A111Q3 DfiTEbS

NATL INST OF STANDARDS & TECH R I.C.

A, 1,03089265 'E & TECHNOLOGY:

COPYRIGHT IN

COMPUTER-READABLE

WORKS:

POLICY IMPACTS OF

TECHNOLOGICAL CHANGE

]

)00-17

7

% NBS Special Publication 500-17

U.S. DEPARTMENT OF COMMERCE

National Bureau of Standards
NATIONAL BUREAU OF STANDARDS

The National Bureau of Standards^ was established by an act of Congress March 3, 1901. The Bureau's overall goal is to strengthen and advance the Nation's science and technology and facilitate their effective application for public benefit. To this end, the Bureau conducts research and provides: (1) a basis for the Nation's physical measurement system, (2) scientific and

technological services for industry and government, (3) a technical basis for equity in trade, and (4) technical services to pro- mote public safety. The Bureau consists of the Institute for Basic Standards, the Institute for Materials Research, the Institute for Applied Technology, the Institute for Computer Sciences and Technology, the Office for Information Programs, and the

Office of Experimental Technology Incentives Program.

THE INSTITUTE FOR BASIC STANDARDS provides the central basis within the United States of a complete and consist- ent system of physical measurement; coordinates that system with measurement systems of other nations; and furnishes essential services leading to accurate and uniform physical measurements throughout the Nation's scientific community, industry, and commerce. The Institute consists of the Office of Measurement Services, and the following center and divisions: Applied Mathematics — Electricity — Mechanics — Heat — Optical Physics — Center for Radiation Research — Laboratory Astrophysics- — Cryogenics^ — Electromagnetics" — Time and Frequency".

THE INSTITUTE FOR MATERIALS RESEARCH conducts materials research leading to improved methods of measurement, standards, and data on the properties of well-characterized materials needed by industry, commerce, educational insti- tutions, and Government; provides advisory and research services to other Government agencies; and develops, produces, and

distributes standard reference materials. The Institute consists of the Office of Standard Reference Materials, the Office of Air and 'Water Measurement, and the following divisions:

Analytical Chemistry — Polymers — Metallurgy — Inorganic Materials — Reactor Radiation — Physical Chemistry.

THE INSTITUTE FOR APPLIED TECHNOLOGY provides technical services developing and promoting the use of avail- able technology; cooperates with pubhc and private organizations in developing technological standards, codes, and test methods; and provides technical advice services, and information to Government agencies and the public. The Institute consists of i the following divisions and centers: Standards Application and Analysis — Electronic Technology — Center for Consumer Product Technology: Product Systems Analysis; Product Engineering — Center for Building Technology: Structures, Materials, and Safety; Building

Environment; Technical Evaluation and Application — Center for Fire Research: Fire Science; Fire Safety Engineering.

THE INSTITUTE FOR COMPUTER SCIENCES AND TECHNOLOGY conducts research and provides technical services designed to aid Government agencies in improving cost effectiveness in the conduct of their programs through the selection, acquisition, and effective utilization of automatic data processing equipment; and serves as the principal focus wthin the exec- utive branch for the development of Federal standards for automatic data processing equipment, techniques, and computer'

languages. The Institute consist of the following divisions: Computer Services — Systems and Software — Computer Systems Engineering — Information Technology.

THE OFFICE OF EXPERIMENTAL TECHNOLOGY INCENTIVES PROGRAM seeks to affect public policy and process

to facilitate technological change in the private sector by examining and experimenting with Government policies and practices in order to identify and remove Government-related barriers and to correct inherent market imperfections that impede

the innovation process. THE OFFICE FOR INFORMATION PROGRAMS promotes optimum dissemination and accessibility of scientific information generated within NBS; promotes the development of the National Standard Reference Data System and a system of in- formation analysis centers dealing with the broader aspects of the National Measurement System; provides appropriate services

to ensure that the NBS staff has optimum accessibility to the scientific information of the world. The Office consists of the following organizational imits:

Office of Standard Reference Data — Office of Information Activities — Office of Technical Publications — Library —

Office of International Standards — Office of International Relations.

^ Headquarters and Laboratories at Gaithersburg, Maryland, unless otherwise noted; mailing address Washington, D.C 20234.

^ Located at Boulder, Colorado 80302.
1877

COMPUTER SCIENCE & TECHNOLOGY:

Copyright in Computer-Readable Works:

Policy Impacts of Technological Change

Roy G. Saltman

Information Technology Division

Institute for Computer Sciences and Technology

National Bureau of Standards

Washington, D.C. 20234

Sponsored by the

Division of Science Information

National Science Foundation

Washington, D.C. 20550

U.S. DEPARTMENT OF COMMERCE, Juanita M. Kreps, Secretary

Dr. Sidney Harman, Under Secretary

Jordan J. Baruch, Assistant Secretary for Science and Technology

NATIONAL BUREAU OF STANDARDS, Ernest Ambler, Acting Director

Issued October 1977
Library of Congress Cataloging in Publication Data

Saltman, Roy G

Copyright in computer-readable works. (Computer science & technology) (National Bureau of Standards

special publication ; 500-17)

Includes bibliographical references. Supt.ofDocs.no.: C13. 10:500-17.

1. Copyright-Computer programs-United States. I. Title. II. Series. III. Series: United States. National Bureau of Standards

Special publication ; 500-17. QC100.U57 no. 500-17 [KF3024.C6] 602'.ls [346'.73'048202854] 77-14143

National Bureau of Standards Special Publication 500-17

Nat. Bur. Stand. (U.S.), Spec. Publ. 500-17, 267 pages (Oct. 1977) CODEN: XNBSAV

U.S. GOVERNMENT PRINTING OFFICE

WASHINGTON: 1977

For sale by the Superintendent of Documents, U.S. Government Printing Office, Washington, D.C. 20402

Price $4. Stock No. 003-003-01843-1
ABSTRACT

The findings, recommendations, and conclusions of a policy-oriented,

multi -disciplinary study of copyright in computer- readable works are reported.

The foundations of copyright are examined for basic principles, and

the theory of public goods is applied to develop the rationale for

copyright protection. The judicial history of copyright in the

twentieth century is reviewed with respect to advances in information

technology. The impact of technological change on judicial decisionmaking in copyright is analyzed.

The problem of transaction costs in the marketplace for copyrighted

works is examined and methods for the reduction of such costs are described. Models of policymaking are developed which clarify the

roles of interest groups and the branches of Government, demonstrating

their interactions and providing insights into possible futures.

Recommendations on the conditions of copyrightability for computerreadable data bases and computer programs are presented and are based

on findings of basic principles developed during the study and described

in the report.

Key Words: Computer; computer program; copyright; data base;

economic efficiency; information technology; policy

analysis; policymaking; public goods; technological change;

transaction costs.

NOTE

The conclusions and recommendations of this report on the copyrightability

of computer-readable data bases and computer programs are in no way

intended to imply the copyrightability of any work of the United States

Government excluded by law from such protection.
ACKNOWLEDGMENTS

Contributions to this project were made by several persons with

considerable expertise in diverse professional fields. On the subject

of copyright law, indispensible assistance was provided by Abe A. Goldman,

retired General Counsel to the Copyright Office and by Michael S. Keplinger,

originator of the concept of this project, and now Assistant Executive

Director of the National Commission on New Technological Uses of

Copyrighted Works (CONTU). Mr. Goldman was responsible for the legal

information and interpretations contained in Appendix A and made himself available to provide additional information as the need arose. The project benefited similarly from discussions with Mr. Keplinger

who, with the concurrence of Arthur J. Levine, Executive Director of

CONTU, enabled additional fruitful interchanges to be held with the

professional staff of CONTU. Useful discussions were held with

Jeffrey L. Squires and Christopher A. Meyer, staff attorneys and with

David Y. Peyton, policy analyst.

On the subject of economics, the project was assisted by Professors

Yale M. Braunstein and Janusz A. Ordover of New York University who

are the authors of Appendix B. Dr. Braunstein also wrote Appendix D.

Dr. Ordover, with Dr. R. D. Willig of Bell Laboratories, wrote

Appendices CI and C2.

The clarification of ideas relating to public policy was assisted by

discussions with Professor Patrick Eagan of the University of Massachusetts

at Amherst.

Project monitors for the National Science Foundation in the Division

of Science Information were Dr. Joel Goldhar, Program Director, User

Requirements and Ms. Helene Ebenfield, Research Economist, Economics of

Ini'ormation Program. The National Science Foundation Advisory Committee

consisted of Professor William Capron, Harvard University; Professor

Roger Collons, Drexel University; Dr. Eugene Garfield, President,

Institute for Scientific Information; Professor Arthur Miller, Harvard

University; Ms. Barbara Ringer, Register of Copyrights; Mr. Gerald Smith,

Senior Vice-President, Commercial Credit Company; Mr. Robert Stern, The

Conference Board; and Mr. Ben Weil, Exxon Research and Engineering

Company. Their patience, suggestions, and comments are sincerely

appreciated.

Acknowledgment of the assistance provided by any of the above persons

should not be construed as necessarily implying their concurrence in

the findings, conclusions, or recommendations of this report.

Roy G. Saltman

Project Director

i V
COPYRIGHT IN COMPUTER-READABLE WORKS: POLICY IMPACTS

OF TECHNOLOGICAL CHANGE

TABLE OF CONTENTS PAGE

1. EXECUTIVE SUMMARY AND CONCLUSIONS 1

1.1 Origin of This Study 1 1.2 Content of This Report 1 1.3 Findings of Basic Principles 2

1.4 Recommendations for Implementation 3

1.4.1 Computer-Readable Data Bases 3

1.4.2 Computer Programs 3

1.4.3 Transfer of Ownership of Copies of ComputerReadable Works 4

1.5 Conclusions 5

1.5.1 Technological Change and Copyright 5

1.5.2 Judicial Decisionmaking Under Technological

Change 5

1.5.3 Models of Copyright Policymaking 6

1.5.4 Economic Efficiency 6

1.6 Recommendations for Further Investigations 7

2. THE FOUNDATIONS OF COPYRIGHT 9

2.1 Common Law and the Principle of Natural Equity 9

2.2 National Uniformity in the Face of Mobility 10

2.3 Private Actions in the Public Interest U

2.4 Market Failures and Public Goods 11

2.5 Protection for Publication as Well as Creation 12

2.6 The Value Judgment of Copyright 12

2.7 Summary 13

3. SOME LANDMARKS OF TECHNOLOGY-CONDITIONED COPYRIGHT

POLICYMAKING 15

3.1 Early Historical Activities 15

3.2 Copyright in Sound Recordings 15

3.2.1 Copyrighted Music in Sound Tracks 17

3.2.2 Educational and Library Reproduction of

Phonorecords 17

3.3 Copyright in Motion Pictures 17

3.3.1 Sound Tracks in Motion Pictures 18

V
3.4 Radio and Television Broadcasting 19

3.4.1 Retransmissions of Broadcasts 20

3.5 Copyright in Cable Television Retransmissions 21

3.6 Copyright in Photocopies 23

3.6.1 Williams & Wilkins v. United Sta tes 24

3.6.2 The 1976 General Revision 25

3.6.3 Current Situation 26

3.7 Copyright in Micromedia and Videotape 26

3.8 The Establishment of CONTU 26

3.9 Summary 28

4. TOWARDS AN EFFICIENT MARKETPLACE FOR COPYRIGHTED WORKS 30

4.1 The Problem of Transaction Costs 30

4.2 The Question of Enforcement 31

4.2.1 Transaction Costs Even if No Copyright 31

4.2.2 The Optimal Level of Enforcement and Its

Consequences 32

4.3 The Design of Royalty Collection Systems 34

4.3.1 A Comparison of Types of Licenses 34

4.3.2 Examples of Existing Clearinghouses 35

4.4 Royalty Pricing Schemes 36

4.4.1 Individual and Institutional Users 36

4.4.2 Services with High Fixed Costs 37

4.5 Fair Use as an Economic Concept 37

4.6 Price Setting for Compulsory Licenses 38

4.6.1 The Phonorecord Manufacturing License, 1976 Act . . 38

4.6.2 Jukebox Performance Royalty, 1976 Act 39

4.6.3 New Statutory Compulsory Licenses 39

4.6.4 The Copyright Royalty Tribunal 40

4.7 Copyright and Monopoly 40

4.7.1 Government Remedies for Market Monopoly 41

4.8 Summary 42

5. COPYRIGHT IN COMPUTER-READABLE WORKS 44

5.1 Technology Forecasting, 1967 Style 44

vi
5.1.1 Technology of the Future, Updated 46

5.2 Some Technical Issues in the Hearings, 1967 47

5.3 Current Status, 1976 General Revision 48

5.4 The Implications of Abolishment of Common Law

Protection 49

5.5 Registration and Disclosure 50

5.5.1 The Extent of Disclosure Requirements 51

5.5.2 The Policy Implications of Disclosure Rules .... 51

5.6 Copyright in Computer-Readable Data Bases 52

5.6.1 Publication Only in Computer-Readable Form 53

5.6.1.1 Display Only, Single Licensee 54

5.6.1.2 Printouts at Terminals 54

5.6.1.3 Identity of the Publication 54

5.6.1.4 Needed Clarifications 55

5.6.2 Statutory Deposit to the Library of Congress. ... 55

5.6.3 The Question of Monopoly 56

5.7 Copyright in Computer Programs 58

5.7.1 The Program as the Writing of an Author 59

5.7.2 Computer Programs and Literary Works 61

5.7.3 Originality of Computer Programs 61

5.7.4 Protection of Object Code as a Computer Program . . 62

5.7.5 Translation to a New Source Language 63

5.7.6 Value of Copyright Protection 63

5.7.7 Copyright and Software Industry Strength 64

5.7.8 Duration of Copyright Protection 64

5.7.9 User Rights in Computer-Readable V/orks 65

5.8 Improving Salability of Computer-Readable Works 65

5.8.1 The Right to Ephemeral Recordings 65

5.8.2 The Right to Make and Use Machine Code 66

5.8.3 Differential Pricing 66

5.8.4 Data Base Access Services 67

5.9 Summary 67

6. POLICYf^KING FOR COPYRIGHT 69

6.1 Copyright and Other Property Rights 69

6.2 Applicable Decisionmaking Models 70

6.2.1 Pluralism 70

6.2.2 The Power Arena Model 71

vii
6.3 The Impact of Technological Change 73

6.4 The Public Interest and Computer-Readable Works 74

REFERENCES 76

ILLUSTRATION

Figure 1-The "Optimal" Level of Copyright Enforcement 33

APPENDICES

TABLE OF CONTENTS PAGE

Appendix A: Impact of Information Technology on Copyright

Law in the Use of Computerized Scientific and

Technological Information Systems, by CRC

Systems, Incorporated, Vienna, VA A-1

Appendix B: The Role of Transaction Costs in the Design

of Royalty Pricing Schemes for STI, by

Y. M. Braunstein and J. A. Ordover,

New York University B-1

Appendix CI: On the Optimal Provision of Journals Qua

Excludable Public Goods: Summary and Major

Findings, by J. A. Ordover and R. D. Willig,

New York University and Bell Laboratories Cl-1

Appendix C2: On the Optimal Provision of Journals Qua

Excludable Public Goods (full text), by

J. A. Ordover and R. D. Willig, New York

University and Bell Laboratories C2-1

Appendix D: The Role of Copyright Protection and Optimal

Pricing in Computerized STI Systems, by

Y. M. Braunstein, New York University D-1

viii
1. EXECUTIVE SUMMARY AND CONCLUSIONS

1.1 ORIGIN OF THIS STUDY

This study began in October, 1974, and has been sponsored by the

Division of Science Information of the National Science Foundation.

The problem seen at that time was that copyrighted works were beinq

fixed in computer-readable media and the copyright law concerning the

use of such works was unclear. The copyright law had not been fully

revised since 1909, a time when the possibility of copies of literature

fixed in media that would make the copies invisible to the unaided eye

was unthinkable.

A major issue in 1974 and for several previous years was whether a copyright owner deserved compensation when his work was first encoded into

electronic form, or for the time it continued to be stored, or only upon

each instance of a hard-copy being created. In addition, a sense of

urgency had been created at Congressional hearings in 1967 with predictiQ^is that in the near future, hard copy distribution of technical books

and scientific journals would be replaced by a single copy, converted

into computerized form, being replicated at hundreds, perhaps thousands

of remote terminals. The implications for copyright owners were severe.

As a result of those conditions, what was desired was a multi-disciplinary, "policy-oriented" study which would clarify the issues, including

the issue of economically-sound, technical mechanisms in such automated

systems that would enable reporting of the data on which royalties could

be based.

However, the National Commission on New Technological Uses of Copyrighted Works (CONTU) was established at the very end of 1974, with the

function of recommending to Congress changes in the copyright law with

respect to uses of copyrighted works in conjunction with computers. In

October, 1976, the General Revision of Copyright Law was enacted, which

did much to clarify the rights of copyright owners to their works when

fixed in any tangible medium, but did not finally resolve the issues of

computer-readable works.

CONTU has not yet submitted its recommendations to Congress, and the

copyright laws with respect to computer-readable works will remain am- biguous until Congress acts on those forthcoming recommendations.

This study analyzes the issues of copyright in computer-readable works

and is pertinent to current policy considerations.

1.2 CONTENT OF THIS REPORT

The purpose of this report is to present the results of the study, and

to recommend mechanisms that will maximize the long-term availability

of computer-based information.

The subject of this study does not concern an activity in which there

1
is a comprehensive or coordinated investment program aimed at achieving

a specific goal. Consequently, recommendations are not based on a quantification of benefits and a resulting cost-benefit comparison. In or- der to establish a firm basis for recommendations, basic principles of

copyright have been surveyed; and an analysis has been made of the impact of information technology on copyright law as that technology has

advanced during the twentieth century. In addition, fundamental con- cepts of economics have been reviewed to assure that recommendations are well-grounded in that discipline.

As an outcome of the evaluation of fundamentals, and of the historical

analyses, it has been possible to enumerate a set of basic principles

that are employed as the foundation of the recommendations. In addition,

insights have been developed and conclusions drawn about the reduction

of transaction costs, the impact of technological change and about the

existing and expected mechanisms of policymaking in copyright. It is

hoped that the recommendations and conclusions will be of value to decisionmakers, as well as to policy analysts and researchers. Certainly

the findings, conclusions and recommendations of this report are not to

be taken as the final, definitive view. Other analyses of the legal and

historical precedents may reveal different interpretations and conse- quently different conclusions and recommendations. Additional contributions to the literature are welcomed.

1.3 FINDINGS OF BASIC PRINCIPLES

1. The concept of common law copyright conforms to the philosophy

of the Enl ightenment, enunciated by Locke, that each person has

the right to the fruits of his creations.

2. Due to the inherent rights in the copy, an intrinsic market

failure results from the ease of copying or plagiarism of intellectual property. Correction of the failure requires the

public good of statutory copyright protection.

3. The principle of inherent ownership and consequent statutory

protection do not imply a value judgment as to the relative

merit of an individual work or the inherent right to financial

remuneration. The economic value of a work is to be determined

in the marketplace where copyright protects the distributors of

intellectual works as well as the creators.

4. If free economic competition is possible, opportunities for it

should be maximized, including opportunities for entry of new

products and new competitors.

5. Copyright protection assumes the concept of the quid pro quo

of a social contract. The application of this concept requires

that in return for protection of law, the copyright holder

makes a public disclosure of his work.

2
6. The dissemination of scientific and technical information should

be maximized, subject to resource constraints, excepting where

such principles as personal privacy, trade secrecy and national

security take precedence.

7. There would be transaction costs attached to any market, including the market for intellectual property, even if there were no copyright protection. The trade-off in structuring a market is

in the kinds of transaction costs a society is willing to tolerate, as well as in the size of such costs. All other things

being equal, the size of transaction costs should be minimized.

8. Decisionmaking on copyright involves the achievement of a bal- ance of equities between user needs and owner rights that

should include consideration of the general public as well.

1.4 RECOMMENDATIONS FOR IMPLEMENTATION

1.4.1 Computer-Readable Data Bases

1. Computer-readable data bases, whether compilations, collective

works, or reference works of a single author should be copyrightable in any tangible medium of expression.

2. Complete disclosure of the contents of the data base to the

Copyright Office should be required, in some tangible medium,

when the data base is initially registered.

3. Deposit requirements for data-base updating should be satisfied

by a yearly submission of a complete list of additions and deletions. At some multi-year interval, e.g. ten years, a com- plete re-disclosure should be made if the data base has been

frequently updated.

4. Clarification of what constitutes publication of a data base is

needed when a data base is distributed only in computer-readable

form via a terminal query system through one or a very few

specifically-licensed computer systems.

1.4.2 Computer Programs

1. A computer program written by a person in a source language,

with or without the assistance of a computer, generically qualifies as a work of authorship. An original computer program

should be copyrightable in source language in any tangible me- dium of expression. Machine (object) code should not qualify

as a source language.

2. Disclosure of the computer program upon copyright registration

should be accompanied by definition and usage manuals for the

computer language and dialect in which the program is written,

if such information is not on file already with the Copyright

3
Office.

3. The transformation of a copyrighted computer program into object code from source language should be considered to be the

making of a copy, even if the translation requires the implementation of some housekeeping functions such as the selection

of peripheral units, storage allocation and the assignment of

absolute addresses.

4. The translation of a copyrighted computer program into a com- pletely different source language (not just a dialect or variant) should constitute the authorship of a derivative work.

5. The duration of copyright protection for computer programs

should be no less than the duration of protection of other

original works of authorship, in order to promote the use of

computer languages that can be expected to endure regardless of

changes in hardware technology.

6. Decisionmakers should be aware that assignment of computer programs to a particular category of copyrighted work forces the

adoption of the limitations on exclusive rights already inherent in that category. For example, categorization of a computer program as a "literary work", rather than as a separate

copyrightable category assigns to computer program users the

exemptions to exclusive rights granted to users of literary

works in Section 110 of the 1976 General Revision of Copyright

Law.

7. The flowchart of a computer program ought to be separately

copyrightable as a pictorial work, but it ought not to be able

to employed to support an infringement charge against another

program that employs the same flowchart unless the flowchart is

sufficiently detailed so as to mirror the specific expression

of the original program.

1.4.3 Transfer of Ownership of Copies of Computer-Readable Works

1. Outright sale of computer-readable works, i.e. transfer of own- ership of copies as distinguished from lease or rental with

permissions, should be promoted so as to reduce transaction

costs.

2. In order to effectively use a copyrighted computer-readable

work, an owner of a copy should have the right to make and re- tain additional copies for his internal use (which would have

to be destroyed when and if he resold the work), and should

have the right to use a copy in a computer. The right of internal use should not include the right to make the work available to outsiders via a computer network or otherwise. The

assignment of usage rights to purchasers should not prevent

4
copyright owners from retaining all exclusive rights in situations not involving transfer of ownership of copies.

1.5 CONCLUSIONS

1.5.1 Technological Change and Copyright

1. An essential point at issue, as seen by decisionmakers in copyright policymaking, is the definition of the boundaries of the

property right, regardless of the specific technologies involved.

2. A major effect of technological change is that it causes ambiguities in some of the definitions of property rights that may

have seemed perfectly clear before the change.

3. An effect of successful technological change is a multiplication

of interest groups organized around the new technologies. The

increase in number of interest groups causes an increased incidence of inter-group conflict. This often results in additional

rules as well as more complex rules regulating group interactions.

4. It seems inescapable that "a complex civilization necessarily

develops complex political arrangements" if each interest group

is granted a certain legitimacy through a democratic process.

1.5.2 Judicial Decisionmaking Under Technological Change

1. One viewpoint taken by the Federal Courts in copyright litigation is that if the general concept of the law then in effect

can be extended to the new situation without stretching the

law's meaning too far, it should be done. This interpretation

is more likely to be employed when the decision so taken will

not extend much beyond the boundaries of the specific case at

hand, that is, will not affect the balance among interest

groups.

2. A second viewpoint is that stretching the law's meaning (or

specifically defining the ambiguous) beyond a certain point

would be for the Federal Courts to take on a responsibility

better left to Congress. This viewpoint is more likely to be

taken in a situation in which a decision has ramifications beyond the particular litigants, i.e., affects the balance among

interest groups.

3. In taking the second viewpoint, the Courts apparently recognize

that Congress is much more capable of implementing a flexible

solution involving give and take among interest groups, while

the Courts are simply required to give a right-wrong solution.

Therefore, it appears that the Courts have decided these cases

5
in favor of the side upholding the status quo, so that Congress

can receive the situation without the effect of an unbalancing

Court decision.

1.5.3 Models of Copyright Policymaking

1. Decisionmaking in copyright in the twentieth century has been

essentially a pluralist process, that is, has consisted of com- promises among various interest groups gathered around different

functions related to copyrighted works.

2. The power arena model of Theodore Lowi which assigns decisions

to the distributional, regulatory or redistributional arenas

is a useful vehicle with which to examine copyright policymaking.

3. Individual copyrights may be the ultimate distributional good,

since they can be dispensed in small units, and since registration of copyrights does not reduce the stock of unregistered or uncopyrighted works waiting for claimants. Originality is an unlimited resource, although nurturing and institutionalizing

originality may not be.

4. The effect of technological change has been, in Lowi's terms,

to move copyright policymaking from the distributional arena

(in the nineteenth century) to the regulatory arena (primarily

in the twentieth century). The regulatory arena is very close

in concept to the pluralist model of policymaking.

5. As long as copyright continues to be seen mainly as a problem

of "balancing the equities" (i.e., in the regulatory arena).

Congress will retain the major role vis-a-vis the Executive

Branch.

6. Increasing concern for consumer welfare and for prevention of

monopoly are indicative of redistributional concern and with

the potential for increased Executive Branch involvement.

7. While not apparent at present, it is conceivable that changes

in prices of raw materials (such as paper) and other resources,

as well as technological change, may serve to bring copyright

more significantly into the redistributive arena; but probably

as part of a more encompassing and consumer-related issue, such

as "public access to information."

1.5.4 Economic Efficiency

1. Clearinghouses are useful multi -producer organizations for re- ducing the transaction costs of information and communication

in the collection and payment of royalties for a permission

system, but there may be a blurring of individual proprietor

considerations.

6
2. The selection of blanket or per-use licenses on a least-cost

basis in a permissions system may be technologically determined.

For example, a computerized system of data base access is likely to develop usage information at low cost. In that situation,

per-use calculation of royalties is not difficult.

3. With high data-collection costs of usage information, a blanket

license is likely to result in lower overhead costs than a peruse license, provided the less-precise information available

from the reduced data collection does not result in inequitable

treatment of some of the concerned parties.

4. Price differentials in subscription charges between individual

purchasers of journals and institutional purchasers are eco- nomically justified on efficiency criteria. This concept can

be applied to computer-readable works that are sold, as it has

been to journals.

5. The exemption from royalty payments for "worthy" users is inefficient because it forces the "less worthy" users to carry

more than their share. On efficiency criteria, "worthy" use is

public good which should be paid for by everyone.

6. Whether a copyright is an exercisable economic monopoly depends

on the substi tutabil ity of other copyrighted works as determined

by the actions of consumers of such works.

7. Since a researcher must be comprehensive in the literature of

his field, there may be very little substi tutabil ity among

works he must have.

8. The possibility exists that in some field of research, by virtue of economy of scale, an established system of suppliers and

customers and already amortized costs of market entry, a single

organization may achieve a virtual market monopoly over a class

of nonsubstitutable computer-readable data bases.

9. If there were no copyright protection at all, there would still

be the transaction costs of increased secrecy, cut-throat com- petition, and lowered opportunity for recognition of creative

talents.

1.6 RECOMMENDATIONS FOR FURTHER INVESTIGATIONS

1. The potential for monopoly in the delivery of computer-readable

data-base access services, as discussed above and in Section

5.6.3, may be an area of useful additional investigation.

There is a need to consider the fostering of useful innovations

as well as the potential for monopoly pricing.

2. The effectiveness of discovery of infringements in the copying

7
and unauthorized sale and use of computer-readable works may

need study. The question of the practical value of copyright

protection can be raised if significant infringements can be

shown to be occurring without discovery, prosecution and con- viction.

3. New types of technologically-based intellectual property may

be invented and new copyright problems may arise. Continuing

review of inventions and innovations might be undertaken to

examine the possibility of the need for further changes in the

copyright statute.

4. The electronic journal, while strongly forecasted by some, has

not materialized. A useful study would be a consumer-oriented

(user-pull) survey, determining to what extent such a product

would be acceptable and purchased by potential users.

5. The "worthy use" exemption from copyright royalty payments has

been suggested to be economically inefficient. It could be

hypothesized that innovations of intellectual products serving

the market in which there is a worthy-use exemption would be

stifled because of the potential for lesser returns. It would

be useful to examine this hypothesis in a research project.

6. Additional examination of whether it would serve the public

interest if computer programs were protected under a more-encompassing concept than copyright appears to be worthwhile.

7. While the concept of price descrimination between individual

and institutional purchasers of scientific and technical information has been shown to be economically efficient, the

legal ramifications controlling its use have not been examined

in this report. Such an examination may prove valuable.

8
2. THE FOUNDATIOMS OF COPYRIGHT

2.1 COMMON LAW AND THE PRINCIPLE OF NATURAL EQUITY

Article I, Section 8 of our Constitution gives to Congress the power

"To promote the progress of science and the useful arts,

by securing for limited times to authors and inventors the

exclusive right to their respective writings and discoveries;. .

.

The extant documents that might describe for us the original basis used

by the framers of the Constitution for inclusion of this clause are very limited. The Federal ist , written in 1787 and 1788 by Alexander

Hamilton, James Madison, and John Jay in an effort to explain, defend

and obtain support for the ratification by the States of the then-pending Constitution devotes just five sentences to the clause. In Federal ist No. 43, James Madison wrote:

"The utility of this power /_~~of Congress_7 wil 1 scarcely be

questioned. The copyright of authors has been solemnly adjudged in Great Britain to be a right of common law. The

right to useful inventions seems with equal reason to belong

to the inventors. The public good fully coincides in both

cases with the claims of individuals. The States cannot

make effectual provision for either of the cases, and most

of them have anticipated the decision of this point by laws

passed at the instance of Congress."

Into Madison's short sentences are packed a wealth of social, economic

and political philosophy. In his statement that "copyright of authors

has been solemnly adjudged in Great Britain to be a right of common law,"

Madison implied that basic principles of British common law were valuable, and in addition, continued in effect in the United States; at

that time newly-formed out of British colonies. Walter Pforzheimer, in

a scholarly historical review of copyright law, has similarly quoted an 1807 Massachusetts decision as stating:

"Our ancestors, when they came into this new world, claimed

the common law as their birth-right, and brought it with them,

except such parts as were judged inapplicable to their new

state and condition."^

Professor Emmette Redford, in describing our legal and ideological

heritage, has noted that "...early English judges looked not alone to

custom, but also to reason and natural equity for their decisions."^

Thus, by citing British common law, Madison implied principles of natural justice which included the concept that each person has an inherent

right to control of the products of his own creation.

The philosopher most associated with this principle and whose writings

9
would have been known to Madison was Englishman John Locke (1632-1704).

Locke has been called "first advocate of the modern conception of civil

liberties and definer of the limitations of property and the powers of

the common wealth... the formulator of constitutional law and the democratic processes as we know them."^ Locke had written, in his Second

Treatise on Civil Government , (Chapter V, para. 27):

"...every man has a property in his own person... The labor

of his body and the work of his hands we may say are properly

his... It being by him removed from the common state nature

placed it in, it hath by his labor something annexed to it

that excludes the common right of other men..."

It is useful to note at this point that common law copyright in all un- published works (with its basis in the British common law to which

Madison referred) will continue to be in force in the United States

through December 31, 1977. Pforzheimer notes that a principle of British common law that has been carried down to us, and is in effect at

this time, is that the author has complete dominion over his work until publication, after which his rights conform to the statute then in

effect. The case of Donaldson v. Becket decided in 1774 in Great Britain confirmed this situation."*

However, on January 1, 1978, the 1976 General Revision of Copyright Law

takes effect, and under this new statute, common law copyright is ended

for all unpublished works fixed in any tangible medium of expression.

As of that date, such works will be covered by the Federal copyright

statut| and will not be subject to the common law or statutes of any

State. Works not fixed in any tangible medium such as unscripted

utterances or performances will continue to be subject to common law

as interpreted by the Judiciary.

