* Edith Kinney Gaylord Presidential Professor, University of Oklahoma College of Law, Norman, Oklahoma. This paper is based on a presentation at the Boston College Law School Symposium on Intellectual Property, E-commerce, and the Internet, October 18–19, 2002. I am grateful for the comments of the symposium participants, particularly those of Graeme Dinwoodie, who served as the principal commentator. I would also like to thank Maureen O’Rourke for comments on an earlier draft of this article. Jeb Boatman and Julie Short provided valuable research assistance.
1 Information technology has radically altered traditional models of production, management, and governance in firms. The simultaneous elimination of distance and time as costs or barriers to the movement of factors of production has facilitated the expansion of businesses across geographic borders as well as less dependence on government actors as indispensable agents in the creation of global markets. See Ruth Gana Okediji, Copyright and Public Welfare in Global Perspective, 7 Ind. J. Global Legal Stud. 117, 117–18 (1999) (describing features of globalization); see also id., at 117 n.2. Fundamentally, the phenomenon of globalization reflects a transition from land, capital, labor, and entrepreneur as basic production factors to information, technology, and skilled labor. Consequently, multinational corporate alliances have assumed increasingly powerful roles, both formal and informal, that largely determine the substance of legal regimes that regulate the global economy. The internationalization of intellectual property is paradigmatic of this phenomenon, but the influence of multinational corporations in other regulatory areas is evident in both national and international settings. See, e.g., Jeff Gerth, Where Business Rules: Forging Global Regulations That Put Industry First, N.Y. Times, Jan. 9, 1998, at D2. On the “public” law side, there has also been a significant rise in the number and influence of nongovernmental organizations. For an examination of the role of non-state actors in law-making processes in the international arena, see Peter J. Spiro, New Players on the International Stage, 2 Hofstra L. & Pol’y Symp. 19, 24–36 (1998) and Peter J. Spiro, New Global Potentates: Nongovernmental Organizations and the “Unregulated” Marketplace, 18 Cardozo L. Rev. 957, 959–62 (1996).
2 In this Article, the terms “Internet” and “cyberspace” are used interchangeably.
3 Some scholars have expressed skepticism about the singularity of the Internet and its effects on traditional regulatory forms, particularly in light of other revolutionary innovations. For a general critique of the idea of a specific “law of cyberspace,” see generally Frank H. Easterbrook, Cyberspace and the Law of the Horse, 1996 U. Chi. Legal F. 207. For an international law perspective, discussing claims that the Internet is ungovernable by any single nation-state, see generally Jack L. Goldsmith, Against Cyberanarchy, 65 U. Chi. L. Rev. 1199 (1998) (arguing that the Internet does not present any issues that international law has not hitherto successfully confronted). See also Robert J. Gordon, Does the “New Economy” Measure up to the Great Inventions of the Past?, J. Econ. Persp., Fall 2002, at 49, 66–72 (expressing skepticism about the economic impact of the Internet).
4 See Michael Spence, Signaling in Retrospect and the Informational Structure of Markets, 92 Am. Econ. Rev. 434, 454 (2002) (noting that the Internet has led to some productivity gains due to shifts in market parameters, particularly in the area of transaction costs and suggesting a need to study some of these shifts). Several empirical and theoretical studies of the relationship between information technology and productivity exist. See, e.g., Erik Brynjolfsson & Lorin M. Hitt, Beyond Computation: Information Technology, Organizational Transformation and Business Performance, J. Econ. Persp., Fall 2000, at 23, 30–45; David Lucking-Reiley & Daniel Spulber, Business-to-Business Electronic Commerce, J. Econ. Persp., Fall 2001, at 55, 56–62 (examining areas of expected increase in productivity gains in business-to-business e-commerce); Stephen D. Oliner & Daniel E. Sichel, The Resurgence of Growth in the Late 1990’s: Is Information Technology the Story?, J. Econ. Persp., Fall 2000, at 3, 9–21. Much of the current literature on the effect of the Internet and information technology on the market relies on Coase’s seminal work on the nature of the firm. See Ronald H. Coase, The Nature of the Firm, 4 Economica 386 (1937); cf. Gordon, supra note 3, at 54–57 (arguing that the effect of information technology is not as significant for multifactor productivity growth and may account for only twelve percent of economic activity).
5 For discussions concerning the influence of information economics, see generally Drew Fudenberg & Jean Tirole, Game Theory (1991); Jack Hirshleifer & John G. Riley, The Analytics of Uncertainty and Information (1992); John G. Riley, Silver Signals: Twenty-Five Years of Screening and Signaling, 39 J. Econ. Literature 432 (2001). In my recent work, I have sought to introduce insights from information economics to explain and analyze particular concerns in international intellectual property regulation. See generally Ruth L. Okediji, Rules of Power in an Age of Law: Process Opportunism and TRIPs Dispute Settlement, in Handbook of International Trade Law: Economic and Legal Analysis of Laws and Institutions (Kwan C. Choi & James Hartigan ed., forthcoming 2004); Ruth L. Okediji, A Cartography of WTO TRIPs Dispute Settlement and the Future of Intellectual Property Policy (March 15, 2002) (unpublished manuscript, on file with author). Much of my knowledge and understanding has come from the work of several economists, particularly that of Professor Joseph E. Stiglitz. Some articles with interesting implications for intellectual property rights include the following: Joseph E. Stiglitz, Information, Screening and Welfare, in Bayesian Models in Economic Theory 209 (M. Boyer & R. Kihlstrom eds., 1984); Barry J. Nalebuff & Joseph E. Stiglitz, Prizes and Incentives: Towards a General Theory of Compensation and Competition, 14 Bell J. Econ. 21 (1983); Joseph E. Stiglitz et al., Privatization, Information and Incentives, 6 J. of Pol’y Analysis and Mgmt. 567 (1987); Joseph E. Stiglitz, Information and Economic Analysis: A Perspective, 95 Econ. J. 21 (1985); Joseph E. Stiglitz, Incentives, Risk and Information: Notes Toward a Theory of Hierarchy, 6 Bell J. Econ. 552 (1975). For a review essay of the contributions of information economics, see Joseph E. Stiglitz, Information and the Change in the Paradigm in Economics, 92 Am. Econ. Rev. 460 (2002) [hereinafter Stiglitz, Paradigm in Economics].
