Compulsory Terms in Internet-Related Contracts
William W. Fisher III

 [Set forth below is the first draft of an essay on intellectual-property rights on the internet.  It touches briefly on several of the issues discussed in this course, but concentrates on the question of how (if at all) the law should limit the ability of "content producers" to use contracts or encryption to limit users' access to their intellectual products -- a question that lies at the heart of the material in Module #4.  To avoid clogging the text with references, I have omitted the footnotes.

During the next week, I would welcome comments and questions on the paper.  I will do my best to respond to all.  The best way to submit comments is through the last "thread" in the threaded conference.]

The premise of this essay is a prediction: the creators of intellectual products suitable for distribution on the internet will soon come to rely less and less on copyright law to enable them to charge consumers who wish access to their products and more and more on a combination of contractual rights and technological protections. The principal argument of the essay is that courts and legislatures should facilitate and reinforce that shift, but should require that creators (and consumers) when setting up such "private" arrangements abide by restrictions designed to protect the public interest.

Part I of the essay lays the groundwork for the analysis by pledging allegiance to the "social planning" method of defining (intellectual) property rights. Part II relies on that method to criticize both of the two arguments that currently dominate the discussion of intellectual-property rights on the internet. Part III outlines an alternative approach, incorporating (among other things) the claim that customized contractual arrangements between creators and consumers should be encouraged. Part IV argues for the imposition on parties entering into such arrangements of a set of compulsory terms.

Many of the topics addressed in Parts I-III have been well chewed by other writers. Accordingly, I will move through them fairly rapidly, relying on others’ analyses wherever I can. The issues addressed in the later stages of Part III and in Part IV have received less attention to date. Accordingly, my own presentation of them will be slower and more thorough.


I. Foundations

Before advocating reform of a field of legal doctrine, it is best, I think, to state one's premises. The disadvantage of such a strategy is, of course, that readers who find one's methodology uncongenial stop reading. But given the depth and importance of the differences among rival schools of legal thought these days, it is best to be clear at the outset concerning the angle from which one is viewing the cathedral. So here goes.

A.  Theories of (Intellectual) Property

Political theorists and legal scholars have developed four main ways of shaping and justifying property rights in general and intellectual property rights in particular. None of the four can convincingly claim to provide policymakers a determinate method for creating and allocating legal entitlements. Rather, each is best understood and employed as a language – a framework helpful in identifying considerations that ought to be taken into account when determining who should own what.

The first approach springs from the propositions that a person who labors upon resources that are either unowned or "held in common" has a natural property right to the fruits of his or her labor – and that the state has a duty to respect and enforce that natural right. These ideas, originating in the writings of John Locke, are widely thought to be especially applicable to the field of intellectual property, where the pertinent raw materials (facts and concepts) do seem to be "held in common" and where (intellectual) labor seems to contribute so importantly to the value of the finished product. Agreement upon this basic proposition, however, has not produced consensus on details. Scholars who work this theoretical vein continue to argue over such questions as: Does any sort of intellectual labor give rise to natural property rights, or must the labor be socially valuable, or unpleasant, or especially creative to support such a claim? Does the creator of an intellectual product deserve to charge whatever the market will bear for access to his creation, or are her entitlements more limited? Does the famous Lockean "sufficiency" proviso (or the more general no-harm principle latent in other parts of Locke’s work) limit in any way the scope of the entitlements the creator acquires?

The principle that powers the second of the four approaches is that a policymaker’s beacon when shaping property rights should be the greatest good of the greatest number. In other words, he should strive to select a set of entitlements that (a) induces people to behave in ways that increase socially valuable goods and services and (b) distributes those goods and services in the way that maximizes the net pleasures people reap from them. A modified version of this principle is the main article of faith of those lawyer/economists who continue to march under the banner of the Kaldor-Hicks criterion. The literature (both judicial and scholarly) on the law of intellectual property is rife with invocations of this ideal. However, its champions differ at least as much as the proponents of labor-desert theory concerning its doctrinal implications. Fundamental questions – such as whether intellectual-property rights stimulate sufficient creative activity to offset the efficiency losses caused by the concomitant increases in the prices of intellectual products – remain contested, and many more specific issues -- such as whether patentees should enjoy broad or narrow rights to control improvements on their inventions -- continue to produce heated controversy.

The heart of the third approach is that private property rights are crucial to the satisfaction of some fundamental human needs or interests; policymakers should thus strive to select the set of entitlements that most conduces to human flourishing. Much of the interest – and controversy – associated with this approach concerns the difficult job of identifying exactly which human needs or interests are both implicated by property rights and deserving of respect. Among the ideals emphasized by different theorists who have adopted this strategy are: autonomy; self-realization as an individual; self-realization as a social being; security and leisure; control over the presentation of one's self to the world; personal responsibility; identity; peace of mind; privacy (and associated opportunities for intimacy); citizenship (and the associated value of civic virtue); and benevolence. The task of determining which system of intellectual-property rights would promote the widespread realization of each of these ten ideals has only just begun.

