act by defining the transaction as a license rather than a sale of a copy. Section 117 authorizes owners of copies of computer programs to make copies to the extent it is an essential step in the utilization of the program. See 17 U.S.C. § 117 (1994).
B15B15B15B15B1515. See 17 U.S.C. § 202 (1994).
B16B16B16B16B1616. ProCD I, 908 F. Supp. at 644. The district court held that placing the package of software on the shelf is an offer and that paying the asking price and leaving the store with the goods is acceptance. Id. at 651-52. The contract formed by this exchange includes only the terms on which the parties have agreed, namely, the terms that were explicit at the time of the transaction. Id. at 652-55. Any terms that purchasers could not inspect were not binding. ("I conclude that because defendants did not have the opportunity to bargain or object to the proposed user agreement or even review it before purchase and they did not assent to the terms explicitly after they learned of them, they are not bound by the user agreement.") Id. at 655 (emphasis added). The court further noted that users should be given a fresh opportunity to review any terms to which they are bound. This is because licensors reserve the right to modify the terms of their shrinkwrap licenses in future versions. Therefore, the court did not consider prior purchases of the same product as a sufficient opportunity to inspect the terms of the license. Id. at 654-55. Finally, the court relied on the proposal of the American Law Institute to amend UCC § 2-203 to make standard form contracts enforceable under certain circumstances. The court concluded that under current law, and until the amendment is made effective, shrinkwrap licenses are not binding. Id. at 655-56.
B17B17B17B17B1717. Id. at 658.
B18B18B18B18B1818. Id. The legal doctrine under which the court held the license unenforceable was the preemption doctrine. See discussion infra Part III.A.
B19B19B19B19B1919. ProCD II, 86 F.3d at 1452:
A vendor as a master of the offer, may invite acceptance by conduct, and may propose limitations on the kind of conduct that constitutes acceptance. A buyer may accept by performing the acts the vendor proposes to treat as acceptance. And that is what happened. ProCD proposed a contract that a buyer would accept by using the software after having an opportunity to read the license at leisure.B20B20B20B20B2020. Id. at 1455.
B21B21B21B21B2121. Id.
B22B22B22B22B2222 . Id. However, the court appeared to narrow its holding when it stated "[W]e think it prudent to refrain from adopting a rule that anything with the label ‘contract’ is necessarily outside the preemption clause: the variations and possibilities are too numerous to foresee." Id. Yet the court also stated, "But whether a particular license is generous or restrictive, a simple two-party contract is not ‘equivalent to any of the exclusive rights within the general scope of copyright’ and therefore may be enforced." Id. In a later decision, Judge Easterbrook further elaborated this doctrine regarding contract formation. In Hill v. Gateway 2000, Inc., 105 F.3d 1147 (7th Cir. 1997), the court held that "[a] contract need not be read to be effective; people who accept take the risk that the unread terms may in retrospect prove unwelcome." Id. at 1148. This article does not argue that no bargain should be enforced unless both parties had the opportunity to read the terms before the transaction became effective. It does suggest, however, that the low level of assent recognized by the court as sufficient for contract formation makes contract claims equivalent to copyright claims. Therefore, standard form contracts that rely upon this low level of assent should be subject to the preemption doctrine.
B23B23B23B23B2323. As I shall argue below, I disagree with this perception of copyright law. The primary function of copyright law is to define initial endowment. Copyright law is not a default rule in the economic sense. First, it does not reflect the most efficient allocation among the parties. Default rules are designed to reflect the parties' expectations in order to minimize transaction costs. See David Charny, Hypothetical Bargains: The Normative Structure of Contract Interpretation, 89 MICH. L. REV. 1815, 1841-42 (1991). But see Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An Economic Theory of Default Rules, 99 YALE L.J. 87, 126 (1989) (suggesting that in particular contexts penalty default rules are likely to be more efficient, since they are designed to give at least one party—typically the party with superior information—an incentive to contract around the default rule and therefore to choose affirmatively the contract provision both parties prefer). Copyright law cannot reflect the most efficient bargain of the parties. This is because of the potential for a "public good" market failure in any market for information. Such market failure, on which copyright policy rests, prevents efficient transactions from occurring. Second, copyright law defines initial endowment. Whether these rights should be governed by the law of property or the law of torts is a question addressed below.
B24B24B24B24B2424. 17 U.S.C. § 102 (1994).