6 See Spence, supra note 4, at 453–54 (noting that the Internet has changed the informational structure of markets and identifying forces behind those changes).
7 I use the terminology “markets” to denote both formal transactions markets and what I call “interaction” markets—that is chat rooms, bulletin boards, and other closed areas where individuals engage primarily in social or political exchanges.
8 See, e.g., Julie E. Cohen, Lochner in Cyberspace: The New Economic Orthodoxy of “Rights Management,” 97 Mich. L. Rev. 462, 480–515 (1998); I. Trotter Hardy, Property (and Copyright) in Cyberspace, 1996 U. Chi. Legal F. 217, 258–60; David R. Johnson & David Post, Law and Borders—The Rise of Law in Cyberspace, 48 Stan. L. Rev. 1367, 1400–02 (1996); Lawrence Lessig, The Zones of Cyberspace, 48 Stan. L. Rev. 1403, 1403–11 (1996); Maureen A. O’Rourke, Fencing Cyberspace: Drawing Borders in a Virtual World, 82 Minn. L. Rev. 609, 640–86 (1998).
9 See Johnson & Post, supra note 8, at 1390–91.
10 See id. at 1393–400; cf. Lessig, supra note 8, at 1403 (criticizing the idea that cyberspace is distinct from real space).
11 Richard A. Posner, Economic Analysis of Law 36–45 (5th ed. 1998); Ronald Coase, The Problem of Social Cost, 3 J. Law & Econ. 1, 19–28 (1960); Harold Demsetz, Toward a Theory of Property Rights, 57 Am. Econ. Rev. 347, 347–59 (1967).
12 There is an extensive body of literature dealing with the different justifications for intellectual property. In the area of copyright particularly, several scholars have explored cultural, social, and economic justifications for such protection. See generally, Wendy J. Gordon, A Property Right in Self-Expression: Equality and Individualism in the Natural Law of Intellectual Property, 102 Yale L.J. 1533 (1993); Hardy, supra note 8; Jessica Litman, The Public Domain, 39 Emory L.J. 965 (1990); Neil Weinstock Netanel, Copyright and a Democratic Civil Society, 106 Yale L.J. 283 (1996).
13 U.S. Const. art. I, § 1, cl. 8; see also Mazer v. Stein, 347 U.S. 201, 219 (1954) (“The economic philosophy behind the clause empowering Congress to grant patents and copyrights is the conviction that the encouragement of individual effort by personal gain is the best way to advance public welfare through the talents of authors and inventors in ‘Science and useful Arts.’”); H.R. Rep. No. 2222, 60th Cong., 2d Sess., 7 (1909) (“The enactment of copyright legislation by Congress under the terms of the Constitution is not based on any natural right that the author has in his writing . . . but upon the ground that the welfare of the public will be served and the progress of science and the useful arts will be promoted by securing to authors for limited periods the exclusive rights to their writings.”).
14 See Dan L. Burk, Muddy Rules for Cyberspace, 21 Cardozo L. Rev. 121, 121–27 (1999) (arguing that indeterminate entitlements can promote efficient transactions in cyberspace).
15 See, e.g., Tom W. Bell, Fair Use v. Fared Use: The Impact of Automated Rights Management on Copyright’s Fair Use Doctrine, 76 N.C. L. Rev. 557(1998); Hardy, supra note 8; I. Trotter Hardy, The Proper Legal Regime for “Cyberspace”, 55 U. Pitt. L. Rev. 993 (1994); Pamela Samuelson, Intellectual Property and the Digital Economy: Why the Anti-Circumvention Regulations Need to Be Revised, 14 Berkeley Tech. L.J. 519 (1999). Even in the off-line world the relationship between first and second comers is fraught with considerable tension and uncertainty as to the nature of the entitlements that legal rules reserve to either party. See Burk, supra note 14, at 121–27 (suggesting that the on-line world would benefit from the range of entitlements—from complete and strong to divided and weak—that currently exist in real property).
16 See Burk, supra note 14, at 143–44; Glynn S. Lunney, Jr., Reexamining Copyright’s Incentives-Access Paradigm, 49 Vand. L. Rev. 483 (1996); Netanel, supra note 12. In the vintage utilitarian justification, the grant of proprietary rights is designed to “promote” progress. An instrumentalist view of “progress” would include both access to and use of protected works. See Lunney, supra; Ruth Okediji, Givers, Takers, and Other Kinds of Users: A Fair Use Doctrine for Cyberspace, 53 Fla. L. Rev. 107, 117 (2001). The objectives of the TRIPs Agreement reflect similar public policy ideals. See General Agreement on Tariffs and Trade—Multilateral Trade Negotiations (The Uraguay Round): Agreement on Trade-Related Aspects of Intellectual Property Rights, Including Trade in Counterfeit Goods, Dec. 15, 1993, 33 I.L.M. 81, 84 (“taking into account the need to promote effective and adequate protection of intellectual property rights, and to ensure that measures and procedures to enforce intellectual property rights do not themselves become barriers to legitimate trade . . . .”).
A venerable body of literature has examined the language and intent of the intellectual property clause. What seems relatively uncontroversial is that intellectual property rights exist to benefit society in a number of different ways. See supra note 12 and accompanying text.