2.2 NATIONAL UNIFORMITY IN THE FACE OF MOBILITY

In calling in The Federalist for a Federal copyright law, as opposed

to a set of State laws, Madison recognized the natural mobility of information (recently proclaimed by some to a 20th century concept) and

the inefficiency of different requirements for intellectual property

rights in the separate States. Professor Redford has noted that this

attempt at uniformity was part of an overall pattern of Constitutional

provisions that had a strong economic impact. As Redford states:

"/The framers of the Consti tution_7 made certain decisions

tnat were necessary to allow the free flow of persons, investment money, and commerce over the nation as a whole,

thus opening a vast area and a vast market to the entrepreneurial geni_us of Americans, wherever located . . . I_ The framers_/ made possible national uniformity in certain facilities for commerce, such as coinage, patents

and copyrights, uniform weights and measures, and a postal system. "6

10
2.3 PRIVATE ACTIONS IN THE PUBLIC INTEREST

Finally, in asserting in The Federalist that "t^he public good fully co- incides . ._. with the claims of individuals /_ for copyright and patent

protection_/" Madison made a bold statement with profound economic as well as political implications. The statement implies, first, that

there exists a "public good" that is distinct and separate from individual or orivate goods. Second, it is implied that the Government may

grant incentive benefits or remuneration to individuals for private and

voluntary activities that are consistent with the public good. Third,

in the cases of patents and copyrights, the private benefits to be

granted by the Government will have no public effects except good effects; and fourth, the value of benefits granted is equivalent to the

public good thereby obtained.

These implications raise issues that even today, have not been fully

analyzed and may never be fully resolved. They are in the arena of what

has been referred to as the theory of public goods or public expenditure

analysis, but which Professor Peter Steiner has broadened to call "the

theory of the public interest. These economic theories "concern the

way in which demands for public activity arise, are articulated, and are legitimatized."® The theories include the definition and classification of public goods and the mechanisms of their creation, financing,

and distribution. In the case of intellectual property, the specific

public good is the protection offered to copyright proprietors by the

Government through its registration and enforcement mechanisms. Note

that the Government protection is the public qood; the individually-held

copyright is a private asset,

2.4 MARKET FAILURES AND PUBLIC GOODS

Public goods may be differentiated in general from private goods and

from collective goods. The necessity for public provision of a qood

may arise because the technical nature of the good is such that a private market, however perfectly competitive, would not be able to provide it.

The need for a public good may arise also if the imperfections of a real

market create public "bads" (e.g., an externality, for example, pollution) which only Government action can cause to correct. In either case,

"market failure" is said to occur. If some group of persons acting together take cognizance of the inability of the market to supply the good

and provide the good for themselves outside of the free market activity,

a collective good results. "Any publicly-induced or provided collective

good is a public good,"^ according to Steiner.

In the case of copyright protection, a conventional economic analysis

would state that the need for a public good arises because intrinsic

technical characteristics of an intellectual work prevents the operation

of the perfectly competitive market for such works without Government

intervention. One technical characteristic is simply that an original

authored work fixed in any tangible medium of expression (i.e., a 11
copyrightable work) is typically reproducible at a very low cost in the same or similar medium. The work is also subject to plagiarism. In the

presence of these technical facts, and with the condition that the au- thor or his assignees have a property right in the work, a market failure would result without the protection and enforcement power of the

Government. The market failure is that without copyright protection

the author or rights proprietor would not be able to fully appropriate

the economic value of originality through sale.

2.5 PROTECTION FOR PUBLICATION AS WELL AS CREATION

The conventional economic analysis given above has been discussed in a perceptive paper on

" The Economic Rationale of Copyright " by Professors Robert M. Hurt and Robert M. Schuchman. One question these authors

ask is: "Does the copyright system induce the creation of new goods

which would not have been created in the absence of copyrights?"^^ The

authors answer that "copyright does lead to the creation of new goods by

encouraging the assumption of greater risks. "^^

It is necessary to comment, however, (as Hurt and Schuchman imply) that

many kinds of works are subject to copyright, and the importance of

copyright for the creation of new works varies with the type of work.

In particular, for scientific and technical research papers, copyright

is typically of minor importance to the authors of such papers even though publication is very important to them. The remuneration to au- thors of research papers occurs indirectly through increased salary,

improved job security, prizes, travel opportunities and prestige, but

not typically from the sale of papers.

However, copyright is extremely important to the publishers of such papers because (as is pointed out in Appendix B of this report), copyright protects the publishers' opportunities to cover their fixed costs.

Thus in the case of research papers, cooyriqht does not lead directly

to the creation of new goods, but rather to the direct protection of

channels of publication for already-existing goods. (This may lead, as

a secondary effect, to the further creation of new goods of a similar

type for distribution through the protected publication channels.)

2.6 THE VALUE JUDGMENT OF COPYRIGHT

Under the assumption, then, that copyright increases the creation and/or

publication of some original works of authorship. Hurt and Schuchman

then inquire "whether the reallocation of resources induced thereby is

conducive to general welfare, "13 One argument is that copyright encourages literature, which like education, has greater intrinsic merit than

its alternative product. Thus social welfare in enhanced. Hurt and

Schuchman state that this assumption is in the nature of a value judgment. This is undeniable. It may be noted, in addition, that such a judgment was conceivably in the minds of the Constitution ratifiers who

voted "to promote the progress of science and the useful arts" without

conclusive proof that copyright protection (along with patent protection)

was the most economically efficient or socially equitable method of

12
pursuing that goal

However, the Judiciary has held that this Constitutional qualification

is explanatory and not prescriptive; and that a copyrighted work need

not specifically promote anything as publicly valuable as science or the

useful arts, however those terms might have been defined in the 18th

century or are defined in the 20th. At present, the judgment of (U.S.)

society is, as expressed in law, that any "original works of authorship

fixed in any tangible medium of expression "^^ that are accepted for

copyright protection are more valuable than the alternatives, whatever

they might be.

Furthermore, copyright protection provides society with no comparative

value judgment as to the inherent worth of a particular work of authorship; although the availability of copyright may be a Lockean/Madisonian

judgment that all such works are qualitatively worth something. Copyright protection is primarily a mechanism designed to correct a flaw or failure in the competitive economic market. As such, it carries no intrinsic predetermined dollar value for any work so protected. It may be,

therefore, that "copyright seems to be an inefficient device for simply

rewarding authors"^^ as Hurt and Schuchman suggest, but specific financial reward for an individual never has been shown to be the function

of copyright. Copyright is directly pertinent to the market for works,

and certainly pertinent to the rights of authors, but secondary to au- thors' specific income. Although copyright protection makes possible

a certain monetary compensation for all those involved on the producer

side of the economic market for works of authorship, remuneration occurs

only to the extent of the revenue that can be obtained from the set of

costs, prices, and quantities of sale that market conditions permit.

As persons of uncommon taste or strongly-held belief can attest, market

prices and revenues rarely reflect an individual's sense of basic priorities or fundamental values. The just rewards to the creators of intellectual works of lasting value that advance the state of civilization

will not be through the market mechanism, however protected, by copyright or otherwise.

2.7 SUMMARY

This chapter has provided a background in the foundations of copyright,

both ideological and economic. It has considered the question of who

gains from copyright protection and the extent, if any, of value judgment in copyright.

The ideological basis for copyright has been shown to be closely related

to the concept that each person has the right to control the products

of his own creation. This natural right evolved into common law copyright in Great Britain; and the limitations of the protection inherent

there was part of the rationale for the Copyright Clause in the Constitution.

Because of the rights of the creator or his assignees, a technical failure exists in the market for intellectual property. The technical

13
failure, which is the ease of misappropriation through copying or plagiarism, is corrected through a public good, the Government protection

of copyright. Note that if there were no inherent right in the copy,

there could be no misappropriation, and consequently no implicit market

failure. Thus, there would be no reason for Government intervention in

the free market.

Copyright is of importance to the publisher as well as the author. This

is particularly true in the case of scientific journals. However, the

fact of copyright carries with it no comparative value judgment of works

so protected. The economic worth of a work is determined in the marketplace where remuneration for the author and/or publisher may (or may

not) be obtained. Copyright is not a financial subsidy for authors nor was it ever meant to be. It is a tool through which an author or his

assignees may earn an income in the marketplace, if they so choose to use the tool in that manner.

14
3. SOME LANDMARKS OF TECHNOLOGY-CONDITIONED COPYRIGHT POLICYMAKING

3.1 EARLY HISTORICAL ACTIVITIES

The Constitution was declared in effect on March 4, 1789, having been

ratified by the minimum nine States and two others by that time. The

first U.S. Congress began regular sessions on April 6, 1789 and the

Copyright Act of 1790 was adopted on May 31 of that year.^^ Maps,

charts, and books were covered by the first Act. The very early adoption of a Copyright Act may be indicative of the general inclinations

of the members of our first Federal government towards the pursuit of

knowledge for its practical implications. A less practical, more

esthetic class of work, prints, were protected in 1802, although Taubman states that the art of the engraver had been protected in England

by 1735.^'' Musical compositions embodied as sheet music were added as

a protected class in the general copyright revision of 1831. Photographs were added by the Act of 1865 and works of fine arts were enu- merated in the second general copyright revision in 1870.

The adaption of the copyright laws to the technologies of the twentieth

century (except for computer technology) is detailed in Appendix A,

Chapter A. 2 of this report. Much of the following part of this chapter

is essentially a summary of that material. Special organization and

additional information and interpretation have been added to clarify

and elucidate certain concepts.

3.2 COPYRIGHT IN SOUND RECORDINGS

This technology is considered first because of the early consideration

by the Supreme Court of a principle that was to have effect on thinking

about copyright, even with respect to other technologies, until 1976.

The essential question at issue before the Supreme Court in the 1908 case of White-Smith Music Publishing Co. v. Apollo Co. was whether a perforated piano roll constituted a copy" of sheet music. Now a piano

roll, which is simply a cylinder of hard material with holes in it, is

a sound recording, as that term is understood today. True, music is

only heard when the piano roll is used together with a properly-instrumented piano, but the analogy with a phonograph record or magnetic tape

is clear. Neither of those latter recording media contain sounds either;

they contain grooves or altered magnetic domains. When a record or tape

is used together with properly-instrumented equipment, the intended music is heard; and it cannot be heard from the recording without that

equipment or other equipment performing the same function. In effect,

the piano used with the piano roll is the playback equipment.

However, sound recordings were not a protected class in 1908 and the

Supreme Court decided in White-Smith that the definition of a copy of a musical composition was "a written or printed record of it in intelligible notation." To the Supreme Court in 1908, a piano roll, or for

that matter a phonograph record, was not a copy (because it was not

15
humanly intelligible through the sense of sight) and therefore, in the

Court's opinion, was not covered by the copyright statute.

Furthermore, the Court said, in keeping with its narrow construction of

the word "copy", that issues of a new technology not specifically covered in the current statute "properly address themselves to the legislative and not to the judicial branch of the Government." However, it was clear from other Court statements that the Court was sympathetic to

sound recording protection, despite its contrary ruling on the basis of

its interpretation of the law as written.

At the time of the White- Smith ruling. Congress was working on the prospective Copyright Act of 1909, and one issue was whether copyright

owners should have a new exclusive right to make recordings of their music. During hearings. Congress was told that one company had contracted

with most of the major music publishers for exclusive licenses under the

anticipated new law to record all the music controlled by those publishers for many years to come. The result was that Congress, in the 1909

Act, established a compulsory license for musical recording, requiring

that once an owner of a musical copyright had permitted his work to be

recorded by one company, any other company could record it similarly,

upon payment of 2 cents for each reproduction of the composition manufactured. This step prevented the anticipated recording monopoly.

However, this did not mean, necessarily, that recordings of musical

compositions were copyrightable. They were not, strictly speaking, even though no one could lawfully manufacture records of copyrighted music

without paying the compulsory license fee. Nevertheless, Congress provided for the copyright owner of a dramatic work to have exclusive rights

in "any transcription or record thereof" in the 1909 Act, and extended

this right this right to nondramatic literary works in 1952. The question whether, under the Constitutional clause on copyright, a recorded

performance could be considered the "writing" of an "author" and therefore eligible for copyright protection if Congress so chose to grant it, was apparently disposed of in the affirmative in the case of Capitol

Records, Inc. v. Mercury Records Corp. , heard by the 2nd Circuit Court

in 1955. However, it was not until 1971 that Congress passed a law naming "sound recordings" as a category of copyrightable works, when it be- came evident that "record piracy" had become rampant and was growing.

In the 1976 General Revision, Congress provided for copyright of works

"fixed in any tangible medium of expression" and defined "sound record

ings" as "works that result from the fixation of a series of musical,

spoken, or other sounds, but not including the sounds accompanying a motion picture or other audiovisual work, regardless of the nature of

the material objects such as disks, tapes, or other phonorecords in which

they are embodied" (Section 101). Thus motion picture sound tracks are

not covered as "sound recordings," although they are covered elsewhere.

This is due to their judicial history and their closer connection with

motion pictures as an industry.

16
3.2.1 Copyrighted Music in Sound Tracks

In 1946, the question arose whether a producer of motion pictures was entitled to a compulsory license for 2 cents per recording for use of a performance of copyrighted music in a sound track of a motion picture.

Clearly, in 1909, when the compulsory license for music recordings be- came law, sound tracks in motion pictures were unknown. Consequently,

this was a clear case for judicial interpretation. That the Court decided in the negative on purely economic grounds may be noted from the

following quotes from the Court decision on this case, Jerome v. Twentieth Century - Fox Film Corp :

"Counsel assert that no more than 500 positive prints of a film of a musical motion picture are made to supply the demands for exhibition purposes. If Section 1(e) j_ tjn^e com- pulsory license provision of the 1909 Copyright Act_/ applied to a motion picture use of a musical composition, then

and producer could appropriate a copyrighted musical com- position for use in a motion picture for a total sum of

about $10.00, at the rate of li for each positive print...

The result would be destructive of valuable rights of com- posers and publishers, which the Act was intended to se- cure and protect.

In the 1976 Act, the view that the compulsory license provision did not

apply to sound tracks was stated explicitly. Owners of copyrights in music retained the exclusive rights to record on sound tracks and the com- pulsory license to record was confined to the making of "phonorecords"

which excludes sound tracks as a subset.

3.2.2 Educational and Library Reproduction of Phonorecords

In the 1976 General Revision of Copyright Law, sections 107 and 108 and

related pages of House Reports 94-1476 and 94-1733 concern the concepts

of fair use and permitted educational and library reproduction of works.

The content of this material is discussed in Section 3.6.2 below in the

context of photocopying because the problems addressed by that material

arose primarily from that cause. However, a review of the documents

shows that the solutions applied to photocopies also apply, in general,

to phonorecords.

3.3 COPYRIGHT IN MOTION PICTURES

I With this technology, as with others, the Federal Courts struggled with

the question of whether new technology not specifically provided for by

Congress is protected by virtue of extension of concept or is not protected by virtue of strict literal interpretation.

The problem arose in 1903 in the question whether a sequence of photographs telling a story could be protected with the affixation of a single copyright notice or whether each photograph had to have its own notice, as literally intended when Congress protected (individual)

17
photographs in 1870. This was the situation in Edison v. Lubin . In

that case, the District Court said:

"...if... the law is defective, it should be altered by Congress, not strained by the courts."

On the other hand, the Circuit Court of Appeals, in reversing the District Court, said:

"When Congress. . .saw fit... to extend copyright protection to

a photograph. .. it is not to be presumed it thought such art

could not progress, and that no protection was to be afforded

such progress. It must be recognized there would be change

and advance. .

.

In 1912, Congress amended the copyright statutes to include "motionpicture photoplays" and "motion pictures other than photoplays" as protected classes of works. The 1909 revision had made no mention of these

concepts, although they were well-known at the time. After 1912, then,

there was protection for motion pictures against unauthorized copying,

but due to the specific language of the statute, it was clear that there

was protection against unauthorized "public performances" (as distinguished from copying) only for dramatic and musical works. The question

whether a motion picture photoplay was a dramatic work arose therefore

through litigation.

Specifically, this question arose in Tiffany Productions v. Dewing , (1931), and in M. G. M. v. Bijou Theatre , (1933). Thi~effect of both cases was to insure that a motion picture photoplay was legally defined

as a type of dramatic work and that the protection of copyright was ac- corded to public performances or exhibitions of this type of motion picture.

In the Tiffany Productions case, the Court (holding that a motion picture photoplay was a form of a dramatic work) said that:

"The statute must be given a sensible meaning in its application to modern invention, expressly within the scope of the

statute.

In the M. G. M. case, the District Court, in a decision later countermanded, had said:

"...the effect of a new invention in any given field seems to

be a matter for legislative consideration, rather than for the

extension of existing statutes by judicial construction."

3.3.1 Sound Tracks in Motion Pictures

"Talking motion pictures began to be produced about 1924, some 12 years

after motion pictures were added to the copyright statutes as a protected class of work. Despite the lack of explicit copyright protection.
the industry groups concerned tacitly accepted and operated on the premise that the sound track is protected as an integral part of the motion

picture; and this premise appeared then and continues to appear to be

logically valid since the pictures and sound together are necessary to

constitute the complete work and to convey its artistic effect. This

concept was given some judicial validity in the case of L. C. Page & Co.

V. Fox Film Corp. , (1936); in which the Court stated that "as the plaintiff well says, 'talkies' are but a species of the genus motion pictures."

In 1971, in tne House Report on the amendment to the copyright statute

which extended nrotection to sound recordings excepting those sounds

accompanying a motion picture, a statement on sound tracks was made.

The House Report stated:

"The exclusion r'of sound tracks from the protection accorded

sound recordings_/ reflects the. . .opinion that sound tracks or audio tracks are an integral part of the "motion pictures"

already accorded protection. . .and that the reproduction of

the sound accompanying a motion picture is an infringement

of copyright in the motion picture."

Finally in the 1976 General Revision, it was clearly stated that the

definition of motion picture included accompanying sounds, and that the

copyright in a motion picture included the right to perform it publicly

by making its images visible or its sounds audible.

Thus, from 1924 until 1976, more by general unstated agreement than by

actual law or judicial interpretation, sound tracks were accepted as an integral part of motion pictures.

3.4 RADIO AND TELEVISION BROADCASTING

In 1909, radio and television broadcasting were unknown and a public

performance was thought of as a performance given in the presence of a group of persons assembled within sight or hearing of the performers.

When the use of the copyrighted music and plays in radio broadcasts be- came common in the early 1920 's, the question arose whether broadcasts

of copyrighted works were public performances within the scope of the

1909 Statute.

This question was considered in the case of Jerome H. Remick & Co. v. American Automobile Accessories Co. in 1925 with respect to a radio

broadcast of a musical work. The court held that the broadcast did con- stitute a public performance, stating:

"While the fact that the radio was not developed at the time

the Copyright Act... was enacted may raise some question as to

whether it comes within the purview of the statute, it is not

by that fact alone excluded The statute may be applied to new situations not anticipated by Congress, if, fairly con- strued, such situations come within its intent and meaning

19
While statutes should not be stretched to apply to new situations

not fairly within their scope,,they should not be so narrow- • ly construed as to permit their evasion because of changing

ha^bits due to new invent^ions and discoveries The artist

/_ in a radio broadcast_/ is consciously addressing a great,

though unseen and widely scattered audience, and is therefore

participating in a public performance."

The ruling in this case was generally accepted in practice by broadcasters and other concerned parties. In addition, the ruling in this case determined that the public performance was "for profit" if the

broadcast was over a commercial station that was used as a medium for

advertising, regardless of the fact that the broadcast listeners did not

pay an admission fee.

A similar result ensued in the case of Leo Feist, Inc. v. Lew Tendler

Tavern in 1958, which extended the public performance concept from

broadcasting to wire transmissions. In this case, music transmitted

over wire from a central location to a restaurant and then made audible

there for the benefit of restaurant patrons was found to be a public

performance for profit.

The 1976 Act codified these results by assigning the copyright owner the

exclusive right (with certain exemptions) of public performance and display; and by including in the definition of public performance and display transmission or communication to the public "by means of any device

or process, whether the members of the public capable of receiving the

performance or display receive it in the same place or in separate places

and at the same time or at different times" (Section 101).

3.4.1 Retransmissions of Broadcasts

A question that was to have very important ramifications 35 years later

for cable television retransmissions was raised in the case of Buck v. Jewell -La Salle Realty Co. in 1931 before the U.S. Supreme Court. In

that case, a hotel maintained a master radio set which was wired to loud

speakers from which the radio programs could be heard in all of the public and private rooms of the hotel. The Court held that the hotel's re- production of the broadcast performance, through its receiving set and

loudspeakers, for the entertainment of its guests, was itself a public

performance under the 1909 Statute and therefore not exempt from the implications of the Statute for royalty payment. The opinion in this case

by Justice Brandeis for the Court is quoted from extensively in Section

A. 2.4. 2 of Appendix A of this report and is a prime example of reasoning

by analogy in determining the law with respect to new technological devices not previously considered by Congress.

Another similar case which confirmed the copyright owners' rights to

retransmissions in a hotel situation was SESAC v. New York Hotel Statler

Co. decided in 1937.

20
3.5 COPYRIGHT IN CABLE TELEVISION RETRANSMISSIONS

By the middle of the 1960s, commercial enterprises had sprung up whose

functions were to provide TV viewers with programs that the viewers were

unable to receive satisfactorily with standard antennae. This industry,

because it serviced subscribers via cable, a non-broadcast mode, became

known as CATV, community antenna television, or cable television. The

industry obtained much of its program material from broadcasted TV which

it acquired with more sensitive receiving equipment and more sophisticated or better situated antennae than its subscribers were capable of

providing for themselves individually.

In the opinion of copyright owners, significant copyright problems existed. The primary over-the-air boradcasters obtained licenses from

copyright owners for the motion pictures, plays, music, and other works

that they broadcast. Was the retransmission of the broadcasted programs

by the cable system to its subscribers to be treated as a further public

performance of the copyrighted works which infringed the copyright owners exclusive rights?

This question came before the courts in 1966 through 1968 in the case of

United Artists Television, Inc. v. Fortnightly Corp. The District and

Circuit Courts held for the copyright owners, relying on the previous

decisions described above, i.e. Remick , Jewel 1-LaSalle , and SESAC , that

the retransmission, as a public performance for profit, was covered by

the Copyright Act then in force. It is not surprising, in light of previous decisions quoted, that the District Court in this case spoke about

"accomodating the statute to the realities of modern science and technology."

However, to the surprise of many, the Supreme Court reversed the lower

court findings by essentially determining that cable television program

providers were acting as viewers' agents rather than as secondary producers. The Court reasoned that:

"...while both broadcasters and viewers play crucial roles in

the total television process, a line is drawn between them.

One is treated as active performer; the other as passive

beneficiary.

"When CATV is considered in this framework, we conclude that

it falls on the viewer's side of the line...."

The Court carried forward this precedent-breaking decision and similarly

found no infringement in the 1974 case of CBS v. Teleprompter . The issue in the latter case was a possible distinction between the retransmission over cable of local signals that could have been received over

the air by cable subscribers and the retransmission of far distant signals not originally intended for the cabled locale. The Supreme Court

found no distinction and determined that there was no infringement in

either case.

21
The more complete discussion of Section A. 2. 6 of Appendix A provides

some rationales for these Supreme Court decisions. As noted there, a major element in the decisionmaking appeared to be a desire to prevent

the CATV industry from being retroactively liable for royalties and infringement damages. The majority opinion in the Fortnightly decision

had said in a footnote, that a decision consistent with Jewell -La Salle

would be such "as retroactively to impose copyright liability where it

has never been acknowledged to exist before." Here the Court is implying that a judicial decision for the copyright owners (unlike a legislated decision) could not cause royalties to flow from that time on, but

would be forced to require that the CATV industry be responsible for all

past royalties it should have paid. These back royalties might be large

enough to destroy many of these small operations.

The fact that Congress was considering major revisions to the Copyright

Act during the times of the Fortnightly and Teleprompter litigations

cannot be ignored as a factor in the Supreme Court's decisionmaking. As

noted in Section A. 2. 6, both the majority and dissenting opinions in

Fortnightly , as well as in the lower court decisions, in both Fortnightly

and Teleprompter , took cognizance of the on-going considerations by Congress of the copyright problem of cable retransmissions in the context

of the general revision of copyright law. Justice Fortas, in his dissent in Fortnightly had consented:

"Our major object, I suggest, should be to do as little damage

as possible to traditional copyright principles and to business relationships, until the Congress legislates and relieves

the embarrassment which we and the interested parties face."

Similarly, the Circuit Court of Appeals noted in Teleprompter :

"The complex problems represented by the issues in this case

are not readily amenable to judicial resolution We hope

that the Congress will in due course legislate a fuller and

more flexible accomodation of competing copyright, anti -trust,

and communications policy considerations, consistent with

the challenge of modern CATV technology."

Thus the judiciary in general, saw the issues as more complex than a simple extension of principle as embodied in Buck v. Jewell-La Salle . The interaction of basic communications policy in the public interest

and the economic interests of the concerned parties demanded a legislative solution. Ultimately, the approximately ten years of negotiation

among the various concerned parties resulted in the provisions of Section 111 of the 1976 General Revision of Copyright Law.

This 1976 General Revision makes cable retransmissions subject to the

restrictions of copyright, thereby validating at least the principle of

the dissent in Teleprompter which was based on the precedent of Buck v. Jewell -La Salle . However, a cable company now may obtain a compulsory

license for retransmission of programs from those stations whose

22
signals the system is authorized to carry hy the Federal Communications

Commission, and it is not liable for any royalties before the effective

date of the new Act.

3.6 COPYRIGHT IN PHOTOCOPIES

The issue of photocopying as a serious concern to copyright proprietors

of printed matter dates from the 1930s. During that period, microphotography came to be extensively used, because it was a process that en- abled printed matter to be reproduced at a reasonable cost.

In the 1930s, discussions took place between the predecessor to the

Association of American Publishers and organizations of scholarly users

such as the American Council of Learned Societies and the Social Science

Research Council in order to define the boundaries of acceptable non- infringing photocopying. These discussions resulted in the "Gentlemen's

Agreement" of 1935 which, although not binding, provided guidelines that were followed by many libraries and which stood as a basis governing library photocopying for a generation.

The significant paragraphs of the Gentlemen's Agreement are as follows:

"A library, archives, office, museum, or similar institution

owning books or periodical volumes in which copyright still

subsists may make and deliver a single photographic reproduction or reduction of a part thereof to a scholar representing

in writing that he desires such reproduction in lieu of loan

of such publication or in place of manual transcription and

solely for the purpose of research; provided

(1) that the person receiving it is given due notice in

writing that he is not exempt from liability to the

copyright proprietor for any infringement of copyright

by misuse of the reproduction constituting an infringement under the copyright law;

(2) that such reproduction is made and furnished without

profit to itself by the institution making it."

This was an important effort on the part of opposing interest groups to

solve a national copyright problem among themselves without recourse to

Government instrumentalities.

From the 1960s onward, the photocopying problem became progressively

more acute as new photocopying technologies and improved mechanical

I paper-handling systems combined to reduce significantly the cost per

copy and to increase significantly the speed of multi-copying. Publishers, especially of scientific and technical journals and of educational

texts, expressed fears that loss of sales due to photocopying might force

I- them to discontinue certain publications. However, the several opposing

interests groups agreed that in the revision bills Congress considered

23
in the late 1960s, the doctrine of fair use would be incorporated rather

than any specific rules for photocopying. The groups hoped to work out

the details of an agreement among themselves using the fair use doctrine

as a basis. This doctrine, as it had been developed by the courts, was contained in Section 107 of the copyright bill passed by the House of

Representatives in 1966 but never enacted into law. Section 107 of the

1966 bill included the following:

"...the fair use of a copyrighted work such as criticism,

comment, news reporting, teaching, scholarship or research,

is not an infringement of copyright. In determining whether

the use made of a work in any particular case is a fair use,

the factors to be considered shall include--

(1) the purpose and character of the use;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in

relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of the copyrighted work."

However, final agreement between librarians and publishers was not able

to be worked out at that time. It foundered on the essential question

of the specific boundary between fair use and infringement, and the

quantity and purposes of copying which crossed the boundary.

3.6.1 Williams & Wilkins v. United States

In 1971, a suit was instituted in the U.S. Court of Claims in which the

plaintiff, a publisher of medical journals and books, charged that two

Government libraries, The National Institutes of Health library and the

National Library of Medicine, had infringed the copyright in several of

its medical journals. The plaintiff claimed that the copying done by

those institutions in supplying journal articles to other medical libraries, research institutes, individual researchers, and practitioners

exceeded fair use.

This case was Williams & Wilkins Co. v. United States . The initial

opinion of the Commissioner hearing the case (1972) held that photocopying practices of the two Government libraries exceeded fair use. The full Court (1973) reversed this decision, 4 to 3, basing its majority opinion on essentially three criteria:

"First, plaintiff has not in our view shown, and there is inadequate reason to believe that it is being or will be harmed

substantially by these specific practices of NIH and NLM;

"second, we are convinced that medicine and medical research

will be injured by holding these particular practices to be an infringement; and

"third, since the problem of accomodating the interests of

24
science with those of the publishers (and authors) calls

fundamentally for legislative solution or guidance, which

has not yet been given, we should not, during the period before congressional action is forthcoming, place such a risk

of harm upon science and medicine. "^^

The three dissenting judges of the Court of Claims noted, in opposition:

"What we have before us is a case of wholesale copying, and

distribution of copyrighted material by defendant's libraries

on a scale so vast that it dwarfs the output of many small

publishing companies .. .This is the very essence of wholesale

copying and, without more, defeats the defense of fair use."

Thus, the two sides differed materially on the interpretation of the

facts. The situation is reminiscent of the cable TV cases, Fortnightly

and Teleprompter , where Court majorities were of the opinion that the

situation demanded a legislative answer that was more flexible, involving components of right from both sides, rather than the limited yes-no

answer of a judicial decision. As in those cases, the Court refrains

here from providing the decision that would tend more to permanently

end the controversy and would tend to end it with a greater detriment to one side than the Court feels that the losing side deserves. This interpretation may be supported with this quote from the majority opinion in

Williams & Wilkins :

"The Courts are now precluded, both by the Act and by the na- ture of the judicial process, from contriving pragmatic or compromise solutions which would reflect the legislature's

choice of policy and its mediation among the competing interests. . .Hopeful ly, the result in the present case will be but

a 'holding operation' in the interim period before Congress

enacts its preferred solutions."

The Williams & Wilkins case was accepted for review by the Supreme Court,

where, after the arguments were heard, the Court split 4 to 4 without an exposition of the reasoning on the two sides. This had the effect of

affirming the decision of the full Court of Claims.

3.6.2 The 1976 General Revision

Certain provisions included in the 1976 General Revision of Copyright

Law were the result of hard bargaining among authors, publishers, educators, and librarians. Section 107 of the 1976 Act contains the fair

use concept essentially as reproduced above (in Section 3.6) except for

the addition of two phrases as concessions to educators. A purpose of

use for which fair use is allowable is now teaching "(including multiple

copies for classroom use)." In addition, a factor to be considered in

determining whether a particular use is a fair use is "whether such use

is of a commercial nature or is for nonprofit educational purposes."

The House of Representatives report on the proposed 1976 Act (Report No.

25
94-1476 at pages 67-71) includes the texts of agreements between educators on one side and authors and publishers on the other establishing

standards of fair use for educational purposes. These agreements were

reached at the urging of the Congressional committees, after a series of

meetings between the opposing parties.

The problem of library photocopying for scholars and researchers is

dealt with in Section 108 of the 1976 Act. The language of Section 108

makes it clear that library rights do not extend to "the related or con- certed reproductions. . .of multiple copies... of the same material," or "the systematic reproduction. . .of single or multiple copies." In addition, the Conference Report on the proposed 1976 General Revision (House

Report No. 94-1733 at pages 71-73) contains a set of guidelines agreed

to by the opposing parties that define the extent of loans permitted in

interlibrary arrangements. These guidelines were developed with the

assistance of the National Commission on New Technological Uses of

Copyrighted Works (see Section 3.8, below).

3.6.3 Current Situation

Despite the successful negotiations that resulted in the provisions of

the 1976 General Revision, the photocopying problem is not fully solved.

There does not exist at this time any fully-established clearinghouse

or other mechanism for payment of royalties for photocopying beyond the

guidelines established, nor is it clear that the current guidelines can

be enforced. At present, an effort is underway through the auspices of

the Association of American Publishers to establish a clearinghouse

system.

3.7 COPYRIGHT IN MICROMEDIA AND VIDEOTAPE

The decision to accept for copyright registration a work on a micromedium that would otherwise be copyrightable if intelligible to the unaided

eye was made independently by the Copyright Office through its regulations. It was believed by that office that the 1908 Supreme Court decision in the White-Smith case, which had never been overturned, would

not prevent the registration of a work on micromedia since that Court

ruling concerned a piano roll which was not intended to be made visually

intelligible in its normal use. Since a work on any type of micromedia

was intended to be made visually intelligible (with the aid of devices)

when communicating information to people, the Copyright Office did not

believe that the White-Smith ruling took precedence. The same reasoning

was applied in the later acceptance for copyright of works on videotape.

These regulations of the Copyright Office were generally accepted and

not challenged in the Courts. The 1976 General Revision of Copyright

Law removed any lingering doubts about these regulations by making copyrightability independent of the medium in which a work is fixed.