B25B25B25B25B2525. See 17 U.S.C. § 106 (1994).
B26B26B26B26B2626. I use the term "information" to refer to any "work of authorship," namely works that are the "subject matter" of copyright law. See 17 U.S.C. § 102 (1994).
B27B27B27B27B2727. "Non-excludability" means that excluding non-payers (free-riders) from using the information is either impossible or inefficient. In other words, given a good for which the marginal exclusion cost is greater than the marginal cost of provision, spending resources to exclude non-payers is inefficient. See Peter S. Menell, Tailoring Legal Protection for Computer Software, 39 STAN. L. REV. 1329, 1337 (1987) [hereinafter Menell, Tailoring Legal Protection]; see generally William M. Landes & Richard A. Posner, An Economic Analysis of Copyright Law, 18 J. LEGAL STUD. 325 (1989); Peter S. Menell, An Analysis of the Scope of Copyright Protection for Application Programs, 41 STAN. L. REV. 1045, 1059 (1989).
B28B28B28B28B2828. See Menell, Tailoring Legal Protection, supra note 27, at 1337.
B29B29B29B29B2929. According to the neoclassical economic model, government intervention in the market is justified only to the extent that it is necessary to remedy a market imperfection. Information products, such as books or computerized telephone listings, exhibit one of these market imperfections. Specifically, information products are "public goods." A "public good" has two distinct characteristics: non-excludability and non-rivalrousness. Id.
B30B30B30B30B3030. If everyone is allowed to copy ProCD's software, then the marginal cost per copy will be low since the cost of a floppy disk and the time necessary for copying are negligible. Therefore, if competitors are allowed to copy the product freely, then its price would go down to the marginal cost. This price drop would allow many users who value the product at such a cost to use it. As noted by the court, however, the product cost $10 million to develop. ProCD II, 86 F.3d at 1449. ProCD would need to charge more than the marginal cost of creating a copy in order to recoup such an investment. Copyright law allows ProCD to prevent unauthorized copies and to sell at a price higher than the marginal cost.
B31B31B31B31B3131. See William W. Fisher III, Reconstructing the Fair Use Doctrine, 101 HARV. L. REV. 1659, 1702 (1988) ("‘[D]eadweight loss’ is measured by the total of the consumer surplus that would have been reaped by the excluded consumers and the producer surplus that would have been reaped by the copyright owner had he sold that work to them.").
B32B32B32B32B3232. Other societal costs include maintaining the copyright system (registration) and using the legal system to deter copyright infringements and to enforce owners’ rights. See Menell, Tailoring Legal Protection, supra note 27, at 1340.
B33B33B33B33B3333. See id. at 1337.
B34B34B34B34B3434. Landes and Posner refer to this phenomenon as "cost of expression." See Landes & Posner, supra note 27, at 327. Compare this analysis with Landes and Posner's similar discussion of the consequences of providing copyright protection to ideas, which they argue may increase the cost of creating works and consequently may reduce the number of works being created. Id. at 349.
B35B35B35B35B3535. This proposition may generally explain the development of arts and science, but the extent to which new creation uses prior art may differ from one market to another. The refining of existing programs or the use of prior art may be more common in the software industry then in the visual arts.
B36B36B36B36B3636. See Landes & Posner, supra note 27, at 326.
B37B37B37B37B3737. See Robert A. Kreiss, Accessibility and Commercialization in Copyright Theory, 43 UCLA L. REV. 1, 2-4 (1995).
B38B38B38B38B3838. See 17 U.S.C. §§ 107-120 (1994).
B39B39B39B39B3939. The concept of the "public domain" refers to the entire universe of works and uses that are not protected by copyright law.
B40B40B40B40B4040. The 1976 Copyright Act imposes compulsory licenses in several industries. See, e.g., 17 U.S.C. §§ 111, 115, 116 (1994). For example, copyright owners cannot prohibit the preparation of a phonorecord using a composition once it has first been authorized for distribution on a phonorecord. A performer may obtain a compulsory license to make a phonorecord using the composition. See 17 U.S.C. § 115 (1994).
B41B41B41B41B4141. One such provision under the 1976 Copyright Act provides special privileges to libraries. See 17 U.S.C. § 108 (1994).
B42B42B42B42B4242. See 17 U.S.C. §§ 107-120 (1994).
B43B43B43B43B4343. See 17 U.S.C. § 107 (1994) ("Limitation on exclusive rights: Fair Use").