17 Most students of intellectual property are familiar with the classic trade-offs in the intellectual property bargain: exclusive rights are granted in exchange for disclosure. The economic and administrative costs of the system are a trade-off to ensure optimal levels of creativity and innovation. The costs of granting intellectual property rights are assumed to be less than the value generated by the availability of the grant for qualifying works. Intellectual property rights are thus consistent with some theories of property, namely that the allocation of rights internalizes certain externalities and affects decisions made by persons in an interactive setting. See Demsetz, supra note 11, at 348.
18 The argument advanced on behalf of owners in the digital context is that stronger rights, measured both by numbers and scope, are necessary to internalize the harmful effects of digital technology. See Hardy, supra note 8, at 223–28 (discussing four factors that limit copying, including state-of-the-art limitations). Professor Hardy argues that because cyberspace exponentially shrinks the assurances from copying based on the state of existing technology, there should understandably be a corresponding increase in other forms of protection to preserve the aggregate level of assurance to which owners are “entitled.” See id. But see Cohen, supra note 8, at 547–49. Of course, there is always the argument that technology itself can resolve the problem of transaction costs in intellectual property bargains. In part, the rights management regime intensely debated, but nevertheless established by the Digital Millennium Copyright Act (“DMCA”), reflects this notion. See 17 U.S.C. § 1201 (1998). Two appellate decisions regarding the fair use doctrine also reflect elements of this argument. See, e.g., Am. Geophysical Union v. Texaco, Inc., 60 F.3d 913, 930–31 (2d Cir. 1994) (stating that “it is not unsound to conclude that the right to seek payment for a particular use tends to become legally cognizable under the fourth fair use factor when the means for paying for such a use is made easier”). The court concluded that the development of a market for users to obtain licenses makes it appropriate now to consider the loss of licensing revenue in analysis of the fourth fair use factor which focuses inquiry on the effect of the use upon the potential market for, or value of, the protected work. See id. at 931–32; see also Princeton Univ. Press v. Mich. Document Serv., Inc., 99 F.3d 1381, 1386–87 (6th Cir. 1996). There is a wealth of literature on the issue of market failure (failure of markets to clear) and the fair use doctrine. The leading article on the topic is Wendy J. Gordon’s Fair Use as Market Failure: A Structural and Economic Analysis of the Betamax Case and Its Predecessors, 82 Colum. L. Rev. 1600 (1982). See also Bell, supra note 15, at 596–600; Lydia Pallas Loren, Redefining the Market Failure Approach to Fair Use in an Era of Copyright Permission Systems, 5 J. Intell. Prop. L. 1, 32–47 (1997); Robert P. Merges, The End of Friction? Property Rights and Contract in the “Newtonian” World of On-Line Commerce, 12 Berkeley Tech. L.J. 115, 130–36 (1997).
19 See generally Lunney, supra note 16. For discussions on the scope of rights between first and second innovators/creators, see references cited infra, note 21. In copyright law, secondary creators may violate both the right to copy and the right to make a derivative work from the protected work. On the scope of derivative rights, see generally Paul Goldstein, Derivative Rights and Derivative Works in Copyright, 30 J. Copyright Soc’y 209 (1983).
20 See generally Thomas Dreier, Balancing Proprietary and Public Domain Interests: Inside or Outside of Proprietary Rights, in Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society 295 (Rochelle Dreyfuss et al. eds., 2001) [hereinafter Innovation Policy] (discussing the debate over what the balance should be and what regulatory tools may be used to fashion such a balance). Professor Dreier concludes that the intellectual property framework is still the most desireable. See id.; see also Bell, supra note 15, at 596–600; Loren, supra note 18, at 32–47; Merges, supra note 18, at 130–36; Okediji, supra note 16, at 112, 153–73 (suggesting that the evolutionary nature of information technology requires a dynamic view of the fair use doctrine, and that efforts should focus on rethinking the nature of the balance to reflect the benefits of cyberspace interactions rather than attempting to apply the balance crafted for print works to the digital environment).
21 This principle is at least partially evident in the exceptions and limitations available in patent and copyright law. Principally, however, the legal structure of intellectual property rights between first and second innovators/creators is fashioned by courts incrementally (and not always consistently) as they construe the scope of the statutory rights and limitations. One problematic result is that follow-on innovators/creators have no certain or predictable rights and the legitimacy or propriety of private decisions to improve on, work with, or in other ways utilize protected material is always made with a degree of risk. See Robert P. Merges, Of Property Rules, Coase, and Intellectual Property, 94 Colum. L. Rev. 2655, 2658–59 (1994) (discussing difficulties in applying the Coase Theorem to intellectual property transactions because of the difficulty in identifying whether externalities exist and what they are in the context of first and second creators). For a discussion of the scope of intellectual property rights and second comers, see generally Edmund W. Kitch, The Nature and Function of the Patent System, 20 J.L. & Econ. 265 (1977); Mark A. Lemley, The Economics of Improvement in Intellectual Property Law, 75 Tex. L. Rev. 989 (1997); Robert P. Merges & Richard R. Nelson, On the Complex Economics of Patent Scope, 90 Colum. L. Rev. 839 (1990); Suzanne Scotchmer, Standing on the Shoulders of Giants: Cumulative Research and the Patent Law, J. Econ. Persp., Winter 1991, at 29. In copyright law, the fair use doctrine has provided a rich context for the discussion of copyright scope with regard to unauthorized creative uses of protected work. See Lemley, supra, at 1036–38; Okediji, supra note 16, at 126–29; see generally Dreier, supra note 20. Professor Joe Liu’s contribution to this symposium is also an important consideration of the topic of copyright scope. The idea of a creative or interactive user illustrates the slippery slope between user/infringer and creator. See Joseph Liu, Copyright Law’s Theory of the Consumer 43 B.C. L. Rev. 397 (2003).