3.8 THE ESTABLISHMENT OF CONTU

Significant recognition of the need for the National Commission on New

26
Technological Uses of Copyrighted Works (CONTU) dates from 1967. It

became clear at that time that the lack of adequate study of the problem

of the impact of computers and information storage and retrieval systems

on copyright would conflict with efforts to enact a general revision of

copyright law.

The question of how the law would view computer uses of copyrightable

works during the time that CONTU was deliberating and before Congress

acted on CONTU 's recommendations prevented quick agreement on the formation of CONTU and delayed its establishment. Ultimately, agreement

was achieved among opposing interest groups on inserting a section in

the proposed general revision of copyright law that provided that the

law on the use of copyrighted works in computer systems was to be un- affected by enactment of the general revision. This paved the way for

establishment of CONTU on Dec. 31, 1974 as P.L. 93-573.20

In addition, the "hold constant" section. Section 117, was enacted as a part of the 1976 General Revision of Copyright Law, P.L 94-553 on Oct.

19, 1976. The new Act takes effect on January 1, 1978. Section 117

states that:

"...this title does not afford to the owner of copyright in a work any greater or lesser rights with respect to the use of

the work in conjunction with automatic systems capable of

storing, processing, retrieving, or transferring information...

than those afforded to works under the law... in effect on December 31, 1977..."

The function of CONTU (according to P.L. 93-573, Section 201) is to

study and make recommendations to Congress on legislation or procedures

concerning

"(1) the reproduction and use of copyrighted works of authorship--

(A) in conjunction with automatic systems capable of

storing, processing, retrieving, and transferring information, and

(B) by various forms of machine reproduction, not including reproduction by or at the request or instructors

for use in face-to-face teaching activities; and

(2) the creation of new works by the application or intervention of such automatic systems of machine reproduction."

It may be noted also that CONTU is to be concerned with:

"Changes in copyright law or procedures that may be necessary

to assure. . .access to copyrighted works, and to provide recognition of the rights of copyright owners" (Section 201 (c)).

In the above, the balancing of the needs of users and producers may be

27
seen. Similarly, the balancing of several interest groups may be noted

in the establishment of the requirements for memberships on the Commission (Section 202 (a)):

"The Commission shall be composed of thirteen voting members,

appointed as follows:

(1) Four members, to be appointed by the President, selected

from authors and other copyright owners;

(2) Four members, to be appointed by the President, selected

from users of copyright works;

(3) Four nongovernmental members to be appointed by the

President, selected from the public generally, with at

least one member selected from among experts in consumer

protection affairs;

(4) The Librarian of Congress."

CONTU must present its final report to Congress by July, 1978, if the

extension of time it has requested is enacted by Congress. Otherwise

its final report is due in December, 1977.

3.9 SUMMARY

This chapter has examined policymaking about copyright through a review

of some important litigations and some aspects of enacted law and regulation which have concerned the impact of technological change. The re- view appears to show that some significant litigations in this field

have concerned the boundaries of property rights left ambiguous because

of the occurrence of technological change unforseen by Congress in previous revisions of law or the occurrence of specific situations not definable in legislation.

In general, the Federal Courts have approached the question of ambiguities due to technological change from two distinct points of view.

The first viewpoint is that, if the general concept of current law can

be easily extended to new situations without stretching the law's meaning too far, it should be done. The second viewpoint is that stretching

the law's meaning (or specifically defining the ambiguous) beyond a certain point would be to take on a responsibility better left to Congress,

particularly if a judicial decision would be precedent setting, involving relations between interest groups, not just the particular litigants.

The first viewpoint may be seen in the final decisions of the cases described involving broadcasting, motion pictures, and sound recordings

except for White-Smith . The second viewpoint was taken in the prevailing decisions in White-Smith , the cable TV cases Fortnightly and Teleprompter , and in Williams & Wilkins .

Significantly, during all the cases above involving the second viewpoint.

Congress was in the process of actively revising the copyright statute.

Such statutory revision often involves representation of many opposing

28
interest groups and the ultimate statutory language may involve interest

group compromise setting forth obligations and responsibilities and es- tablishing new institutions in a manner completely impossible to accomplish through a judicial decision. In fact, in the 1976 General Revision, the new statutory language and associated legislative documentations involving cable TV and educational and library copying are examples

of such a complex balancing of interests.

Furthermore, in the more recent situation described above, a new balancing of interests may be seen which is not apparent in the earlier

cases. If persons concerned with copyrighted works may be considered

either producers or users, the earlier cases described are all essentially conflicts between original producers and secondary producers. (The

enactment of the compulsory license for phonorecord manufacturing in 1909

could be viewed as expression of user concern, however).

In the Fortnightly decision (1968), the view was taken that the cable TV

company was the viewer's (i.e. user's) agent. In photocopying, the con- flict between authors and publishers on one side and librarians and

educators on the other is essentially a user-producer conflict (although

some educators are also producers). This increasing concern with the user in the copyright field has been carried forward in the establishment of CONTU where both representatives of users and producers and

"at least one member selected from among experts in consumer protection

affairs" are included in the membership of the Commission by statutory

requirement.

Finally, it seems clear from the above that, in this field, administrative regulation plays a relatively small role in contrast with some other Federal domestic responsibilities. Nevertheless, the Copyright

Office has played a role in technological change by agreeing to accept

for copyright registration, works in micromedia and videotape by its

interpretation of existing law rather than through explicit congressional

action or judicial orders. However, see Section 5.5.1 and 5.5.2 for an important policy-impacting function of the Register of Copyrights.

29
4. TOWARDS AN EFFICIENT MARKETPLACE FOR COPYRIGHTED WORKS

The previous chapter considered the legal framework for copyright. This

chapter is concerned with economic questions relevant to the market for

copyrighted works. Clearly, an effective legal structure and an efficient marketplace for copyrighted works are both necessary and mutually

supportive.

In this chapter, the fundamental question of transaction costs is con- sidered. The question of exclusion and enforcement is discussed in

light of the ease of modern technology to permit easily available and

low-cost duplication of works. Mechanisms for the minimization of transaction costs are described including types of efficient pricing schedules

In addition, fair use is considered from an economic viewpoint. Lastly,

the question of monopoly is discussed and government remedies are described.

4.1 THE PROBLEM OF TRANSACTION COSTS

The view of Professor Kenneth Arrow is that transaction costs are more

fundamental than market failure as a basic problem pertinent to the

choice of whether a particular good should be provided through the market mechanism or through some form of collective action. He states that:

"...transaction costs are attached to any market and indeed

to any mode of resource allocation. Market failure is the particular case where transaction costs are so high that the existence of a market is no longer worthwhile. "^i

Two major sources of transaction costs, according to Arrow, are:

"(1) exclusion costs /7and_7 (2) costs of communication and

information, including both the supplying and the learning of

the terms on which transactions are carried out."^^

Steiner sees transaction costs specifically involved when there is an

"inability of the ma_rket_to translate potential willingness to

pay into revenues [_ and_/ where the private market is technically able to collect revenues, but at a high cost."^^

Hurt and Schuchman are, to a large extent, considering transaction costs

when they ask:

"If there is a benefit from the copyright system, is it offset,

at least in part, by various administrative costs and frictions

inherent in the system? "^^

Specifically, transaction costs play a large role in copyright problerns,

and overcoming high transaction costs plays a large role in the solution

of copyright problems.

30
4.2 THE QUESTION OF ENFORCEMENT

There are situations involving copyright that concern the fundamental

issue of what Arrow referred to as "exclusion." At the present time, some of these situations are occurring because of the availabil ity of the

technologies of high-speed photocopying and of copying digitized information by computer.

Persons with easy access to machines employing these technologies can become low-cost publishers, legalities aside. Thus, these persons are

not easily "excluded" from ownership of copies upon their failure to

pay a royalty. The question of enforcement then arises, and the cost of

enforcement must become an issue. Concern with efficient allocation of resources as well as the deleterious effects of easy evasion of law must

prompt the question of whether there is any value in issuing copyrights

that cannot be enforced with any reasonable allocation of effort.

Hurt and Schuchman have theorized about strategies an original book publisher might employ in the absence of any copyright at all.^^ According

to one scenario, the original publisher must produce enough books in his

first edition to saturate the market. If a copying publisher enters the

market (probably with a similar number of copies), the first publisher

must be prepared to compete by lowering his prices. Many unsold books

can be expected in this situation. A second strategy is for the first

publisher to be prepared with an extremely low-cost edition as a retaliatory measure.

Similarly, in a 1970 article in the Harvard Law Review opposing copyright protection for computer programs at that time. Professor Stephen

Breyer proposed a strategy that could be employed by program developers

in the absence of such protection.

"One may wonder, for example, whether, without protection,

smaller hardware or software firms would not find it easier to use parts of IBM programs in their efforts to compete with

IBM,"

Professor Breyer wrote.

Although Professor Breyer did not extend his scenario, it is possible to

theorize about protective behaviors available to the originators of computer programs to protect themselves in such a hypothetical situation.

One such strategy could be for an originator to produce programs for sale

in object code only, with minimum documentation, thereby making it very

difficult for a potential copier to know exactly what he had in hand.

In fact a proposal for "sealed-in software" that might be protectable by

either trade secret or copyright has been made recently by Calvin

Mooers.^^

4.2.1 Transaction Costs Even If No Copyright

A conclusion that can be drawn from both these examples is that there

31
are transaction costs regardless of whether the imperfect protection of

law exists or does not exist. To repeat from Arrow, "transaction costs

are attached to any market and indeed to any mode of resource allocation." In the Hurt and Schuchman example, among the transaction costs

that might be expected are the extra books left over, the poor quality

of merchandise required to prevent financial losses, the extra secrecy

required to prevent future plans and the first copies from being prematurely revealed, and the extra efforts that would be needed in mer- chandizing strategems to thwart a competitor's sales outlet possibilities. In the Breyer example, assuming the protective strategy of object code dissemination only with minimal documentation, among the

transaction costs to be expected are the reduction in information dissemination about program content to everyone including disinterested

observers who might benefit in another context, the reduction in ability

to recognize mistakes in programs and to correct them, and the lowering

of incentives to produce new programs that are genuinely novel or original .

Thus, in both examples which assume no Government copyright protection,

we have postulated that cut-throat competition, losses in information

flow and increases in secrecy would result. In a society in which the

market protection of copyright is available. Government regulation has

its cost and some infringement from imperfect exclusion can be expected

to result, but we suggest that in addition, a more open society with

greater opportunities for creativity exists. Thus, the choice is not

just between the size of transaction costs inherent in the alternatives,

but in the kinds of costs and their effects which a society is willing

to tolerate.

4.2.2 The Optimal Level of Enforcement and Its Consequences

Hopefully, a society will select that set of resource allocation mechanisms that maximizes its satisfactions. However, a difficult state of

affairs for a society to accept is that it cannot achieve the complete

maximization of its satisfactions with any set of mechanisms because of

the limited resources it can apply. A reasonable strategy is to achieve

an optimum level of satisfaction from resources available, permitting a certain amount of dissatisfaction to remain. Professor Edwin Mansfield

has demonstrated that there is an optimum level of crime whose cost

ought to be tolerated, based on the finite resources of enforcement

which a society is willing to allocate. This concept can be easily

adapted to copyright infringement.

As shown in Fig. 1, the probability of apprehension and conviction of

infringers increases with increasing expenditure of resources devoted to

enforcement; but the costs to society of infringements increase as fewer resources are devoted to enforcement and the probability of conviction

goes down. A minimum total cost results from the sum of infringement

and enforcement costs, at a particular probability less than 1.0 of apprehension and conviction. This leaves some infringers unapprehended or unconvicted.

32
CO

<

o

o

CO

hC/3 O

INFRINGEMENTS

TO SOCIETY

+ +

.2

+

COSTS OF

I ENFORCEMENTS

RESOURCES

MINIMUM TOTAL

COSTS

OPTIMAL

ENFORCEMENT

RESOURCES COSTS

OPTIMAL

INFRINGEMENT

COSTS 4

.8 1.0

PROBABILITY OF APPREHENSION &

CONVICTION OF INFRINGERS

PROBABILITY

FOR MINIMUM

TOTAL COSTS

Figure 1. The "Optimal" Level of Copyright Enforcement

33
If a society is unhappy with this level of infringement, it can raise

the resources allocated to enforcement. However, it might take unrealistically large resources to guarantee conviction of all infringers.

On the other hand, abolishment of enforcement on the grounds of its ineffectiveness and the consequent large increase in what was formerly

called crime might create new, unanticipated kinds of dissatisfactions

which society is unprepared to accept.

4.3 THE DESIGN OF ROYALTY COLLECTION SYSTEMS

Under the assumption that the benefits to a society of providing copyright protection and enforcement outweigh the costs, a question that

arises is how the market for intellectual property should be structured

to minimize transaction costs and to promote efficient pricing. The

transaction costs considered here are Arrow's "costs of communication

and information." A situation requiring special consideration for re- duction of transaction costs is that which exists when there are a large number of users and a large number of producers. In this case, one of a number of different licensing schemes may be most effective.

4.3.1 A Comparison of Types of Licenses

Clearinghouse licensing and direct licensing are examples of licensing

types that may be employed. With either of these situations, there is

the possibility of a blanket license or a per-use license.

A clearinghouse is simply a multi-producer organization established for

royalty collection. The advantage of a clearinghouse over direct licensing is that the user has a single point of negotiation, a single

place to send royalty payments; and there is likely to be a reduction

in the number of payments having to be made. The producer similarly

has a reduction in transaction costs because he obtains his royalties

from one place and with one payment. On the other hand, with a clearinghouse, there may be a blurring of individual producer considerations.

The necessity of simple, all-encompassing contractual provisions may

cause some producers with special situations to obtain less (or more)

royalties than they would have if they negotiated individually. For

each producer, the gain from the economy of scale of the clearinghouse

would need to be traded-off against this loss of individuality.

Similar problems must be considered in the selection of the per-use or blanket license. With a per-use license, the major cost is collecting

the information. This may be technologically dependent. For example,

with uses that are associated with a computer, the capability of collecting use-related data may be high, particularly if it is the producer's computer that is being used and if "use," as opposed to memoryresidence, is easily defined. On the other hand, for mechanical photocopying, the collection of use-related data may be difficult, particularly data which might distinguish the various works being copied.

With blanket licensing (a single yearly fee for all use), the amount

34
of data needed to be collected is reduced. If the blanket license is

in reality a substitute for a per-use license, simply because the cost

of collecting per-use data is too high, then the reduction in data collection costs must be traded-off against the increase in inaccuracy and

inequity in royalty collections and royalty distributions. Some reduction in inaccuracy may result from dividing users into classes dependent

on expected use; and by sampling uses.

Appendix B presents some data from the British Lending Library (simply

as an illustrative example) demonstrating that photocopying there is

heavily skewed in terms of the frequency of photocopying from various

journal titles. A survey indicates that of approximately 15,000 serial

titles held by the British Lending Library, the top 200 titles accounted

for 20% of the photocopying demand and the 6000 least-requested titles

accounted for the last 10% of the demand. U.S. data will likely show a similar skewness.

As noted in Appendix B, this skewness can lead either to lower or higher

payments to individual copyright proprietors, depending on the payment

algorithm employed. In addition, for those journal titles little used,

a larger amount of sampling conceivably coupled with more sophisticated

sampling methods might be needed to accurately determine the true extent

of photocopying.

At a time a new licensing scheme is to be established, producers may

find it important to consider these various trade-offs so that the mechanism with the lowest transaction costs can be adopted. From the user's

viewpoint, transaction costs include the value of time and effort as well as the dollar amount of royalties. That mechanism that is easiest

to use, i.e. least costly in time and effort, all other things being

equal, will probably generate the least amount of deliberate evasions

and therefore the lowest enforcement costs as well.

4.3.2 Examples of Existing Clearinghouses

The Harry Fox Office is the mechanism through which many of the music

publishers have issued licenses for the recording of individual compositions on phonorecords. (See Appendix A, Section A. 4. 6.3). Despite

the availability, since the passage of the 1909 Act, of a compulsory

license with the Copyright Office serving as a repository of ownership

information^^, licensees may find that better terms are available from

the Harry Fox Office in return for greater assurance of precise information about numbers of records manufactured and delivered. Royalties

owed are computed from this information.

Three clearinghouses now exist for the collecting royalty payments for

public performances of musical works. These are the American Society

of Composers, Authors and Publishers, Inc. (ASCAP)» Broadcast Music, Inc.

(BMI) and SESAC, Inc. The combined membership of ASCAP, BMI and SESAC

comprise the copyright owners of virtually all music copyrighted in the

United States. Licensees are required to pay only a lump-sum royalty

35
annually in a predetermined amount (a blanket license). However, many

broadcasters maintain logs as a matter of standard practice, and these

are made available to the clearinghouses if required. These logs, plus

a limited amount of sampling of performances, provide sufficient information for proportioned distribution among the individual copyright

owners of the fees collected. The distribution is made approximately

according to the estimated number of performances of each work. The

cost of operating ASCAP is said to run about 19% to 20% of its gross

revenues.

4.4 ROYALTY PRICING SCHEMES

This section considers pricing rules that can be employed to differentiate different classes of users and to cover different types of costs.

It is assumed that all users in a particular class are treated identically, and that the purpose of the pricing rules is not for anticompetitive reasons, but to efficiently maximize income.

4.4.1 Individual and Institutional Users

A theory which justifies price differentials between individual and

institutional users is described in Appendices CI and C2 of this report.

Here, an institutional user is one that serves to further distribute

the work among individuals served by the institution. It is noted in

Appendix CI that, for a product distributed to classified users who do

not move from class to class, an existing theory states that the prices

among the classes should be inversely proportional to those classes'

respective price elasticities, provided that marginal costs are the same

for each class. However, in the provision of certain copyrightable

works, e.g. scientific journals, users may obtain their copies either as the result of individual subscription or through use of an institutional

copy. Thus, there are "cross-market" effects as users move between the

classes. In this case, the work of Appendix C2 employs a variable

called "the average number of potential subscribers" which measures the

number of additional individual uses that would result from discontinued

institutional use due to increased prices to the latter class. The value of this variable determines the price differential that should be

offered. Tests that producers can make about the potential market can determine the value of this variable.

A second issue raised in these Appendices is whether the users of the

institutionally-obtained work should pay per-use fees to the institution to defray the cost of the institutional subscription. In general,

to the extent that the individual uses via the institutional subscription are private appropriations, these uses should be paid for by the

users unless there are valid countermanding reasons. One such reason might be that it is in the public interest (or in the interest of the

institution's owner) to encourage such individual use; and a second reason might be that the costs of collection are high relative to the revenue gained.

36
4.4.2 Services With High Fixed Costs

A pricing system often used for the provision of services that have a high fixed-cost element is the combination entry fee and per-use charge.

Utilities often have connection charges as well as per-use charges.

Some computerized, on-line, bibliographic or full-text search services

are now using this type of pricing. Typically, there is a monthly or yearly use fee or entry charge, a time-on-line charge, and a "hit"

charge for retrieval.

It is possible, also, to offer a user a choice between two charge plans.

For example, a user might be offered either (a) a higher connect (entry)

charge and a very low per-use charge or (b) a very low entry charge and

a higher per-use charge. Depending on the break point, the high volume

user will probably select (a), the plan with the low per-use charge,

whereas the casual user probably will select (b), the plan with the low

entry charge. The offering of two such plans may prevent either type

of user, casual or high volume, from subsidizing the other type.

4.5 FAIR USE AS AN ECONOMIC CONCEPT

"Fair use" was originally a judicially-developed concept that can be

conceived as a method of reducing certain kinds of transaction costs.

It is now embodied in Section 107 of the 1976 General Revision of Copyright Law, as described in Section 3.6 above. The "fair use" concept

historically recognized and attempted to allow for two basic principles

that can be counterposed to the principle of copyright in a potential

infringement situation. A third principle of "fair use" was added in

the 1976 General Revision.

The first principle is that of the freedom of communication of ideas,

derived from First Amendment considerations. (Professor Melville Nimmer

has delineated the balance point in this potential conflict. Where

First Amendment principles have dominance, there can be no exclusion.

Thus, under "fair use", purposes of use such as "criticism, comment,

news reporting, teaching. . scholarship or research" are permitted, subject to limiting factors such as the amount of the work used. "Fair

use" may be viewed as a method of reducing the cost inherent in a con- flict between Article 1, Section 8 of the Constitution and the First

Amendment.

The second principle allowed for under "fair use" is lack of marketplace impact. In the consideration of whether a particular use is a "fair use," a factor to be taken into account is "the effect of the use

upon the potential market or value of the copyrighted work." Thus, it

is recognized to be uneconomical and therefore inappropriate for re- sources to be expended in contractual efforts to obtain permission for

usage of little or no market impact.

The third principle now added to "fair use" is indicated by the phrases

in SectTon 107 of the 1976 General Revision relating to education.

37
These phrases, concerning allowable purposes of fair use, are "{

multiple copies for classroom use)" and "for nonprofit educational purposes."

The exemption of royalty payments for worthy uses has been criticized

by economists on principles of economic efficiency. The argument is

that if a use is genuinely worthy, it is a public good whose cost ought

to be spread over all the population and paid for through taxes. Otherwise, allowing an exemption for some uses and not for others has the

effect of imposing the costs of worthy use exemptions on the "lessworthy users" as a specific class. This argument was similarly expressed by Professor Paul Goldstein in a criticism of the full Court of

Claims decision in the Williams & Wilkins case^^. In that case, the

worthy use of medical research was given as a reason for rejecting the

plaintiff's claim of infringement in a wholesale copying situation.

4.6 PRICE SETTING FOR COMPULSORY LICENSES

Compulsory licenses have been established in statute by Congress for

certain categories of intellectual property; and in one case, a compulsory license is being enforced by Court order. In general, royalty

prices in these situations have been (or will be) established by adversary proceedings involving producers and users and their supporters

testifying before some institutional group empowered to set the figures.

4.6.1 The Phonorecord Manufacturing License, 1976 Act

An example of the procedure is the establishment of the compulsory li- cense royalty fee for phonorecord manufacturing as a statutory matter

in the 1976 General Revision. A summary of the testimony on this subject and the conclusion of the Senate Committee on the Judiciary is given on pages 91 through 94 of Senate Report No. 94-473.

Among the subjects of the testimony were (1) the need for an increase in

the fee by copyright holders, (2) the potential impact of an increase on the record industry, and (3) the potential impact of an increase on the

consuming public. Songwriters and publishers testified in favor of an increase over the 2t per each recording manufactured that was provided

for in the 1909 Statute. They were supported by music consumers represented by the National Federation of Music Clubs who preferred a higher (royalty) ceiling "as a means of encouraging the writing of more

and better music." The record companies testified in opposition to any

increase in the Zt figure. They were supported by the Consumer Federation of America who wrote to the Committee agreeing that if the statutory fee were raised, record manufacturers would have to avoid risks on new and unusual compositions, reduce the number and length of selections

record fewer serious works and rely more on the public domain for popular material

.

Some of the factors discussed in testimony included the royalty as a percent of list price per song; the royalty as a percent of manufacturer

38
wholesale selling price; record company sales and profits; organization

of the record industry; changes in income of copyright owners as a function of time, inflation rate, and royalty fee; and the effect of royalty

fee on incentives for quality and quantity of products.

The Senate Committee concluded that the royalty fee per work embodied

in each phonorecord manufactured and distributed should be 2 1/2 cents

or one-half cent per minute of playing time, whichever is greater.

The House Committee on the Judiciary, on the basis of essentially the

same testimony, concluded that the royalty fee per each work embodied

in a phonorecord that is made and distributed should be "2 3/4 cents or 0.6 of one cent per minute of playing time or fraction thereof whichever amount is larger." (See House Report No. 94-1476 at pages 16 and

111).

The Conference Report (House Report No. 94-1733 at page 77) adopted the

House fixed rate and the Senate per minute rate. This was ultimately

enacted. Therefore the royalty is "either two and three-fourths cents

or one-half of one cent per minute of playing time or fraction thereof,

whichever is larger." (Section 115(c)(2), P.L. 94-553).

4.6.2 Jukebox Performance Royalty, 1976 Act

Under the 1909 statute, renditions of musical compositions through re- cordings in coin-operated machines (jukeboxes) were not classified as public performances for profit unless an admission fee to the location

of the performance was also charged. Thus, most jukebox renditions were exempted from royalty payments. As both the Senate and House Reports on the 1976 Copyright Law Revision state, efforts to remove this

exemption have persisted for 40 years. It is believed by some observers

that in 1909, the extent of the jukebox industry could not be forecast

and that this exemption was an historical accident. Testimony by copyright owners in congressional hearings on copyright revision strongly

urged the imposition of a royalty fee on jukebox renditions of copyrighted works. Testimony by jukebox operators and manufacturers supported the retention of the present exemption. (See House Report No.

94-1476 at pages 111 to 115, and Senate Report No. 94-473 at pages 95

to 99.)

In the 1976 General Revision, Congress ended the exemption and imposed

a yearly compulsory blanket license of $8 per jukebox (Section 116(b)(1)

P.L. 94-553). In general the reasons given for ending the exemption

were that the exemption was unfair to music producers; and also unfair

to those other users who paid royalties and therefore were also paying

the jukebox operators' share.

4.6.3 New Statutory Compulsory Licenses

The 1976 General Revision established two other compulsory licenses in

addition to the jukebox performance license, all three of which joined

39
the previously-established phonorecord manufacturing license. The new licenses are for cable-assisted television (CATV) retransmission of

broadcasted programs (Section 111(c) and 111(d), and for the use of certain copyrighted works in non-commercial broadcasting (Section 118).

As stated in Appendix A, Section A. 4. 6. 3 "the purpose of the compulsory

license in these three instances. . .is to avoid the difficulties that the user groups would encounter if they had to obtain licenses from and pay

fees to the individual copyright holders." In other words, transaction

costs are lessened under the compulsory license system.

4.6.4 The Copyright Royalty Tribunal

The 1976 Act establishes a Copyright Royalty Tribunal as an independent

agency in the legislative branch (See Chapter 8 of the Act). The Tribunal's function is to periodically and equitably adjust the statutory

blanket license fees for jukebox operation, to distribute equitably to

copyright holders the statutory royalty proceeds collected from CATV

operators, and to determine the terms and conditions of the compulsory

license for non-conmercial broadcasting of certain copyrighted works,

but in the latter case, only if the interested parties fail to negotiate

their own arrangements. The Tribunal determines, also, the royalty rates

for CATV retransmissions under certain conditions.

4.7 COPYRIGHT AND MONOPOLY

It is common understanding that copyright is a monopoly, although limited

to some degree. Walter Pforzheimer has quoted Judge Learned Hand on this

point:

"Copyright in any form, whether statutory or at common law, is

a monopoly; .. .Congress has created the monopoly in exchange for

a dedication, and when the monopoly expires the dedication must

be complete. "^^

Similarly, the House Committee on Patents in their report accompanying

the bill that became the 1909 Copyright Act stated:

"The granting of such exclusive rights, under the proper terms

and conditions, confers a benefit upon the public that outweighs the evils of the temporary monopoly."^'*

The appellation of "monopoly" can have several implications. A question

that can be asked is: to what extent does the exclusive right granted

to an author and his assignees constitute an exercisable economic monopoly in a market sense, thereby requiring Government regulation or other

collective action as an antidote? The answer to this question may also

provide an answer to an issue raised by Hurt and Schuchman which is:

whetji^er "copyright protection artificially enhances the private returns

on / some / ventures and leads to the distortions of monopoly pricing. "^^

The answer depends, to some extent, on the nature of the copyrighted work

40
and whether other works can be considered substitutable and therefore

competing.

If the copyrighted work is a book, musical performance or film produced

for a general audience, there may very well be high substitutabil ity

among individual works as far as the ultimate consumer is concerned. In this situation, one author's exclusive right must compete with other ex- clusive rights in the marketplace to be selected or rejected by a typical consumer. However, since the competing works have a certain individuality about them, by the fact of their having the requisite originality for copyright protection, pure competition in a classical sense cannot exist. Nevertheless, the "monopolistic competition" which exists

among the works may be very close to pure competition in the absence of

externalities, collusion or restraints of trade by competitors. As

Professor Mansfield states about competition in general, "...most firms

face relatively close substitutes and most commodities are not completely homogeneous from one producer to another In other words, there is no single homogeneous commodity called an automobile; instead, each producer differentiates its product from that of the next producer. This,

of course, is a prevalent case in the modern economy. "^^

Thus, among certain classes of copyrighted works, there may be as much

or more competition for consumer interest as exists among competitive

hard goods or other "non-intellectual" properties. Competition among

copyrighted works is assisted by the fact that although protection covers the author's specific expression, it does not extend "to any idea,

procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained,

illustrated, or embodied "^'^ Although a copyrighted work must be

"original," it need not be novel or non-obvious, which are requirements

for patent protection.

4.7.1 Government Remedies for Market Monopoly

The problem of monopoly has arisen in the music and motion picture industries on several occasions but not in the context of control exercised by virtue of an exclusive right in a single property. The problem

in these industries has invariably related to attempted control over a market due to exclusive rights in at least several properties, and in some cases, exclusive rights in very many properties. The example of

the potential monopoly over phonorecord recording which resulted in the

compulsory license provision of the 1909 Act has been mentioned previously and is also described in Appendix A, Section A. 4. 6. 3.

A number of monopoly-related cases in the performing rights area are mentioned by Taubman.^^ ASCAP consented to an anti-trust decree of the

U.S. Dept. of Justice in 1941 and the decree was further modified in

1950.39 In the 1948 decision, ( Alden-Rochelle v. ASCAP ) "ASCAP was declared to have achieved monopolistic domination of the music integrated

in sound films, in violation of Section 2 of the Sherman Act."'+o As a result, ASCAP "must license all qualified applicants, all licensees of

the same class are charged the same fees, and any licensee or applicant

41
may request t^he Court l_ the U.S. District Court for the Southern District

of New York_/ to review the fees charged." (See Appendix A, Section

A.4.6.2.1.)

In general, the result of a threat of market monopoly is additional

Government intervention and regulation. Both the phonorecord manufacturing and ASCAP situations have resulted in compulsory licensing re- quirements. In one case, the royalty fee was fixed in law by Congress;

and in the other case, the Federal Judiciary, although not fixing the

royalty payment, required that ASCAP must license all qualified applicants and must provide equitable treatment to all licensees, with Court

jurisdiction retained as a place of recourse.

4.8 SUMMARY

Problems in the development and maintenance of an efficient market for

copyrighted works have been considered and some remedies have been discussed. Problems considered have included exclusion costs, the costs

of information and communication, trade-offs in the design of royalty

collection systems, royalty pricing schemes, economic implications in

the "fair use" doctrine, price setting for compulsory licenses, and

economic monopoly.

The presence of transaction costs is not necessarily a reason for abolishing copyright, despite the cost of Government regulation. There are transaction costs in any market. Without copyright, it is postulated

that there would be cut-throat competition, increased secrecy and a re- duced flow of information. A society must select which set of dissatisfactions it finds less onerous or more contributing to its overall

goals.

Clearinghouses are one method of reducing the costs of communication and

information. Blanket licenses assist similarly, but there are costs to

the use of these systems as well. That payment mechanism that is least

costly in time and effort to users, all other things being equal, will

probably generate the least amount of deliberate evasions.

There are efficient royalty pricing schemes that distinguish different

classes of users and which account for both fixed and marginal costs.

Pricing may usefully distinguish institutions from individuals and may

usefully offer a choice of schedules to suit both the heavy user and

the casual user.

Fair use may be treated as a mechanism for the reduction of certain

transaction costs. However, the doctrine of permitting an exemption

from royalty fees for "worthy" uses that do not come under First Amendment or "lack of market impact" considerations can be criticized on efficiency criteria.

Compulsory licenses have been established in three new areas under the

1976 Act. Price-setting of royalty fees for compulsory licenses is

42
essentially an adversary preceding between producers and users before

an impartial panel empowered to set rates.

Copyright is a limited monopoly over a single work. In the markets for

works of general interest (e.g. phonorecords, musical performances)

anti-trust problems have concerned, in general, attempted control over many works. The results have been imposition of a compulsory license or judicial intervention.

43
5. COPYRIGHT IN COMPUTER-READABLE WORKS

Following the development in the preceding chapters, the questions of

copyrightabil ity in computer- readable data bases, full text, and com- puter programs may be considered. First some of the issues raised in

1967 hearings are reviewed, so that some of the arguments can be aired

and the situation can be placed in context. Then, the current situation resulting from the passage of the 1976 General Revision is described

The issue of registration and disclosure is then considered in the context of public policy about information transfer.

The technical issues of copyrightabil ity are then pursued, with the

economic aspects of data base uniqueness and computer network distribution of copyrighted works considered. The conditions of sale of

computer-readable works which need to be different than works in hard

copy are discussed.