The fourth approach – upon which this essay is founded – is rooted in the proposition that property rights can and should be shaped so as to help foster the achievement of a just and attractive culture. This perspective is less well known than the other three – each of which has both a familiar moniker (Labor-Desert Theory; Utilitarianism; and Personality Theory) and a famous ancestor (Locke; Bentham; Hegel). But once charted, the provenance of the fourth approach is equally impressive; theorists who have approached property rights in this spirit include Jefferson, the early Marx, the Legal Realists, and the various proponents (ancient and modern) of classical republicanism. It lacks only a label to give it credibility. For that purpose, Greg Alexander offers "proprietarian" theory; my own preference is for "social-planning theory."

To be sure, the boundaries between these four approaches are far from precise. With a little effort, they can be shown to blur. For example, as Alan Ryan has shown, much of Locke’s labor-desert argument depends upon recognition of the social advantages of inducing people to labor – and thus incorporates a utilitarian theme. Similarly, while the distinction between the personality and social-planning theories is clear enough in the abstract (the former urges the selection of property rights that help fulfill fundamental individual needs, while the latter seeks to promote a just and attractive culture), the examples of civic virtue and classical republicanism -- as well as many of the issues discussed in the following section -- suggest that they sometimes overlap in practice.

It is not my objective here to sharpen or defend those boundaries. (My sense, in general, is that the four perspectives, though not wholly autonomous, are useful as ideal types – but I will not undertake now to defend that claim.) Rather, the purpose of the foregoing quick sketch of the principal property theories has been to identify – by contrasting it with its main rivals – the methodology that undergirds this essay. (A secondary goal of the essay is to lend some credence to the methodology by showing that it can be helpful in practice.)

B.   The Vision Thing

The fourth approach, to repeat, counsels crafting property rights so as to promote a just and attractive culture. Well, then, what are the features of a just and attractive culture? The difficulty of answering that question is, I think, the principal reason the method has not gained more adherents -- and it would be foolhardy to attempt a comprehensive response in a preface to an essay on the internet. But at least a rough sketch is essential to the argument that follows. Set forth below, in very brief form, are the components of the vision -- with emphasis (for obvious reasons) on characteristics that are related to intellectual property.

1.  A Cornucopia of Information and Ideas.  An attractive culture would be one in which citizens had access to a wide array of information, ideas, and forms of entertainment. Material of these sorts helps make life stimulating and enlivening. Access to a broad range of intellectual products is also crucial to widespread attainment of two related conditions central to most conceptions of the good life -- namely, self-determination and self-expression -- both by providing persons the materials crucial to self-construction, and by fostering a general condition of cultural diversity, which (in ways best described by Mill) enables and compels individuals to shape themselves.

2.  A Rich Artistic Tradition.  As Ronald Dworkin has persuasively argued, the more complex and resonant the shared language of a culture -- including, above all, its "vocabulary of art" -- the more opportunities it affords its members for creativity and subtlety in communication and thought. As Dworkin suggests, recognition of that fact points toward governmental polices designed to make available to the public "a rich stock of illustrative and comparative collections of art" and, more generally, to foster "a tradition of [artistic] innovation."

3.  Distributive Justice.  Specification of the ways in which wealth would distributed in a just society would take us very far afield. For present purposes, a much more modest (though not trivial) assertion should suffice: to the greatest extent possible, all persons should have access to the informational and artistic resources described above.

3.  Semiotic Democracy.  In an attractive society, all persons would be able to participate in the process of meaning-making. Instead of being merely passive consumers of cultural artifacts produced by others, they would be producers, helping to shape the world of ideas and symbols in which they live. Active engagement of this sort would help both to sustain several of the features of the good life -- e.g., meaningful work and self-determination -- and to further foster cultural diversity.

4.  Sociability.  Self-determination does not imply radical individualism; on the contrary, it points toward a society rich in opportunities for community. To be willing and able to avail oneself of a range of life choices, one much have a secure sense of self and a capacity for reflection -- attributes most likely to be found in persons grounded in "communities of memory." Moreover, persons' capacity to construct rewarding lives will be enhanced if they have access to a variety of "constitutive" groups.

5.  Respect.  Semiotic democracy does not imply that persons should be free to manipulate the creations of others without any restraints whatsoever. Appreciation of the extent to which self-expression is often a form of self-creation should make people respectful of others' work.

There are tensions among some of the various features just canvassed -- for example, between the value of self-expression and the value of respect. But for the most part, I contend, they hang together. They reinforce one another and (if elaborated substantially) would together constitute a coherent picture of an attractive society. Substantiation of that bald assertion is plainly beyond the scope of this essay. But my intention is to offer, not a list of ideals that pull in inconsistent directions, but an integrated vision.

Now, having blithely taken positions on some of the burning questions of moral and political philosophy, I hasten to escape the ensuing conflagration by turning my attention to a specific set of problems -- namely, the content of the rules that should govern nonpermissive uses of material available in cyberspace.


II. Troubles with the Existing Options
The large majority of proposals for shaping intellectual-property law as applied to the internet take one or the other of two forms. Proposals of the first type urge lawmakers to tighten up the copyright regime, giving the creators of original forms of expression effective protection against cyberspace "piracy." For example, they commonly advocate more generous interpretations of the terms "copying" and "distribution" (thereby expanding copyright owners' ability to control the manner in which their works are used); increasing the exposure of internet service providers for carrying infringing material; constriction of the kinds of uses of copyrighted works privileged by the fair-use doctrine; and reinforcement of copyright owners' ability to employ technological aids (encryption, digital watermarks, etc.) to discourage infringing behavior. The document that best exemplifies this set of attitudes is, of course, the "White Paper," but a wide array of commentators have taken similar positions.