22 See Samuelson, supra note 15, at 562–66; see also Cohen, supra note 8, at 559–63; David Nimmer, Appreciating Legislative History: The Sweet and Sour Spots of the DMCA’s Commentary, 23 Cardozo L. Rev. 909, 967 (2002) (noting that Congress weighed two policy judgements regarding fair use and chose the option that would preserve fair use in the digital world).
23 I deliberately use the word “translate” to distinguish my specific focus in this Article from the more familiar problem of how extant intellectual property doctrines and precepts can remain unchanged in cyberspace. This ongoing project is one of preservation. In this Article, however, my interest is narrowly confined to considering the possibilities of a change in the function or form of proprietary rights.
24 Specifically, the grant of business method patents. See State Street Bank & Trust Co. v. Signature Fin. Group, 149 F.3d 1368, 1375–77 (Fed. Cir. 1998).
25 See, e.g., Morris R. Cohen, Property and Sovereignty, 13 Cornell L. Q. 8, 8–12 (1927).
26 Governments, however, have been increasingly aggressive in asserting jurisdictional control in a number of disputes involving cyberactivity. See Michael Geist, Cyberlaw 2.0: New Laws and New Borders, 43 B.C. L. Rev. 323, 332–57 (2003). In a recent case where an Australian High Court asserted jurisdiction over Dow Jones, the court expressed disapproval over a jurisdictional rule that would “entrench” the United States as the forum for disputes over on-line activity. See Dow Jones & Co. v. Gutnick (2002) 194 A.L.R. 433 (Supreme Court of Victoria, on appeal to the Australian High Court).
27 Professor Geist notes that there is increasing government regulation of cyberspace and cites examples in the e-commerce realm. See Geist, supra note 26, at 332–47. None of these examples, however, affect market conditions or market structure. It is in this sense that I argue that government interference is important.
28 See Susan DeSanti et al., Competition to Innovate: Strategies for Proper Antitrust Assessments, in Innovation Policy, supra note 20, at 317–18 (noting the tension between promoting productivity which requires innovation and promoting competition in innovation).
29 Agreement Establishing the World Trade Organization, Agreement on Trade-Related Aspects of Intellectual Property Rights, April 15, 1994, 33 I.L.M. 1197 [hereinafter TRIPs Agreement].
30 WIPO Copyright Treaty, Dec. 20, 1996, 36 I.L.M. 65 [hereinafter WCT]; WIPO Performances and Phonograms Treaty, Dec. 20, 1996, 36 I.L.M. 76 [hereinafter WPPT].
31 Ruth Okediji, Toward an International Fair Use Standard, 39 Colum. J. Transnat’l L. 75, 152–53 (2000) (concluding that the Agreed Statements to the WCT could be used to establish evidence of subsequent state practice and thus serve as a source of customary international law between members of the Berne Convention and the TRIPS Agreement); see also Neil W. Netanel, The Next Round: The Impact of the WIPO Copyright Treaty on TRIPS Dispute Settlement, 37 Va. J. Int’l L. 441, 449–51 (1997) (discussing how the WIPO Copyright Treaty could be interpreted in light of the TRIPS Agreement).
32 A preliminary word on globalization: it is common to describe the Internet as a global communications medium. The global nature of the Internet, however, is, thus far, limited to the technological promise that links the international community through information networks. In reality, the characteristics of the Internet—its users, its culture, the dominant language and even the legal norms most referenced—are distinctly those of the western hemisphere. See Neil Weinstock Netanel, Cyberspace Self-Governance: A Skeptical View from Liberal Democratic Theory, 88 Calif. L. Rev. 395, 445 (2000). If the domestic law of cyberspace is yet unformed, the international law of cyberspace is yet to be imagined. In the process of social engineering, cyberlaw must contend not only with competing visions of optimal governance structures, best described as a problem of “multiple and overlapping sovereignties,” but with whom is being governed and what is the end of such governance. Keith Aoki, Considering Multiple and Overlapping Sovereignties: Liberalism, Libertarianism, National Sovereignty, “Global” Intellectual Property, and the Internet, 5 Ind. J. Global Legal Stud. 443, 443–46 (1998).
33 Recent articles have examined the role of information in the patent system and how patents themselves serve certain informational roles. See, e.g., Jay P. Kesan, Carrots and Sticks to Create a Better Patent System, 17 Berkeley Tech. L.J. 763, 770–84 (2002); Clarisa Long, Patent Signals, 69 U. Chi. L. Rev. 625, 643–78 (2002).
34 See Hardy, supra note 8, at 236–37.
35 Scholars have identified four areas that are related to the drastic reduction in transaction costs: (1) efficiencies from the automation of transactions; (2) intermediation and market-making by brokers, auctioneers, dealers, and exchanges; (3) consolidation of demand and supply through organized exchanges between firms in the same industry; and (4) changes in the organization of firms reflected in economic processes that take place within the firm and those that are outsourced. See Brynjolfsson & Hitt, supra note 4, at 30–45; Lucking-Reiley & Spulber, supra note 4, at 56–62; Oliner & Sichel, supra note 4, at 9–21; see also Spence, supra note 4, at 454–55 (identifying similar areas).
36 For example, business method patents threaten the ability of businesses to capture such benefits. Compare Ann Marie Rizzo, The Aftermath of State Street Bank & Trust v. Signature Financial Group: Effects of United States Electronic Commerce Business Method Patentability on International Legal and Economic Systems, 50 DePaul L. Rev. 313, 361–62 (2000), with Jeffrey R. Kuester & Lawrence E. Thompson, Risks Associated with Restricting Business Method and E-Commerce Patents, 17 Ga. St. U. L. Rev. 657 (2001).
