a continuation of High Technology Law Journal
Volume 12: Issue 1 (Spring 1997)

ARTICLE

COPYRIGHT POLICY AND THE LIMITS OF FREEDOM OF CONTRACT

NIVA ELKIN-KOREN



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.

A. Defining the Bargain

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-licensed 59 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. 60
While 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?

The question of whether copyright owners may expand their copyrights by contracts must involve not only the rights of owners but also those of users. Limiting the legal power of copyright owners to contract around some copyright provisions correspondingly restricts the power of users to contract away their fair use rights granted under copyright law. It makes users’ rights, at least to some extent, inalienable. Is such inalienability justifiable?

Freedom of contract suggests that parties should be allowed to bargain freely over their rights. It assumes that assenting parties who voluntarily enter a private exchange have reached a bargain that makes them both better off, or else they would not have entered into it. 64 In other words, if a copyright owner and a user agree to restrict the user’s privileges, the presumption is that such transactions are pareto superior. 65 Users who place high value on receiving the information will be willing to accept restrictions on its use.

That conclusion holds true, of course, only in the absence of any market failure that would undermine the fundamental propositions on which the freedom of contract rests (for instance, the proposition that both parties acted voluntarily or that they were fully informed). In the absence of a perfect market, limitations on the parties’ abilities to engage freely in transactions may be a more effective way of achieving economic efficiency. 66 Such market imperfections, and the resulting need for limitations, may occur when copyright owners use contractual provisions to expand their rights under copyright law. 67

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. 69
However, 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. This section suggests that even though users may agree to restrict their use privileges in return for access to information, such restrictions may impose costs on society as a whole. Such costs may not be internalized by parties to any specific transaction, and thus, the implementation of use restrictions across the board may affect the public at large. These costs may impair the balanced control over information, previously imposed by copyright law, which is essential for its production and dissemination.

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 libraries 78), 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. Making some information freely available to the public is essential for stimulating further creation. We refine our ideas about the world through interactions with others’ ideas, feelings, beliefs, and discoveries. A licensing regime will not facilitate random access to information as well as the existing copyright regime. If owners are able to restrict any use of information, they could attempt to charge for each and every use of the work. If information owners are able to charge for every conceivable use of their works, fewer users will be able to afford to purchase such access to information, and this cost barrier may limit opportunities for further development. A regime that allows owners to charge for any such interaction is detrimental to any vision of learning and growth. Even if price discrimination is available, many of the acts we currently do for free (and indeed take for granted), such as reading a book borrowed from the public library, will be subject to a licensing fee.

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. The power to control every conceivable use of information places a privilege never enjoyed by the public under private control. It therefore enhances the ability of owners to exclude access to cultural forms and to limit access to information on the basis of economic power. Information in the broad sense of the term—comprising data, books, movies, music—constitutes culture. Depriving access to cultural artifacts may have political consequences. It may severely restrict the ability of people to react and respond to cultural symbols. In addition, it may hamper the ability of people to participate in political deliberations and social dialogue.

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.

V. CONCLUSION

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.


Footnotes

© 1997 Niva Elkin-Koren.

. 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.
 

57. That is, of course, unless another law provides the owner with a monopoly over the use of a recipe (such as patent law).

58. For a discussion of this distinction, see L. R AY PATTERSON & STANLEY W. L INDBERG, THE NATURE OF C OPYRIGHT, A LAW OF USERS' R IGHTS 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.

59. "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.

60. ProCD I, 908 F. Supp. at 645.

61. See supra note 49.

62. ProCD II, 86 F.3d at 1450.

63. Compare this to the analysis of the district court in the ProCDI 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.

64. See Trebilcock, supra note 56 , at 6.

65. A transaction is considered pareto superior if it makes one party better off while making no other worse off.

66. See Guido Calabresi & Douglas Melamed, Property Rules, Liability Rules, and Inalienability: One View of the Cathedral, 85 HARV. L. R EV. 1089, 1111 (1972).

67. Several commentators have attempted to suggest criteria for determining the validity of use restrictions in shrinkwrap licenses. See , e.g., RAYMOND T. N IMMER, THE LAW OF C OMPUTER TECHNOLOGY : RIGHTS, L ICENSES, LIABILITIES ¶ 7.24 (1992) (the validity of restraints should be determined in light of the entire transaction) Maureen A. O'Rourke, Drawing the Boundary Between Copyright and Contract: Copyright Preemption of Software License Terms, 45 DUKE L.J. 479, 545-51 (1995) (antitrust considerations).

68. ProCD II, 86 F.3d at 1455.

69. Id. at 1453.

70. Id. at 1450.

71. See Feist Publications, Inc. v. Rural Tel. Serv. Co. Inc., 499 U.S. 340, 363-64 (1991).

72. 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.

73. See, e.g., Landes & Posner, supra note 27, at 328.

74. 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.

75. 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).

76. See Landes & Posner, supra note 27, at 359.

77. "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.

78. See Robert Berring, Chaos, Cyberspace and Tradition: Legal Information Transmogrified, 12 BERKELEY T ECH. L.J. 189, 203-07 (1997) (discussing the possible decline of libraries in response to the wide availability of on-line information).

79. But see Eric Schlachter, The Intellectual Property Renaissance in Cyberspace: Why Copyright Law Could Be Unimportant, 12 BERKELEY T ECH. L.J. 16, 21-31 (1997) (discussing on-line distribution methods that give large amounts of information free to all users).

80. See Samuelson, supra note 3 , at 60-61 (suggesting that technological and contractual fencing may replace copyright protection for intellectual property).