Proposals of the second type claim that tightening up the copyright regime will seriously threaten the potential benefits of the internet. Certainly the entitlements of copyright owners should not be expanded; most likely, they should be limited. Thus, for example, commentators in this camp typically urge Congress: to make clear that the temporary retention of a digital work in the memory of a computer should not be deemed "copying"; to curtail the potential liability of internet service providers for either direct or contributory copyright infringement; and to expand (e.g., through generous interpretation of the fair-use doctrine) consumers' rights to "browse" material on the internet. Some commentators go further, insisting that the net should be deemed a "copyright-free zone." The most prominent and politically viable legislative proposal of this general sort is the Digital Era Copyright Enhancement Act.

Neither of these strategies seems likely to cultivate the sort of culture described in the preceding section. The defects of the first approach should by now be familiar: It would limit the ability of authors and artists to mine the stock of ideas developed by others and thus would ultimately limit the menu of intellectual products available to all of us. It would sharply curtail the ability of persons having access to the internet to engage creatively with works produced by others, thus narrowing the potentially huge opportunities for semiotic democracy created by the internet. Effective enforcement of such a regime would entail enormous transaction costs -- not merely the social costs of detecting and prosecuting violations, but also the costs (borne by law-abiding creators) of assembling the myriad array of permissions necessary before one could make use of internet material. Alternatively, the strongly anarchic culture of the internet, combined with the ingenuity of many of its participants, might well make effective enforcement of such a regime impossible.

The potential defects of the second approach are perhaps less fundamental but are still substantial. Most importantly, a regime of the second sort would make it more difficult for creators to make money from internet consumers. The proponents of the White Paper have exaggerated the harms suffered by copyright owners as a result of internet "piracy," but they are correct that nonpermissive internet copying of copyrighted material is currently very common, and that the sanctions against it are largely ineffective. That circumstance certainly deters producers from making their material available on the net, thereby diminishing the potential advantages of the medium. Even more seriously, if potential producers of copyrighted material fear that their works will be "posted" without their permission -- and that thereafter those works can be copied with impunity -- they may deterred from creating the works in the first instance.

Finally, the relaxation of copyright protection contemplated by the second strategy increases the chances that material on the internet will be distorted or manipulated in ways threatening to the personalities of their creators. Worrisome stories of conduct of this sort are beginning to multiply. We may well tolerate or even applaud -- as attractive forms of self-expression and semiotic democracy -- the nonpermissive production and dissemination of "alternative Barbies" (e.g., "Possessed Barbie"; "Fat and Ugly Barbie"; and "'Mentally Challenged' Barbie") and even the appropriation for personal homepages of Gary Larson's cartoons. But we will not be so happy when we begin to see on the net analogues to Time Magazine's deliberate distortion of O.J. Simpson's mug shot to make him appear blacker and more sinister or the erotic animation of Frederick Hart's sculpture, "Ex Nihilo," in the movie, "Devil's Advocate." If the internet becomes -- in law or in fact -- a "copyright-free zone," we may need to find some other way of preventing such abuses.


III. An Alternative Regime

What system of rules would work better? We can’t be sure. The internet is changing very fast; we can’t be certain what it will look like in a decade or even a year. For that reason, I agree wholeheartedly with those commentators who urge lawmakers to be cautious and not try to impose a permanent, comprehensive regulatory regime on this protean medium.

Caution is also consistent with the methodology advocated in this essay. The vision outlined in section I is nothing more than a sketch -- or, to change metaphors, merely one contribution to an ongoing conversation about the sort of society we wish to live in. The internet is a potentially revolutionary medium -- socially, economically, and politically. Engagement in and with it is likely to alter our values. It is bound to change our senses of how we might implement our existing ideals. And it may well alter the values themselves. We should be open to such possibilities -- and should not foreclose them through premature efforts to impose order on the system.

But being cautious does not mean doing nothing. If we can nudge the system in more attractive directions -- or prevent it from drifting in pernicious directions -- we should do so, always leaving open the possibility that whatever rules we adopt will have to be modified soon. In that spirit, I propose that we move toward a regulatory regime centered on the following principles:

Because items 1 and 3 of this composite proposal have already been the subjects of intense and thorough debate, I will say nothing whatsoever about them here. Items 2 and 4 have received less attention; consequently, I will address them briefly. Most of my energy in the remainder of this essay will be devoted to item 5 -- the portion of the proposal I regard as (more or less) original.
Moral Rights

An artist's "moral rights" are conventionally understood to include the following entitlements: (a) a "right of integrity" (a right not to have one's creations mutilated or destroyed); (b) a "right of attribution" (encompassing the rights to be given credit for one's work, to publish anonymously or pseudononymously, and not to be given credit for a work one did not create); (c) a "right of disclosure" (the right to determine when and how one's work is first released to the public); (d) a "right of withdrawal" (the authority to remove one's works from public circulation -- usually understood to carry with it a duty to indemnify the persons from whose possession it is withdrawn); and (e) a "droit de suite" (the right to collect resale royalties). No legal system currently protects fully all of these entitlements, but European regimes typically shield a much larger subset of them than state or federal law in the United States.