37 See generally Spence, supra note 4.
38 See infra notes 43–68 and accompanying text.
39 For discussion of the development and application of trade usage to supplement (and in many cases legitimize) shrinkwrap agreements, see generally David McGowan, Recognizing Usages of Trade: A Case Study from Electronic Commerce, 8 Wash. U. J.L. & Pol’y 167 (2002).
40 See infra notes 43–68 and accompanying text.
41 See infra notes 69–109 and accompanying text.
42 See infra notes 110–126 and accompanying text.
43 Distinctions of this sort are increasingly difficult to sustain in the digital context where users, consumers, and producers are often one and the same. See supra note 21 and accompanying text. For my immediate purposes, the distinction is intended to identify initial interest in using a particular product.
44 See Posner, supra note 11, at 54. This paradigmatic rationalization of intellectual property rights is somewhat reductionist. Empirical data does not support a direct relationship between property rights and investment incentives. However, “secure” property rights (i.e., enforceable rights) are not tantamount to expansive rights. In other words, having a guarantee of complete, indivisible property interests does not necessarily increase the amount of investment an individual is willing to make. For example, an individual that has decided to purchase land will likely do so despite the other property rules that permit or facilitate some encroachment on that property. Indeed, a robust body of literature has analyzed the value of less than determinate property rights. See generally, e.g., Burk, supra note 14; Thomas W. Merrill, Trespass, Nuisance, and the Costs of Determining Property Rights, 14 J. Legal Stud. 13 (1985); Marc R. Poirier, The Virtue of Vagueness in Takings Doctrine, 24 Cardozo L. Rev. 93 (2002); Carol M. Rose, Crystals and Mud in Property Law, 40 Stan. L. Rev. 577 (1988). Once the decision to invest is made, it necessarily has partially internalized the costs of divided entitlements that permit some encroachment. Trotter Hardy makes this point about information owners. See Hardy, supra note 8, at 222 (noting that “would-be producers of information need some assurance that copying will be limited. The notion of ‘some assurance’ rather than ‘complete assurance’ reflects the fact that 100 percent assurance of anything—or zero risk—has never been a requirement of any business. Similarly, I use the deliberately vague notion of ‘limited’ copying rather than ‘no copying’ because the exact amount of copying that an information producer will tolerate will vary widely . . . .”). In the copyright context, extending protection to derivative works, for example, is likely less relevant to the decision to produce informational works that the right to exclude copying. This causal observation is certainly affirmed in the context of patent law where the possibility of an improvement by a secondary innovator does not deter the first inventor. The point is that the grant of proprietary rights in a creative work may, and does, lead to additional creativity by a variety of individuals other than the author/inventor. As others have argued, this outcome is a public benefit that can enhance social welfare. See, e.g., Lemley, supra note 21; Liu, supra note 21; Lunney, supra note 16.
45 See Phillip Nelson, Advertising as Infomation, 82 J. Pol. Econ. 729, 730–31 (1974); George J. Stigler, The Economics of Information, 69 J. Pol. Econ. 213, 215–16 (1961).
46 See Long, supra note 33, at 644–55 (exploring the informational role of patents in capital markets and concluding that signaled characteristics of a firm with a large patent portfolio are positive).
47 Cohen, supra note 8, at 548–49 (“[I]f the public is willing to pay the prices set by copyright owners, we must ask what the public believes it is paying for, and what copyright owners believe they are selling. Any answer to that question must take existing statutorily-mandated public access and use rights into account. . . . [The public] . . . count[s] among those benefits those that the public law of copyright guarantees”). Some have criticized this point by noting that the “public” generally has no idea which uses are permissible; such a recognition, however, seems to strengthen the argument for clarifying intellectual property rights in cyberspace.
48 See, e.g., Bell, supra note 15, at 583–84; Robert P. Merges, Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations, 84 Cal. L. Rev. 1293, 1377 (1996); see also supra note 17 and accompanying text. Note, however, that this assumption addresses the primarily economic costs involved with search, not intangible costs associated with the inability of a user to pay for the use and any resulting social loss. In the digital context, an additional cost that should factor into the equation is the cost of added attempts to “hack” or otherwise overcome barriers to access to digital works, including the development of tools that make it possible to do so. Although the DMCA has outlawed such attempts and devices, the DMCA model is not yet universal. Further, the administrative, legal, and economic costs of adding yet another layer to the already cumbersome copyright laws must still be considered in evaluating the efficiency of the system as a whole.
49 Merges, supra note 21, at 2658.
50 Id. (noting that with intellectual property rights, there is likely to be great debate over whether externalities exist at all because, in the patent realm, an infringer may not know ex ante that her independently created work is an infringement); see also Burk, supra note 14, at 138 (arguing that muddy rules may enhance levels of creativity by encouraging bargaining between copyright owners and would be users).
51 See, e.g., Kenneth D. Crews, The Law of Fair Use and the Illusion of Fair-Use Guidelines, 62 Ohio St. L.J. 599 (2001); Glynn S. Lunney, Jr., Fair Use and Market Failure: Sony Revisited, 82 B.U. L. Rev. 975 (2002); Honorable Jon O. Newman, New Lyrics for an Old Melody: The Idea/Expression Dichotomy in the Computer Age, 17 Cardozo Arts & Ent. L.J. 691 (1999).
