Privately legislated intellectual property rights: reconciling freedom of contract with public good uses of information.

• Author: Reichman, J.H.

INTRODUCTION

In an age of omnipresent clickwrap licenses,(1) we acknowledge the need for a uniform set of default rules that would validate non-negotiable licenses as a mechanism for minimizing transaction costs likely to hinder economic development in a networked environment.(2) However, we contend that any model of contract formation not driven by the traditional norms of mutual assent(3) requires specially formulated doctrinal tools to avoid undermining long-established public good uses of information for such purposes as education and research, technical innovation, free speech, and the preservation of free competition.(4)

With the convergence of digital and telecommunications technologies, creators and innovators who distribute computerized information goods online(5) can increasingly combat the causes of market failure directly(6)--even in the absence of statutory intellectual property rights--by recourse to standard form contractual agreements that allow access to electronically stored information only on the licensor's terms and conditions. In the networked environment, however, routine validation of mass-market access contracts and of non-negotiable constraints on users would tend to convert standard form licenses of digitized information goods into functional equivalents of privately legislated intellectual property rights.(7) Firms possessing any degree of market power could thereby control access to, and use of, digitized information by means of adhesion contracts that alter or ignore the balance between incentives to create and free competition that the Framers recognized in the Constitution and that Congress has progressively codified in statutory intellectual property laws.(8)

Because existing legal doctrines appear insufficient to control the likely costs of such a radical social experiment, the main thrust of this Article is to formulate and develop minimalist doctrinal tools to limit the misuse of adhesion contracts that might otherwise adversely affect the preexisting balance of public and private interests.(9) We believe such tools ought to figure prominently in any set of uniform state laws governing computerized information transactions, whether or not they emerge from the current debate surrounding a proposed Article 2B of the Uniform Commercial Code ("U.C.C." or "the Code").(10)

Digitized transactions in information goods are typically configured as licenses of intangible rights, rather than as "contracts for the sale of goods" within the jurisdiction of Article 2 of the U.C.C.(11) The vagaries of the common law of contracts, as elaborated in fifty different forums, are then often compounded by the uncertain boundaries between these state laws and those supporting the federal intellectual property system, which implements possibly conflicting purposes and policies.(12) In the belief that this uncertainty hampers the growth of both the domestic and worldwide information economies,(13) the American Law Institute and the Commission on Uniform State Laws have formulated a draft Article 2B of the U.C.C. to govern the licensing of computer software and other information goods.(14)

While sympathetic to the goals of this project, we believe that the drafters of the proposed Article 2B have systematically subordinated the public good nature of information(15) to the private interests of licensors and so-called "content providers."(16) As we read the literature, an efficient set of default rules(17) should reflect the needs and interests of both licensors and licensees(18)--most transactors will, in fact, play one or the other role at different times--and not just the dictates of a few powerful firms who happen to control a disproportionately large share of the world's information goods in the last quarter of the twentieth century.(19) Such rules must also take account of the dual nature of information, which functions both as a valuable commodity and as the foundation of knowledge in the information economy.(20)

We concede that entrepreneurs should have broad powers contractually to control the online exchange of downstream products in which they have bundled information to achieve specific commercial effects, without encountering excessive or premature governmental regulations.(21) It does not necessarily follow, however, that entrepreneurs should have equal autonomy to restrict use of the unbundled information in their possession as raw materials of science and education or as inputs into the production of value-adding or second-generation information goods.(22) To ignore such discriminations as these is to risk watching model laws, adopted to govern the virtual marketplace for information goods, foster conditions that actually decrease innovation, discourage competition, and stifle the traditional marketplace of ideas.

Accordingly, we propose a set of countervailing doctrinal tools, tentatively collected under a "public-interest unconscionability" rubric,(23) that courts could apply case by case to limit the adverse effects of mass licensing contracts and their non-negotiable terms and conditions without necessarily invoking either the preemption doctrine familiar from intellectual property law(24) or other equally unsatisfactory doctrines, including the public policy exception, familiar from standard contract law.(25) While legislative adoption of our proposed doctrinal safeguards would enable entrepreneurs to preserve the benefits of Article 2B for most market-enhancing information contracts, it would discourage them from converting mass-market contracts that control access to information into privately legislated intellectual property rights that undermine essential public good uses of information.

In Part I of this Article, we begin by identifying key misconceptions concerning the interface between federal intellectual property rights and state contract laws that have marred the drafters' own notes and comments in the various iterations of Article 2B. We then explain how digital technologies, when combined with mass-market contracts, enable information providers to alter the existing legislative balance between public and private interests in unexpected and socially harmful ways. We further demonstrate that the uniform state laws proposed to validate these private rights have been crafted without balancing the social costs of legal incentives to innovate against the benefits of free competition, and without regard for the constitutional mandate to "promote the [p]rogress of [s]cience and useful [a]rts."(26) On the contrary, the drafters of Article 2B empower purveyors of digitized information goods to undermine, by contract, long-standing policies and practices that directly promote cumulative and sequential innovation as well as the public interest in education, science, research, competition, and freedom of expression.(27)

In Part II, we discuss the new doctrinal tools with which we would empower courts to apply public-interest checks on standardized access contracts and on non-negotiable terms and conditions affecting users of computerized information goods. In so doing, we take pains to preserve the maximum degree of freedom of contract, not just with respect to negotiated terms generally, but even with respect to non-negotiable terms lacking any socially harmful or demonstrably anticompetitive impact over time. We also compare the costs and benefits of Article 2B, as refined by the addition of our proposed safeguards, with those likely to ensue if Article 2B were adopted in its present form. Here, we focus particularly on issues affecting the legal protection of computer software, on the role that the "fair use" exception of copyright law might play in information transactions generally, and on issues affecting bundles of factual information that cannot be copyrighted under existing laws.

In Part III, we explore the deeper implications of a shift from the traditional, assent-driven model of contract formation to a model that validates non-negotiable contracts of adhesion containing socially acceptable terms and conditions. We show that a minimalist regulatory tool along the lines of our proposed "public-interest unconscionability doctrine" yields positive social benefits, despite the transaction costs and enforcement problems it logically engenders. We also explore the connection between the kind of "non-negotiable middle ground" we deem indispensable to a paradigm shift in contract formation and the need for a broader information policy. We conclude with a prediction that if Article 2B were to incorporate the safeguards we propose, it might better yield sound empirical data for devising the long-term information policies that elude us in our present state of ignorance and uncertainty.

1. CONTRACTING AROUND THE OUTER EDGE OF THE FEDERAL INTELLECTUAL PROPERTY SYSTEM

   Information manifests awkward properties that have always challenged standard economic assumptions.(28) The convergence of digital and telecommunications technologies, which triggered new opportunities for the production and marketing of information goods, has further strained the conventional economics of innovation by blurring heretofore settled lines of demarcation between the private and public domains.(29) The growth of the networked environment has also required state contract laws to fill widening gaps in the federal intellectual property regime.

   The forces driving the information-based sectors of the economy thus tend to destabilize the relationship between state and federal laws that had previously buttressed the national system of innovation. Whether the traditional reliance of that system on public good uses of information can withstand the privatizing assault on the public domain that has accompanied these phenomena increasingly depends on the extent to which state contract laws governing access to information will validate standardized "click on" and "shrinkwrap" licensing agreements.

   A. The...