Should entitlements of these sorts be protected on the internet? Entitlement (c), the "right of disclosure," seems important for several reasons: It is closely connected with creators' interests in privacy and in controlling the faces they present to the world. Lack of protection for this right would distort the creative process -- for example, by making creators unduly secretive in order to shield from premature release embryonic forms of their works. Last but not least, recognition of this right is essential to protect a creators' ability to demand compensation from users of their work -- of which much more will be said below.

Entitlement (b) -- the "right of attribution" -- seems worthy of protection for a different reason: Permitting an author both to claim credit for work he has produced and to avoid being credited with work he has not produced seems central to the ideal of respect identified in Section I. Many of the same intuitions that underlie our understandings and customary practices concerning plagiarism also rightly make us cringe at the notion that someone could make a copy of an artifact I had posted on the web, copy it, and recirculate it under his own name. Equally worrisome is the notion that someone could copy one of my works, modify it substantially, and then recirculate it with my name still attached to it. If (as seems likely) the largely extralegal sanctions that limit the incidence of plagiarism in other media will have little grip on the internet, we should be chary of curtailing copyright protection so far as to remove all disincentives to engage in such behavior.

A firm defense of moral rights would go further. Shouldn't creators be able to object when their works are mutilated and then recirculated (even without their names attached)? If you have come to regret a work you posted on the net, shouldn't you be able to withdraw it? Perhaps, but the benefits secured through the protection of such rights would be swamped by the concomitant threats to other aspects of the society we wish to promote. Specifically, the resultant curtailment of opportunities for self-expression and semiotic democracy would be severe.

Protection of the right of attribution, fortunately, would have few side-effects of this sort. Little would be lost and much would be gained by requiring net users, when they copied substantial portions of a work, to leave the name of its creator on it. But what if they modified the work sufficiently to make the creator regret the retention of his name? The appropriate norm in that context is less obvious, but the following might work: If person A creates a work, posts a copy on the internet, and indicates in the document itself the URL where it may be found, and person B then modifies the work and makes it available on the net in modified form (either in isolation or as a part of some composite work), then B must not remove A's URL -- i.e., A's indication of a site where an unadulterated version of the work may be found. It would then be A's responsibility to maintain that site.

What would be the sanctions for violations of these norms? Again, the answer is not obvious. The simplest solution might be to preserve for these purposes current copyright law. In other words, contravention of the first of the rules just mentioned would be deemed to violate section 106(1) of the Copyright Act, which protects the owner's exclusive right "to reproduce the copyrighted work in copies," while contravention of the second norm would be deemed to violate 106(2), which protects the owner's right "to prepare derivative works." But that solution presumes that some effective sanction is available for internet copyright infringement, which is doubtful at best. More work plainly must be done on the question of how to give this proposed norm bite.

Discussion of the "droit de suite" is postponed -- for reasons that will become apparent -- to section IV, infra.


Framing, Linking, and Caching

One of the ways in which producers (and compilers) of informational products have sought to make money on the internet has been through the sale of advertisements. Companies pay for the right to place advertisements on the producers' homepages. In the simplest form of this strategy, newspaper N creates a website that functions as an index to all of N's services. Links on the website will, when activated, take users to other sites created by N, which contain individual articles. On the primary or index page, N places advertisements. Internet surfers who visit the site in the traditional fashion go first to the primary page, see the advertisements, from which they are referred to advertisement-free individual stories. A more complex version of the same strategy entails posting advertisements, not merely on the central, index page, but in a frame that surrounds the textual material in all subordinate pages as well.

At least three sorts of activities threaten the effectiveness of these strategies. First, X -- a rival of N or simply a party unrelated to N -- can establish in its own homepage links to subordinate pages in N's system. Internet users who gain access to N's system through X's homepage rather than through N's homepage thus miss the first wave of N's advertisements. Second, X may go further, placing advertisements in a frame around its own homepage -- a frame that obscures comparable advertising frames on N's subordinate pages when users link to them. Third, X may organize its system in such a way that it "caches" for substantial periods of time N's homepage -- in other words, stores N's page on X's system. The result is that there will a delay between the time when N changes its advertisements and the time when those changes appear on the version of N's page that users see when they gain access to it through X's page.

N might invoke at least two doctrines in an effort to halt these practices. First, each of these activities might be characterized as "copying" (at least for brief periods of time in the memory of a computer) without permission N's copyrighted material -- and thus deemed to violate the Copyright Act. Second, N might argue that X is "misappropriating" the "hot news" contained in the articles -- which N had gathered through the expenditures of substantial labor and money -- in violation of state unfair-competition law.

Should N prevail under either of these theories? We are unlikely to answer that question sensibly by extrapolating from the ways in which copyright law and misappropriation doctrine have been applied in other contexts. (This is especially true with regard to misappropriation, which is a notoriously inconsistent and unpredictable field.) A much more promising strategy would ask whether application of these theories would be likely to promote the set of cultural conditions sketched in part I.

Because all three of the activities described above would reduce N's revenue (and thus erode N's incentive to construct homepages of this sort in the first instance) we should be wary of them -- for the obvious reasons that they would reduce the production of informational works. Unless the availability of these options served other, more important ends, we should interpret one or another of the available doctrines to proscribe them.

Do these activities serve other, important ends? With respect to "deep linking" (the first of the activities described above), the answer would seem to be yes. Deep links have two valuable functions: they make it much easier for users of the net to gain access to the sort of material they want and need; and the act of constructing them is an important way which people express themselves and help take control of the meaning of the net. Deep linking, consequently, should be permitted.