52 Law and economics literature identifies two forms in which law may be created—rules or standards. See generally Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 Duke L. J. 557, 557 (1992). A rule is given content ex ante, specifying what precise conduct is prohibited or allowed. On the other hand, a standard is flexible and generally is given content ex post. Although rules are more costly to promulgate, individuals are better able to make informed decisions about the benefits of compliance. See id. A standard, however, is cheaper to promulgate, but raises the cost of acquiring information. Consequently, individuals will decide either to acquire information about the standard to make an informed decision, will fail to act, or will act only on the strongest interpretation of the standard to avoid any accusations of violation. The latter is a problem associated with levels of risk aversion. See id.
53 I might add that intellectual property grants may also introduce asymmetries of information between investors and firms. Consider, for example, the fact that fifteen million dollars of venture capital was invested into Napster, which was ultimately ruled to be a violation of the laws protecting the proprietary interests of the content industry. P.J. Huffstutter, Company Town EMusic, Grammy Producer Joins Legal Assault on Napster, L.A. Times, Mar. 8, 2001, at C6.
54 See Jessica Litman, Revising Copyright Law for the Information Age, 75 Or. L. Rev. 19, 38–39 (1996); see also Cohen, supra note 8, at 547–49.
55 But see Princeton Univ. Press v. Mich. Document Servs., 99 F.3d 1381, 1412 (6th Cir. 1996); Am. Geophysical Union v. Texaco, Inc., 60 F.3d 913, 940–41 (2d Cir. 1994).
56 Consider, for example, that “ordinary uses” of the Internet does many infringers make. See generally Pamela Samuelson, Toward a “New Deal” for Copyright in the Information Age, 100 Mich. L. Rev. 1488 (2002). For example, routine practices such as downloading material, forwarding email, etc., are, strictu sensu, copyright infringement. For an institutional solution to this problem, see Mark A. Lemley, Dealing With Overlapping Copyrights on the Internet, 22 U. Dayton L. Rev. 547, 584–85 (1997), proposing a license system for multiple use of works on the Internet.
57 See Cohen, supra note 8, at 542–43.
58 Mark A. Lemley, Rational Ignorance at the Patent Office, 95 Nw. U.L. Rev. 1495, 1495 (2001); Arti Rai, Addressing the Patent Gold Rush: The Role of Deference to PTO Patent Denials, 2 Wash. U. J.L. & Pol’y 199, 203 (2000).
59 See Nancy T. Gallini, The Economics of Patents: Lessons from Recent U.S. Patent Reform, J. Econ. Persp., Spring 2002, at 131, 149–50.
60 See DeSanti et al., supra note 28, at 317–18; see also Hanns Ullrich, Intellectual Property, Access to Information, and Antitrust: Harmony, Disharmony and International Harmonization, in Innovation Policy, supra note 20, at 365.
61 See generally Simon Johnson et al., Property Rights and Finance, 92 Am. Econ. Rev. 1335 (2002) (concluding that in five post-communist countries, the security of property rights alone sufficiently and positively affects firms’ decisions to reinvest retained earnings). The authors also find a weak correlation between external credit availability and the decision to invest. See id. Countries in transition provide a useful analogy to cyberspace given the fact that these economies are characterized by disequilibrium, weak or nonexistent regulatory institutions, significant preoccupation with the development of legal norms, and a need for reform or adaptation of existing macroeconomic tools.
62 See J.H. Reichman, Legal Hybrids Between the Patent and Copyright Paradigms, 94 Colum. L. Rev. 2432, 2436–42 (1994); see also, Merges, supra note 21, at 2655–62 (commenting on Professor Reichman’s article).
63 See Jan Eeckhout & Boyan Jovanovic, Knowledge Spillovers and Inequality, 92 Am. Econ. Rev. 1290, 1290–91 (2002) (challenging literature posting that spillovers from leading firms allow other firms to catch up and thus reduce inequalities between firms).
64 In the patent area, a number of scholars have raised this concern. See, e.g., Gallini, supra note 59, at 131–33 (citing other articles); Michael A. Heller & Rebecca S. Eisenberg, Can Patents Deter Innovation? The Anticommons in Biomedical Research, 280 Science 698, 698–701 (1998).
65 See Posner, supra note 11, at 53.
66 Some commentators have suggested that the fair use doctrine could serve the same purpose. See Burk, supra note 14, at 140–41; Gordon, supra note 18, at 1614–15 (suggesting fair use when there is evidence of a market failure); Lunney, supra note 51, at 981.
67 See Litman, supra note 54, at 19.
68 Screening is a term used to denote attempts by an uninformed player to distinguish the well-informed player from the poorly informed player in games of incomplete information. When screening is successful, separating equilibria obtains. See generally Stiglitz, Paradigm in Economics, supra note 5, at 475–76.
69 See Severin Borenstein & Garth Saloner, Economics and Electronic Commerce, J. Econ. Persp., Winter 2001, at 3, 4–9 (discussing a number of ways the Internet creates value both on the supply and demand side); Spence, supra note 4, at 453–55.
70 EBay has succeeded with a mix of competition and compromise. On one hand, eBay has consistently fought off efforts by competitors to break eBay’s near monopoly of the on-line auction industry. See Cecilia Kang, On-line Auction Group Prepares to Attack eBay; but Loyal Following May Help Market Leader Withstand the Assault, Chi. Trib., Sept. 27, 1999, at C2. But see Reid J. Epstein, Who Needs eBay?, Wall St. J., Sept. 11, 2002 at A1 (describing “Tradio” an on-air swap meet that dominates small town radio stations and facilitates auction trades that, unlike the eBay format, are ultimately negotiated face to face).
71 See Press Release, eBay, America Online and eBay Expand Relationship: Multi-Year Agreement Enhances eBay’s the Preferred Person-to-Person Online Auction Service on AOL (Sept. 2, 1998), available at http://pages.ebay.com/communit/aboutebay/releases /pr98. html#19 (last visited Jan. 31, 2003); see also Mary Kwak & David Yoffie, Inside Track–Lessons from the Dotcom Days, Fin. Times (London), Sept. 28, 2001, at 12 (noting that eBay entered into business agreements with AOL to “[reduce] AOL’s desire and ability to launch a crippling attack”).
