Copyright Law and the Information Cost Theory

Intellectual Property as Property: Delineating Entitlements in Information, authored by Prof. Henry Smith was published last summer in the Yale Law Journal. It is an important article, a must-read for IP theory fans, all the more for law-and-economics folks. A blog post is perhaps not the ideal venue to discuss Smith’s insights in depth. The breadth of the theoretical discussion it begs is vast and the potential application of the information cost theory to property issues is enormous. My limited aim here is to share some thoughts about possible applications to copyright law and the tendency to protect technological access-controls under the copyright statue.

Smith’s latest paper, applying the information cost theory (ICT) to intellectual property, requires to go back to his earlier papers (often co-authored with Prof. Thomas Merrill) in order to get a fuller idea about the theoretical framework they have developed. The following short description can by no means substitute reading the full accounts. Smith originally proposed to view the legal regime controlling entitlements in valuable resources as ranging from what he coined an “exclusion” strategy to a “governance” strategy. Exclusion strategy is characterized by providing simple rules, rough proxies about entitlements surrounding a resource. Exclusion rules tend to bunch together and allocate multiple positive uses, hence characterized by a low level of precision. From an economic viewpoint, exclusion rules provide relatively low-cost signals about who is entitled to do what with the resource. Their simplicity and straightforwardness reduces the cost of delineating, communicating and processing the signals by all affected parties. The paradigmatic example is trespass rules in the context of land ownership. They send a simple signal to strangers to keep off unless permitted (on/off signals), and it doesn’t matter who the strangers are and what the purposes of their entrance may be.

At the other end of the spectrum, Smith proposed that a governance strategy picks uses and users with greater specification and precision. It delineates more fine-grained use entitlements, for example, a detailed agreement between two or more claimants concerning their respective use of a single resource. This type of rules is more costly to delineate, communicate and process due to their relative greater complexity. Importantly, exclusion/governance is not a dichotomy but a continuum. The actual property regime applied to a resource is located somewhere on a spectrum between full, unqualified exclusion (sheer access control) and fine-grained positive use rights stipulated in increasing degrees of precision, theoretically to infinity. The central insight of the ICT is that information cost considerations determine the positioning on this continuum and guide the type of mix chosen by the law to regulate use of valuable resources.

In a series of papers published in recent years, Smith and Merrill have demonstrated how the ICT can explain basic conceptual notions of property, for example, the primacy of the negative right-to-exclude, the numerus clausus principle, the in rem principle and the prevalence of property rules (as opposed to liability rules) in the realm of property law. These conceptual notions correspond to the layperson understanding of “property” and they are largely confirmed by the positive law. However, this is not necessarily the way legal academics would choose to describe property. Perhaps the most significant contribution of the ICT is its effective attack on the “bundle of sticks” theory invented by the legal realists/nominalists, which has been vigorously pursued in property academia during the 20th Century. Property as a random and flexible bundle of entitlements between two persons is the first thing law students hear in their first property law class. Ironically, Smith and Merrill employ economic rationales – which became increasingly sophisticated and served law-and-economics scholars to support their bundle of sticks metaphor - only to crush the bundle theory to pieces.

After warming his cannons while setting the theoretical foundations of the information cost analysis to property law, Smith turns now to take a closer look at IP. The article sways most of the time at a high theoretical altitude. Its main proposition is that IP law generally behaves like property in tangibles from an ICT viewpoint. Applying this theory to IP entitlements should therefore provide equally compelling and nonobvious insights into urgent policy questions. Whether one agrees with this proposition or not, it seems that this article marks the beginning of an intensive discussion among property and IP scholars about the theoretical and pragmatic ramifications of Smith’s arguments. Which brings me to my own point about the application of the exclusion/governance distinction in the area of copyright law.

To Smith, exclusion strategy is more prevalent in the classic private property scenario. That exclusion is always to some extent “softened” by more-or-less-precise governance rules. In general, regimes that adhere more to exclusion and less to governance fit better in the legal-conceptual rubric of property law. Now, this observation is open to debate, but accepting its assumptions at face-value, a brief glance at the copyright statute confirms that copyright law is much closer to the governance pole as it is to the exclusion pole. According to an ICT analysis, traditional copyright law is much less like conventional property and much more like governance, because rightholders’ entitlements (the “exclusive rights”) cover a quite narrowly-tailored class of specific, predefined uses. The governance accent of copyright law is even more striking when it comes to its numerous exceptions, limitations and specific use rules that are explicitly permitted.

It is true that in general, copyright exclusively, when it applies, behaves like property in the sense that it furnishes subjective-negative entitlements good against the world. But exclusion in rem uncovers only one dimension of a property regime. An important question is what this exclusion covers. The more it covers, the closer we get to an exclusion regime predominant in property law. The observation offered by the exclusion/governance distinction is that copyright is actually much less similar to property as we are so very often told. It also means that copyright imposes a potentially heavy information costs burden. In fact, the information cost (or, the ex ante costs that must be invested to reduce the level of uncertainty with respect a potentially infringing act) imposed by a rule such as fair use are so great, that in many cases they result in a de facto exclusion.

Think about the introduction of legal protection against circumvention of TPM-protected works. An untold number of books and scholarly articles have taken to describe and evaluate this development. Copyright experts did not have a name for this type of expansion, so they invented exotic terms such as paracopyright, übercopyright, or supercopyright. The grant of an exclusive right to prevent the circumvention of access-controls is often depicted as bringing copyright exclusion scope with respect works closer to ownership in physical assets by virtue of its trespass-like operation. Anticircumvention laws have been accused of granting property-like protection to functional technology itself (the TMP) under copyright, making it more like patent law than ever before.