5.1 TECHNOLOGY FORECASTING, 1967 STYLE

The questions of copyright in literary works entered into a computer

and of copyright in computer software were raised substantially in

testimony before the Senate Committee on the Judiciary concerning

revision bill S.597 in March 1967. Authors and publishers appeared

concerned by the possibility that, in the near future, a significant

amount of publishing would be done in machine-readable format with

extensive distribution of works accomplished by computer networks without hard copy. Clearly, there were serious copyright implications in

this concept. Professor Jesse Markham, speaking on behalf of the

American Book Publishers Council and American Text Publishers Institute

stated that:

"The present state of technology suggests that the computer

will affect conventional publishing in two distinct ways:

(1) The initial versions of some types of information that

are reduced to writing, copyrighted and published, will

very likely be computerized, thus by-passing conventional

publishing altogether; and (2) The contents of published

works will be stored in computers and, once stored, serve

as a substitute for additional printed copies . . ."^^

Similarly, Mr. LeeC. Deighton, also appearing on behalf of the

American Textbook Publishers Institute, stated that:

"The same kind of transmission [as closed-circuit television]

is now technologically possible in computer network systems.

It is contemplated that in these systems, a central com- puter will store copyrighted works, and that they will be

transmitted by wire to hundreds of individual console

screens upon demand. It is merely displayed on the console screen to be read at leisure by the user. The computer

in effect becomes the library."^^

44
Ms. Elizabeth Janeway, appearing on behalf of the Authors League of

America, was more certain of the arrival of electronic publishing. "It

is clear that computers and computer networks will soon become a principal means of disseminating much that authors write," she stated.

As a reference, Ms. Janeway cited a study Copyright and Intellectual

Property published (in paper) by the Fund for the Advancement of

Education.'*^ This study was cited also by another testifier,

Mr. Charles Gosnell, chairman of the Committee on Copyright Issues of

the American Library Association and director of the libraries of

New York Uni versi ty.^^ The cited study included the following quotes:

"The library of the future will be unrecognizable to the

librarian of today; it will be so dependent on the hardware of the new technology, that apocryphal ly speaking,

the librarian of the future will be a mechanic with a screwdriver, ever alert to repair breakdowns in the

service. "^'^

"Audio-visual dial-access teaching machines, operated

by remote control, will provide hundreds and even thousands of students with simultaneous audio and visual access to a journal article or excerpts from a book."'^^

"... the computer, in essence, assumes the role of a duplicating rather than a circulating library. One copy

of a book fed into such a system can service all simultaneous demands for it; of course this substitution for

additional copies will vitally affect the publishers'

traditional market. "^^

"The information world of the future will revolve around

information systems, educational programs, and library

complexes in which the complete documentation of the

system concerned will be equivalent to a computer memory.

In a sense, therefore, by providing copies of works

stored in the computer, these systems become publishers.

Traditional publications will also be available from

commercial publishers, but it would seem that 'nonbook'

production will predominate. "^°

The cited study quoted an article from the New York Times which was mentioned also by Professor Jesse Markham.^"^^ This article had re- ported that:

"The medical libraries of three major eastern universities

will be tied together in a network of computers and telephone lines to give scholars virtually instant access to

their pooled resources . . . the three libraries will

then contain 1,025,000 items. These can be searched by

computers in seconds . . . When telecommunication and

photographic reproducing devices are added to the network

45
system . . . pages from a book in New York could be

flashed to a user in another city and even reproduced

for him in take-home form."^^

The time scale in which these changes would come about was unfortunately

not reported. The relative economics of the situation, such as the

development and implementing costs as well as the operating costs

relative to current systems, were similarly not reported. As of 1977, some publishing in electronic media is being done, particularly with

data bases of various types. In addition, computers are now heavily

used in the publishing process, e.g., typesetting and line justification. However, the vast changes contemplated by the above quotes have

not materialized, although they might occur in the future. Certainly,

the bulkiness of paper-based systems and library labor-intensi vi ty are forcing functions. The costs of paper, of data and postal communications, and of computer programming, the sunk costs (economic and social)

in current systems, and the psychological needs of readers to prefer

one kind of media to another will be factors in the rate of change.

Mot everything that is technically feasible is economically feasible

or even desirable. As was reported by the National Academy of Sciences

in 1971:

"The primary bar to development of national computer-based

library and information systems is no longer basically a technology-feasibil i ty problem. Rather it is the combination of complex institutional and organizational humanrelated problems and the inadequate economic/ value system

associated with these activities. "^^

This means, in plain text, that decisionmakers didn't want it strongly

enough to put up the money at that time.

5.1.1 Technology of the Future, Updated

Although the time scale implied by the predictions of 1967 was incorrect, the technological feasibility of what was described cannot be

denied. Changes in prices among various elements of current and

future systems plus additional technological breakthroughs may yet

cause more electronic publishing than can be envisioned currently.

At present, the development of large-scale integration of logic elements and improvements in mass production technology have brought down

the prices of central processor units of computers enormously. The

capabilities of peripheral units have similarly been improved. The

result is that the prices of some mini -computers of substantial capability are now equivalent to the prices of some automobiles. The

sale of electronic home entertainment centers that involve substantial

logic capability and which plug into TV sets have burgeoned. This is one step short of the home computer.

46
It may be that books will be sold on video disks the way phonograph

records are sold, to be viewed on a TV screen controlled by a home

computer. It may be that libraries will store many books in memory,

and that hundreds of terminals will permit simultaneous reading by

patrons on TV screens (with optional printout) of anything in the

memory. The current uses of computer-assisted instruction and of com- puterized data bases may set the example.

However, the cost of computer software to accomplish the desired functions cannot be ignored, and it is not decreasing in cost. The cost

of operating any computer system today is fast approaching a 90%-10%

split in software and personnel versus hardware. In addition, it is

likely that social, institutional, and psychological factors will

have as much if not more control over the future in this area than

technological and economic factors.

5.2 SOME TECHNICAL ISSUES IN THE HEARINGS, 1967

The issues raised in the Senate hearings in 1967 on computer-related

works can be indicated in part, with reference to two points raised

by EDUCOM (the Interuni versity Communications Council) in its statement

entitled The Copyright Revision Bill In Relation to Computers .

First, the EDUCOM statement opposed granting copyright protection to

computer programs except in a very narrow sense. The statement said

that "as the programs represent algorithmic plans for using machines

to achieve practical results, they are poles apart from the conventional

subject matter of copyright . . ."^^ Furthermore, the statement said

that if a copyright were granted to a program, this should "in no event" bar an outsider from replicating the program exactly and using

it "in order to carry out the process or practice the art."^^

Second, the statement called for an educational exemption from

infringement for entering copyrighted material into a computer, noting

that there will be cases where the proprietor is not interested in

making the needed transformation (to machine-readable form) and the

institutions must have access to the work.^''

The EDUCOM statement also called for retaining "traditional exemptions"

in educational use of copyrighted works and suggested that the Revision

Bill then being considered had provisions which "seem to eliminate

virtually all preference for educational and related institutions

utilizing copyrighted works by means of computers. "^^

The General Counsel to the Electronic Industries Association,

Mr. Graham W. McGowan, also testified at this hearing. Mr. McGowan

testified that his organization favored exemption from infringement

for computer input of copyrighted works (as distinguished from computer

output). Among the bases of the argument were: (a) the author's

reward should be based on demand for his work and that entering a work

into a computer "is not attributed to the demand for the copyrighted

47
work"; (b) "when in a computer, a copyrighted work is not intelligible

to any human being. Therefore, there is no harm to any copyright owner

to put works in storage . . (c) "to be required to seek permission

to only store the work in a computer is time-consuming and expensive in

and of itself. Having to deal with every copyright owner would be

overly burdensome and highly impractical ..."

The publishers point of view was perhaps summed up by this statement

of Mr. Lee Deighton:

"We have looked at copyright legislation not only as publishers but as citizens of a free economic society.

We have observed a central thread running through the

dialogue of the past three years. It is quite simply a demand for free use of copyrighted materials through the

grant of special exemptions. It is our position equally

with authors, composers, artists and other creative talents

that the product of a man's mind and imagination is

property just as much as the product of his hands or machines. Every exemption granted is an abridgment

of the creator's rights to enjoy the fruits of his labor.

As citizens, we are concerned lest the granting of exemptions proceed so far as to hinder the flow of creative

materials."^°

5.3 CURRENT STATUS, 1976 GENERAL REVISION

Several additional Congressional hearings and debates have been held

since 1967. An analysis of the issues of copyright and the computer

as seen in 1973 is available in a publication of the American Society

for Information Science. The recent history of copyright legislation

may be obtained from the Copyright Law Revision Reports of the Congress

(Senate Report No. 94-473 at pages 47-50 and House Report 94-1476 at

pages 47-50). The net results of those hearings and debates at this

time are embodied in the new statute P.L. 94-553, enacted October 19, 1976J

to take effect January 1, 1978.

The law with respect to the use of copyrighted works in conjunction

with computers would be considerably clearer at this time if it were

not for the provisions of Section 117. That section says that the new Act has no effect on the use of copyrighted works in connection with

computers. That means, in effect, that copyright law on computer use remains in doubt.

Section 117 was inserted because of the existence of CONTU, and the

section is expected to be altered or eliminated as a result of eventual

Congressional action on CONTU recommendations.

In any event, the new Act states, in Section 102, that "copyright protection subsists ... in original works of authorship fixed in any

tangible means of expression," and states, in Section 106 that "the

48
owner of copyright. ... has the exclusive rights (1) to reproduce the

copyrighted work in copies or phonorecords [and] (2) to prepare derivative works based upon the copyrighted work "

That means that the right of conversion of a copyrighted work from one medium to another is reserved to the proprietor, excluding specific ex- emptions given elsewhere in the Act. It seems clear, then, if a copyrighted work can be converted to a computer-readable format without

actually using a computer to do it, the converted work is protected.

The law with respect to the use of the work in a computer or the con- version of a work to computer-readable format using a computer is not

clear at present because of Section 117. Thus, if it were not for Section 117, the debate over infringement at input or output would be over.

The copyright holders in the absence of Section 117 have control of

their works in any medium (excluding specific exemptions) and therefore

at input.

On the subject of the copyrightabil ity of computer programs, the Copyright Office has been accepting programs for registration since 1964;

although its Circular 61, Computer Programs , of latest date March 1975,

states that certain issues about the copyrightabil ity of programs are "doubtful." The two issues asked in Circular 61 are these:

"(1) Is a program the 'writing of an author' and thus copyrightable, and

(2) Can a reproduction of the program in a form actually

used to operate or be 'read' by a machine be considered

an acceptable 'copy' for copyright registration?"

The first question above references the Copyright Clause in the Constitution, not any particular Act of Congress. If computer programs are Constitutionally copyrightable, it seems clear at least that the humanwritten hard-copy form of an "original" computer program is copyrightable, barring specific denial by Congress, regardless of question (2)

i„ above.

Furthermore, if (1) above is answered in the affirmative, then in the

absence of Section 117 of the new Act, the computer-readable version

most likely would be considered a valid copy. However, because of Section 117, if the computer-readable version had been made with the aid

of a computer, its copyrightabil ity is clearly in doubt.

5.4 THE IMPLICATIONS OF ABOLISHMENT OF COMMON LAW PROTECTION

It was made clear in Section 2.1 above that common law copyright is ended in the United States as of the effective date of the 1976 General

Revision. The concept now ending, dating back to Donaldson v. Becket , 1774, is that the author has complete dominion over his work with common law copyright protection before publication, but he must rely on statutory copyright following publication. Despite the fact that this

"dual system" was unique among nations, it originally had considerable

49
appeal

.

Specifically, the line of demarcation between works intended for general public distribution and those intended to be kept private was publication. Those works intended to be distributed publicly could be disclosed and given statutory copyright protection. Those works intended

to be kept private were, at the option of the owner, not disclosed and

not copyrighted under statute. Thus, for disclosure and publication,

activities which made the work more susceptible to infringement, the

copyright owner obtained the protection of the Federal Government.

Without publication or disclosure, a proprietor could still make lease

agreements with specific users involving nondisclosure which were en- forceable in State courts under common law copyright (as well as under

other types of protection).

Under the 1976 General Revision of Copyright Law, the legal distinction

based on publication is ended. All works, "whether published or unpublished" are governed as of January 1, 1978 by the Federal copyright

statute with regard to "all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright" (Section 301(a)). On and after the effective date, "no person

is entitled to any such right or equivalent right in any such work un- der the common law or statutes of any State" (Section 301(a)).

Thus, common law copyright protection in unpublished works is ended.

However, unlawful activities "violating legal or equitable rights that

are not equivalent to any of the exclusive rights within the general

scope of copyright ..." are still subject to the available "remedies

under the common law or statutes of any State ..." (Section 301(b)).

The bill that passed the Senate, S.22, gave examples of unlawful activities against which remedies are still available. These included non- equivalent misappropriation, breaches of contract, breaches of trust,

trespass, conversion, invasion of privacy, defamation and deceptive

trade practices such as false representation. However, these examples

were eliminated from the final bill as enacted. Therefore, the totality

of exactly what remedies would qualify may be in doubt.

Since unpublished works are now copyrightable, a new definition was needed to define the onset of copyright. Now copyright in a work "subsists" (begins) at "its creation" (Section 302(a)) which essentially

means from the moment that the last finishing stroke of creation is

completed. Thus, even if the author does not wish copyright, his work

has it from the moment of its completion if it is in a category of copyrightable works and the work is not otherwise exempted from copyright.

5.5 REGISTRATION AND DISCLOSURE

A copyright owner need not take advantage of copyright. He need not

register his work with the Copyright Office if he does not wish to disclose his work publicly. Under the 1976 General Revision, registration

is optional; but agreement to register involves deposit of the work with

50
the Copyright Office and therefore a certain public disclosure (Section

408). For works that have been published with a notice of copyright,

there is the additional requirement at the option of the Register of

Copyrights, of deposit of two copies for the Library of Congress (Section 407(a)). Unpublished works and works published without copyright

notice are exempt from this latter requirement. Even if copies for the

Library of Congress are demanded, this requirement may be circumvented

by payment of a fine of $250 plus the retail price of two copies of the

work (Section 407(d)).

The advantage of registration, under the 1976 General Revision, is

that it is a pterequistie to an infringement suit (Section 411); and

furthermore, awards of statutory damages are permitted only for infringements occurring after the date of registration of an unpublished

or a published work; or for infringements occurring after the date of

publication of a work and before the date of its registration if and

only if the work is registered within three months of its date of first

publication (Section 412).

Thus, the copyright owner has a trade-off. If he wants the maximum

Government legal protection, he must register his work and disclose it

to the extent of Government requirements. If he does not wish to register and disclose it, he need not; but in that case he must depend for

protection, to a large extent, on lesser remedies or on remedies available through State courts that are not equivalent to copyright protection.

5.5.1 The Extent of Disclosure Requirements

The maximum statutory requirements for registration (of a literary work)

must include, in the case of an unpublished work, one complete copy,

and in the case of a published work, two complete copies (Section

408(b)).

However, the Register of Copyrights is authorized to permit, for particular classes of v/orks (with classes defined by the Register), "the

deposit of identifying material instead of copies ..." (Section

408(c) (1) ) . Furthermore, "the Register of Copyrights may by regulation

exempt any categories of material from the deposit requirements [for

the Library of Congress]." (Section 407(c)).

Thus, the Register has been assigned regulatory authority which has

very important public policy implications.

5.5.2 The Policy Implications of Disclosure Rules

There is in this nation an underlying philosophy that information transfer should be maximized, subject to certain restraints, such as those

due to personal privacy, trade secrecy, and national security. In the

area of scientific and technical information, Federal responsibilities

are quite clear.

51
The National Science Foundation Act of 1950 authorized and directed NSF

to "foster the interchange of scientific information among scientists in

the United States and foreign countries. "^^ In the same Act, NSF was given the authority "to publish or arrange for the publication of scientific and technical information so as to further the full dissemination

of information of scientific value consistent with the national interest. "^3

In a report of the President's Science Advisory Committee, 1963, known

as the Weinberg Panel Report, it was concluded that "transfer of information is an inseparable part of research and development. "^'^ In a re- port of the National Academy of Sciences, the SATCOM report, 1969, rec- ommendations were made to insure effective communication of scientific

and technical information;^^ and in the "Greenberger Report" of the NSF

and the Federal Council for Science and Technology, 1972, technical information was referred to as "a vital national resource. "^^

The importance of information flow to modern society has been noted by

important observers such as Daniel Bell and Peter Drucker. Bell has

written that the United States is the first postindustrial nation and

that "a postindustrial society is organized around information and

utilization of information in complex systems, and the use of that information as a way of guiding the society."^'' Drucker has concluded

that "knowledge, during the last few decades has become the central

capital, the cost center, and the critical resource of the economy. . . Free trade in goods ... is important. But free movement of capital

and free movement of knowledge may be more important still."^^

It would seem, therefore, that there is a strong public interest in

maximizing disclosure on two counts: first, for the maximization of

information transfer about original works, with all the implications for

additional creativity that this implies; and second, to make meaningful

the exchange of full protection of copyright for disclosure through

registration. If registration is to imply a minimal disclosure, then

the proprietor is capable of obtaining two opposite types of protection,

surely not the intent of Congress. A permission for minimal disclosure

would give full copyright protection; but, would permit the proprietor

to maintain his work essentially secret, particularly if he makes it

available through lease agreements only with restrictive disclosure

clauses.

It is hoped that provisions for maximum disclosure in the public interest can be worked out without imposing difficult or costly tasks on copyrighted proprietors. This subject is further discussed below in

connection with the characteristics of specific kinds of computer-readable works.

5.6 COPYRIGHT IN COMPUTER-READABLE DATA BASES

A data base, in many cases, is a "compilation." In copyright terminology, a compilation "is a work formed by the collection and assembling

52
of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes

an original work of authorship" (Section 101, (Definitions), 1976 General Revision). Compilations are copyrightable under Section 103 of

the 1976 General Revision, but the copyright is in the organization of

the materials and not in any used materials that are in the public domain or are already copyrighted. Copyright in the compilation does not

imply any exclusive right in the preexisting used materials. As ex- amples, a telephone book, a gazetteer, and an almanac are all compilations in which copyright subsists primarily in the organization of the

materials and not in the individual materials contained therein.

This type of work has been given copyright protection in human-readable

form as a type of literary work, one of the categories of protectable

subject matter.

As the House Report 94-1476 makes clear (on page 54),

"The term 'literary works' does not connote any criterion of

literary merit or qualitative value: it includes catalogs,

dictionaries, and similar factual, reference, or instructional

works and compilations of data ..."

The House Report goes on to state that "computer data bases" are also

literary works with the implication that they are copyrightable, but

for certainty about that question, the caveat "in the absence of Section

117" should be added. In the long run, however, Section 117 is certain

to be excised or significantly altered, and therefore the caveat will be

rendered moot. There seems to be no serious opposition to the copyrightability of compilations in computer-readable form.

Other literary works of a factual nature for example, encyclopedias and

other reference works, may be used and treated as data bases even though

copyright may subsist in the literary expressions in the entire works.

A work of this type may be either a "collective work" like an encyclopedia, or a reference work on a specialized subject by a single author,

e.g. Nimmer on Copyright . Copyrightabil i ty in the computer-readable

form of the work is just as clear for these works as it is for compilations. The following discussion will concern computer-readable data

bases in general without regard to their subcategory as either compilations, collective works, or literary works of a single author. The

important connecting element of all of them is how they are used.

5.6.1 Publication Only in Computer-Readable Form

There may be some question as to what constitutes publication of a computer-readable data base that has not been published previously in

a paper edition. It is assumed that the date of publication of a com- puter-readable data base that has been published previously in a paper

edition without any change in content is the same date as that for the

paper edition.

53
5.6.1.1 Display Only, Single Licensee : The particular situation of

interest here is that in which the data base is made available only

through user terminals attached to a central computer. This is a typical method of permitting accessibility. It is assumed that the central

computer is owned either by the copyright proprietor or by a distributor

who has obtained the data base from the proprietor under an exclusive

license.

Now, if either the proprietor or the exclusive licensee make the data

base available by display only at the terminals and do not permit

printouts to change hands, no publication has occurred. The basis of

this statement is the definition of "publication," in Section 101, and

the explanatory material in House Report 94-1476 at page 138 and Senate

Report 94-473 at page 121. (The pertinent sentences from both reports

beginning "Under the definition in Section 101. . are identical):

First, the definition states that "display of a work does not of itself

constitute publication." Thus the proprietor's display is not publication. However, the definition also states that "the offering to distribute copies ... to a group of persons for purposes of further distribution ... or public display, constitutes publication." Thus,

distribution to a single exclusive licensee for display purposes only

is not publication (since a single individual is not a group).

Suppose the proprietor distributed the data base to two or more licensees for display only. Whether this constitutes publication depends on how many licensees constitutes "a group " The answer to this question

had best be left to the Judiciary or to further Congressional interpretation.

5.6.1.2 Printouts at Terminals : If users at terminals are permitted

to make printouts of retrieved material, without any "explicit or implicit restrictions with respect to disclosure of the contents," then

publication has occurred. The argument could be made that if restrictions are placed on disclosure or distribution of the printouts, then no publication has occurred. However, since the concept of "publication"

is no longer central to copyright, extended analysis of particular situations is unwarrented at this point. In any event, it would be expected, if there is a likelihood that a printout would be considered "published," that a proprietor or a licensee would be sure to have the com- puter mark each printout with a complete notice of copyright to insure

that proprietary rights were protected under Chapter 4 of the 1976

General Revision.

5.6.1.3 Identity of the Publication : The question of exactly what has

been published remains to be discussed. The printouts, if provided un- der no restriction, are published material. The physical printout belongs to the user who paid for it. The copyright ownership of the

printouts belongs to the proprietor of the data base. This is not un- usual. When a book is purchased at retail, the buyer owns the book and

the publisher continues to own the copyright in the content.

54
The argument could be made that only the printouts have been published

and the data base has not been published. After all, only the printouts

have changed hands; and it is assumed here that the proprietor or his

exclusive licensee have retained control of the full data base. In the

manner in which data base systems are operated, a user identifies a particular set of categories of information in which he is interested

and queries the data base. The data base system responds with the number of items in the set, and on command, the text retrieved is shown on

a CRT terminal. If the user is satisfied with the text retrieved, he

requests a printout. It would seem that the printout is a "derivative

work," similar to an abridgment or condensation (see Section 101 for

definition), and there appears to be no requirement that a published

derivative work be based on a publ ished preexisting work. On the other

hand, each printout may be different, depending on the specific query

which the user has entered into the computer. Thus, the published

"derivative works" may be one of a kind.

5.6.1.4 Needed Clarification : It seems reasonable to suggest that a clarification of what constitutes publication of a computer-readable

data base is in order. For example, a reasonable understanding is that

a computer-readable data base is to be considered "published" in its

entirety if it is offered to the public on a query basis such that any

item in the data base is capable of being retrieved and printed out and

the printouts become the physical property of the users on the basis of

unrestricted disclosure. Furthermore, "publication" occurs in this

situation whether the offering to users is made by the proprietor or

his licensee.

Additional clarification appears to be needed, also, in the definition

of how many persons constitute "a group of persons" as the number of

distributors to whom a work has to be offered in order to be published.

Furthermore, it does not seem to be clear if a work is "published" if

it is offered to a group of persons on a restricted-disclosure basis

for further distribution on a restricted-disclosure basis.

5.6.2 Statutory Deposit to the Library of Congress

As was indicated in Section 5.5 above, there are valid public policy

considerations that suggest the maximum disclosure of copyrighted works

in return for copyright protection. There is no reason to exempt com- puter-readable data bases from these considerations.

The Library of Congress could be viewed in this connection as an archival location where anyone could view and peruse nearly any computerreadable work published with copyright notice. This would be an immense

aid to scholarship, to historical review, and to the generation of new

ideas for the future, as it has been with works in the older technological media.

The issue, then, is the form in which computer-readable data bases

should be deposited under Section 407 in order to maximize their

55
availability, minimize storage and handling problems for the Library,

not provide a hardship of supply to the proprietors and not strain fair

use.

It is not immediately clear, on these criteria, whether the initial

deposit should be a printout or a magnetic tape, but it seems reasonable to suggest that it should be the complete data base, not just

identifying descriptions, regardless of which medium is chosen. The

advantage of the printout is that any reader could peruse it without

straining fair use. Microfilm could be used to reduce size and bulkiness. The advantage of the magnetic tape is that the data base is published in that medium; and it is a medium in which it is available for

a scholar's manipulation and use, assuming it were an outdated tape

that the proprietor no longer saw as an immediately marketable product

that the scholar ought to buy by signing on the proprietor's computer

system.

Many data bases are updated frequently, and it seems reasonable to

suggest that a yearly update, containing only the new material added

during the preceding year and the old material dropped, is not a burdensome requirement. The deposit of a complete data base, under the

circumstances of continuous updating, could conceivably be required at

least once in a period of several years, for example, ten.

5.6.3 The Question of Monopoly

In Section 4.7 of this report, the question of monopoly was discussed,

and it was noted that the existence of an economic monopoly depends on the availability of substitutable works. In works produced for the

general consumer, there may be high substitutabil ity among individual

works.

However, an important distinction must be noted between the respective

market behaviors of the general consumer and the researcher-consumer of

copyrighted works. The general consumer typically selects competitively

for purchase or use one (or a few) of a class of relatively substitutable works while rejecting all others. The researcher in any professional field desires to be comprehensive in the full-text as well as in

the data base literature of his field. Thus, the researcher (or his

library surrogate) cannot reject totally anything pertinent, and his

marketplace behavior with respect to competitive producers cannot be

analogous to the general consumer. The question may be asked whether

there is a greater potential for a market monopoly in this situation.

If such is the case, a question that may be asked is what form of intervention should be pursued by consumers collectively or by the Government.

With respect to scientific journal articles, the situation is ameliorated through the formation of professional societies which serve as the

collective good to circumvent the implicit market failure. Furthermore,

the social ethic of research is that all those involved, even in different organizations, benefit from the unimpeded flow of information.

56
This ethic may tend to lower the prices of journals produced by scientific societies rather than raise them. Therefore, any independent

entrepreneur of a proprietary journal may find that the subscription

prices that can be charged are limited by competition from journals of

non-profit societies. The fact that the primary producer community and

the final user community of scientific journal articles are essentially

the same population may be a key factor in preventing monopoly pricing.

With respect to bibliographic and other specialized data bases, a different situation exists. In contrast to the situation with scientific

journal articles, there is very little in the publication of continual

updates of a data base that can be translated by a professional re- searcher into either financial or symbolic remuneration unless the work

is a full-time business. Thus the producer and consumer communities

need not be the same population and this particular negative feedback

restraint on the subscription price of journals need not hold for data

bases. It is not surprising, therefore, to find that (excluding Government production) a significant fraction of data bases used for re- search purposes are produced and distributed for profit as proprietary

products.

The development of computer-based information retrieval systems based

on machine-readable data bases has added an additional complicating

factor. First, the development of a computer-readable data base (with

continual updating to insure an indefinite life) requires a certain investment in data collection, organization, manipulation, and digital

conversion. Clearly, those organizations that already have computeraided publishing systems to help produce hard-copy informational products may be able to generate computer-readable data bases as relatively

inexpensive by-products. Secondly, a parameter of usefulness of a data

base is the comprehensiveness of its coverage of a specific field; and

conceivably, only the largest organization with well-established lines

of data supply and customer acceptance may be able to satisfy this need.

Thus, the possibility exists that in some field of research, by virtue

of economy of scale, an established system of suppliers and customers

and already amortized costs of entry in the market, a single organization may achieve a virtual market monopoly over a class of nonsubstitutable computer-readable data bases. An anti-trust suit concerning this

very problem is now under litigation in the field of computer-based

legal information retrieval.

Additional sources of monopoly control and a potential solution are described in Appendix A, Section A. 4. 4. 5 of this report. The following

is excerpted from that Section:

"In some instances, publishers of data bases have leased them

exclusively for use in one computerized information service

system . . . Exclusive licensing of data bases may tend to

foster the monopolization of data base search services by one

or two giant systems. Whether the prevention of such a monopoly

57
or the regulatory control of a permitted monopoly as a public

service organization would be preferable is an open question.

"From the standpoint of providing maximum service for re- searchers, and at the same time preventing the development

of a monopoly . . the ideal situation might be the development of a number of competing systems, each of which can offer comprehensive coverage of any subject area. One way

of encouraging such a development would be to provide for a compulsory licensing scheme under which a data base made

available for use in any one system would thereupon become

available for use in all other systems.

"Whether a compulsory licensing scheme ... is needed and

whether is would be desirable, are debatable issues ..."

It seems reasonable to suggest that a valid research subject at this

time is the economics of provision of data base information in computerized form, considering both the incentives for innovation and the

potential for monopoly pricing.

5.7 COPYRIGHT IN COMPUTER PROGRAMS

Some of the questions concerning the copyrightabil i ty of computer programs are first listed below and then are considered individually in some detail. These questions are:

Is a computer program a writing of an author and thus eligible for copyright protection under the Constitution?

Is a computer program a "literary work"?

Can a computer program be sufficiently "original" that it

meets the requirements for a copyrighted work?

Should a program in object code be treated any differently

under copyright than a program in a source language?

Is protection of the specific expression of a program but not

the underlying conception sufficient protection to be valuable

Should copyright protection be denied computer programs on the

basis of the strength of the software industry?

How long should protection last, if a program is copyrightable?

What should be a buyer's usage rights in a program?

58
5.7.1 The Program as the Writing of an Author

In general, a computer program is written by a human being, and is

written in a specific formal language. Those persons engaged in the

occupational specialty of writing programs are known as programmers.

Others engaged in the tasks of determining requirements for and blocking out the logical flow of programs may be known as systems analysts.

However, engineers, scientists, and others may write programs in the course of using a computer to assist them in solving problems in which

they are engaged. In the United States today, there are probably several million persons who can comprehend at least superficially a com- puter program written in FORTRAN, a widely-used programming language.

In opposition to the copyrightabil ity of computer programs, the point

has been made that a computer program is a set of instructions for a machine, and in fact, according to this view, since the machine cannot

operate without the program, the program is really part of the machine.

Thus, programmers are really engaged in machine design, according to

this argument, and the output of their work is more appropriately protected under a different legal mechanism than copyright.

Several points can be made in rebuttal to this line of reasoning.

First, there is nothing inherent in a computer program that cannot be

carried out by human labor, given either enough time or enough people

to undertake the work. That is, the computer program written by a programmer is a set of instructions understandable by other persons; and

it consists of individual steps that are possible to accomplish by

humans, if time restraints are relaxed. The only capabilities needed

to carry out the instructions of a program written in a typical source

language, besides an understanding of the language, are (a) the ability

to distinguish negative, zero and positive numbers, (b) the ability to

perform arithmetic and elementary Boolean algebra, and (c), the ability

to correctly select the next instruction, given explicit and unambiguous directions as to where to find it. It hardly seems fair to the

author of such a set of instructions or to the public interest in eco- nomic efficiency to deny Government protection to the author's expression simply because, for purposes of speed and accuracy, the instructions

are to be carried out by machine instead of by human labor.

If it is to be put forward that computer programs are not in a language

in which humans speak to each other, that point can be accepted without

damaging the case for copyrightabil ity. Categories of works now copyrightable include musical works (that is, sheet music not necessarily

including any accompanying words); pantomimes and choreographic works;

and pictorial, graphic and sculptural works. None of these communicate

to humans in natural language. Certainly included in the category of

pictorial and graphic works are engineering and architectural drawings

and schematic diagrams, all of which can be employed as instructions

to those persons engaged in the construction of machines, devices, and

structures.

59
Close to the concept of the computer program is musical notation and

similar notations for sequences of choreographic motions. Musical no- tation is, in essence, a set of instructions for the operation of mechanical devices so as to produce a particular sequence of sounds, each

with a particular pitch held for a particular length of time. It

follows that the question whether a computer without its program is

still a computer is analogous to the question whether a piano without

someone playing it is still a piano. Discussion of such a question is

not likely to be fruitful in the present context.

It may be helpful to point out, however, that a computer program is

more than simply a set of instructions used to operate a machine. Computer programs are involved, in their operational use, in a variety of

real human purposes. Some of those purposes involve research and other

professional activities, while other purposes may appear to be mundane.

However, the development of a computer program that will be used in

connection with any real human purpose must include an understanding

of the human and physical systems with which the program will be associated. Implicit in any set of calculations that represent the real

world is a model of that portion of the real world. Clearly, the com- puter programs now in use throughout the United States that assist

physicians in the diagnosis of heart ailments on the basis of an analysis of electrocardiogram signals constitute models of the heart's operation. Similarly, but perhaps not so obviously, accountants have begun to realize that the system of financial records of an organization

including the records of collections, inventory, and disbursements is

nothing less than a financial model of the organization.