72 Spence, supra note 4, at 454–55 n.29.
73 See eBay, Inc. v. Bidder’s Edge, Inc., 100 F. Supp. 2d 1058, 1069–70 (N.D. Cal. 2000) (protecting eBay from competition under a trespass to chattels theory).
74 See Stiglitz, Paradigm in Economics, supra note 5, at 467; see generally Coase, supra note 11.
75 Michael Rothschild & Joseph E. Stiglitz, Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information, 90 Q. J. Econ. 629, 629 (1976).
76 See generally Maureen A. O’Rourke, Property Rights and Competition on the Internet: In Search of an Appropriate Analogy, 16 Berkeley Tech. L.J. 561 (2001).
77 In considering this issue, one has to determine if the costs to eBay’s servers are worth the improvement in markets clearing. Alternatively, will a liability rule requiring Bidder’s Edge to compensate eBay for damage lead eBay to forgo posting its prices? And will this result be more efficient? To the extent that price aggregation actually reduces information asymmetries, the court’s decision may have actually served to benefit markets. The choice of legal rule has implications for how the market will develop and how transactions will be structured. It may still be too early to be certain which rule will best promote market efficiency in cyberspace. See id.
78 It is worth exploring at a later time whether this is an effective way to analyze the viability of the open-source software movement.
79 See supra notes 49–57 and accompanying text.
80 See generally Stephen D. Oliner & Daniel E. Sichel, Computers and Output Growth Revisited: How Big Is the Puzzle? 2 Brookings Papers on Economic Activity 273 (1994) (examining the relationship between investments in information technology and productivity growth); Oliner & Sichel, supra note 4, at 9–13 (updating the earlier paper and concluding that increased efficiency gains in computer technologies and increased investments in information technology are largely responsible for the rapid growth in the non-farm business sector during the late 1990s).
81 Consider, for example, the controversial case MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511, 513, 523–24 (9th Cir. 1993) (finding a computer maintenance company liable for infringement for running plaintiff’s software, licensed to Peak’s customers, in the process of servicing the computers).
82 Some scholars are skeptical of such bargaining, particularly in the context of intellectual property rights. Where proprietary rights represent only one factor of production, however, Coasian bargaining may be feasible in the form of a division of labor between the supplier of the technology and the user/producer of goods and services in cyberspace. The valuation problem identified by Professor Merges may be reduced, if not completely eliminated, where the cooperative surplus is generated in ways distinct to each party’s contribution to the final output. See Robert P. Merges, Intellectual Property Rights and Bargaining Breakdown: The Case of Blocking Patents, 62 Tenn. L. Rev. 7, 75–76 (1994).
83 See Borenstein & Saloner, supra note 69, at 5 (noting the ease of customizing service as one of the characteristics of the Internet that make it valuable for e-commerce).
84 Brynjolfsson & Hitt, supra note 4, at 24 (noting that as hardware becomes cheaper and more efficient, business value will be located in the ability of managers to “invent new processes, procedures and organizational structures” that make effective use of new hardware capabilities); see also Susan Kelly, A Critical Relationship: Technology and the CEO, Executive Insights, Fall 2002, at 2.
85 See Brynjolfsson & Hitt, supra note 4, at 30–45; Erik Brynjolfsson et al., The Matrix of Change, 38 Sloan Mgmt. Rev. 37, 37–54 (1997); Paul Milgrom & John Roberts, The Economics of Modern Manufacturing: Technology, Strategy, and Organization, 80 Am. Econ. Rev. 511, 526–27 (1990); see also Steven Schnoll, New Challenges Call for a New Business Paradigm, Executive Insights, Fall 2002, at 1.
86 See Milgrom & Roberts, supra note 85, at 526–27; Brynjolfsson et al., supra note 85, at 37–54; see generally Brynjolfsson & Hitt, supra note 4.
87 See Brynjolfsson & Hitt, supra note 4, at 30–45.
88 See generally Oliner & Sichel, supra note 80.
89 See Douglas L. Rogers, Give the Smaller Players a Chance: Shaping the Digital Economy Through Antitrust and Copyright Law, 5 Marq. Intell. Prop. L. Rev. 13, 115–16 (2001) (reviewing a number of intellectual property/antitrust cases and arguing for construction of copyright law in a way that promotes competition).
90 See Borenstein & Saloner, supra note 69, at 3–4 (noting that traditional firms hold significant strategic assets, including intellectual property rights, and their choices pertaining to how to exploit the on-line environment will powerfully affect the shape of the market).
91 There are a number of reasons for this, including scale and liquidity effects. The dominance of eBay is an example of how returns to scale and liquidity are likely to lead to only one or few markets in a particular area. As the number of participants at a site increase, buyers and sellers will be drawn to that site to better their chances of realizing an exchange, thus making the market more liquid. See Lucking-Reiley & Spulbur, supra note 4, at 62; Spence, supra note 4 at 455.
92 See Patricia Buckley & Sabrina Montes, The Evolving Online Environment, in Digital Economy 2002, 9, 21 (2002), at http://www.esa.doc.gov/508/esa/pdf/DE2002_CH2.pdf (noting that nearly 1000 companies tried to market gas-powered automobiles prior to 1927 but only 200 survived long enough to do so—and of these, only a handful exist—but that handful accounts for a large share of the economy).