With regard to "framing," however, the answer would seem to be no. Neither self-expression nor semiotic democracy would be materially advanced by permitting deep linkers to obscure with their own advertising frames the advertisements on the pages to which they link. It is true that a ban on framing would reduce the incentives for people to set up sites like X's, which in turn would diminish to some degree the ease with which surfers could move around the internet. But this effect seems less substantial and important than the alternative: eroding N's incentive to create its site in the first instance. So framing should probably be proscribed.

"Caching" is harder to assess, but the balance seems to tilt slightly in favor of permitting the activity -- partly because of its advantages from users' standpoints (it dramatically reduces the time that a visitor to X's site must wait before seeing N's site) and partly because the threat to N's revenues (and thus N's incentives) seems modest.

It should be emphasized that the judgments ventured in the preceding three paragraphs are tentative, and technological innovations might trump them altogether. They are offered in the hope of modeling a method for addressing such questions, not as definitive answers.



A growing number of creators and purveyors of intellectual products have despaired of protecting their works through copyright law. It is simply too difficult, they think, to identify and prosecute (or recover damages from) infringers. They are turning instead to a combination of two strategies. First, they are demanding from consumers of their products agreements that those products will only be used in certain ways. To date, the most common examples of such agreements have been so-called "shrinkwrap licenses" through which purchasers of software typically consent, among other things, not to make more than a limited number of copies of the program in question, to abide by the manufacturers' warranty systems, etc. But similar contracts are beginning to appear in other contexts as well.

The second approach (sometimes used as an alternative to, sometimes to supplement the contractual strategy) has been to bury in their products devices that limit the ways in which consumers can use them. Devices of this sort include: "scramblers" that render copies made without permission unusable; combinations of electronic components designed to discourage "serial" copying; "crytolopes" and "trusted systems" that prevent anyone who does not have a "key" supplied by the producer from gaining access to the products; gizmos that prevent a product from being used more than a prescribed number of times or for more than a prescribed period of time; and gizmos that alert the producer each time a product is used, thus enabling the producer to charge consumers based on usage. We can expect to see many more such devices in the near future.

Neither of these techniques, it should be emphasized, are the exclusive province of copyright owners. The producers of kinds of intellectual products that are not eligible for copyright protection – such as databases that fail to satisfy the Feist standard of originality – have even greater reason to avail themselves of these options.

Should these tactics be permissible? Should courts enforce shrinkwrap licenses and similar contracts? (For example, should the ALI and state legislatures adopt the proposed UCC section 2-2203?) Should companies be free to use whatever encryption devices they please? Should their abilities to employ such devices be enhanced through legislation -- either through prohibitions on the manufacture of "black-boxes" or through requirements that consumer electronic products contain devices that facilitate encryption or discourage copying?

A person primarily concerned about the erosion of incentives for creativity on the net will be inclined to answer yes to all of these questions. The availability of such options will help to overcome the well-known public-goods problem that threatens to curtail the production of materials from which we all benefit. If potential producers of intellectual products are told that they cannot prevent the first purchasers of their products from making them available for free (or very cheaply) to all other potential purchasers, they will not produce them at all, thereby depriving society at large of the benefits of their genius. Our collective interest in avoiding this scenario is, of course, the classic utilitarian defense of copyright law (and intellectual property law in general). If copyright law is incapable any longer of performing this role vis-à-vis works on the internet, contracts and technology would seem plausible substitutes.

The problem with the foregoing response, say the critics of these innovations, is that these tactics will enable producers to gouge consumers -- to charge for access to their works whatever the market will bear. Contracts and technology are not merely substitutes for copyright law; they will enable producers to charge more consumers more. On this point, the critics are clearly correct. To see why and how requires a brief foray into the world of microeconomics.

When the creator of an intellectual product for which there are no good substitutes (say, a novel) is awarded a copyright, she becomes a monopolist. In other words, she need no longer fear that, if she charges more for each copy of her work than the marginal cost of producing it, she will be undersold by a rival producer -- because now she (or her licensees) have the exclusive right to make copies of the work. If she wishes to maximize her profits (and, for simplicity, we will assume that that is her only goal), she will thus charge substantially more than marginal cost. If she has good information concerning the potential demand for her work, she will adopt the strategy indicated in the following graph:

By offering her books at price B, she is able to sell quantity F, yielding the profits represented by the shaded area. Should we be disturbed by the fact that she is able, in this fashion, to make so much money? Not at all. The whole point of intellectual-property protection (viewed, for the time being, from a utilitarian vantage point) is, by holding out to potential creators the chance of earning profits of this sort, to induce them to produce socially valuable things they would otherwise not produce. But adoption of this strategy is not costless. More specifically, it alters the fortunes of consumers in the fashions suggested by the following graph:

Consumers able and willing to pay more than price B for the product (i.e., consumers represented by line OF) plainly are worse off than if they had been able to obtain it for the marginal cost of producing it (price C). Put differently, their consumer surplus (the difference between the value they place on the product and the price they pay for it) has been reduced from figure ACED (rectangle 1 plus triangle 2) to figure ABD (triangle 2). More seriously, consumers represented by line FH (i.e., those who are not able and willing to pay price B) are "priced out of the market" altogether. In the vernacular of economics, the result is a "deadweight loss" in the form of a loss of potential consumer surplus represented by figure DEG (triangle 3).