In effect, the computer program is an implementation of the view that

the physical world and at least part of the human world is amenable to

rational analysis and quantification, and to understanding deduced from

these processes. Scientists, engineers, economists and statisticians

must be listed among those whose core of professional work conforms to

this view. No person need accept this view either in its entirety or uncritically. In fact, a world run solely on the basis of this view

might very well lack fundamental and essential value judgments that

cannot be deduced or quantified. Copyright protection, however, as discussed in Section 2.6, requires no value judgment as to the individual merit of a particular writing of an author; and it is clear that the source code written by a programmer is such a writing.

While the most fundamental statutory test of copyrightabil ity is whether

the category in question constitutes a writing of an author, it is useful to consider the basic principle enumerated in Section 1.3 of this

report. Under these principles, this study finds that the author of a computer program is entitled to the fruits of his creation; and that

the ease of copying of this form of intellectual property constitutes

an intrinsic market failure requiring the public good of statutory

copyright protection. In addition, this study finds that without copyright protection for computer programs, losses in information flow, increased procedures for secrecy and less opportunity for creativity

60
would result.

5.7.2 Computer Programs and Literary Works

Seven categories of works are now granted protection under Section 102

of the 1976 General Revision of Copyright Law. While the definition of

"literary works" given in Section 101 of the new Act is broad enough to

include computer programs, it is not necessary that computer programs

be defined for purposes of the statute as literary works. An alternative is a new category of copyrightable work to be enumerated in Section 102, namely "computer programs."

One reason for consideration of this question is that computer programs

are used in different ways than prose or poetry. The limitations on exclusive rights granted to users of literary works, for example, as specified in Section 110 of the 1976 General Revision, may or may not

be appropriate for computer programs. In particular, the applicability

of the limitations of Section 110 to computer programs used for computer-assisted instructional purposes is worthy of examination.

Similarly, as the uses to which computer programs are put or the manner

in which they are used differ from more standard literary works, additional modifications of the copyright statute may be appropriate to

specify the assignment of property rights with respect to each type of

work. Categorization of computer programs separately from literary

works might assist the process of specifying these differences.

5.7.3 Originality of Computer Programs

While no specific research study can be identified yielding definitive

results that computer programs can be "original", as the meaning of that

term is understood in copyright law, experience and knowledge of the

field make possible an unequivocal affirmative response.

Many books have been written on the subject of how to write programs

and how to write better programs. If originality were not possible, it

would have been difficult if not impossible for Gerald M. Weinberg to

have written the book The Psychology of Computer Programming ^^ including

sections on "Programming as Human Performance" and Programming as an Individual Activity." Similarly, it would have been far less likely

for Dennie Van Tassel to have written on "Program Style" in his book on Program Style, Design, Efficiency, Debugging, and Testing '^^ or for

Frederick P. Brooks, Jr. to have written of "the joys of the craft" or

of "craftsmanship" in his book on The Mythical Man-Month, Essays on Software Engineering .^^

Of course, the more complex a program's function, the greater the variety of unique ways of expressing the steps in the performance. On the

other hand, it is questionable whether a program carrying out an elementary and well-defined function such as the calculation of the roots

of a second-order polynomial could be considered "original." It may be

61
within the discretionary power of the Register of Copyrights to deny

copyright to such a program on that basis. It is likely, however,

that the copyrighting process will be self-regulating. Only programs

having an intrinsic originality are likely to be submitted for registration.

5.7.4 Protection of Object Code as a Computer Program

The object code is the conversion into symbols usable directly by the

computer of the source program written by the programmer. The basic

question with respect to object code is whether it should be able to

be copyrighted independently of the source code. If it were independently copyrightable as a computer program, a programmer could submit

the object code to the Copyright Office for registration and never disclose the source code at all.

The point has been raised that, very likely, the sequence of ones and zeros in hard-copy form constituting the object code is, in the abstract,

already copyrightable as a literary work under present law. Analogously,

the sequence of numbers in a data base are clearly copyrightable and

similarly, original sequences of nonsense syllables are acceptable for

registration since no value judgment need be made as to literary merit.

However, the concept of a "computer program" implies a sequence of instructions involving a solution to a quantifiable problem. The granting

of the protection of copyright implies the right to prevent infringements and imposes responsibilities on the Government. Yet the object

code (except for a program of very short length) is unreadable as a computer program by a person. It would be exceedingly difficult for

the Copyright Office to assure that the object code was "original" for

registration purposes and similarly difficult for the facts to be determined in an infringement action.

The registration of the sequence of ones and zeros constituting the object code could be used, certainly, to prevent unauthorized copying and use of exactly that sequence. However, many infringements of the underlying program could occur without the use of the exact sequence. For

example, it would be extremely easy to shift the specific sequence while

still plagiarizing the program through the insertion of a single instruction not changing the logic of the sequence, or to change the en- coded addresses of operands, or to use different encodings for the machine commands. A copyright registrant might find that object code registration actually provided, as a practical matter, very little real protection.

In addition, copyright registration of object code as a computer program discloses almost nothing in return for the protection of law. Information transfer about the program is deliberately minimized, not

maximized. Thus, this study finds that the independent copyrightabil ity

of object code as a computer program is not in accord with the basic

principles on which its recommendations are based.

62
On the other hand, the above should not be understood as implying the

finding that object code is not protectable at all. The copyrightability of programs in source language would have very little value if

the object code could be produced or copied with impunity. It is con- cluded, therefore, that the conversion of a source program into object

code, which implies no addition to the logic of the program and therefore no value added, constitutes the making of a copy.

Thus, object code should be protected by virtue of the copyright in the source program. It may be noted that in the process of producing object code from a source program, the usual procedure is to combine certain necessary operating parameters into the object code. These parameters often select the specific peripheral units that will be used with

the program when the program is run and also select the location of the

program in the computer storage units. In the view of this study, these

additions to the object code constitute almost nothing that could be

classed as original works of authorship. Thus, the generation of object code, even with the addition of these housekeeping functions, cannot be classed as the preparation of a derivative work.

5.7.5 Translation To a New Source Language

The translation of a source program from one source language to another

source language should be considered the preparation of a derivative

work. The translation makes possible the understanding of the program

by an additional group of persons and provides for wider dissemination

and use.

5.7.6 Value of Copyright Protection

It is clear from the concept of copyright and from Section 102(b) of the

1976 General Revision that only the "expression" of a program can be

protected. As stated in Section 102(b):

"In no case does copyright protection for an original work of

authorship extend to any idea, procedure, process, system,

method of operation, concept, principle, or discovery, re- gardless of the form in which it is described, explained,

illustrated, or embodied in such work."

The question may be asked, whether protecting the expression only,

rather than the concept is valuable. An answer is that copyright protection hopes to prevent a major type of market failure with regard to

computer programs, but does not claim to protect against all types of

market failure. Therefore, copyright is valuable, but not valuable for

every purpose.

It is important to note that unauthorized copying of computer programs,

even without any further use or dissemination of the concepts of the

program, is a major type of market failure. The reason this is true is

that examination of the program code to determine any unique concepts

63
contained therein requires the expenditure of significant resources,

while copying by itself requires only a bare minimum of resources. A

copier who is assured that the program in question performs the functions he desires in an error-free manner has obtained something of con- siderable value, at minimum expense. The added effort of understanding

any unique procedures contained in the program is not likely to yield

a corresponding advantage for a pragmatic user.

The disclosure of unique concepts, certainly, will assist competitors

in the development of competing programs, but whether a particular

unique or innovative design concept is protectable would depend on how

a statute (such as the patent law) protecting such concepts might be

written or might be interpreted. This report is not the proper vehicle

for a detailed discussion of this matter; but it can be pointed out that

very few programs contain (or need to contain) new concepts as unique

as the simplex method for the solution of linear programming problems

or the fast fourier transform algorithm, both outstanding advances in

computational procedures. For the most part, what is required of programs is that they carry out their intended functions with precision

and in an error-free manner. Performance is improved if in addition,

programs minimize execution time and use of storage space to the extent

practicable. For most applications, unique concepts are not required,

and for these programs, copyright protection should be sufficient.

Clearly, there appears to be room for further study on the possible

protection of unique and innovative programming concepts.

5.7.7 Copyright and Software Industry Strength

One argument against copyrightabil ity of computer programs is that the

industry is burgeoning and therefore copyright is unnecessary. It must

be noted, however, that copyright does not specifically protect an industry, but rather a particular work in the marketplace. The protection

is particularly important for the smaller entrepreneur who does not have

the resources to engage in the kind of retaliatory measures suggested

by Hurt and Schuchman or to protect himself against the predatory practice proposed by Breyer and described in Section 4.2 above. Copyrightability promotes competition and innovations by the small competitor.

These aspects of the marketplace are important criteria for public policy towards an industry, as are growth and size of the industry.

5.7.8 Duration of Copyright Protection

It seems reasonable to propose that the author of a computer program

should not be treated any differently than the author of any other type

of copyrightable work. Therefore, the duration of copyright in computer

programs should be the same as the duration of copyright in other works.

A reason that has been given for proposing a shorter duration of copyright is that with changing technology, computer programs would become

valueless after several years. However, if the proposal of this report

is adopted, that an original computer program copyright should be

64
obtainable only in the source program, and not in the object code, then

a separation of the programmer's expression from the hardware technology

is promoted. Furthermore, even if popular source languages are altered

or improved, the copyright proprietor retains the right to prepare derivative works, permitting him to update the program as required.

5.7.9 User Rights in Computer-Readable Works

A computer program, and a computerized data base as well, are intended

for use in conjunction with a computer. That is, a computer-readable

work is used by entering it into a computer system and manipulating it

through the logic of a computer. It seems reasonable to propose that

the copyright proprietor should retain the exclusive right to the use

of a computer-readable work in a computer.

However, this study proposes a limitation on the exclusive right of use,

in order to reduce transaction costs in connection with the transfer of

ownership of copies of computer-readable works. This limitation is intended to operate through improved sal ability of computer programs and

computerized data bases, considered immediately below.

5.8 IMPROVING SALABILITY OF COMPUTER-READABLE WORKS

Several kinds of copyrighted works are offered for sale at retail.

Books, maps, and sound recordings are typical of this class. The advantage of sale over lease or rental is that transaction costs are minimized. No agreement, except to pay the retail price, need be made.

The buyer obtains ownership over the copy or phonorecord he has purchased, including the right to resell that copy, except for certain

rights retained by the copyright owner. The retained rights include

the rights to make and sell copies (with exemption for fair use, com- pulsory licenses, etc.), the right to prepare derivative works, and the

rights to perform and display the work publicly.

If the rights to computer-readable works could be defined in such a way

as to promote the sale rather than lease of such works, transaction

costs might be similarly minimized. This would be, certainly, in the

public interest.

5.8.1 The Right to Ephemeral Recordings

One of the problems in the sale of computer-readable works is the right

of the buyer to copy for his own use. Here, "buyer" means the purchaser

I of a copy where ownership of the copy is transferred. For works published in paper, "use" simple means "reading" and no copying is re- quired. For sound recordings, "use" means "playing" the recording on a playback mechanism, but again, no copying is required. For computerreadable works, copying into the computer is required in order to use,

! and in addition, archival copies are made in normal practice in case a copy in use is destroyed inadvertently.

65
In Section 112 of the 1976 General Revision, the right to ephemeral re- cordings is recognized for a "transmitting organization." This means

that a radio station or TV station has the right to record a performance

that it is transmitting for its own internal purposes, for example,

"for purposes of archival preservation or security."

It seems reasonable to suggest that buyers of computer-readable works

ought to have similar statutory rights of ephemeral recording in order

to be able to effectively use what they have bought. It seems reasonable to suggest, also, that restrictions on the use of such ephemeral

recordings ought to be imposed. For example, if a buyer resells the

copy of the computer-readable work that he has bought, he ought to be

required to destroy all ephemeral copies. The buyer ought to be able

to resell no more than one copy of a computer-readable work if he had

bought only one copy. Furthermore, the right of internal use should

be distinguished from network use. The usage rights of a buyer should

not include the right to make the work available to outsiders through a computer network or otherwise.

The effect of the allowance for free internal use in situations of

transfer of ownership means that there could be no performance royalty

charged. If the seller wants the buyer to pay for each individual use

of the computer-readable work, the seller would have to negotiate a lease or rental agreement with the buyer. For lease with per-use

charges, the transaction costs are probably higher than for outright

sale.

5.8.2 The Right to Make and Use Machine Code

Similarly, the need of a buyer to copy a computer-readable work into a computer in order to use it requires that the buyer make object code

out of the work. It seems reasonable to suggest, in order to promote

the sale of computer-readable works and thereby reduce transaction

costs, that a buyer be permitted, for his own use, to convert a com- puter-readable work to object code and to use the code in his own computer.

5.8.3 Differential Pricing

Another concept which might induce an increase in sales rather than

leases is differential pricing between individual buyers and institutional buyers. This concept has been described in Chapter 4 of this

report as having a theoretical economic basis, and the concept is further described in Appendices CI and C2. The concept, in general, has

been described in terms of the sale of scientific journals, but there

is no reason why the concept could not be adapted and utilized for the

sale of computer-readable works, as proposed in Appendix D.

In general, an individual buyer would be one with a single computer

system and a small number of terminals. For the sale of computer programs, that is, computer-readable works that are typically manipulated

66
by the arithmetic units of computer systems, an institutional buyer

could be defined as one with a large number of computer systems on which the program might run or as one who could be expected to use the

program to benefit many individuals. For the sale of computer-readable

data bases or textual works, that is, works that are typically viewed

at terminals with subsets being retrieved by users, an institutional

buyer could be defined as one with a large number of internal (user)

terminals attached to his system.

5.8.4 Data Base Access Services

A special type of institutional buyer must be noted. The independent

data-base access service employs a computer-readable data base, and for

a use-dependent fee, permits outsiders to obtain printouts of subsets

of the data base at external user terminals.

The data base access service is providing derivative works to outsiders

through the printouts, as well as displaying the work publicly, two

rights which are reserved to the copyright holder under Section 106.

In order to make the concept of outright sale useful to independent

data base access services, these services would have to be given statutory permission to display computer-readable works publicly and to prepare derivative works. It is not clear that copyright proprietors

would want to give up these rights in this situation.

5.9 SUMMARY

The issue of computer-readable works was raised significantly in Senate

hearings in 1967. Predictions of vast changes in methods of production

and distribution of works alerted publishers and authors to the need

for language in the copyright law which protected their works in computers. The predictions were premature, but technically feasible, and

within the realm of possibility, depending on many social, economic,

and psychological factors.

The 1976 General Revision clarified rights in works fixed in any tangible medium, but the insertion of Section 117, because of the establishment of CONTU, continued certain ambiguities. The 1976 Act abolishes

common law protection for fixed, but unpublished works and provides

statutory protection instead.

The most important act assuring maximum Federal protection is registration of the copyright and deposit of the necessary copy. Disclosure

through this act is an important quid pro quo for Federal protection.

The Register of Copyrights is entitled to make rules allowing the deposit of identifying information instead of complete copies for certain

classes of work. The principle of maximum information transfer would

seem to demand complete disclosure for scientific and technical information.

67
Data bases should be copyrightable in any medium of expression. Clarification is needed as to what constitutes publication for a data base

distributed only in computer-readable form to one or a small number of

computer systems that provide user-access via a terminal query.

There is a need to review the possibility of monopoly pricing in com- puter-readable, data-base access services. Some of these data bases

are relatively nonsubstitutable, and competitive entry in the field may

be difficult. Compulsory licensing may be a remedy but innovation

should not be stifled.

Computer programs should be copyrightable in human-readable form

(source language) in any tangible medium of expression. The object

code should be protectable as a copy of a computer program, but not as

an original copyrightable computer program by itself, because it fails

to disclose anything substantial. Material defining the language of a computer program should be disclosed at time of registration. For most

computer programs, copyright protection is sufficient because the programs contain no innovative concepts. Further study may be worthwhile

to determine the value of protecting the innovative concepts that might

be contained. The duration of copyright for computer programs should

be no less than the duration of protection of other works. This should

promote the writing of programs in enduring languages. The definition

of a program converted to a new source language as a derivative work

will help extend the life of programs.

There is a need to insure a user's rights in computer-readable works if

the user has purchased the work in outright sale. The sale of copyrighted works rather than lease or rental should be promoted as being

lower in transaction costs. A buyer needs the right to make source- language copies for his internal use and the right to make and use object code. The buyer would not be permitted to resell more than the

number of copies he had purchased nor make the work available externally

to others on a computer network without permission. At the time of

resale, extra copies would have to be destroyed.

68
6. POLICYMAKING FOR COPYRIGHT

In the course of this project, it was recognized that if conclusions

were to be drawn about the applicability of copyright to computer-readable works, then decisionmaking with respect to other kinds of copyrightable works ought to be researched. Therefore, an historical analysis was undertaken, and the fundamental principles and concepts underlying copyright were reviewed.

This historical and conceptual study has been found to be extremely useful. It has elucidated the principles of political philosophy and eco- nomics on which copyright is based. It has clarified the roles of the

separate branches of the Federal Government in copyright policymaking

and demonstrated their interactions. It has identified the impact of

incremental technological change, thereby showing decisionmaking under

increasing complexity. Finally, it has enabled copyright policymaking

to be placed in the matrix of decisionmaking in general, thereby making

possible an identification of the political system models with which it

is most closely associated.

6.1 COPYRIGHT AND OTHER PROPERTY RIGHTS

The history of copyright presents evidence that an essential point at

issue, regardless of the technology involved, is the definition of the

boundaries of the property right. In this, copyright is not much different than other kinds of property, tangible or intangible. In addition, with the property right is typically associated reciprocal re- sponsibilities. An example of the conception of property rights in this

manner is presented by Walter Lippmann in The Public Philosophy ; in

which the concept of quid pro quo is stated to be fundamental to our

system of government:

"Early in the history of Western society, political thinkers

in Rome hit upon the idea that the concepts of the public

philosophy - particularly the idea of reciprocal rights and

duties under law - could be given concreteness by treating

them as contracts. In this way, freedom emanating from a constitutional order has been advocated by establishing

the presumption that civilized society is founded on a public social contract.

"A contract is an agreement reached voluntarily, quid quo pro

and likely, therefore, to be observed - in any event, rightfully enforceable..."'^^

Copyright appears at first glance to be encumbered with many kinds of

conditional rights and complexities, whereas other property rights may

appear to be relatively clean and easily defined. Actually, this is

not so. A farmer may be restrained from using insecticides if his

neighbor is a beekeeper and may be induced by Government to plant or not

to plant certain crops. A builder may be restrained from constructing

69
a factory in a residential neighborhood. Airplanes may be confined to

certain corridors for purposes of noise abatement and places of business

must meet many standards of safety and occupancy.

In general, the rights of property are the creation of law. Lippmann

has quoted Blackstone's Commentaries on this question:

"The original of private property is probably founded in

nature but certainly the modifications under which we at

present find it, the method of conserving it in its present

owner, and of translating it from man to man, are entirely

derived from society, and are some of those civil advantages

in exchange for which every individual has resigned a part

of his natural liberty. "^^

Thus, people may act from a foundation of what they believe to be naturally right, but one view is that enforcement of those rights is derived from the public social contract, through which some liberty is

exchanged for some protection of law. Copyright appears to assume such

a social contract.

6.2 APPLICABLE DECISIONMAKING MODELS

6.2.1 Pluralism

It seems clear that decisionmaking on copyright questions has been very

much in the pluralist mode in the twentieth century. That is, conflict

has been among contending factions (interest groups) gathered around

different functions related to copyrighted works. For the most part,

the contenders have been the primary producers, i.e., authors and their

original publishers, against secondary producers, that is, those who

would use copyrighted works to provide ultimate consumers with additional products and services. In general, the Congress refers to the sec- ondary producers as "users" although they are not the ultimate consumers.

The secondary producers have included phonorecord manufacturers, jukebox owners, movie makers (in the use of copyrighted music in sound

tracks), over-the-air broadcasters, cable TV broadcasters, educational

photocopiers (for further distribution to students), and Government librarians (for further distribution to researchers).

The ultimate consumers are usually not involved, although users of com- puter programs and researchers in educational institutions who use photocopies have been involved. Neither of these groups can be identified

with the general public consumer of copyrighted works, e.g., the general

buyers of books, records, movie tickets, concert tickets, etc.

The governmental role envisioned by the pluralist model is:

"(1) establishing rules of the game in the group struggle, (2)

arranging compromises and balancing interests, (3) enacting

compromises in the form of public policy, and (4) enforcing

these compromises."'"*

70
There is no question that Congress and the Judiciary have served these

purposes in copyright decisionmaking. In fact, the idea of group com- promise is no secret in this field. The 1976 General Revision of Copyright Law calls upon the Register of Copyrights to submit a_ report to

Congress "setting forth the extent to which this section /_ 108_/ has

achieved the intended statutory balancing of the rights of creators, and

the needs of users." Thus, the balancing concept is specifically written into law in the photocopying area. Similarly, House Report 94-1476

on page 65 speaks of the definition of "fair use" j_ Section 107_/ as "balancing the equities."

The setting of the royalty rate for the phonorecord manufacturing li- cense between the 3^ per musical piece manufactured asked by some representatives of the publishers and writers and the li requested to be

retained by representatives of the record manufacturers, and the further compromise between the Senate-passed royalty fee and the Housepassed royalty fee is an additional example. The statutory balancing

of the membership of the National Commission on New Technological Uses

of Copyrighted Works is another example; and in the statement contained

within House Report 94-1476 on page 360, the Hon. George E. Daniel son states (about Section 111) that:

"....the committee has arrived at a solution which I submit

is fair and equitable to both the owners and the users of

copyrighted materials "

It can be reasonably expected that decisionmaking will continue in a primarily pluralist mode for the foreseeable future in order to resolve

disputes in which a balance of equities is the primary consideration.

Probably, the Copyright Royalty Tribunal will be aided in its efforts

by a rational analysis of economic issues.

6.2.2 The Power Arena Model

Professor Theodore J. Lowi has defined domestic policies as falling into one of three arenas of power: distribution, regulation, or redistribution. Lowi states that:

"distribution /7was_7 almost the exclusive type of national

domestic policy from 1789 until virtually 1890. Agitation

for regulatory and redistributive policies began at about

the same time, but regulation had become an established fact

before any headway at all was made in redistribution."''^

Distributive policies are those decisions that can be made in the short

run without regard to limited resources. The standard example is 19th

century land policy. Distributive policies are typically capable of

disaggregation so that what is being distributed can be dispensed in

small units. Under distribution, indulged and deprived may be members

of the same group (i.e. the winner and loser of a Government contract

or grant).

71
Regulatory decisions normally affect an entire industry and often concern the ability of that industry to do business in the long term.

Within the context of the regulatory structure, there may be distributive decisionmaking (e.g. assignment of a TV channel or an airline

route), but regulatory decisions typically affect all industry members

in a similar manner. Often, the regulatory policies affecting one industry are of little concern to other industries.

The redistributive arena, according to Lowi , involves issues that con- cern "haves and have-nots, bigness and smallness ""^^ Typical issues

that appear in the redistributive arena are overall tax policy and policies on unemployment and retirement income. Industry groups concerned

with separated regulatory policies are likely to find a common ground

in the redistributive arena.

The importance of the power arena model is in what it says about the

changing nature of copyright decisionmaking. In 1790 and until about

the time that Lowi dates the beginning of regulatory policies, copyright fitted neatly into the distributive arena. The contention among

factions was not a primary factor. Clearly, individual copyrights have

been and will continue to be dispensed in small units in the short run without regard to limited resources. In fact, copyrights (and patents)

may be the ultimate distributive good since originality and creativity

are essentially independent of resource constraints (although nurturing

these qualities may not be). The increase in registered copyrights and

patents does not diminish the stock of un-issued copyrights and patents

waiting for new claimants.

While the distribution of copyrights continues, it seems clear that much

copyright policymaking since the turn of the century has been in the

regulatory arena, and is increasingly so. This has been due to the increasing number of secondary producer groups ("users") who have been

contending the boundaries of intellectual property rights with primary

producers. Each field of copyright has its own contenders, and major

decisions in each field treat all producers in the same way, as the

regulatory arena requires. Not surprisingly, Lowi recognizes that his

regulatory arena is very close in concept to the pluralist model of

pol icymaking.

Another factor causing an increase in regulatory policymaking in copyright is the increase in the sensitivity of public decisionmakers to

monopoly and other forms of market failure such as high transaction

costs; and the consequent increase in public institutions and mechanisms

involved in correcting these market problems. Thus, there are now four

compulsory license types within the copyright domain, a Copyright Royalty Tribunal to oversee certain aspects of these licenses, and a Federal court supervising the performing rights area. It remains to be seen if the photocopying problem can be successfully concluded with a collective mechanism that does not involve additional, permanent Federal

intervention; and final Congressional action in the area of computerreadable works is yet to come.

72
Very little about copyright is directly in the redistributive arena unless the truism is cited that, in the long run, all policies are redistributive. It could be said, however, that activities that prevent

monopoly pricing of copyrighted works are redistributive since prices

affect the ultimate consumer. At the same time, it may be noted that,

except for anti-monopoly and infringement prosecution activities in the

Department of Justice, the only Executive Branch concern with copyright

is as a peripheral policy issue that may affect research through the

availability of data and scientific journals, and may affect TV viewers

in the quality of available programs. There is no administrative "program" about which one could make cost-benefit calculations with concern

for objectives achieved in relation to funds spent. Copyright is now primarily a regulatory balancing issue involving producer interests and

special classes of users, and is likely to remain so. Congress appears

to regard the balancing of equities in copyright as a distinct function

reserved to itself.

The future cannot be predicted with any certainty but it is possible

that additional technological change, coupled with increases in the

costs of resources such as raw materials, may bring copyright policymaking more into the redistributive arena. If that occurs, it is likely

to be in a context in which copyright is an element of a more consumeroriented issue, such as "public access to information."

6.3 THE IMPACT OF TECHNOLOGICAL CHANGE

It is most interesting that Lowi dates the beginning of the regulatory

policy era at approximately the start of growth in innovations of information technology. The effect of new innovations is to make available new opportunities, which means in economic terms, new industries

and increases in investment and employment; but which means in political

terms, increases in the number of interest groups and the consequences

of their activities.

Furthermore, another effect of new innovations is to make ambiguous the

definitions of property rights that were perfectly clear before the

innovations. As John Dewey stated many years ago,

"Every thinker puts some portion of an apparently stable

world in peril and no one can predict what will emerge in

Its place. "^7

Thus, "public performance for profit" has an entirely different meaning

after the commencement of commercial broadcasting than before. "Fair

use" has an entirely different meaning after the diffusion of high speed

photocopying than before; "copy" a different meaning after the invention

of punch cards and magnetic tape than before.

It seems completely in the spirit of free enterprise for an innovator

to attempt to combine a new technology with the new ambiguity or un- certainty it raises in order to develop a new market and a new industry.

73
Should the innovator succeed, a new interest group is formed around the

successful technology, but the proliferation of interest groups must

generate additional conflict in the contention for the same property

right.

Consequently, the nearly inevitable result of the successful introduction of new technology is increased regulation as contenders pursue

their rights through the Judiciary and Congress. This is happening with

information technology and copyright as it has in other fields. To

quote from Professor David Truman in The Governmental Process :

"The causes of this growth /^in organized interest groups_7

lie in the increased complexity of techniques for dealing

with the environment, in the specializations that these involve, and in associated disturbances of the manifold expectations that guide individual behavior in a complex and interdependent society. Complexity of technique, broadly con- ceived, is inseparable from complexity of social structure.."''^

Thus, complex ways of using information technology, for example by amplifying distant TV signals and distributing them by cable to viewers,

or by abstracting scientific articles, combining them with key words

and distributing them to researchers via terminals attached to a com- puter with a logical query system, must involve complex rules of property rights in a society where such things are important.

By setting priorities that establish the importance of a balance of

property rights, rational decisionmakers must then establish a working

regulatory system that minimizes transaction costs but allows for the

balance of rights established. This may be a complex system of rules,

and if the rules appear to be difficult to follow or enforce, perhaps

the priorities must be reviewed. Care must be exercised, however, so

as not to throw out basic principles simply for the sake of simplification.

6.4 THE PUBLIC INTEREST AND COMPUTER-READABLE WORKS

In proposing recommendati-ons for the application of copyright to com- puter-readable works, a set of criteria must be used. It seems reasonable to suggest that the overriding criterion must be "the public interest," however, that may be defined.

One aspect of the public interest is how decisionmaking affects the

individual citizen. It has been pointed out earlier in this chapter

that in the twentieth century, copyright decisionmaking has involved

contending interests groups gathered around different functions related

to copyrighted works. The individual citizen, in general, has not been

directly involved. Such decisionmaking, not involving the public directly but having an ultimate impact, has concerned some observers.

The following statement of concern is by Victor Ferkiss in Technological

Man: The Myth and the Reality : 74
"The danger is not that industrialism has destroyed the

intermediate group in modern democratic society but that

the group is so strong that the individual, instead of

finding freedom in the interstices created by group com- petition, may be crushed between the contending parties,

or that instead of a dominant total government riding roughshod over an inert society, public purposes will be lost

sight of in the feudal istic struggle of competing special

interests . ""^^

Professor David Truman considered the question raised above and con- cluded that "multiple memberships in potential groups based on widely

held and accepted interests"^° prevents the culmination of a situation

such as that suggested by Ferkiss. That is, while groups may contend

over specific property rights, the members of the groups share common

fundamental views that prevent the erosion of individual rights that

would have the effect of hurting everyone. Truman calls these shared

attituded the "rules of the game" and quotes others as describing them

as a "general ideological consensus" and as "a broad body of attitudes

and understandings regarding the nature and limits of authority." As

a further description, Truman states that " the 'rules' would include

the value generally attached to the dignity of the individual human being, loosely expressed in terms of 'fair dealing' "^^

For the purposes of proposing recommendations on computer-readable

works, this study has enumerated in Section 1.3 those "Findings of

Basic Principles" which it conceives to be the applicable "shared attitudes" and "rules of the game." As stated in Section 1.2, these findings are not be be taken as the final, definitive view. Other analyses

may reveal different interpretations. Additional contributions to the

literature are welcomed.

75
REFERENCES

1 Walter L. Pforzheimer, "Historical Perspective on Copyright Law and

Fair Use" in Lowell H. Hattery and George P. Bush, (eds.) Reprography

and Copyright Law , Washington, D.C., American Institute of Biological

Sciences, 1964, p. 25.

2 Emmette S. Redford, American Government and the Economy , New York,

The Macmillan Co., 1965, p. 13.

Saxe Commins and Robert N. Linscott (eds.) Man and the State: The

Political Philosophers , New York, Random House, Inc., 1947, p. 56.

1^ Walter L. Pforzheimer, op. cit., p. 24.

^P. L. 94-553, Section 301, 94th Congress, October 19, 1976.

^Emmette S. Redford, op. cit., pp. 6, 7.

7 Peter 0. Steiner, "The Public Sector and The Public Interest" in

Robert H. Haveman and Julius Margolis (eds.). Public Expenditures

and Policy Analysis , Chicago, Rand McNally Publishing Co., 1970, p. 21.

^ibid,. p. 21.

9 ibid,, p. 25.

^° Robert M. Hurt and Robert M. Schuchman, "The Economic Rationale of

Copyright" in The Economics of Publishing , American Economic Rev.,

May 1966, pp. 421-432.

^S'bid. , p. 425.

^^ibid., p. 429.

^^•bid., p. 429.

^""P. L. 94-553, Section 102(a)

1 5 Hurt and Schuchman, op. cit., p. 424.

1 6 Joseph Taubman, "Creation, Copyright and the Constitutional Clause,"

Bulletin. Copyright Society of the U.S.A. (1959), vol. 6, pp. 163-

164.

Paul Goldstein, "The Private Consumption of Public Goods: A Comment

on Williams & Wilkins Co. v. United States ," Bulletin. Copyright

Society of the U.S.A. "[1974), vol. 21, p. 204.

76
19

Association of American Publishers, Inc., "Program for the Provision

of Copies of Technical-Scientific-Medical Journal Articles and for

Related Information Service Copies," March 17, 1977, One Park Avenue,

New York, N.Y. 10016

20

National Commission on New Technological Uses of Copyrighted Works

Preliminary Report, Oct. 1976, National Technical Information Service,

Springfield, Va. 22161, Report No. PB 260373.

21

Kenneth J. Arrow, "The Organization of Economic Activity: Issues

Pertinent to the Choice of Market Versus Non-Market Allocation," in

Robert H. Haveman and Julius Margolis (eds.), op. cit., p. 68.

23

Peter 0. Steiner, op. cit., p. 30.

Hurt and Schuchman, op. cit., p. 425.

^^'bid., p. 428.

2 6 Stephen Breyer, "The Uneasy Case for Copyright: A Study of Copyright

in Books, Photocopies and Computer Programs" Harvard Law Review , vol.