I do not dispute these descriptive claims. They are frequently offered to underpin critique and objection to the expansion of digital copyright law into the domain of “pure” access to works, something that copyright law has never been before and that it should not become in the future. A prominent economics-oriented policy argument is that as the value of access rises, the positive externalities of unregulated mere access conferred on the public becomes more significant. Subjecting mere access to copyright monopoly would therefore increase its social cost, at least to a degree that outweighs the net increase in welfare effectuated by the greater value internalized by owners who now enjoy broader property rights. This argument (and its rebuttal by copyright optimists, who are convinced that the net increase in welfare does outweigh the increase in net social costs) are not empirically testable, which renders such arguments appear like a more-or-less informed guesswork.

In any event, Smith’s framework can provide a fresh descriptive theory to the movement towards access control regulation under copyright. Accordingly, the copyright regime has been undergoing a dramatic shift from governance to an exclusion-type regulation. Access-controls protection (“electronic fences” erected around information like hedges around private land) represent an exclusion strategy par excellence. Opponents of anticircumvention laws complain loudly that the access-control regime is capable of replacing the copyright system, at least in the digital realm. Here, access control to information that is separate from any ancillary property rights in spacial things (e.g., the book or the room in which it is stored) - is feasible. This form of regulation provides much more powerful private rights and much less privileges to the public, as compared to the traditional order. But this is exactly the point. Copyright shifts to an exclusion regime, in which the law does not specify use rules; it simply grants the rightholder a gatekeeper status, which implies the power to delineate positive use rights according to his/her will, interests and whims. The entitlement to control access becomes legally enforceable under anticircumvention laws. In theory, rightholders can use it to determine the conditions for any imaginable use of the protected information.

Copyright pessimists condemn this trend. It is well possible that the reason we have Section 1201 in the Copyright Act is simply because the lobby of the content industry was stronger than anything other more skeptical stakeholders could do to influence the legislative process. This way or the other, the shift to exclusion strategy, evaluated through the spectacles of the ICT, may help to frame the debate and the key questions somewhat differently. Governance-dominated regime was good for copyright law that contemplated only a limited number of methods to economically exploit information and which applied to a relatively small number of resourceful and sophisticated duty holders. In the digital setting, infringing acts are less costly and the number of valuable things we can do with copyrighted information in the digital environment proliferates. As a consequence, our governance-profiled copyright system becomes more complex and more expensive. The level of complexity calls for an urgent change in the strategy. The two alternatives are either to abolish copyright or to shift towards exclusion strategy.

According to the information cost theory, exclusion strategy makes more sense when the duty holders are numerous, indefinite, and unsophisticated. This is offered to explains why exclusion-based rules dominate private property law in general. If we still believe that creation of new works needs government-supported incentives in the form of exclusive rights (an alternative would be a liability-rule-based regime that relied on levies and/or non-voluntary licensing, which is another form of a very costly, governance-oriented regime), we may find restructuring the traditional set exclusive rights more plausible. You don’t need six, one is enough, that is, the gatekeeper’s entitlement to control access. Since “digital fences” are technologically and economically feasible in the digital domain, the monitoring and enforcement costs of an “access right” to information are manageable. Like any other exclusion-based regime, also this one would need to be cushioned by governance-type provisions – the privileges and rights of nonowners to use proprietary information when public policy so commands.

When the lawmaker turns to the impotent task of tailoring governance rules, such rules may range from being general and flat to a more specific, circumstantial form of regulation. The legislature, guided by policy consideration, would grant permission to access, a license to circumvent, a claim to receive means to circumvent, or even a cause of action to have the locked information “surrendered.” The interesting aspect of such a new regulation mode is that access to information, from the perspective of nonowners, is and can be treated formally as a type of valuable use. Indeed, access is the most basic use of information. This mode turns mere access into a definable nonowners' entitlement eligible to a crude governance arrangement that is meant to improve the position of nonowners. Alternatively, the lawmaker could formulate a more use-specific and/or user-specific governance rules to counterweight the rigidness of the baseline exclusion strategy.

Exclusion-based copyright regime might also entail some old-new owners’ threshold requirements, most fundamentally, duties to register and mark their “property.” Registration and notice are information cost friendly rules, since the boundaries of copyrighted information cannot be marked by virtue of their spacial attributes. If you want trespass-like entitlements in intangible works under the conditions of the information society, these entitlements can no longer attach automatically at the moment of creating/fixation. Rightholders would be called to internalize the information costs of access control by signaling their claims out to the world (I call this the "assertion" principle.)

Rightholder who want to exercise their gatekeeper entitlement per se (i.e., prevent any unapproved access, all the rest is unimportant) would have to fence around their information. Deploying effective TPMs would become a legal requirement borne by copyrighted information gatekeepers. Simultaneously, registration and notice would precondition the vindication of exclusive rights in information that go beyond mere access, i.e., uses that involve any sort of communication by nonowners. The point is that an exclusion-based regime is not necessarily and utterly good for rightholders and bad for nonowners. At minimum, there is an argument that a coherent and transparent system of access regulation under copyright is better than cloaking the informal access right behind some poorly-drafted anticircumvention laws.

If Smith is right that IP is like property in the sense that information cost considerations apply with equal force when the res is information, than exclusion strategy as the baseline would make sense under the same conditions and considerations it makes sense in the world of tangibles. This provides a vast and fertile ground for debate about the wisdom of our current IP laws, the wisdom in improving them and strategies how to go about it. My unverified assumption is that many people right now are frantically striking their keyboards, doing exactly that.