Can’t our hypothetical author somehow gain access to the market represented by line FH? Isn’t there some way that she could offer her work to poorer (or less eager) consumers without foregoing the profits she makes from the eager buyers? For that matter, can’t she contrive some way to charge the very eager consumers (clustered close to the Y axis on this graph) more than price B? Fine tuning of this sort – called price discrimination – is difficult under the copyright system, primarily because of the first-sale doctrine. A marginal consumer, to whom the author sells the product at a low price, may, under current doctrine, resell his copy to an eager consumer for a higher price, thereby depriving the author of the revenue she could have received from the latter. Opportunities for arbitrage of this sort radically limit the author’s ability to differentiate among consumers. (Some degree of price discrimination is still possible – typically by segregating the market chronologically. Thus, for example, hardcover editions of novels are typically sold at high prices to eager and wealthy consumers; after the demand for the hard-cover edition has subsided, a paperback edition is made available to less eager consumers for a much lower price. More refined versions of the same technique underlie the seemingly contorted ways in which motion pictures are marketed. But the first-sale doctrine sharply limits the possibilities for non-chronological subdivisions of markets.)

If we permit our hypothetical author to limit access to her work through customized contracts and technology, her ability to engage in price discrimination will increase sharply. The primary reason is that she will be able using such systems to forbid or prevent consumers from reselling the copies they purchase. Once arbitrage has been shut down, all sorts of techniques for subdividing her market become available. She can charge businesses a high price, individual consumers a lower price, and students a still lower price. She can tie prices to the frequency with which each consumer uses the product. She can establish a system of "microcharges" – under which consumers pay a small amount for each bit of information they employ. The economic effects of such techniques are represented in the following graph:


To milk the market to best advantage, the author divides the pool of consumers into segments, and then charges the members of each group what the author thinks they are able and willing to spend. Thus, on the simplified assumptions embodied in this graph, she will charge consumers 0-1 price p, charge consumers 1-2 price q, charge consumers 2-3 price r, charge consumers 3-4 price s, and charge consumers 4-5 price t.

By engaging in price discrimination of this sort, our hypothetical author has been able to increase her monopoly profits substantially. (Compare the size of zone 1 in this graph with the size of zone 1 in the preceding graph.) Is that bad? Not necessarily. Before passing judgment, we should at least consider the impact of her marketing strategies on other parties. Notice that price discrimination has substantially reduced the consumer surplus enjoyed by wealthy and eager buyers (near the Y axis), but has made the product available to a much larger set of consumers, who are now enjoying surpluses of their own. Whether the total consumer surplus has increased or decreased is impossible to determine. But we can say with confidence that many more consumers are now benefiting from the author’s creation. To rephrase the point in terms consistent with Part I of this essay, price discrimination leads to substantial improvements in distributive justice – better approximation of the ideal of affording all persons equal access to works of the intellect.

Price discrimination has other advantages as well. Notice that triangle 3 in the last graph – representing deadweight losses caused by enabling the author to wield market power – is substantially smaller than triangle 3 in the preceding graph. Moreover, the ratio of the monopoly profits enjoyed by the author to the concomitant deadweight losses (i.e., the ration of zone 1 to triangle 3) is much larger. So what? That means, first of all, that social welfare losses have been reduced. In addition, we are getting much more bang for our buck – a much larger incentive for creative activity per unit of social cost. Such a system of rules, applied to the internet, should move us faster than a copyright-based system in the directions of an informational society and rich artistic tradition.

Finally, transaction costs are likely to be substantially lower if we permit producers to employ the contract/technology strategy rather than limiting them to the copyright. Many of the mechanisms discussed above are essentially self-enforcing; consumers are simply unable to make use of the products unless they comply with the producers' conditions. By contrast, for the reasons sketched above, the total public and private costs of effectively enforcing copyright laws on the internet would be very large. To be sure, the contract/technology regime would not be costless; to keep ahead of hackers, producers would be obliged to continue refining their information-protecting technology. But the need to innovate -- and the associated social waste -- could be much reduced through the adoption of an anti-circumvention statute of the sort recently proposed by the World Intellectual Property Organization and currently being considered by Congress.

In short, internet-related contracts and their technological supplements seem to have much to recommend them.


IV. Compulsory Terms

The considerations reviewed in the preceding section should be sufficient to establish a prima facie case for permitting producers of material on the internet to use contracts and technology to limit the ways in which consumers use their products. Unfortunately, this is not the end of the story. Given the authority to adopt such strategies, producers would be likely to use them in ways we would find less socially beneficial. A good sense of the range of conditions producers would be likely to demand from consumers can be obtained from Mark Lemley’s examination of shrinkwrap licenses. Lemley found that the licenses currently used by software manufacturers commonly contain terms of the following sorts:

    (a) Restraints on resale or rental by the consumer of his copy of the product;
    (b) Limits on the manufacturers' warranties;
    (c) Prohibitions on modifying or tampering with the product (including disassembling them or reverse engineering);
    (d) Prohibitions on uses of the product that would have been permitted by the application of the fair-use doctrine in copyright law;
    (e) Requirements that the consumer not contest the validity of the producer’s copyright or patent;
    (f) Requirements that the user pay royalties for a period longer than would be permitted by copyright or patent law.
Conditions of type (a), we have just concluded, are presumptively socially beneficial, insofar as they prevent the arbitrage that interferes with price discrimination. But some of the other conditions are troubling. Lemley's objection to contractual provisions of all of these sorts is that they would alter the careful balance struck by copyright law between competing social policies. My own view is somewhat different. For the reasons outlined in a previous article, I have less confidence that current copyright law represents an optimal compromise among pertinent social values. Consequently, I am less inclined to condemn out of hand contractual arrangements that deviate from that model. On the other hand, several of the contractual provisions catalogued above do seem to me objectionable -- because they are likely to inhibit rather than advance the social vision outlined in Part I.