84, no. 2, Dec. 1970, pp. 281-351.

^^'bid., p. 348.

2 8 Calvin Mooers, "Preventing Software Piracy" COMPUTER, March, 1977,

p. 30.

29

Edwin Mansfield, Microeconomics: Theory and Applications , Second

Edition, New York, Norton, 1975, p. 164.

30

P. L. 94-553, Section 115.

3

1

Melville Nimmer, "Copyright vs. The First Amendment" Bulletin.

Copyright Society of the U.S.A. (1970), pp. 255-279.

^^Paul Goldstein, op. cit., pp. 206-208.

3 3 Walter L. Pforzheimer, op. cit., p. 28.

'^'^ibid., p. 29.

3 5 Hurt and Schuchman, op. cit., p. 429-430.

3 6 Edwin Mansfield, op. cit., p. 302.

^^P. L. 94-553, Section 102(b).

Joseph Taubman, op. cit.

77
39

ibid. , p. 154.

Hurt and Schuchman, op. cit., p. 431

h 1 Copyright Law Revision (1967), Hearings before the Subcommittee on Patents, Trademarks and Copyrights of the Committee on the Judiciary,

United States Senate, Ninetieth Congress, First Session, Part 1,

March 15, 16, and 17, 1967.

"^^ibid., p. 71.

i+3 ibid. , p. 85.

ibid., p. 53.

k 5 Julius J. Marke, Copyright and Intellectual Property , New York, Fund

for the Advancement of Education, 1967.

Copyright Law Revision (1967), op. cit., p. 609.

Julius J. Marke, op. cit., p. 89.

ibid. , p. 93.

""^ibid., p. 9Z, 93.

ibid. , p. 103.

Copyright Law Revision (1967), op. cit., p. 71.

52

Julius J. Marke, op. cit., p. 91.

53

National Academy of Sciences, Information Systems Panel, Computer

Science and Engineering Board, Libraries and Information Technology:

A National System Challenge . Report to the Council on Library

Resources, Inc. Washington, D.C., 1971, p. 10.

5^- Copyright Law Revision (1967), op. cit., pp. 570-578.

^^ibid. , p. 571.

^^ibid., p. 573.

^^•bid., p. 576-5/7.

^S'bid., p. 575.

^^ibid., pp. 969-974.

60

ibid., p. 83.

78
Cambridge Research Institute, Omnibus Copyright Revision, Comparative

Analysis of the Issues , Washington, D.C. American Society for Information Science, 1973, pp. 87-100.

6 2 Federal Management of Scientific and Technical Performation (STINFO)

Activities: The Role of the National Science Foundation , Special Subcommittee on the National Science Foundation of the Committee on Labor and Public Welfare, United States Senate, July, 1975, p. 22.

^^ibid., pp. 22, Zi.

ibid. , p. 75.

ibid. , p. /8.

^"ibid., p. 79.

6 7 Daniel Bell, "Remarks of the Moderator," in The Management of Information and Knowledge , Conmittee on Science and Astronautics, U.S.

House of Representatives, 1970, p. 14.

b 8 Peter F. Drucker, The Age of Discontinuity-Guidelines to our Changing

Society , New York, Harper & Row, 1968.

6 y Gerald M. Weinberg, The Psychology of Computer Programming , New York,

Van Nostrand Reinhold Co., 1971.

70

Dennie Van Tassel , Program Style, Design, Efficiency, Debugging, and

Testing , Englewood Cliffs, N.J., Prentice-Hall, Inc., 1974.

7

Frederick P. Brooks, Jr., The Mythical Man-Month, Essays on Software

Engineering , Reading, Mass., Addi son-Wesley Pub. Co., 1975.

72

Walter Lippmann, The Public Philosophy , New York, Mentor Books, 1956,

p. 127.

7 3 Walter Lippmann, op. cit., p. 92.

71+ Thomas R. Dye, Understanding Public Policy , Englewood Cliffs, N.J.,

Prentice-Hall , 1972, p. 23.

75

Theodore J. Lowi , "American Business, Public Policy, Case Studies,

and Political Theory," World Politics , vol. 16, n.4, July 1964,

p. 689.

^^ibid. , p. 691.

77

quoted in Joseph Weizenbaum, Computer Power and Human Reason , San

Francisco, W. H. Freeman and Co., 1976, p. 26.

79
David B. Truman, The Governmental Process , New York, Knopf, 1951,

p. 502.

^^Victor Ferkiss, Technological Man: The Myth and the Reality , New

York, George Brazil ler, 1969, p. 163.

8 0 David B. Truman, op. cit., p. 514.

81

ibid. , p. 512.

80
APPENDIX A

IMPACT OF INFORMATION TECHNOLOGY

ON

COPYRIGHT LAW IN THE USE OF COMPUTERIZED

SCIENTIFIC AND TECHNOLOGICAL INFORMATION

SYSTEMS

A REPORT TO

THE NATIONAL BUREAU OF STANDARDS

(CONTRACT # T-35712)

PREPARED BY:

CRC SYSTEMS INCORPORATED

125 Church Street

Suite 202

Vienna, VA 22180 18 May 1977

A-1
ABSTRACT

The historical trends, methods, and observations of the courts, legislature and Copyright Office concerning the copyright law in relation

to the development and introduction of technological processes and

products during the twentieth century are analyzed. The rationale and

underlying trends in the adaptation of copyright statutes to new technologies is shown by discussion of key cases.

Several suggested mechanisms are reviewed for providing technological

expertise to the courts to enable them to respond to the complex

technological issues that may arise in copyright litigation.

The impact of copyright law upon computerized Scientific and Technological Information Systems (STI) is discussed in the context of data

bases and document storage and retrieval. The characteristics and

conditions of the use of copyrighted material in computerized STI systems is presented. Blanket licensing, clearinghouses and compulsory

licensing mechanisms that might be adapted for the use of copyrighted

material in computer systems are reviewed.

KEY WORDS:

Copyright

Scientific and Technological Information Systems

Blanket Licensing of Copyrights

Compulsory Licenses

Clearinghouse for Copyright Licensing

Copyrightable Works

Data Bases

Full Text Storage of Documents

Computer Systems

New Technologies Relating to Copyright

Uses of Copyrighted Works

A-2
TABLE OF CONTENTS

SECTION DESCRIPTION PAGE

ABSTRACT A-2

A.l EXECUTIVE SUMMARY A_5

A. 1.1 BACKGROUND A-6

A.l .2 SCjFE of the STUDY A-6

A. 1.3 MAJOR FINDINGS AND CONCLUSIONS !!!!!! A-6

A. 1.3.1 Technological Innovation A-7

A. 1.3. 2 Major Historical Issues A-7

A. 1.3. 3 Conclusions Relating to Adaptation of Copyright Law to New Technologies A-7

A. 1.3. 4 Providing Technological Expertise to the

Judiciary A-10

A. 1.3. 5 STI Systems and Copyright Law A-11

A. 1.3. 6 Groups Interested in Sti Systems A-11

A. 1.3. 7 Orientation of Suppliers and Users of

STI Systems A-12

A. 1.3. 8 Copyright Law and its Impact upon

Computerized STI Systems A-12

A. 1.3. 8.1 Copyright Protection for Computer Programs . . a-12

A. 1.3. 8. 2 Copyright Protection for Data Bases A-13

A. 1.3. 8. 3 The Production of Data Bases A-13

A. 1.3. 8. 4 The Use of Copyrighted Data Bases in

Computerized Systems A-13

A. 1.3. 8. 5 Exclusive and Compulsory Licenses for the

Use of Data Bases A-14

A. 1.3. 8. 6 Full Text Storage and Retrieval of Documents in Computerized Systems A-15

A. 1.3. 9 Unique Characteristics of Computerized STI

Systems A-15

A. 1.3. 10 Clearinghouses and Compulsory Licenses A-16

A. 2 ADAPTATION OF THE COPYRIGHT LAW TO NEW TECHNOLOGIES A-18

A. 2.1 IN GENERAL A-18

A. 2. 1.1 Philosophical Basis of Copyright A-19

A. 2. 2 MOTION PICTURES A-20

A. 2. 2.1 Copyrightabi 1 ity of Motion Pictures A-20

A. 2. 2. 1.1 White Smith v. Apollo [ [ A-22

A. 2. 2. 2 Motion Picture Version of Copyrighted Novel, . , , a-23

A. 2. 2. 3 Performance Rights in Motion Pictures A-23

A. 2. 2. 4 Sound Tracks as a Protected Part of

Copyrighted Motion Picture A-26

A-3
PAGE

A. 2. 2. 5 Use of Music in Sound Tracks A-28

A. 2. 2. 6 Motion Pictures Under the New Act of 1976 A-29

A. 2. 3 SOUND RECORDINGS A-30

A. 2. 3.1 Right to Record Copyrighted Works A-30

A. 2. 3. 1.1 Copyright Act of 1909 A-33

A. 2. 3. 1.2 Copyright Act of 1976 A-34

A. 2. 3. 2 Sound Recordings as Copyrightable Works A-35

A. 2. 3. 2.1 Congressional Leqislation A-38

A. 2.4 RADIO AND TELEVISION BROADCASTS A-39

A. 2. 4.1 Broadcasting as Performance A-39

A. 2. 4. 2 Reception of Broadcasts as Performance A-41

A. 2.4. 3 Wire Transmissions A-44

A. 2.4.4 Copyright Act of 1976 A-44

A. 2. 5 PHOTOCOPYING A-46

A. 2. 5.1 The Copyright Act of 1976 A-50

A. 2. 6 CABLE TELEVISION SYSTEMS A-53

A. 2. 6.1 The Copyright Act of 1976 A-58

A. 2. 7 MICROFILM, VIDEOTAPE, AND COMPUTER PROGRAMS A-60

A. 3 PROVIDING TECHNOLOGICAL EXPERTISE TO THE JUDICIARY A-62

A. 4 THE COPYRIGHT LAW IN RELATION TO COMPUTERIZED INFORMATION

SYSTEMS A-66

A. 4.1 BACKGROUND A-66

A. 4. 1.1 Legislative History A-66

A. 4. 1.2 Interested Groups A-68

A. 4. 2 SCOPE OF THIS SECTION A-69

A. 4. 2.1 Computer Programs A-69

A.4.2.2 Data Bases A-69

A. 4. 2. 3 Supplying Copyrighted Documents A-70

A. 4. 3 COPYRIGHT PROTECTION FOR COMPUTER PROGRAMS A-72

A. 4. 4 DATA BASE SYSTEMS A-73

A. 4. 4.1 Copyright Protection for Data Bases A-73

A. 4. 4. 1.1 Copyrightability A-73

A. 4. 4. 1.2 Copyright Notice on Data Bases A-74

A. 4. 4. 1.3 Deposit of Copies for Registration A-75

A, 4. 4. 1.4 Supplements to Update Data Bases A-76

A. 4. 4. 2 Compiling Data Bases A-76

A. 4. 4. 2.1 Bibliographic Indexes A-76

A.4.4.2.2 Abstracts in Data Bases ..... A-78

A. 4. 4. 3 Putting Copyrighted Data Bases into

Computer Systems A-79

A. 4. 4. 3.1 Where Publishers Offer to Supply Machine

Readable Copies A-79

A. 4. 4. 3. 2 Where Publishers Do Not Offer MachineReadable Copies A-80
PAGE

A. 4. 4. 3. 3 Where Third Persons Offer to Supply

Machine-Readable Copies A-81

A. 4. 4. 3. 4 Input of Data Base as Use Subject to

Copyright A-82

A. 4. 4. 4 Output from Data Base A-83

A. 4. 4. 4.1 Normal Output A-83

A.4.4.4.2 Extraction of Bulk of Data Base by User

of System A-85

A. 4. 4. 5 Exclusive and Compulsory Licenses for the

Use of Data Bases A-86

A. 4. 5 FULL TEXT STORAGE AND RETRIEVAL OF DOCUMENTS .... A-87

A. 4. 5.1 Preliminary Observations A-87

A. 4. 5. 2 Input and Output of Documents as Infringement A-88

A. 4. 5. 3 Input or Output as Occasion for Obtaining

License A-89

A. 4. 6 BLANKET LICENSING AND COMPULSORY LICENSING FOR

REPRODUCTION OF DOCUMENTS A-90

A. 4. 6.1 Need for Blanket Licensing Mechanism A-90

A. 4. 6. 2 Voluntary Clearinghouse A-92

A. 4. 6. 2.1 ASCAP and BMI as Models A-92

A.4.6.2.2 Problem Areas A-94

A.4.6.3 Compulsory Licensing A-96

A. 4. 6. 3.1 The Compulsory License for Jukeboxes .... A-97

A.4.6.3. 2 The Compulsory License for CATV Systems. . . A-98

A.4.6.3. 3 The Compulsory Licnese for Noncommercial

Broadcasting A-99

A. 4. 6. 4 Concluding Comments A-lOO

SUPPLEMENT 1 - STI TECHNOLOGY A-101

A-5
A.l EXECUTIVE SUMMARY

A. 1.1 BACKGROUND

The National Bureau of Standards (NBS) retained CRC SYSTEMS Incorporated,

125 Church Street, Suite 202, Vienna, Virginia 22180 to perform an analysis of the impact of information technology on copyright law in

the use of computerized Scientific and Technological Information Systems

(STI). The purpose of this report is twofold: First, to identify

and describe the recent (1900-1970) impacts of technology upon copyright law and second, to present and discuss the potential impact of

STI systems upon copyright law.

The accelerated pace of technological change and development during the

twentieth century has required major adaptations and adjustments in the

body of copyright law that was set forth in the statutes previously

enacted. The courts have to a large degree been called upon to adapt

the pre-existing copyright statutes by interpretation, to the issues

arising from the later development of technologies. By reviewing

the more significant decisions, this report attempts to develop for the

reader an understanding of the underlying principles and philosophies of

the copyright statutes and the court decisions applying to them. With

this background and framework of the adaptation heretofore of the copyright law to new technologies, the authors focus upon the new computerized STI technology and the issues that this technology may bring to

bear upon the body of copyright law in existence at the time of writing

this report.

A.l .2 SCOPE OF THE STUDY

Although the history of copyright law in the United States dates from

1790, the rapid development of technology, especially electronic-based

technologies, has occurred mainly after 1909. In that year the copyright law was rewritten, and it was not until recently (1976) that it was again rewritten. This report therefore will examine the changes,

interpretations, and modifications to the 1909 law, and the ramifications of the new 1976 Copyright Laws, as they relate to technological

changes. The scope of this report is bounded by issues that developed

as a direct or indirect consequence of the introduction of new technologies.

A. 1.3 MAJOR FINDINGS AND CONCLUSIONS

This section summarizes the major findings and conclusions of this re- port.

A-6
A. 1.3.1 Technological Innovation . Among the more important innovations

in information technology which have had important effects on the applicability, interpretation, and enforceability of copyright law in

the twentieth century are:

0 Motion Pictures

0 Sound Recordings

0 Radio and Television Broadcasts

0 Photocopying

0 Cable Television Systems

0 Microfilm, Videotape, and Computer Programs

A. 1.3. 2 Major Historical Issues . Each of the above new technologies

has resulted in adaptation of the copyright statutes to the new products and processes growing out of the new technologies developed

after the statutes were enacted. With regard to the technologies ex- amined in this report several basic questions arose which required

judicial, legislative, or Copyright Office intervention. Among the more important issues raised were:

1. Is the new product copyrightable? (Motion pictures, sound

recordings, microfilms, videotapes, computer programs.)

2. What rights are covered by the copyright in the new product? (Motion pictures, sound recordings, computer programs .

3. Are new devices for using copyrighted works subject to the

copyright? (Motion pictures, sound recordings, radio and

television broadcasts, photocopying, cable television.)

These issues were dealt with and resolved principally by court decisions,

of which the most significant are reviewed and analyzed in this report.

Some relatively simple issues have been resolved as a practical matter

by industry practice or by Copyright Office interpretation of the

statute. The same issues have been dealt with finally in the new Copyright Act of 1976.

A . 1 . 3 . 3 Conclusions Relating to Adaptation of Copyright Law to New Technologies . We believe the following observations and conclusions

may be drawn from all of these sources concerning the adaptation of the

copyright statutes to the new products and processes growing out of

A-7
new technologies developed after the statutes were enacted. These are

not, of course, the only conclusions that might be drawn from the cases

and events cited:

1. It seems certain that technologies now in their infancy or now un- known will, at some future time, result in new products or processes

that will raise copyright questions not provided for specifically in the

Copyright Act of 1976 (or the earlier statutes). The 1976 Act attempted

to take into account recently developed technologies and their foreseeable applications affecting copyright. Even here the new Act did

not succeed completely: As is shown in Section A. 4 of this report, the

problems concerning uses of copyrighted works in computer systems

(which were discussed during the Congressional hearings in 1965 and

1967 on the copyright revision bills in the light of what was then known

or anticipated as to such computer uses) were considered not sufficiently

crystallized or understood to allow the formulation of legislative rules;

instead, Congress provided (in P.L. 93-573 enacted in 1974) for the

establishment of a National Commission (CONTU) to study these problems

and make recommendations for appropriate legislation. And there will no doubt be other copyright problems raised hereafter by new technologies

of the future that are completely unforeseen now.

2. Past experience indicates that the problems raised in the future by new technologies will be brought before the courts for decision as to

how the terms of the 1976 Act are to be construed in their application

to the new situations. The courts will be expected to make definitive

rulings on many new issues involving such questions as the copyrightability of works produced in new ways or in new forms, and the rights

of copyright owners and users with respect to uses made of copyrighted

works by new methods or in new media.

3. The courts will probably differ among themselves in the basic approach they take to the application of the 1976 Act to the new situations. The decisions reviewed illustrate two main approaches:

(a) One is to expound the philosophy that the copyright law is intended

to stimulate the creation and dissemination of works of authorship by

giving to authors (and their successors as copyright owners) the economic

rewards that are afforded by the market for the various uses that may be

made of their works; the courts taking this approach have looked for

analogies between the situations clearly provided for in the statute and

the new situations, and, finding such analogies, have tended to hold

that the new situation comes within the intended scope of the statutory

provisions.

A-8
(b) The opposite approach has been to construe the statute narrowly

as referring to the situations known at the time of its enactment;

the courts starting with this premise have generally been concerned

with the restrictions that copyright was seen to impose on socially

beneficial new developments, if applied to them, and have considered

that the extension of the statute to these new developments should be

left to Congress.

The review of the court decisions in this study can be taken to indicate

that, on the whole, the courts have been more inclined to take the

first approach, particularly in the usual case where the issue appeared

to be capable of satisfactory resolution by deciding simply whether the

work or the use involved was or was not subject to copyright under the

statute. The courts have taken the second approach when they were

faced with a choice between holding for complete copyright liability

or none, against an important new industry or use whose development or very existence was thought to be jeopardized if complete liability were imposed, and where legislation on the issue appeared imminent.

(The majority opinions in the White-Smith case, in the Court of Claims

decision in the Williams and Wilkins case, and in the Supreme Court

decisions in the Fortni ghtly and Tel eprompter cases illustrate the

second approach; all the other decisions reviewed -- excluding some district court decisions that were reversed on appeal -- illustrate the

first approach.

)

4. Where the courts have held that the earlier copyright statutes

extend to the products or uses resulting from new technologies developed

later. Congress has generally adopted the same position in subsequent

legislation. Where the courts have refused to extend the earlier

statutes to new uses of copyrighted works because of the danger that

imposing full copyright liability would result in unduly harmful con- sequences to the users or to the public. Congress has provided in

subsequent legislation that such uses are to be brought under copyright, but subject to special exceptions or special conditions and

limitations designed to forestall those harmful consequences, while

giving copyright owners the measure of protection still possible or,

at least, compensation for the new uses of their works.

5. Where a clear yes-or-no answer on a question of copyright protection

or copyright liability will solve a problem raised by new technology,

the problem can be, and is likely to be, resolved by judicial decisions

construing the existing statutes. But where the problem is quite complex, with compelling economic or social interests on both sides to be

safeguarded and reconciled, the slow and cumbersome process of legislation may be required to formulate a multifaceted set of basic rules

A-9
together with special conditions, limitations, exceptions, etc., peculiarly tailored to fit the differing needs of the several interest

groups concerned. And it may be extremely difficult to enact legislation of this nature unless and until the interest groups are ready to

agree or to accept the main features of the proposed legislation.

(These observations regarding legislation are illustrated by the provisions in the 1976 Act on photocopying and on cable television.)

6. On some questions of how the existing statutes apply to the products

of new technology, where the question is fairly uncomplicated and the

justice of the answer given is fairly clear, a ruling by the Copyright

Office or a practice adopted by an industry group may be sufficient to

settle the question for all concerned.

A. 1.3. 4 Providing Technological Expertise to the Judiciary . When

courts have needed to be informed concerning matters of esoteric

technology, they have generally been provided with the technological

expertise pertinent to the issues in the case before them through such

established procedures as the testimony of expert witnesses, physical

demonstrations of technical devices or processes, briefs or memoranda

presented by counsel, and research conducted by the court or its aides.

Those procedures have apparently been found adequate in most litigation, including the usual run of copyright cases.

If other means were considered to be necessary, in extraordinary cases,

to provide technological expertise to the judiciary, several other

mechanisms might be given consideration:

1. The establishment of a special court or system of courts to deal with

cases involving highly complex and sophisticated technological issues.

Prototypes of such courts now exist in the Court of Customs and Patent

Appeals, the United States Tax Court, and the special State courts

established to deal with juvenile and domestic relations cases.

2. Having specialists in the fields of science or technology involved

attached to the staff of the court or available to serve as consultants

to the court. Many of the juvenile and domestic relations courts now employ specialists in the medical, behavioral, and social sciences as staff members or consultants.

3. Making available to the courts the expertise of the wide range of

scientific and technological specialists employed by the various Government agencies.

A-10
We do not believe any such special mechanisms are needed in copyright

litigation involving new technologies. The judicial decisions in copyright cases dealing with new technologies -- as exemplified by those

reviewed in this study -- indicate that the courts have been adequately

informed, through the judicial procedures now used, concerning the new technologies involved, to reach intelligent and appropriate judgments.

A. 1.3. 5 STI Systems and Copyright Law . The authors, after reviewing

the general principles that the courts have applied to copyright

issues, and the historical impact of new technologies upon the copyright statutes, examined computerized STI systems in relation to the

copyright law.

A. 1.3. 6 Groups Interested in STI Systems . The interest groups having,

primarily and most directly, a financial, professional or service

interest in the copyright issues relating to the generation, dissemination, or use of STI systems include:

0 Authors of various kinds of works, principally textual

and graphic works in the field of science and technology.

0 Commercial and nonprofit publishers of journals and of

books and monographs of a scholarly or informational

character.

0 Producers and publishers of compilations of bibliographic

and factual data.

0 Libraries, especially large research, university, and

industrial libraries.

0 Educators and students, especially at the college and

university levels.

0 Industrial and nonprofit research organizations and individual researchers.

0 Producers of computer hardware and software.

0 Organizers and operators of computerized information ser- vice systems.

0 Commercial indexing and data search services.

A-11
These groupings could, of course, be arranged in other ways, and there

is considerable overlap among the groups as listed above.

A. 1.3. 7 Orientation of Suppliers and Users of STI Systems . From the

standpoint of their copyright interests, the various groups may be

divided into two broad categories: (1) authors, producers, publishers,

and other suppliers of copyrightable materials, who are interested in

having copyright protection and in receiving compensation for the uses of their works; and (2) researchers, educators, scholars, libraries,

and other users of copyrightable materials, who are interested in having access to and use of those materials.

The differing needs of copyright owners on one hand and users of copyrighted materials on the other hand, are usually met by contracts

negotiated in the open market. The desire of copyright willingness of owners to derive revenue from the market for their works, and the

willingness of users to pay reasonable fees for the use of those works,

have generally operated to make the market place responsive to the

needs on both sides. In most situations the system of freely negotiated contracts should work to meet the needs of the owners and users

of copyrighted works used in computerized STI systems.

In certain situations involving the use of copyrighted works in other

media, problems of accommodating the needs of both owners and users

have called for special treatment, either through voluntary systems

for centralized or blanket licensing or through statutory provisions

for compulsory licensing. These special methods of accommodation are discussed in the report as outlined below.

A. 1.3. 8 Copyright Law and its Impact upon Computerized STI Systems . Among the conclusions reached in this study concerning the application

of the copyright law to computerized STI systems are the following:

A. 1.3. 8.1 Copyright Protection for Computer Programs . Computer

programs generally are subject to copyright protection. The protection

afforded by copyright is limited to reproduction of the program in its

substance. Copyright would not protect the processes or techniques

revealed in the program.

A-12
A . 1 . 3 . 8 . 2 Copyright Protection for Data Bases .

1. In general, data bases, whether in printed or machinereadable form, are copyrightable as compilations.

2. Complying with the requirements of copyright notice and

deposit of copies, as may be necessary for effective

copyright protection, may call for some special procedure

in the case of data bases in machine-readable form, and

in the printout of material from data bases, but no insuperable difficulties in this regard are seen.

A. 1.3. 8. 3 The Production of Data Bases .

1. The indexing of documents in order to compile a bibliographic data base can be done manually or by using a computer. If done by computer, the indexer must have the

documents in machine-readable form. If the documents are copyrighted, the indexer would apparently have to obtain

machine-readable copies from the publishers, or to obtain

permission from the publishers to make and use his own machine-readable copies, for indexing. It has been

argued that where the publishers cannot supply machinereadable copies, an indexer should be permitted by law to

make his own, for the sole purpose of indexing, as a fair

use or, alternatively, under a compulsory license.

2. The typical abstracts in data bases are no more than brief

identifying statements of the subjects covered in the

document; making such abstracts of copyrighted works is

not an infringement. However, a so-called "abstract" that

is actually a digest of the substance of a copyrighted

work, sufficient in detail to substitute for the work itself, would constitute a derivative work, and making such

would infringe the copyright.

A . 1 . 3 . 8 . 4 The Use of Copyrighted Data Bases in Computerized Systems .

1. Where a system operator obtains a machine-readable data

base from the publisher, the lease agreement between them

will generally include (expressly or impliedly) a license

for the operator's use of the data base in his system.

Such agreements will usually serve to settle the copyright

questions that would otherwise be expected to arise.

Where the publisher offers machine-readable copies, a system operator who makes his own copy instead of obtaining

one from the publisher should be considered an infringer.

A-13
2. Where the publisher of a copyrighted compilation of data

does not offer machine-readable copies, an operator who

wishes to place that compilation in his data base system

should be expected to ask the publisher to make and supply a machine-readable copy or to permit the operator to

make one for use in his system. Where the publisher then

refuses or fails to accede to such request, a valid argument could be made for a compulsory license.

3. It can be assumed that the publishers of machine-readable

copies of copyrighted compilations of data will generally

lease them, but not sell them, to system operators. An

operator who is offered such a copy from a third person

should therefore be suspicious of its legitimacy, and

should be held liable if he acquires such a copy that was made or supplied to him in violation of the copyright.

4. If a system operator makes his own machine-readable copy

of a copyrighted compilation or acquires a copy legitimately from a third person, he will need to obtain a license from the publisher to use it in his system. There

are good arguments for requiring the operator in this

situation to obtain such a license before putting the data

into his system.

5. If a license for the use of a copyrighted data base in a system has not been obtained earlier, the operator would

need to obtain a license for the output of material from

the data base. In the absence of a license, the extraction of a small fragment of a data base by a user of the

system on one occasion would appear to qualify as a fair

use; but the aggregate of the output of fragments on many occasions would appear to constitute an infringement

by the operator of the system.

6. If a user of a system were to extract from it an entire

copyrighted data base or a major part of it, he would be

infringing the copyright. Practical arrangements for

preventing and detecting such infringements seem feasible.

A. 1.3. 8. 5 Exclusive and Compulsory Licenses for the Use of Data

Bases . In order to facilitate the development of computerized systems

that will contain all the data bases needed for comprehensive coverage

of any subject area, and also to prevent the monopolization of data

base search services by one or two systems, consideration should be

given to a scheme for precluding exclusive licenses for the use of data

A-14
bases in individual systems. One such scheme would be a statutory provision for the compulsory licensing for use in all systems, of a data

base licensed for use in any one system.

A . 1 . 3 . 8 . 6 Full -Text Storage and Retrieval of Documents in Com- puterized Systems .

1. The questions as to input and output of copyrighted documents are substantially the same as those pertaining to

the input and output of copyrighted data bases. The discussion and conclusions in this study relating to data

bases are applicable generally to the computer storage and

retrieval of the full text of documents.

2. There has been considerable discussion as to whether the

input of copyrighted documents should be free, with a license and payment to the copyright owner being required

for output, or whether a license should be required before input. The arguments advanced on both sides are presented in this report. The authors of this report

are impressed most by the argument that, since a license

will admittedly be required for output, practical con- siderations suggest that the terms of the license, including the basis for assessing fees, should be settled

between the parties before the operator of the computer

system begins the process of using the material.

A. 1.3. 9 Unique Characteristics of Computerized STI Systems . It can be

deduced from the analysis of copyright questions relating to the use of

copyrighted works in computer systems that such uses present special

characteristics not present in the traditional ways of using copyrighted

material. The following special features of computer uses seem particularly significant:

1. Copyrighted works in their usual form of printed pages are usable in that form in other media, but must be converted

to machine-readable form for use in computer systems.

2. The availability to researchers and other users of the

works placed in a computerized STI system will tend to

displace the market that would otherwise exist for the

sale of copies of the works to them.

3. Computerized STI systems, to realize their potential value

for research, must seek to include comprehensively the

whole body of works extant in any particular field of

science or technology.

A-15
4. Exclusive licensing of copyrighted works for use in one

STI system could have two undesirable results: (1) It

would prevent other systems from attaining comprehensive

coverage of the whole body of works in a particular

field, thus putting researchers to the inconvenience of

searching through several systems; and (2) It would tend

to foster the monopolization of STI system services to one

or two giant systems.

The first two of these special features would seem to indicate that the

copyright law should recognize, as it now appears to do, that the con- version of copyrighted works into machine-readable form and their input

and output in the operation of computerized STI systems require the

consent of the copyright owner. The last two of these special features

would seem to indicate that there may be a need to establish, at least

in some situations, either voluntary "clearinghouse" systems for the

blanket licensing, on a nonexclusive basis, of the use of copyrighted

works in computer systems, or a statutory system of compulsory licensing for the use of such works in those systems.

A. 1.3. 10 Clearinghouses and Compulsory Licenses . The clearinghouses

operated by the American Society of Composers, Authors, and Publishers

(ASCAP) and by Broadcast Music, Inc. (BMI) for the blanket licensing of

public performances of musical compositions, have frequently been cited

as possible models that might be adaptable for the blanket licensing

of reproduction rights in journal articles and other works. The operation of these two organizations and the factors that have contributed

most importantly to their effectiveness are outlined in this report.

Some of the major problems that would be faced in attempting to establish a clearinghouse for the reproduction of journal articles are mentioned and some approaches for meeting those problems are suggested

in the report.

Provisions for a compulsory license for the recording of copyrighted

musical compositions were enacted in the Copyright Act of 1909. That

compulsory license was designed to prevent the establishment of a monopoly in making recordings of music under exclusive licenses that would

otherwise have been granted. One of the practical consequences of

these compulsory licensing provisions, incidentally, has been the voluntary establishment by music publishers of a centralized agency (the

Harry Fox Office) for the issuing of negotiated licenses on standard

terms for the music of most of the major publishers.

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The Copyright Act of 1976 provides for compulsory licenses of a different

character in three additional situations: for the performance of music

in jukeboxes, for CATV retransmissions of broadcasts of copyrighted

material, and for the use of certain works in noncommercial broadcasting.

These three compulsory licensing systems are examples of blanket, non- exclusive licensing established by statute. The purpose of the compulsory license in these three instances is not to prevent a monopoly,

but is to avoid the difficulties and high transaction costs that would

be entailed if the user groups had to obtain licenses from and pay fees

to the individual copyright owners.

If a voluntary clearinghouse satisfactory to both copyright owners and users can be organized, that would seem to be preferable over a statutory compulsory licensing scheme. Among other reasons mentioned for

this preference, perhaps the most important is the greater flexibility

of a voluntary arrangement and its easier accommodation, by negotiations

between the groups concerned, to experience and changing circumstances.

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ADAPTATION OF THE COPYRIGHT LAW TO NEW TECHNOLOGIES

A. 2.1 IN GENERAL

Since the enactment of the first United States copyright statute by the

First Congress in 1790, the copyright law has had to be added to, modified, revised, and interpreted to meet changing conditions brought about

in large part by new technological developments. The statutes were completely rewritten in 1831, 1870, 1909, and just recently, in 1976.

In the intervals between those comprehensive revisions, the statutes

were amended in some particulars, and they were further adapted to

changing conditions by judicial interpretation and, to some extent, by

business practice.