Notes 44-56 omitted
B57B57B57B57B5757. That is, of course, unless another law provides the owner with a monopoly over the use of a recipe (such as patent law).
B58B58B58B58B5858. For a discussion of this distinction, see L. RAY PATTERSON & STANLEY W. LINDBERG, THE NATURE OF COPYRIGHT, A LAW OF USERS' RIGHTS 181-86 (1991). Publishers, however, seek to expand their power by "acting on a belief that any use of the work is the use of the copyright and vice versa." Id. at 182-83. Patterson and Lindberg demonstrate their argument by analyzing the provisions of common copyright licenses and copyright notices, including the license of the Copyright Clearance Center ("CCC"). The CCC license purports to license any use of published works notwithstanding the provisions of § 107 ("Fair Use") and § 108 ("Limitations on Exclusive Rights: Reproduction by Libraries and Archives"), which specifically exclude certain uses from the monopoly of the copyright owner. Id. at 183-84.
B59B59B59B59B5959. "License" refers to the legal permission to engage in some activity. A license may be unilateral. Licensing the copyrights should, however, be distinguished from licensing the use of a work.
B60B60B60B60B6060. ProCD I, 908 F. Supp. at 645.
B61B61B61B61B6161. See supra note 49.
B62B62B62B62B6262. ProCD II, 86 F.3d at 1450.
B63B63B63B63B6363. Compare this to the analysis of the district court in the ProCD I case regarding the application of the preemption theory:
Rightful owners should be able to define the limits of permissible copying or modification of their works. It is only when a contract erects a barrier on access to information that under copyright law should be accessible that section 301 operates to protect copyright law from individually crafted evasions of that law.ProCD I, 908 F. Supp. at 658.
Notes 64-67 omitted.
B68B68B68B68B6868. ProCD II, 86 F.3d at 1455.
B69B69B69B69B6969. Id. at 1453.
B70B70B70B70B7070. Id. at 1450.
B71B71B71B71B7171. See Feist Publications, Inc. v. Rural Tel. Serv. Co. Inc., 499 U.S. 340, 363-64 (1991).
B72B72B72B72B7272. This point was acknowledged by the court of appeals: "Someone who found a copy of SelectPhone (trademark) on the street would not be affected by the shrinkwrap license—though the federal copyright laws of their own force would limit the finder's ability to copy or transmit the application program." Id. at 1454.
B73B73B73B73B7373. See, e.g., Landes & Posner, supra note 27, at 328.
B74B74B74B74B7474. Users' attitudes towards their use privileges may not be clearly deduced from their behavior because of lax enforcement by copyright owners. Therefore, users have not been required to advocate strongly their desire to retain their use rights. In fact, only recently have copyright owners sought enforcement, and ProCD II is the first opinion that explicitly holds such licenses valid. Consequently, users' attitudes may change. The uniformity of licenses may also reflect disparities in bargaining power. Individual users simply do not have the necessary bargaining power to change standard industry contractual provisions.
B75B75B75B75B7575. See Sega Enterprises Ltd. v. Accolade, Inc., 977 F.2d 1510, 1520-27 (9th Cir. 1992) (holding that disassembly of the object code of a copyrighted computer program is "fair use" when disassembly is the only way to gain access to ideas and functions embodied in the computer program).
B76B76B76B76B7676. See Landes & Posner, supra note 27, at 359.
B77B77B77B77B7777. "Notice on the outside, terms on the inside, and a right to return the software for a refund if the terms are unacceptable (a right that the license expressly extends), may be a means of doing business valuable to buyers and sellers alike." ProCD II, 86 F.3d at 1451.
B78B78B78B78B7878. See Robert Berring, Chaos, Cyberspace and Tradition: Legal Information Transmogrified, 12 BERKELEY TECH. L.J. 189, 203-07 (1997) (discussing the possible decline of libraries in response to the wide availability of on-line information).
B79B79B79B79B7979. But see Eric Schlachter, The Intellectual Property Renaissance in Cyberspace: Why Copyright Law Could Be Unimportant, 12 BERKELEY TECH. L.J. 16, 21-31 (1997) (discussing on-line distribution methods that give large amounts of information free to all users).
B80B80B80B80B8080. See Samuelson, supra note 3, at 60-61 (suggesting that technological and contractual fencing may replace copyright protection for intellectual property).