Two kinds of contractual terms seem especially worrisome. First, restrictions on the authority or ability of consumers to modify the products they purchase pose serious threats to several related ideals: self-expression; semiotic democracy; and cultural diversity. We should look for ways to encourage, rather than retard, manipulation by consumers of informational products and tools.

Second, contractual restrictions on some kinds of uses of informational products traditionally privileged by the fair-use doctrine also seems highly problematic. We have a strong social interest in continuing to permit consumers to employ informational products in a variety of ways their producers commonly wish to stop -- parodying them; criticizing them; "reverse-engineering" them; etc. Many of these activities necessitate (or are facilitated by) copying significant portions of the products -- which of course would run afoul section 106 of the Copyright Act. One of the purposes of section 107 has been to authorize copying in such contexts. We do not wish to enable producers to circumvent section 107 through the use of contracts or technology.

However, not all of the contractual provisions likely to be employed by producers are subject to such objections. Indeed, not all of the activities traditionally privileged by section 107 seem crucial to shield against contractual modification. For example, it does not seem essential to our social vision that producers be forbidden to require consumers to pay when they use small portions of an informational product -- even if such small appropriations would traditionally have been privileged by the fair-use doctrine. "Microcharges" of this sort represent one way of fine-tuning the system of price discrimination -- which, for the reasons outlined above, is presumptively socially advantageous. As long as producers are willing to permit (for a fee) such uses, rather than forbid them, it is hard to see why we should object.

What about contractual provisions extending beyond the copyright term the period in which consumers are obliged to pay for internet access to works? One's first reaction to such provisions is probably that they will rarely have any practical bite -- insofar as the commercial life of the vast majority of material likely to be made available on the internet will be much shorter than the life of the author plus 50 years. No great harm, consequently, would result from permitting them. Nevertheless, such a clause seems somehow offensive -- greedy. Underlying that intuition is a serious general concern. Intellectual-property law, it is often said, deliberately offers limited rewards to authors and inventors. Our goal is to give creators enough entitlements to induce them to produce the works from which we all benefit but no more -- thus increasing the likelihood that their creations will get into the hands of consumers (at prices the consumers can afford). More precisely, our aspiration, when designing or reforming the intellectual-property system, is to increase the set of entitlements enjoyed by creators only up to the point past which the social losses caused by empowering creators to limit access to their works would exceed the social gains caused by increasing their collective output of works. We lack the information necessary to achieve this objective with any precision, but the general idea is clear enough -- and has guided the interpretation or reform of a wide variety of doctrines in the field.

This general observation has important implications for the management of internet contracts. For the reasons outlined above, permitting producers to use such contracts will usually enable them to make money from their products more effectively than they could through reliance upon copyright law -- an effect that we accept because of its potential benefits in efficiently fostering an informational society and rich artistic tradition. But the superiority in this respect of the contractual strategy reinforces the principle that producers' income-generating entitlements need not and should not be unlimited. Our aspiration, when shaping their contractual powers, should be the same as our aspiration when shaping the entitlements of copyright owners: to cut off their rights at the point beyond which social losses would exceed social gains. That point is just as difficult to identify in this context as it is in the traditional copyright context. (Perhaps more so, insofar as the social gains and losses we are comparing are no longer limited by the economic calculus that has traditionally shaped the copyright inquiry.) But the general observation can and should help guide our decisions concerning which sorts of contractual terms we wish to permit.

Fortified by this discussion, let's return to the question of provisions that permit producers to charge fees for longer than the copyright term. Considering the range of entitlements that we have so far contemplated conferring on producers and the minimal value to them of income streams longer than their lives plus fifty years, it seems plausible that we should prohibit the use of such a contractual provision. But we may wish to go much further -- to limit much more dramatically the payments producers can extract from consumers. In view of the ephemeral nature of much of the material on the internet, limiting (even much more sharply) the permissible duration of internet contracts is likely to be a clumsy or ineffective way of achieving that end. Limiting the prices producers could charge would be more effective, but would have several disadvantages: it would entail a sacrifice of many of the benefits (including distributive justice) of partial price discrimination, and it would be administratively complex and thus costly. A better strategy would be to privilege kinds of activities we consider especially socially valuable -- i.e., forbid producers from charging anything to consumers who put their products to those ends. Examples of such activities might be educational uses (broadly construed), news reporting, or scientific or medical research.

All this is, of course, highly impressionistic and generic. A great deal more work would need to be done to determine, in particular contexts, the appropriate limitations on producers' earning power and the most socially constructive way of setting those limits. My goal in this essay is merely to establish a general proposition: The same argument that supports empowering creators to use contracts and technology to charge consumer more than the marginal cost of making additional copies of their works also supports setting limits on that power -- limits that may well be tighter than the limits currently embodied in copyright law.