Adaptation of the copyright law to changing conditions brought about by new technology has been especially necessary in the twentieth century,

primarily for the obvious reason that the rate of technological development has accelerated rapidly. And, because of the long interval of

more than 65 years from the 1909 revision, with the statute being

amended during that period in only relatively minor respects, the courts

have been called upon to take a large part in adapting the law, by interpretation, to meet the problems emanating from the new technologies.

An analysis of the more significant court decisions dealing with those

problems, particularly as the decisions reveal the basic principles and

philosophical approaches adopted by the courts in construing the copyright statues, may contribute to an understanding of how the copyright

law has been shaped and reshaped to fit new conditions flowing from

technological innovations, and may be useful in indicating approaches to

the solution of similar problems that may be raised by the newer and

emerging technologies of today and the foreseeable future.

In this section we shall seek to show how the copyright law has been

adapted to resolve the questions raised by the new technologies of the

twentieth century that were not dealt with specifically in the statutes

because they were just beginning to emerge or were unknown when the

statutes were enacted. Among these new technologies are:

-- motion pictures, silent and with accompanying sound;

-- sound recordings and sound reproducing mechanisms;

-- radio and television transmission and reception;

-- rapid, effecient copying machines;

-- cable television systems;

-- microfilm, videotapes, and computer programs.

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We shall review principally the adaptations of the copyright law in court

decisions, but some attention will also be given, in passing, to industry practice and to the regulations and practices of the Copyright Office. In addition, we shall summarize the adaptation to the several new technologies reflected in the copyright law revision enacted in 1976.

A. 2. 1.1 Philosophical Basis of Copyright. To understand how the copyright law has developed and has been adapted to meet new issues, it is

important to keep in mind the fundamental philosophy underlying copyright. The basis of copyright is stated in broad terms in the clause

of the United States Constitution empowering Congress --

"To Promote the Progress of Science and useful Arts, by

securing for limited Times to Authors and Inventors the

exclusive Right to their respective Writings and Discoveries .

We deduce from the Constitution that the end purpose of copyright is to

"promote the progress of science and useful arts," that is, to stimulate the growth and spread of learning and culture for the benefit of

society at large; and that, as a means toward achieving this end, authors are to be given exclusive rights in their works; thus, the creation

and public dissemination of works of authorship are to be fostered by

giving to authors the legal means to realize the economic value of their

contributions to society.

The United States Supreme Court has expressed the underlying purpose of

copyright as follows:

"The primary object in conferring the monopoly (of copyright)

lie(s) in the general benefits derived by the public from the

labors of authors. A copyright, like a patent, is 'at once

the equivalent given by the public for benefits bestowed by

the genius and meditations and skill of individuals, and the

incentive to further efforts for the same important objects.'"

( Fox Film Corporation v. Doyal , 286 U.S. 123, 1932)

"The economic philosophy behind the clause empowering Congress

to grant patents and copyrights is the conviction that en- couragement 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'. Sacrificial days

devoted to such creative activities deserve rewards, commensurate with the services rendered."

(Mazer v. Stein, 347 U.S. 201, 219, 1954)

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We move on now to a review of how the courts have dealt with the issues

raised by the new technologies for which the statutes then in effect

made no specific provisions.

A. 2. 2 MOTION PICTURES

Motion pictures have been a prime example of a new technology raising

questions, as to the application of the copyright law, that the statutes currently in effect did not deal with specifically. The courts were called upon to resolve these questions in various situations involving (1) the status of motion pictures as copyrightable subjectmatter, (2) the use of copyrighted literary and musical works in motion

pictures, (3) the rights embraced in the copyright in motion pictures,

and (4) the copyright status of motion picture sound tracks.

A. 2. 2.1 Copyrightabil ity of Motion Pictures . The question of whether

motion pictures could be copyrighted arose at the beginning of the

twentieth century when the motion picture art was in its infancy. The

pertinent statute then in effect (Section 4952 of the Revised Statutes)

had been enacted (in 1870) when motion pictures were unknown. The

statute did specify, among the categories of copyrightable works, "any

photograph or negative thereof." In the case of Edison v. Lubin , decided in 1903, the maker of a series of 4500 photographs which together were to be projected through a machine to show, as a moving picture, the launching of Kaiser Wilhelm's yacht, asserted copyright in

the series of pictures as a single "photograph" under the statute. In

the District Court (E.D. Pa., 119 F. 993), it was held that the statute

did not extend to "an aggregate of photographs," but that each individual photograph would have to be registered separately and to bear the

prescribed notice of copyright in order to be protected. On appeal the

Circuit Court reversed, holding that the series of photographs, which were all on one continuous strip of film, was copyrightable as one "photograph" within the statute (3d Cir. 122 F. 240).

The differing opinions of the District and Circuit Courts in this case

are illustrative of two opposite judicial approaches to the application

of the terms of the copyright statute to a later technological innovation. The District Court said:

"It may be true, as has been argued, that this construction of

the section renders it unavailable for the protection of sucfi a series of photographs as this; but if, for this reason, the

law is defective, it should be altered by Congress, not

strained by the courts. I understand that when this act was passed these groups of consecutive photographs were practically speaking, not in existence; and, in the absence of any

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expression of the will of Congress which can be applied to

them, I am not at liberty to conjecture what further provision, if any, would have been made, if their creation had

been foreseen."

In contrast, as the Circuit Court of Appeals saw it:

"The negative and its positive reproduction represent one act or event, to wit, the launch of the yacht... To say that the

continuous method by which this negative was secured was unknown when the act was passed, and therefore a photograph

of it was not covered by the act, is to beg the question.

Such construction is at variance with the object of the act,

which was passed to further the constitutional grant of power

"to promote the progress of science and useful arts". When

Congress, in recognition of the photographic art, saw fit...

to extend copyright protection to a photograph or negative,

it is not to be presumed it thought such art could not progress, and that no protection was to be afforded such progress. It must have recognized there would be change and

advance in making photographs, just as there has been in making books, printing chromos, and other subjects of copyright

protection. While such advance has resulted in a different

type of photograph, yet it is none the less a photograph--a

picture produced by photographic process .. .And that it is, in

substance, a single photograph is shown by the fact that its

value consists in its protection as a whole or unit, and the

injury to copyright protection consists not in pirating one picture, but in appropriating it in its entirety."

That the Circuit Court was eager to apply the act so as to protect the

motion picture is further shown by its additional comment:

"We are further of opinion the photograph in question met the

statutory requirement of being intended to be perfected and

completed as a work of the fine arts. It embodies artistic

conception and expression. To obtain it requires a study of

lights, shadows, general surroundings, and a vantage point

adapted to securing the entire effect... We have no question

that the present photograph sufficiently fulfills the character of a work of the fine arts."

In sum, the District Court opinion reflects the approach of giving the

terms of the statute the application they had when enacted, with reluctance to extend those terms to subsequent technological innovations;

while the Circuit Court opinion shows the tendency to construe the terms

of the act in the light of the basic purpose of copyright to protect

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works of authorship and, 1n that light, to extend the act to new technological developments that can be analogized to objects specified

in the act.

The holding by the Circuit Court of Appeals in Edison v. Lubin was followed and carried a step further in American Mutoscope & Biograph Co.

V. Edison Mfg. Co. , 137 F. 262 (D.N.J. 1905). The Lubin decision had

equated the motion picture of a single, continuous event -- made at one time and place using a pivoted camera -- with a "photograph"; in

American Mutoscope the motion picture consisted of several sequences of

pictures taken at different times and places so that, when shown as a continuous series, they told a story. Said the court in American

Mutoscope :

"I am unable to see why, if a series of pictures of a moving

object taken by a pivoted camera (as in the Lubin case) may

be copyrighted as a photograph, a series of pictures telling

a single story even though the camera be placed at different points, may not also be copyrighted as a photograph.

Though taken at different points, the pictures express the

author's ideas and conceptions embodied in the one story. In

that story, it is true, there are different scenes. But no one has ever suggested that a story told in written words may

not be copyrighted merely because, in unfolding its incidents,

the reader is carried from one scene to another."

Here again, the court finds its way to protection of a work of authorship in a new technological medium by analogizing that medium with an older one specifically provided for in the statute.

A. 2. 2. 1.1 White-Smith v. Apollo. We digress briefly from the

motion picture cases to mention, in its chronological order, the ruling

of the U.S. Supreme Court in 1908 in the celebrated case of White-Smith

Music Publ ishing Co. , v. Apollo Co . , 209 U.S. 1, on the question of

whether the making of sound recordings (piano rolls in this case) by

which music could be played, infringed the copyright in the music. The

court held that the exclusive right to copy the music was not infringed

because "copy" was understood to denote a visual reproduction of the

written musical score. This ruling that visual perceptibility was an essential element of a "copy" was to be cited profusely thereafter in

various contexts including some of the motion picture issues. We shall

examine the White-Smith decision more fully in the later discussion of cases dealing with sound recordings as a new technology.

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A. 2. 2. 2 Motion Picture Version of Copyrighted Novel . Whether a motion

picture telling, in pictorial pantomime, portions of the story of the

novel "Ben Hur" infringed the copyright in that novel, was the question

raised in Harper & Bros , v. Kalem Co . , before the Second Circuit Court

of Appeals (169 F. 61 ) in 1909 under the older statute. The court felt

constrained first, by the Supreme Court ruling in White- Smith v. Apollo , to hold that the motion picture was not a copy of the novel since it did

not reproduce the language of the novel; but it got around the WhiteSmith doctrine by finding that the right of an author to dramatize his

work, which the statute provided for in general terms, had been infringed

by exhibiting the motion picture. It reached this result by equating

the exhibition of the motion picture with a stage presentation:

"It can hardly be doubted that, if the story were acted without dialogue, the performance would be a dramatization of the

book; and we think that, if the motions of the actors and

animals were reproduced by moving pictures, this would be only

another form of dramatization."

The Supreme Court, reviewing the case in 1911 (222 U.S. 55), agreed with

this view. In his opinion Justice Holmes said:

"Whether we consider the purpose of this clause of the statute

(giving authors the exclusive right to dramatize their works)

or the etymological history and present use of language, drama

may be achieved by action as well as by speech. Action can

tell a story, display all the most vivid relations between

men, and depict every kind of human emotion without the aid of

a word. It would be impossible to deny the title of drama to

pantomime as played by masters of the art... But if a pantomime

of Ben Hur would be a dramatizing of Ben Hur, it would be

nonetheless so that it was exhibited to the audience by re- flection from a glass... The essence of the matter... is not the

mechanism employed but that we see the event or story lived."

Thus, the Circuit and Supreme Courts here took the view that the use of

a new medium to present a version of a copyright work was not an essential factor, but that the use of the work with the effect that copyright was designed to cover was determinative.

A. 2. 2. 3 Performance Rights in Motion Pictures . When the copyright law

was revised in 1909, no mention was made of motion pictures, although

they were well known by that time as shown by the cases reviewed above.

This omission was rectified by amendments enacted in 1912 (37 Stat. 488),

which added to the categories of copyrightable works listed in Section 5

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of the statute, "Motion-picture photoplays" and "Motion pictures other than

photoplays." Strangely enough, however, the 1912 amendments made no cor- responding change in the specifications, in Section 1 of the 1909 act,

of the rights embraced in copyright, thus leaving the situation this way:

The right to make and publish copies was provided for in the 1909 statute

as being applicable to all categories of works, and was therefore applicable to motion pictures after the amendments of 1912; but the right of

public performance was provided for as being applicable specifically to

dramatic and musical works. So it was that the courts were called upon

to determine whether unauthorized performances ("exhibitions") of copyrighted motion pictures infringed the copyright under the 1909 statute.

This question was presented in Tiffany Productions v. Dewing , 50 F. 2d

911 (D. Md. 1931) with respect to exhibitions of a motion picture by a licensed exhibitor beyond the times and places specified in the license.

On the basis of the Supreme Court decision in White-Smith v. Apol lo , the court here held that exhibiting a motion picture was not the making

of a "copy." The court was doubtful as to whether exhibiting a motion

picture might be an infringing "publication" of it: The court said the

White- Smith decision indicated a negative answer, but that the generally

recognized meaning of "publication" would seem to warrant a contrary

conclusion. The approach of the court to adapting the terms of the

statute to a new situation not specifically provided for is shown by its

following observation:

"As a practical matter, the value of the copyright consists in

the monopolistic right to project and exhibit the picture

itself from each and every film as well as the right to exclude

others from duplicating the film. Protection merely of the

latter right may be entirely ineffectual to accomplish the

desired end. The statute must be given a sensible meaning in r its application to modern invention, expressly within the scope c of the statute."

The court then went on to hold that a motion picture photoplay is a form

of "dramatic work" even though the two are mentioned as separate classes

of works in section 5 of the act, so that the exclusive right provided

j in section 1 to "publicly perform" a dramatic work applies to the public i exhibition of a motion picture photoplay.

Concurrently with the Tiffany Productions case, the same question -- whether the copyright in a motion picture was infringed by its exhibition beyond those specified in a license -- was considered also in

Metro-Goldwyn-Mayer v. Bijou Theatre , 50 F. 2nd 908 (D. Mass. 1931),

where the District Court reached the opposite result. The court here

rejected the premise that a photoplay is a "dramatic work" within the

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scope of the statutory provision granting a performance right for dramatic works. The court took the narrow view that when this latter provision was enacted,

"Nobody then thought of 'drama' or 'dramatic work' in terms

of motion pictures. A moving-picture play is utterly different from anything then conceivable -- an entirely new method of communicating ideas."

The court then observed that:

"As a general rule, the effect of a new invention in any given

field seems to be a matter for legislative consideration,

rather than for the extension of existing statutes by judicial

construction."

On appeal, the District Court ruling in the Bijou Theatre case was set

aside by the Circuit Court of Appeals (59 F. 2d 70, 1st Cir. 1932),

which adopted the view of the court in the Tiffany decision. The Circuit Court stated its approach in seeking to find the intention of Congress as follows:

"The copyright statutes ought to be reasonably construed with

a view to effecting the purposes intended by Congress. They

ought not to be unduly extended by judicial construction to

include privileges not intended to be conferred, nor so nar- rowly construed as to deprive those entitled to their benefit

of the right Congress intended to grant."

Leaning on court decisions (notably Buck v. Jewell-La Salle , 283 U.S.

191 (1931), to be discussed below) holding that radio transmission and

reception were within the statutory provisions as to public performance

of music, the Circuit Court commented:

"No sound reason appears why publication through the sense of

hearing is more damaging than publication through the sense of

sight. If inhibition is applicable to the former, it should

also apply to the latter. There appears to be an increasing

tendency to liberalize the construction of copyright statutes

to meet new conditions which have rapidly developed within the

last decade and which are continuing to develop, perhaps most

strikingly illustrated by the application of radio broadcasting to copyright."

On remand of M.G.M . v. Bijou Theatre , 3 F. Supp. 66 (D. Mass. 1933) (remanded for determination that the motion picture involved was a "photoplay")

A-25
the District Court followed the Circuit Court opinion in holding that

the unauthorized exhibition of the photoplay infringed the right to

perform it as a species of dramatic work. It said further that if the

motion picture were considered non-dramatic, its exhibition would infri

the right specified in the statute to dramatize a non-dramatic work.

The Tiffany Productions and Bijou Theatre decisions may be seen as indicating the view that the economic benefits of copyright were intended

to be accorded for uses of copyrighted works in connection with new technological processes, even though such uses through those processes were not expressly provided for in the statute, as long as similar uses through previously known processes were within the terms of the statute.

A. 2. 2. 4 Sound Tracks as a Protected Part of Copyrighted Motion Picture . A whole new set of questions was raised by the advent of "talking pictures" near the end of the 1920s. One such question was presented in

the case of L.C. Page & Co . v. Fox Film Corp ., 83 F. 2d 196 (2d Cir.

1936) where the author of a copyrighted novel licensed the plaintiff to

exercise "the exclusive moving-picture rights" in the novel; this

license was granted in 1923 when "talking pictures" were not yet known

commercially. One of the issues in the case was whether this license

gave the plaintiff the exclusive right to make talking pictures when

they were later developed. The court held that the license did cover

talking pictures:

"We can entertain no doubt that the words used, "the exclusive

moving picture rights," were sufficient to embrace not only

motion pictures of the sort then known but also such technical

improvements in motion pictures as might be developed... The

development of mechanisms making it possible to accompany the screen picture with the sound of spoken words was but an improvement in the motion picture art. As the plaintiff well

says, 'talkies' are but a species of the genus motion pictures

A more fundamental question raised by the development of sound tracks

was whether the sound track and its literary or musical content are protected by the copyright in the motion picture. There appear to be

no judicial rulings on this precise question. In practice the industry

groups concerned tacitly accepted and operated on the premise that the

sound track is protected as an integral part of the motion picture; and

this premise appears to be logically valid since the pictures and sound

together are necessary to constitute the complete work and to convey

its artistic effect.

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As some commentators have pointed out,* there was room for doubt as to

whether the copyright in a motion picture protected its sound track,

since sound tracks might be equated with phonograph recordings which

(before the enactment in 1971 of the statutory amendment to be referred to presently) were not copyrightable. Because of this doubt, the

Copyright Office, until 1975, stated in its Compendium of Copyright

Office Practices (section 2.14.1, III):

"a. The Copyright Office takes no position as to whether

copyright in a motion picture covers the integrated

sound track portions of the work.

b. Registration is not made for a sound track alone, or for

a sound track as the only new matter in a previously

published or registered motion picture."

On October 15, 1971, the copyright law was amended by Public Law 92-140

to extend copyright protection for the first time to "sound recordings"

which were defined as "not including the sounds accompanying a motion

picture." The House Report (No. 92-487) on this amendment explained:

"In excluding 'the sounds accompanying a motion picture' from

the scope of this legislation, the Committee does not intend

to limit or otherwise alter the rights that exist currently

in such works. The exclusion reflects the Committee's

opinion that sound tracks or audio tracks are an integral part

of the 'motion pictures' already accorded protection ... and

that the reproduction of the sound accompanying a copyright

motion picture is an infringement of copyright in the motion

picture.

This amendment and the pronouncement in the Congressional Report served

to remove the doubt about the protection of the sound track under the

copyright in the motion picture. On March 19, 1975, the Copyright

Office amended its regulations to state:

"For purposes of deposit and registration only, any copyrightable component part of a motion picture sound track

(e.g., a musical composition) is considered an integral part

of a motion picture. Registration of any copyrightable com- ponent part of a motion picture sound track may be made by

registration of the motion picture..."

* For example, NIMMER ON COPYRIGHT, sec. 25(2).

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The foregoing history of how the statutory provision for the copyright

protection of motion pictures was adapted to the later development of

sound tracks as an adjunct to the pictures illustrates another process

of adaptation to new technology. Here, while there was a court decision

(in the Page case) that hinted indirectly at the inclusion of the sound

track as part of the protected motion picture, there was no clear ruling

on the question for many years during which a practical adaptation was made by the industry groups concerned; and ultimately the premise of

that practical adaptation was confirmed by a Congressional pronouncement

and by the adoption of a corresponding interpretation of the law in the

regulations of the Copyright Office concerning its registration practices.

A. 2. 2. 5 Use of Music in Sound Tracks . Shortly after the White-Smith

decision in 1908, Congress enacted a general revision of the copyright

law in 1909. Section 1 of the revised law incorporated, among the

exclusive rights embraced in copyright, the new right to make any

"record" of a literary, dramatic, or musical work from which the work

may be "reproduced." In the case of music under section 1(e), this right

with respect to "the parts of instruments serving to reproduct mechanically the musical work" was made subject to a compulsory license; that

is, whenever the copyright owner permitted the use of his music in a mechanical recording, anyone else could make a similar recording of the

music upon payment of a royalty of 2 cents per record.

In Jerome v. Twentieth Century-Fox Film Corp ., 67 F. Supp. 736 (SONY)

decided in 1946, the defendant motion picture producer contended that

the compulsory license provisions for the mechanical recording of music

should be applied to the recording of music on motion picture sound

tracks. The court rejected this contention, saying:

"When (the compulsory license provisions) went into effect

as part of the March 4, 1909 revision of the Copyright Act,

sound on film motion pictures was unknown. 'Talkies' so- called, were not produced until about 1924. The report of the

1909 Copyright Bill to the House of Representatives (Report

No. 2222) discusses Section 1(e) and mentions the various

types of mechanical reproductions such as phonographs and

piano-playing instruments, ' purely mechanical ' means. Counsel

assert that no more than 500 positive prints of a film of a musical motion picture are made to supply the demands for

exhibition purposes. If Section 1(e) applied to a motion picture use of a musical composition, then any producer could

appropriate a copyrighted musical composition for use in a motion picture for a total sum of about $10.00, at the rate

of 2 cents for each positive print.

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'"Talkies' are but a species of the genus motion pictures."...

The sound on film parallels and synchronizes with the pictures

on the film. The sound on film is not the type of 'mechanical

reproduction' to which Section 1(e) of the Copyright Act

appl ies. .

.

"The Copyright Act permits the copyright of a motion picture...;

but a music roll or victrola record cannot be copyrighted...

It was not intended that motion picture films should be in the same class as mechanical reproductions... To give to the defendant's contention any recognition would be to run counter

to the clear intent of Congress. The result would be destructive of valuable rights of composers and publishers, which the

Act was intended to secure and protect."

This decision may be seen as a counterpart of, and consistent with,

those reviewed above which extended the terms of the statute to include

motion pictures and their sound tracks so as to provide the benefits of

copyright to the creators of motion pictures and to the creators of

works used in motion pictures. In the Jerome case, extension of the

compulsory license to the recording of music in motion picture sound

tracks would have cut back sharply on the benefits enjoyed by the copyright owners of music; motion pictures producers would have paid almost

nothing for the highly valuable privilege of using copyrighted music in

their films. So, the statute was construed to preserve the benefits of

copyright for the creators of music.

A. 2. 2. 6 Motion Pictures Under the New Act of 1976 . The general revision

of the copyright law, P.L. 94-533, enacted on October 19, 1976, con- firmed and embodied in the statute the rulings outlined above by which

the earlier statutes had been adapted to the subsequently developed

motion picture technology. Thus, under the new statute: — "Motion pictures" are listed among the categories of protected works (sec. 102 (a)), and that term is defined

(in sec. 101) as including "accompanying sounds, if any."

-- As for the use of other works, such as literary or dramatic works, in motion pictures, the exclusive rights in the

various categories of protected works include the right

"to prepare derivative works based upon the copyrighted

work" (sec. 106), and a "derivative work" is defined (in sec. 101) as including a "motion picture version" of any

preexisting work.

-- The copyright in a motion picture embraces specifically

the right to "perform" it "publicly" (sec. 106), and to

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"perform" a work is defined (in sec. 101) as meaning, "in

the case of a motion picture ... to show its images in any

sequence or to make the sounds accompanying it audible."

The exclusive right "to reproduce the copyrighted work in

copies" (sec. 106) includes the recording of a musical or other work in a motion picture sound track, since "copies"

are defined (in sec. 101) as "material objects in which a work is fixed by any method now known or later developed,

and from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of

a machine or device."*

-- The compulsory license for the recording of music is con- fined to the making of "phonorecords" (sec. 115), and that

term is defined as excluding the sounds "accompanying a motion picture."

So it is that the adaptation of the 1909 and earlier statutes to motion

pictures is completed by the new copyright law of 1976.

A. 2. 3 SOUND RECORDINGS

A. 2. 3.1 Right to Record Copyrighted Works . Devices for the recording

and playing back of music and other sounds were developed late in the

19th century, and during the first few years of the 20th century the

manufacture and sale of such recordings in the form of both phonograph

records and piano rolls grew to a business of substantial volume. Thecopyright owners of music sought to subject the recording of their

music in these new devices to their copyrights by instituting infringement suits, and by proposing, in the movement begun in 1905 to revise

the copyright statutes, that the law be amended to accord them a new exclusive right to make recordings of their copyrighted works.

The most important of the infringement suits was the famous case of

White-Smith Music Publishing Co . v. Apollo Co . , 209 U.S. 1, decided

by the Supreme Court in 1908, to which reference has been made above.

The question at issue was whether perforated music rolls, by which

copyrighted musical works could be played mechanically on player pianos.

* This definition of "copies" overturns the holding in the White -Smith

decision. And note how it seeks to anticipate future technologies

for recording and reproducing images and sounds.

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infringed the copyright owner's exclusive right of "copying" his music

under the statute enacted in 1870. Holding that the piano roll was not

a "copy" of the musical work within the meaning of the statute, the

Supreme Court first referred to the earlier decisions of two lower

courts and of an English court so holding, and pointed out that Congress

had since amended the copyright law (in other respects) when it must

have known of those decisions; from that the Supreme Court reasoned

that "the omission of Congress to specifically legislate concerning

(sound recordings) might well be taken to be an acquiescence in the

judicial construction given to the copyright laws." The Supreme Court

continued:

"When we turn to the consideration of the act it seems evident

that Congress has dealt with the tangible thing, a copy of

which is required to be filed with the Librarian of Congress,

and whenever the words are used (copy or copies) they seem to

refer to the term in its ordinary sense of indicating reproduction or duplication of the original..."

"The definition of 'copy' which most commends itself to our judgment is perhaps as clear as can be made, and defines a copy of a musical composition to be 'a written or printed

record of it in intelligible notation'... The statute has not

provided for the protection of the intellectual conception

apart from the thing produced, however meritorious such con- ception may be, but has provided for the making and filing of

a tangible thing, against the publication and duplication of

which it is the purpose of the statute to protect the composer."

Finally the Supreme Court observed:

"It may be true that the use of these perforated rolls, in the

absence of statutory protection, enables the manufacturers

thereof to enjoy the use of musical compositions for which they

pay no value. But such considerations properly address themselves to the legislative and not to the judicial branch of

the Government.

Inasmuch as this decision of the Supreme Court in the White -Smith case

has often been cited for the proposition that a reproduction of a work

which is not visible to the human eye is not an infringement, it should

be noted here that this proposition has been greatly modified, and

eventually negated, by subsequent legislation and later court rulings,

as we shall see.

The foregoing pronouncements in the White-Smith decision can be characterized as being not so much a statement of judicial philosophy concerning

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the adaptation of the copyright law to new technology, as it is an instance of the general principle of narrow judicial construction of

statutes on the premise that new issues not specifically dealt with in

a statute should be left for Congress to determine.

A philosophical view of how the copyright law should be adapted to new technology is enunciated in the concurring opinion of Justice Holmes

in the White-Smith case. He began by saying:

"In view of the facts and opinions in this country and abroad

to which the majority opinion has called attention I do not

feel justified in dissenting from the judgment of the court,

but the result is to give to copyright less scope than its

rational significance and the ground on which it is granted

seem to me to demand...

He then went on:

"The ground of this extraordinary right (i.e., copyright) is

that the person to whom it is given has invented some new collocation of visible or audible points, -- of lines, colors,

sounds or words. The restraint is directed against reproducing this collocation, although but for the invention and

the statute any one would be free to combine the contents of

the dictionary, the elements of the spectrum, or the notes

of the gamut in any way that he had the wit to devise. The

restriction is confined to the specific form, to the collocation devised, of course, but one would expect that, if it was

to be protected at all, that collocation would be protected

according to what was its essence. One would expect the

protection to be coextensive not only with the invention,

which, though free to all, only one had the ability to achieve,

but with the possibility of reproducing the result which gives

to the invention its meaning and worth. A musical composition

is a rational collocation of sounds apart from concepts,

reduced to a tangible expression from which the collocation

can be reproduced either with or without continuous human

intervention. On principle, anything that mechanically reproduces that collocation of sounds ought to be held a copy, or

if the statute is too narrow ought to be made so by a further

act, except so far as some extraneous consideration of policy

may oppose.

As shown by the later decisions dealing with motion pictures, which were

reviewed above, and by those relating to radio broadcasts, to be

reviewed below, the philosophical approach of Justice Holmes in the

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White- Smith case was to receive greater acceptance thereafter than the

principle of narrow construction adopted in the majority opinion.

A. 2. 3. 1.1 Copyright Act of 1909 . At the time of the White-Smith

decision, Congress was working on legislative proposals that were to

become the copyright law revision of 1909. The most hotly disputed

issue in the legislative proceedings was a proposal to give copyright

owners of musical compositions a new exclusive right to make recordings

of their music. (Incidentally, the fact that Congress was considering

this proposal may have been a factor in the Supreme Court's pronouncement in White-Smith that the issue of making recordings should be

resolved by Congress rather than by the Court.) During the hearings on

the revision bills (1906-1908) there was strong and repeated testimony

from a number of witnesses that one recording company (Aeolian) had

made contracts with most of the major music publishers whereby that

company would acquire exclusive licenses to make recordings under the

anticipated new law, in all the music controlled by those publishers

then and for many years thereafter.

The reaction of Congress to this testimony is shown in the following

passage from the House Committee Report (No. 2222, 60th Cong.) on the

bill eventually enacted:

"It was at first thought by the committee that the copyright

proprietors of musical compositions should be given the

exclusive right to do what they pleased with the rights it was proposed to give them to control and dispose of all rights

of mechanical reproduction, but the hearings disclosed that

the probable effect of this would be the establishment of a mechanical music trust."

Elsewhere in the same Report the House Committee said:

"Your committee have felt that justice and fair dealing, however, required that when the copyrighted music of a composer

was appropriated for mechanical reproduction the composer

should have some compensation for its use and the composer

should have the further right of forbidding, if he so desired,

the rendition of his copyrighted music by the mechanical

reproducers. How to protect him in these rights without

establishing a great music monopoly was the practical question

the committee had to deal with. The only way to effect both

purposes, as it seemed to the committee, was, after giving

the composer the exclusive right to prohibit the use of his

music by the mechanical reproducers, to provide that if he

used or permitted the use of his music for such purpose then.

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upon payment of a reasonable royalty, all who desired might

reproduce the music."

So was born the first compulsory license under the copyright law. Section 1(e) of the Copyright Act of 1909 gave the copyright owner of a musical composition the exclusive right "to make any arrangement or setting of it or of the melody of it in any system of notation or any

form of record in which the thought of an author may be recorded and

from which it may be read or reproduced"; but to this was added the

condition that "whenever the owner of a musical copyright has used or permitted or knowingly acquiesced in the use of the copyrighted work

upon the parts of instruments serving to reproduct mechanically the

musical work, any other person may make similar use of the copyrighted

work upon the payment to the copyright proprietor of a royalty of 2

cents on each part manufactured, to be paid by the manufacturer thereof."

It may also be noted here that the 1909 Act provided that the copyright

owner of a dramatic work was to have the exclusive right to make "any

transcription or record thereof by or from which, in whole or in part,

it may in any manner or by any method be exhibited, performed, represented, produced, or reproduced." (sec. 1(d)); and that the same right

was extended to nondramatic literary works by an amendment (of sec. 1(c))

Thus, in the 1909 Act, Congress did not overturn the holding of the Sup- reme Court in White-Smith that a reproduction of a work which was not

visually perceptible was not a "copy" of the work, and did not infringe

the right to make "copies"; but it rendered that holding ineffectual

with respect to the making of any form of "record" from which a musical,

dramatic, or nondramatic literary work may be reproduced in any manner.

A. 2. 3. 1.2 Copyright Act of 1976 . The new copyright law revision

of 1976 confirms the exclusive right of the copyright owners of all

categories of works "to reproduce the copyrighted work in copies or phonorecords" (sec. 106 (1)). The definition of both of these terms is

stated broadly (in sec. 101):

"'Copies' are material objects, other than phonorecords, in

which a work is fixed by any method now known or later developed, and from which the work can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device."

"'Phonorecords' are material objects in which sounds, other

than those accompanying a motion picture or other audiovisual

in 1952.

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work, are fixed by any method now known or later developed,

and from which the sounds can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device."

These provisions and definitions in the Act of 1976 seem to wipe out any

lingering vestige of the White-Smith decision.

The 1976 Act retains the compulsory license for the making of phonorecords of musical works, with several changes in detail (sec. 115).

Thus, the royalty rate for each musical work recorded is increased from

the old rate of 2 cents per record manufactured, to the new rate, per

record distributed, of two and three-fourth cents, or one-half cent per

minute or fraction thereof of playing time, whichever amount is larger.

This history of the copyright law respecting the right to make sound

recordings of musical and other works demonstrates the adaptation of

that law to new technology by legislative enactment where the courts

abstained from effecting a judicial adaptation.

A. 2. 3. 2 Sound Recordings as Copyrightable Works . The technological

development of sound recording brought forth another question in the

field of copyright: Are sound recordings in themselves (as distinguished from the musical or literary works recorded) works of authorship

that should be accorded copyright protection?