93 See, e.g., Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp. 2d. 1228 (1999), vacated and remanded, 239 F.3d 1343 (Fed. Cir. 2001) (lawsuit between rival online retailers alleging infringement of Amazon’s one-click method patent); see also Rochelle Cooper Dreyfuss, Examining State Street Bank: Developments in Business Method Patenting, 636 PLI/Pat 437, 444–52 (Feb. 2001).
94 See Buckley & Montes, supra note 92, at 12–15 (identifying some hurdles facing on-line businesses).
95 TicketMaster v. Microsoft, No. 97–3055 (C.D. Cal. filed Apr. 28, 1997) (alleging trademark dilution because Microsoft included TicketMaster link on its web page without TicketMaster’s permission).
96 Buckley & Montes, supra note 92, at 17–18.
97 I refer here primarily to the sociology of Napster as a cultural phenomenon and the dynamics that fueled the perceptions about the legitimacy of file-sharing. Fanning, a college drop-out, wrote the source code for an application that combined a music search function with a file sharing system. Napster, the christened name for this application, made it possible to download digital music files from one computer to another via the Internet without compensation. Fanning utilized the digital music standard MP3, a technology developed in 1987, as a non-proprietary method to compress CD-quality sound files, thus enabling consumers to download digital recordings with speed and ease. Fanning predicted that his application would do everything a Web application should do, including building community, breaking down on-line barriers, and eliminating intermediaries. There was, at best, ambivalence in the music establishment (and other intellectual property interests) about Napster. On the one hand, it recognized the immense economic potential of the application, yet it was sufficiently threatened that the application was not within its control.
In May of 2000, realizing the multiple applications for such peer-to-peer software, the venture capital firm Hummer Winblad provided Napster with a fifteen million dollar infusion of capital. The RIAA responded by filing for a petition seeking an injunction against Napster to prohibit the company from facilitating the trading of copyrighted music files. In July 2000, a U.S. district judge ruled in favor of the RIAA and granted the injunction sought against Napster. On October 31, 2000, media conglomerate Bertelsmann, parent company of BMG, a mainstay of the RIAA, structured a strategic alliance with Napster, agreeing to loan Napster an estimated fifty million dollars in venture capital to allow Napster to develop a legal peer-to-peer file sharing system and agreed to drop out of the RIAA lawsuit if Napster was successful.
98 For Adam Smith, these exceptions included national defense and education for the poor. See Adam Smith, Wealth of Nations 463–64 (R.H. Campbell et al. eds., 1981).
99 See generally John Stuart Mill, Principles of Political Economy (W.J. Ashley, ed., 1909) (1848).
100 See id.
101 See generally Alexander Hamilton, Report on the Subject of Manufactures [1791], in The Papers of Alexander Hamilton (Harold C. Syrett ed., vol. X 1966).
102 See generally John Rae, Statement of Some New Principles of Political Economy (A.M. Kelley, Bookseller 1964) (1834).
103 See Douglas A. Irwin, Against the Tide: An Intellectual History of Free Trade 122–24 (1996) (summarizing Rae’s arguments).
104 Rae, supra note 102, at 365.
105 See, e.g., Friedrich List, The National System of Political Economy (G.A. Matile trans., 1856).
106 See Mill, supra note 99, at V.10.12.
The expenses of production being always greatest at first, it may happen that the home production, though really the most advantageous, may not become so until after a certain duration of pecuniary loss. . . . I have therefore conceded that in a new country a temporary protecting duty may sometimes be economically defensible; on condition, however, that it be strictly limited in point of time, and provision be made that during the latter part of its existence it be on a gradually decreasing scale. Such temporary protection is of the same nature as a patent, and should be governed by similar conditions.
Id.
107 See id.
108 But see Burk, supra note 14, at 127–32.
109 See, e.g., Brynjolfsson & Hitt, supra note 4; Oliner & Sichel, supra note 4.
110 See Gordon, supra note 3, at 66–72; Oliner & Sichel, supra note 4, at 18–21.
111 The dotcom bust is the most vivid example of the failure of new markets.
112 See Merges, supra note 82, at 75–77; Merges, supra note 21, at 2659–60.
113 See supra notes 54–57 and accompanying text.
114 See supra notes 80–81 and accompanying text.
115 But see Diane P. Wood, International Harmonization of Antitrust Law: The Tortoise or the Hare?, 3 Chi. J. Int’l L. 391, 405–07 (2002) (arguing for harmonization in the antitrust context).
116 See supra notes 26–27.
117 See generally Netanel, supra note 31.
118 See id.
119 See 17 U.S.C. § 1201 (1998).
120 Kenneth J. Arrow, Higher Education as Filter, 2 J. of Public Econ. 193 (1973) (noting that the use of standards (such as exams) to convey information in a market with assumptions of competitive equilibrium results in gains by the more able made at the expense of the weaker, less able individuals).
121 For a recent empirical study of factors of growth internationally, see generally Subodh Kumar & R. Robert Russell, Technological Change, Technological Catch-Up, and Capital Deepening: Relative Contributions to Growth and Convergence, 92 Am. Econ. Rev. 527 (2002).
122 Professor Jerome Reichman has suggested, for example, that developing countries exploit the indeterminate standards in the TRIPs Agreement to implement rights in a way that is sensitive to the public interest. See J.H. Reichman, From Free Riders to Fair Followers: Global Competition Under the TRIPS Agreement, 29 N.Y.U. J. Int’l L. & Pol. 11, 16–17 (1997).
123 See supra note 24.
124 Most are familiar with the origins of the Internet as a product of the Cold War years; both international law and cyberspace developed as responses to existing “natural” limitations on the ability of sovereigns to control what occurred within and without their borders. Thus, the development of the Internet was a preemptive resort to self-help/self-defense—the ultimate obligation and right of states to defend their geographical boundaries.
125 See Spence, supra note 4, at 455.
126 Id.