The method I advocate for establishing those limits should by now be apparent: compulsory terms. Producers who use contracts to condition customers' access to their works should be forbidden to include in those contracts certain provisions and should be required to include others. The same principle should apply to technological limitations on access. Persons who supply material over the internet should be permitted to employ encryption or analogous systems if and only if those systems constrict consumer access no more than would be permitted by an enforceable contract.

How should compulsory terms of these sorts be established and enforced? The answer is far from clear. Possibilities would include: (a) State courts could define such terms through the administration of ordinary contract law -- just as they have done when defining implied warranties of merchantability; (b) the ALI could provide the states guidance on this question by adopting a more refined version of the proposed UCC section 2-2203; (c) Congress could adopt the Digital Era Copyright Enhancement Act, minus the provision that would preempt all contracts that deviate from Copyright Law, plus a provision imposing mandatory terms on such contracts; (d) Congress could adopt an Anti-Circumvention Statute that proscribed only black boxes designed to evade technologies that conformed to the guideline stated in the preceding paragraph; and/or (e) Congress could go further and forbid the use of technologies inconsistent with that guideline -- as it has forbidden the use of other sorts of encryption. Choices among these various options involve strategic and institutional considerations too complex to explore here.



There remains to be considered only the predictable protests of the producers of informational products. We created this material, they will say. We could refuse to let anyone have access to it. Why shouldn't we be able to set as we wish the terms on which consumers will be afforded access to it? More broadly, why should we be forced to forego income in order to foster your vision of a just society; at a minimum, shouldn't such burdens be spread to the society at large?

There are two, related responses to this claim. Both are familiar in other contexts, but they need to be harnessed in this new domain.

First, compulsory terms of the sort advocated in this essay are ubiquitous in American law. Reference has already been made to implied warranties of merchantability. Other examples include: implied warranties of habitability in residential leaseholds; rent control; minimum-wage laws; maximum-hours legislation; bans on child labor; compulsory terms in insurance policies; manufacturers' strict liability for injuries caused by their products; and protections for mortgagors and the occupants of migrant labor camps. In all of these situations, the parties are not obliged to enter into contractual relations. (The owner of a residential building is not obliged to rent out his apartments; a lawnmower manufacturer is not obliged to sell lawnmowers; an employer is not obliged to hire anyone.) But if they choose to enter into such relations, they must incorporate in their agreements the terms in question, and courts will refuse to honor even explicit, bargained-for, and compensated waivers of those terms. In short, the situation in which this essay would place the producers of informational products is not anomalous; it is routine.

Analogues to the kinds of restrictions on encryption technology advocated in this essay are equally easy to find. In countless situations, we compel persons who supply certain commodities to the public to include specified features. Seatbelts, airbags, catalytic converters, child-proof caps, warning labels (on cigarettes and drugs), construction features specified by building codes or the ADA, safety features in electrical appliances -- the list is endless. The persons supposedly benefited by such features sometimes would happily do without them, but we refuse to allow manufacturers to omit them, and we usually forbid purchasers to disable them.

Compulsory terms of these various sorts are typically justified on one or more of three grounds. First, they are sometimes deemed necessary to avoid negative externalities. Left to their own devices, the contracting parties would likely enter into agreements that harmed third parties. To prevent those injuries, the contracting parties are obliged to accept specified terms. Second, compulsory terms are sometimes justified on the ground that they redistribute wealth from poorer to richer people. Nonwaivable terms in residential leaseholds, for example, are said to redistribute wealth from (richer) landlords to (poorer) tenants. Whether they do in fact have such an effect remains a hotly contested issue, but most (not all) participants in the debate agree that if they did so, they would be defensible. Finally, compulsory terms are sometimes forthrightly justified as exercises of legitimate forms of paternalism. We don't allow the beneficiaries of these provisions to waive them, it is said, because we know better than they do what is in their best interest -- because they have poor information, or because they are prone to making hasty decisions they will later regret, or because they have impoverished conceptions of human flourishing. For obvious reasons, arguments of this third sort tend to be the most controversial.

The arguments deployed in this essay in support of compulsory terms in internet-related contracts include variants of all three of these general defenses. First, I have suggested how, if the producers and consumers of internet products are left to their own devices, they will fail to take adequately into account the interests of their fellow citizens -- for example, the advantages to their fellow citizens of cultural diversity and a rich artistic tradition. The proper response: use compulsory terms to force the contracting parties to accommodate those interests. Second, an unusual variant of the distributive justice argument runs through the essay. Permitting internet producers to engage in price discrimination, it has been shown, will help to redistribute wealth from rich to poor consumers -- or (to put the point in a less inflammatory form) will help advance the ideal of affording all consumers equal access to informational products. Combining opportunities for price discrimination with compulsory terms, I have claimed, will have even better distributive effects -- by compelling producers to make their works available (typically for free) to persons to whom the producers would be inclined to deny access altogether. Finally, the essay is riddled with arguments that implicate paternalism. Americans would be better off, I have argued, if they lived in a more culturally diverse and artistically rich society, in which they had greater opportunities to participate in the shaping of their cultural environment. They might well be inclined to waive contractual provisions designed to foster such a society, but we should not let them. A defense of that sort has both the strengths and the weaknesses of paternalistic arguments in other settings.