Sound recordings, as exemplified by phonograph records or tapes, generally contain more than the musical or literary work reproduced aurally:

They embody also the rendition of the musical or literary work by performers (musicians, singers, actors, etc.), as well as the technical

skill and esthetic judgment of the director and operators of the various

mechanisms that are manipulated to produce the finished record. Performers were long ago regarded as creative artists but their aural performances were evanescent events before the invention of sound recording devices. The advent of those devices, making it possible to pre- serve souncs in a fixation from which they could be reproduced, raised

the possibility of treating recorded performances as works of authorship,

and opened up the question of whether the recordings of those performances should be given the protection of copyright.

The first suggestion that sound recordings should be made a category of

copyrightable works came in a proposal advanced by producers of such

recordings in the early stages of the Congressional proceedings in 1906

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on the general revision of the copyright law. During the progress of

those proceedings in the following two years, the producers of sound

recordings became concerned primarily with opposing the extension to

composers of the exclusive right to make recordings of their music; and

since the Constitutional arguments presented by the producers on the

latter issue would have barred the coverage of sound recordings under

the copyright law, they dropped their efforts to secure such coverage.

The Copyright Act of 1909 therefore contained no provision for securing copyright in sound recordings, and the House Committee in its Report

(No. 2222, 60th Cong.) on the 1909 Act said:

"It is not the intention of the committee to extend the right

of copyright to the mechanical reproductions themselves, but

only to give the composer or copyright proprietor (of musical

compositions) the control, in accordance with the provisions

of the bill, of the manufacture and use of such devices."

Thereafter the Copyright Office, as well as most commentators, took the

position that sound recordings were not copyrightable under the 1909

Act, both because the categories of copyrightable works listed in the

Act did not include them, and because they did not fit into the basic

requirements of the Act as to copyright notice and the deposit of copies

Beginning in the 1930s, a number of court decisions held that the unauth

orized reproduction of the recording of a performance could be enjoined

under principles of unfair competition or "common law copyright" (the

latter being property rights under the common law in unpublished works).

The judges differed as to whether the sale of records constituted "publication" so as to terminate common law copyright protection.

The most important of these decisions was Capitol Records, Inc . v. Mercury Records Corp ., 221 F. 2d 657 (2d Cir. 1955), in which the court

made several significant pronouncements. It concluded first:

"There can be no doubt that, under the Constitution, Congress

can give to one who performs a public domain musical composition the exclusive right to make and vend phonograph records

of that rendition."

Thus, it disposed of the issue, which has been much disputed, of whether

a recorded performance could be considered the "writing" of an "author"

within the scope of the Constitutional clause on copyright. The court

then went on to conclude that Congress had not provided for copyright

protection of recorded performances either before or in the Act of 1909.

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It concluded further that under the common law of New York the recorded

performance was protected against unauthorized duplication, and that

the sale of records did not terminate those common law rights.

In a dissenting opinion in the Capitol Records case, Judge Learned Hand

agreed that:

"The performance or rendition of a 'musical composition' is a 'Writing" under Article I, Sec. 8, CI. 8 of the Constitution

separate from, and additional to, the 'composition' itself.

It follows that Congress could grant the performer a copyright

upon it, provided it was embodied in a physical form capable

of being copied... Now that it has become possible to capture

these contributions of the individual performer upon a physical object that can be made to reproduce them, there should

be no doubt that this is within the Copyright Clause of the

Constitution.

Judge Hand also agreed with the court's conclusion, though on somewhat

different reasoning, that Congress had not provided for copyright in

recorded performances; and he agreed further that such recordings qualified for common law protection, but differed in his view that common

law protection was terminated by the sale of records. Concerning this

last point he observed:

"I recognize that under the view I take the plaintiff can have

only a very limited use of his records. This is indeed a harsh limitation, since it cannot copyright them... Unhappily

we cannot deal with the situation as we should like, because

the copyrightabil i ty of such 'works' is a casus omissus from

the Act. That was almost certainly owing to the fact that in

1909 the practice of recording the renditions of virtuosi had

not sprung up."

The Capitol Records and other similar court decisions paved the way for

Congressional legislation extending copyright protection to sound re- cordings, by holding that recordings of performances were the "writings"

of "authors" within the scope of the Constitution, and that they merited

the protection afforded by copyright. The influences of these court

decisions was augmented by the concurring views expressed by most com- mentators.*

* See, for example, Chafee, Reflections on the Law of Copyright in

45 COLUMBIA LAW REVIEW 503 (1945)

If A-37
A. 2. 3. 2.1 Congressional Legislation . The successive bills for

general revision of the copyright law, beginning with the bill first

considered by Congress in 1965, contained provisions naming "sound

recordings" as a category of copyrightable works, and giving the copyright owner of those (and other) works the exclusive rights "to reproduce the copyrighted work in copies or phonorecords" and "to distribute

copies or phonorecords of the copyrighted work to the public." During

the hearings on the revision bills there was virtually no opposition to

these provisions.

When action on the general revision bills lagged (for reasons unrelated

to the question of protecting sound recordings) and it became evident

that "record piracy" had become rampant and was growing, a special bill was introduced to add to the existing copyright statute, provisions for

the protection of sound recordings against unauthorized duplication.

The provisions of this special bill were the same in substance as those

in the general revision bills, making sound recordings a new category

of copyrightable works and giving the copyright owner the exclusive

rights to reproduce them and to distribute them to the public. This

special bill was enacted on October 15, 1971, as Public Law 92-140.

The general revision bill was eventually enacted on October 19, 1976, as Public Law 94-553. To expand on the earlier summary of its pertinent

provisions:

-- "Sound recordings" are listed among the categories of

works protected by copyright (sec. 102(a)), and that term

is defined (in sec. 101) as "works that result from the

fixation of a series of musical, spoken, or other sounds,

but not including the sounds accompanying a motion picture or other audiovisual work, regardless of the nature

of the material objects, such as disks, tapes, or other

phonorecords in which they are embodied." — The copyright owner of all categories of protected works,

including sound recordings, has the exclusive rights

"(1) to reproduce the copyrighted work in copies or phonorecords; (2) to prepare derivative works based upon the

copyrighted work; (3) to distribute copies or phonorecords

of the copyrighted work to the public by sale or other

transfer of ownership, or by rental, lease, or lending."

(sec. 106).

-- It is stated specifically (in sec. 114) that the exclusive

rights of the copyright owner in a sound recording do not

include any right of performance (this was a matter of

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sharp controversy in the hearings); and that the right to

reproduce a sound recording is limited to the duplication

of the actual sounds fixed in the recording and does not

extend to the independent fixation of other sounds even though they imitate those in the copyrighted recording.

-- Generally speaking, wherever the new Act makes provisions

respecting "copies" of copyrighted works, it extends those

provisions to "phonorecords" as well. (The definitions

in sec. 101 of "copies" and "phonorecords" have been quoted

earl ier .

)

In sum, the history of the extension of copyright protection to sound

recordings reflects a situation where court opinions concerning a new

technology, supported by the concurring views of commentators, laid the

foundation for subsequent legislation.

A. 2. 4 RADIO AND TELEVISION BROADCASTS

The Copyright Act of 1909 incorporated in substance, in section 1, provisions giving the copyright owner the exclusive right to "perform"

the work "publicly" in the case of a dramatic work, and to "perform" it

"publicly for profit" in the case of a musical composition; and the 1909

Act added, for the new category of lectures and similar works prepared

for oral delivery, the corresponding right to "deliver" the work "in

public for profit." In 1909, of course, radio and television broadcasting was unknown; a public performance was thought of as a performance

given in the presence of a group of persons assembled within sight or

hearing of the performers.

iA.2.4.1 Broadcasting as Performances . When radio broadcasting was developed and the use of copyrighted music and plays in radio broadcasts

became common in the early 1920s, the question arose whether broadcasts

of copyrighted works were public performances within the scope of the

1909 Statute. In the case of Jerome H. Remick & Co . v. American Automobile Accessories Co . , 5 F. 2d 41 1 (6th Cir. 1925) , this question was presented with respect to a radio broadcast of a musical work. The

court held that the broadcast did constitute a public performance, saying

"While the fact that the radio was not developed at the time

the Copyright Act... was enacted may raise some question as to

whether it properly comes within the purview of the statute, it

is not by that fact alone excluded from the statute. In other

words, the statute may be applied to new situations not anticipated by Congress, if, fairly construed, such situations come

i A-39
within its intent and meaning. Thus it has been held both in

this country and England that a photograph was a copy or infringement of a copyrighted engraving under statutes passed

before the photographic process had been developed ... While

statutes should not be stretched to apply to new situations

not fairly within their scope, they should not be so narrowly

construed as to permit their evasion because of changing

habits due to new inventions and discoveries."

"... A performance, in our judgment, is no less public because

the listeners are unable to communicate with one another, or are not assembled within an inclosure, or gathered together in some open stadium or park or other public place. Nor can a performance, in our judgment, be deemed private because each

listener may enjoy it alone in the privacy of his home. Radio

broadcasting is intended to, and in fact does, reach a very

much larger number of the public at the moment of the rendition

than any other medium of performance. The artist is consciously

addressing a great, though unseen and widely scattered audience,

and is therefore participating in a public performance."

This decision was frequently cited and consistently followed and its rulwas generally accepted in practice by the broadcasters and other con- cerned.

The conclusion that broadcasting constitutes a public performance was confirmed, though indirectly, by a statutory enactment in 1952 (66 Stat.

752) the primary purpose of which was to extend performing and recording

rights to nondramatic literary works. At the request of the broadcasting industry, a sentence was added to that enactment to place a limit of

$100 on "the damages for the infringement by broadcast" of nondramatic

literary works where the broadcaster was unaware and could not have

reasonably foreseen that he was infringing.

A further question related to the broadcasting of music was whether such

broadcasts were public performances "for profit," since the performance

right in music was limited to those that were given "for profit." This

question was also considered in the Remick v. Automobile Accessories

case reviewed above, where the broadcasting station was operated by the

manufacturer of radio products and supplies and was licensed as a com- mercial station and used as a medium for advertising its products. Citing earlier cases to the same effect, the court held the broadcasts to

be public performances "for profit" and observed:

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"That, under the Copyright Act, a public performance may be

for profit, though no admission fee is exacted or no profit

actually made, is settled by Herbert v. Shanley , 242 U.S.

591 ... It suffices, as there held, that the purpose of the

performance be for profit, and not eleemosynary; it is

against a commercial, as distinguished from a purely philanthropic, public use of another's composition, that the statute

is directed. It is immaterial in our judgment, whether that

commercial use be such as to secure direct payment for the

performance by each listener, or indirect payment, as by a hat-checking charge, when no admission fee is required, or a general commercial advantage, as by advertising one's name

in the expectation and hope of making profits through the

sale of one's products, be they radio or other goods."

In later cases the question of whether radio broadcasting of music was

"for profit" was considered in other circumstances where the commercial

purpose was less evident. It would appear to be irrelevant here to

review those cases. We note simply that broadcasts by commercial stations have generally been regarded as being for profit, either because

they are operated as commercial businesses or because they carry com- mercial advertising, while broadcasts by stations licensed as noncommercial educational stations have generally been regarded as being not

for profit.

A. 2.4. 2 Reception of Broadcasts as Performance . The development of

broadcasting also gave rise to a more difficult question: was the

reception of a broadcast (as the question arose initially, of a radio

broadcast of music) in a place where the performance being broadcast

would be reproduced, by means of the receiving equipment, for the entertainment of the public, a further performance under the 1909 Copyright

Act?

This question reached the U.S. Supreme Court in the famous case of Buck

V. Jewel l-LaSa11e Realty Co ., 283 U.S. 191 (1931). In that case a hotel

maintained a master radio set which was wired to loud speakers from

which the radio programs could be heard in all of the public and private

rooms in the hotel. The Court held that the hotel's reproduction of the

broadcast performance, through its receiving set and loud speakers, for

the entertainment of its guests, was itself a public performance under

the statute. Because of the novelty of the technology involved and the

far-reaching effect of the decision, and the parallel with the question

of cable television retransmission of broadcasts which the Supreme Court

ruled on more than 35 years later, the reasoning of the Court in the

Jewel 1-LaSalle decision, by Justice Brandeis, merits quotation at some

length:

A-41
"The defendant contends that the Copyright Act may not

reasonably be construed as applicable to one who merely re- ceives a composition which is being broadcast. Although the

art of radio broadcasting was unknown at the time the Copyright Act of 1909 was passed, and the means of transmission

and reception now employed is wholly unlike any then in use,

it is not denied that such broadcasting may be within the

scope of the act... The argument here urged, however, is that,

since the transmitting of a musical composition by a commercial broadcasting station is a public performance for profit,

control of the initial radio rendition exhausts the monopolies

conferred. .

.

"The defendant next urges that it did not perform because there

can be but one actual performance each time a copyrighted selection is rendered, and that, if the broadcaster is held to be

a performer, one who, without connivance, receives and distributes the transmitted selection, cannot also be held to

have performed it. But nothing in the act circumscribes the

meaning to be attributed to the term 'performance', or prevents

a single rendition of a copyrighted selection from resulting

in more than one public performance for profit. While this may

not have been possible before the development of radio broadcasting, the novelty of the means used does not lessen the duty

of the courts to give full protection to the monopoly of public

performance for profit which Congress has secured to the composer. .

.

"The defendant contends further that the acts of the hotel com- pany were not a performance because no detailed choice of

selections was given to it. In support of this contention it

is pointed out that the operator of a radio receiving set cannot render at will a performance of any composition, but must

accept whatever program is transmitted during the broadcasting

period. Intention to infringe is not essential under the act..

And knowledge of the particular selection to be played or received is immaterial. One who hires an orchestra for a public performance for profit is not relieved from a charge of

infringement merely because he does not select the particular

program to be played. Similarly, when he tunes in on a broadcasting station, for his own commercial purposes, he neces sarily assumes the risk that in so doing he may infringe the

performing rights of another...

"Second. The defendant contends that there was no performance

because the reception of a radio broadcast is no different

from listening to a distant rendition of the same program.

(In footnote: "Hence it is urged that the radio receiving set

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is no more than a mechanical or electrical ear trumpet for

the better audition of a distant performance.") We are satisfied that the reception of a radio broadcast and its translation into audible sound is not a mere audition of the

original program... Radio waves are not audible. In the

receiving set they are rectified; that is, converted into direct currents which actuate the loudspeaker to produce again in

the air sound waves of audible frequencies. The modulation

of the radio waves in the transmitting apparatus, by the

audible sound waves, is comparable to the manner in which the wax phonograph record is impressed by these same waves through ' the medium of a recording stylus. The transmitted radio waves require a receiving set for their detection and translation

into audible sound waves, just as the record requires another

mechanism for the reproduction of the recorded composition.

In neither case is the original program heard; and, in the

former, complicated electrical instrumentalities are necessary for its adequate reception and distribution. Reproduction

in both cases amounts to performance... In addition, the

ordinary receiving set, and the distributing apparatus here

employed by the hotel company are equipped to amplify the

broadcast program after it has been received. Such acts

clearly are more than the use of mere mechanical acoustic devices for the better hearing of the original program. The

guests of the hotel hear a reproduction brought about by the

acts of the hotel in (1) installing, (2) supplying electric

current to, and (3) operating the radio receiving set and

loudspeakers. There is no difference in substance between

the case where a hotel engages as orchestra to furnish the

music and that where, by means of the radio set and loudspeakers here employed, it furnishes the same music for the same purpose."

This opinion of the Supreme Court in the Jewell-LaSalle case presents a prime example of analogizing the operation and effect of new technological devices with those of previously known devices that the law has

already dealt with. In this opinion we see the Supreme Court taking

much the same philosophical approach, to the adaptation of the copyright

statute to new technology, as we have seen earlier in the court decisions

on motion pictures, in the concurring opinion of Justice Holmes in

Whi te-Smi th , in the judicial recognition of the possible extension of

copyright to sound recordings in the Capitol Records case, and implicitly

in the extension of the copyright statute by Congress to the products of new technology and their use.

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It may be noted briefly that the ruling in Jewel l-LaSalle was carried a step farther in the case of SESAC v. New York Hotel Statler Co ., 19 F. Supp. 1 (S.D.N.Y. 1937). In the latter case, the hotel received the

broadcast programs of two stations on a master receiving set and transmitted those programs to speakers in each of its individual guest

rooms; each guest could turn the speaker in his room on to his choice

of two programs or could turn it off. Relying on the Remick and

Jewel 1 -LaSal le decisions, the court held the transmission by the hotel

of the copyrighted music in the broadcasts was a public performance for

profit.

A. 2. 4. 3 Wire Transmissions . Mention should be made of a process of

transmitting performances of copyrighted works somewhat similar, in its

effect, to broadcasting; that is, the use of wire systems for supplying

performances of music from a central source to a number of subscribing

business establishments for the entertainment of their patrons. (A

well-known system of this kind is Muzak.) In Leo Feist, Inc . v. Lew Tendler Tavern , 162 F. Supp. 129 (E.D. Pa. 1958), both the company

that supplied the music by transmissions over leased wires and the

tavern in which the music was received and played over loudspeakers

were held to have given public performances for profit. Citing several

earlier cases, including Jewel l-LaSalle and SESAC , the court said:

"The circumstance of the novelty of the combination of mechanical means involved, however, does not appear to vary the

principles established in the three cases heretofore cited.

For that matter, the numerous cases of musical infringement

under the act involve infinite combinations of means of

musical performance. The principles applied, however, are those of the same leading cases, despite the individual differences as to where and how the music is produced, transmitted, and made audible."

The foregoing decision of the District Court in the Lew Tendler case

was affirmed by the Circuit Court on appeal: 267 F. 2d 494 (3rd Cir.

1959).

(The question of retransmissions of broadcasts as public performances of

the works in the broadcast was to be raised again years later in the

context of retransmissions by cable television systems. We shall con- sider the cases dealing with cable television below.)

A. 2. 4. 4 Copyright Act of 1976 . The recently enacted revision of the

copyright law gives statutory confirmation to the results reached in

the decisions reviewed above concerning broadcasts and wire transmissions

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of performances of copyrighted works, and their reception and retransmission. Thus, the 1976 Act provides that:

-- In the case of enumerated categories of works capable of

performance, the copyright owner has the exclusive right

"to perform the copyrighted work publicly" (sec. 106(4).

(This right is subject to certain exemptions provided for

elsewhere in the Act which need not be detailed here).

-- To "perform" a work is defined as meaning "to recite,

render, play, dance, or act it, either directly or by means of any device or process or, in the case of a motion

picture or other audiovisual work, to show its images in

any sequence or to make the sounds accompanying it audible" (Sec. 101). — The exclusive right of the copyright owner "to display the

copyrighted work publicly" is specified for the first time

in the new statute with respect to enumerated categories

of works that may be so displayed (sec. 106(5)). (This

right of public display is subject to some of the same exemptions as the right of public performance.)

-- To "display" a work is defined as meaning "to show a copy

of it, either directly or by means of a film, slide,

television image, or any other device or process or, in

the case of a motion picture or other audiovisual work,

to show individual images nonsequential ly" (sec. 101). — To perform or display a work "publicly" is defined as meaning:

"(1) to perform or display it at a place open to the

public or at any place where a substantial number

of persons outside of a normal circle of a family

and its social acquaintances is gathered; or

(2) To transmit or otherwise communicate a performance or display of the work to a place specified by clause

(1) or to the public, by means of any device or process, whether the members of the public capable

of receiving the performance or display receive it

in the same place or in separate places and at the same time or at different times" (sec. 101). — To "transmit" a performance or display is defined as meaning "to communicate it by any device or process whereby

images or sounds are received beyond the place from which

they are sent" (sec. 101).

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It will be observed that the preceding definitions embrace all forms of

transmission and communication, including broadcasting and wire transmission, by which a performance or display is brought to members of the

public, in a group or individually, at another place or places. The

definitions would also include the communication to the public of a performance or display reproduced from a broadcast or wire transmission.

A. 2. 5 PHOTOCOPYING

In common usage, the duplication of a printed page by modern copying

machines is referred to as "photocopying" whether the process used by

the machines is photographic or is of another kind such as a thermal or xerographic process. As the making of copies by such machines became

easier, faster, more effective, and less costly, the practice of using

those machines to provide copies of copyrighted material for persons

engaged in study, research, teaching, and other activities, created

serious and difficult problems concerning the application of the copyright law to such copying.

The 1909 Copyright Act (like all the earlier acts) made no provision

allowing any copying of copyrighted material without the copyright

owner's permission. The Act gave the copyright owner the exclusive

right to make copies of his work, without qualification. The courts,

however, over a long period of time, had developed the doctrine of "fair

use" which, stated in broad terms, allowed the copying of small portions

of copyrighted works, for a legitimate purpose, in circumstances where

such copying would have no appreciable effect upon the copyright owner's

market for his work. The court decisions dealt mainly with short quotations from the work of one author in the later works of other authors;

how far the doctrine of fair use extended to photocopying for research

or scholarly purposes remained problematical.

At an early stage when the photocopying processes were less proficient

and more costly, the processes then in use being mainly photostatic

and mimeographic, copies made by libraries for scholars and researchers

were relatively few in number and short in length and were made in

response to isolated and occasional requests. Even then the existence

of a copyright problem was recognized, and the first efforts to resolve

the problem were made by members of the groups concerned -- publishers,

scholarly and research organizations, and libraries who sought to

work out an agreement defining the area and limits of permissible

photocopying. In 1935 members of those groups adopted a statement known

as the "Gentlemen's Agreement" which stated that a library owning copyrighted books or periodicals "may make and deliver a single photographic

reproduction or reduction of a part thereof to a scholar representing

in writing that he desires such reproduction in lieu of loan of such

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publication or in place of manual transcription and solely for the purpose

of research."

The "Gentlemen's Agreement" had no binding effect for several reasons:

Among others, the persons signing it were not representative of the

generality of the groups concerned. Nevertheless, it suggested guidelines that were followed thereafter by many libraries, and that were

to be referred to as a basis for working out a solution to the copyright

issue concerning library photocopying. It is also significant as an example of attempts to adapt the copyright law to a new technology by

a practical agreement negotiated between the opposing interest groups.

The photocopying problem became acute as copying machines became highly

proficient in producing excellent reproductions rapidly and at steadily

declining cost. During the 1960s and early 1970s the volume of copyrighted material being photocopied by libraries, as well as in schools

and elsewhere, ballooned continuously to the point, and beyond the point,

where publishers -- especially of scientific and technical journals and

of educational texts -- expressed the fear that the resulting loss of

subscriptions and sales might force them to discontinue publication of some of those materials.

The problem was given attention in the preliminary stages of the program

looking toward the general revision of the copyright law*, but the

groups concerned were agreed, when the first revision bill to be con- sidered by Congress was introduced in 1965, that no specific rules for

library photocopying should be incorporated in the bill; they were all

willing to leave the photocopying issue for resolution by agreement

among themselves or by the courts under the general principles of the

fair use doctrine.

Meanwhile, a suit was instituted in the U.S. Court of Claims, Will jams

and Wil kins Co . , v. United States , in which the plaintiff, a publisher

of medical journals and books, charged two Government libraries, the

National Institutes of Health library and the National Library of

Medicine, with having infringed the copyright in several of its medical

journals by supplying photocopies of articles in those journals to the

staff researchers of NIH and to medical libraries, research institutes,

and practitioners throughout the country. The main defense (among

* See the Report of the Register of Copyrights on the General Revision

of the U.S. Copyright Law, published as a House Judiciary Committee

Print in July, 1961 , at p. 25.

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others) argued on behalf of the libraries was that their photocopying

was a fair use. The case was a particularly difficult one because it

presented a situation of copying on such a large scale as to strain - the usual limits of fair use and perhaps jeopardize the economic viability of publishing such journals; but, on the other hand, copying for

a noncommercial social purpose to supply medical and related scientific information to those engaged in medical research and health maintenance -- as worthy and essential as any that could be thought to justify

copying as a fair use.

In both the initial opinion of the Commissioner of the Court of Claims

(172 USPQ 670, 1972) and the subsequent decision by the full Court

(487 F. 2d 1345, 1973), it was noted that fair use is a judiciallycreated doctrine that cannot be defined with precision, and that the

House Judiciary Committee, in its Report (No. 83, 90th Cong.) on the

copyright law revision bill then pending had stated that the principal

factors in determining what constitutes a fair use were:

"(a) the purpose and character of the use, (b) the nature of

the copyrighted work, (c) the amount and substantiality of

the material used in relation to the copyrighted work as a whole, and (d) the effect of the use on a copyright owner's

potential market for and value of his work."

The Commissioner held that the photocopying practices of the two

Government libraries were not within the bounds of fair use but con- stituted infringement of the copyrights. As he saw it:

"Defendant's photocopying is wholesale copying and meets none

of the criteria for 'fair use.' The photocopies are exact

duplicates of the original articles; are intended to be substitutes for, and serve the same purpose as, the original

articles; and serve to diminish plaintiff's potential market

for the original articles since the photocopies are made at

the request of, and for the benefit of, the very persons who

constitute the plaintiff's market."

The full Court divided 4 to 3 on the issue. The majority stressed the

social importance of making information readily available for medical

research and played down the potential damage to the copyright owner,

concluding that the photocopying practices of the two libraries were

fair use. Quoting from the majority opinion:

"While, as we have said, this record fails to show that plaintiff (or any other medical publisher) has been substantially

A-48
harmed by the photocopying practices of NIH and NLM, it does

show affirmatively that medical science will be hurt if such

photocopying is stopped. Thus, the balance of risks is

definitely on defendant's side -- until Congress acts more

specifically, the burden on medical science of a holding that

the photocopying is an infringement would appear to be much

greater than the present or foreseeable burden on plaintiff

and other medical publishers of a ruling that these practices

fal 1 within ' fair use.

'

The majority opinion wound up by calling for Congressional resolution of

the problem:

"Finally, but not at all least, we underline again the need for

Congressional treatment of the problems of photocopying...

The Courts are now precluded, both by the Act and by the nature

of the judicial process, from contriving pragmatic or com- promise solutions which would reflect the legislature's choice

of policy and its mediation among the competing interests...

Hopefully, the result in the present case will be but a 'holding operation' in the interim period before Congress

enacts its preferred solution."

The three judges of the Court of Claims who dissented from the majority

opinion expressed their agreement with the Commissioner's view of the

case, saying:

"What we have before us is a case of wholesale, machine copying, and distribution of copyrighted material by defendant's

libraries on a scale so vast that it dwarfs the output of

many small publishing companies...

"It is indisputed that the photocopies in issue here were

exact duplicates of the original articles; they were intended

to be substitutes for and they served the same purpose as the

original articles. They were copies of complete copyrighted

works within the meaning of Sections 3 and 5 of the Copyright

Act. This is the very essence of wholesale copying and, without more, defeats the defense of fair use."

The minority opinion sought to counter the fear expressed by the majority

that a holding of infringement in this case would result in stopping

entirely the furnishing of photocopies needed by medical researchers;

the minority suggested that those needs could be met by arrangements for

licensing photocopying.

A-49
The Williams and Wilkins case was accepted for review by the Supreme

Court where, after the arguments were heard, the Court split 4 to 4

without an exposition of the reasoning on the two sides (420 U.S. 376,

1975). The case thus came to an inconclusive end.

A. 2. 5.1 The Copyright Act of 1976 . During the proceedings for general

revision of the copyright law, the question of photocopying came up

primarily and most importantly in two contexts; in connection with

copying by teachers for classroom use in schools, and with copying by

libraries for the use of scholars and researchers. The proposals for

legislation in each of these contexts were subjects of major controversy. Two sets of provisions evolved in the successive revision bills;

section 107 dealing with fair use generally and containing special

references to copying for purposes of teaching, scholarship, or research;

and section 108 dealing specifically with copying by libraries.

Section 107, providing that "the fair use of a copyrighted work... is not

an infringement of copyright," specifies that:

"In determining whether the use made of a work in any particular

case is a fair use the factors to be considered shall include --

(1) the purpose and character of the use, including whether

such use is of a commercial nature or is for nonprofit

educational purposes;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in

relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of the copyrighted work."

As noted in the Congressional committee reports on the revision bills,

this statement of the determining factors is a distillation of those

stated by the courts in the line of decisions that developed the fair

use doctrine, except for the phrase in clause (1) reading "including

whether such use is of a commercial nature or is for nonprofit educational purposes." This added phrase was thought to be within the

spirit of the court-developed doctrine and was added to the bill as a concession to the educators.

Section 107 also specifies, as examples of uses that may be fair use

(if they come within the stated criteria):

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"The fair use of a copyrighted work, including such use by

reproduction in copies or phonorecords or by any other means...,

for purposes such as criticism, comment, news reporting,

teaching (including multiple copies for classroom use),

scholarship, or research..."

It may be noted that the parenthetical phrase was added to the bill in

the late stages of the Congressional proceedings as a further concession

to the educators.

The language of section 107 pertaining to copying for educational purposes reflects agreements reached between the educator and copyright

owner groups over a period of time. In addition, the Reports of the

Congressional Committees on earlier versions of the revision bill

(House Report No. 83, 90th Cong., and Senate Reports No. 93-983 and

No. 94-473) contained an explanatory discussion in considerable detail

of how the four criteria of fair use stated in section 107 would apply

to copying by teachers for classroom use, which also reflected an understanding between those groups. Further, and with more finality,

the House Committee Report (No. 94-1476 at pages 67-71) sets forth the

texts of agreements between educator groups on one hand and representatives of authors and publishers of books, periodicals, and music on the

other, stating in precise terms, as guidelines, the minimum standards

of fair use copying for educational purposes. These agreements were

reached at the urging of the Congressional committees, after a series

of meetings between the interested groups.

The more far-reaching problem raised by modern photocopying devices -- that of copying by libraries for scholars and researchers -- is dealt

with in section 108 of the new statute. (That section also provides

for copying for certain internal library purposes but we are not con- cerned with that here.) In main substance, section 108(d) and (e) permits libraries to make, for any user requesting it, a single copy of no more than one article or other contribution to a copyrighted collection

or periodical issue or of a small part of any other work (such as a book), or a single copy of an entire work or a substantial part of it

if the library has first determined that a copy cannot be obtained

from trade sources at a fair price. (This right of a library to make

single copies for users is subject to certain specified conditions and

exceptions which we need not detail here.)

To preclude multiple copying under the guise of repeated single copying, section 108(g) states that, while the right of a library to make

copies extends to "the isolated and unrelated reproduction. . .of a single

copy... of the same material on separate occasions," it does not extend

A-51
to "the related or concerted reproduction, . .of multiple copies... of the same material, whether made on one occasion or over a period of time,

and whether intended for aggregate use by one or more individuals or for

separate use by the individual members of a group;" and to preclude

wholesale copying under a systematic program whereby one library would

serve as the source of material for a number of other libraries or persons who might otherwise subscribe for or purchase copies, section 108

states further that the right of a library to make copies does not

extend to "the systematic reproduction. . .of single or multiple copies,"

with the proviso that this does not prevent a library "from participating

in interlibrary arrangements that do not have, as their purpose or effect,

that the 1 ibrary. . .receiving such copies... for distribution does so in

such aggregate quantities as to substitute for a subscription to or purchase of such work.

This latter provision of section 108 excluding "systematic reproduction"

had been objected to strongly by library groups, and the proviso to

permit "interlibrary arrangements" was added in an effort to meet those

objections. The proviso, however, was thought to be too vague in its

reference to "such aggregate quantities as to substitute for a subscription

to or purchase of such work." Accordingly, the National Commission on New Technological Uses of Copyrighted Works (CONTU) undertook to bring the

interested parties together to see if agreement could be reached on a practical definition of that phrase, and it succeeded in formulating a set of guidelines that were accepted by the several groups concerned.

These guidelines are set forth in the Conference Report (H. Rept. No.

94-1733, at pages 71-73) on the bill which was then enacted. In essence,

the guidelines state that the "aggregate quantities" limitation in the

proviso would permit, for any requesting library within any calendar

year, not more than five copies of articles published in any given periodical during the preceding five years, and not more than five copies

of any other material from any given work (including a collective work)

during the entire period of copyright.

So it was that the complex and multi-faceted resolution of the problem of

adapting the copyright law to the availability of modern copying machines

was achieved through the legislative process. The one appeal to the

courts to resolve the issue -- the Williams and Wilkins case -- proved

to be futile. As the Court of Claims observed, the problem of photocopying in its broad and varied aspects did not lend itself to judicial

resolutions; the Court could do no more than to decide whether the photocopying done in the particular circumstances of the case before it was

or was not an infringement of copyright under the existing law; Congressional action was needed to examine the wide range of situations in which

photocopying could be a useful practice, and to arrive at policy determinations that in certain circumstances and under certain conditions

A-52
photocopying should be permitted free of copyright while other circumstances and conditions called for subjecting photocopying to copyright

restrictions. On the foundation of the fair use doctrine developed

earlier by the courts, the principles underlying the "Gentlemen's

Agreement" worked out initially be some of the interested groups, and

the practical and equitable considerations presented by the needs of the

several interested groups. Congress was able to establish sets of basic

principles and subsidiary conditions and exceptions to resolve the

issues in the variety of situations that had arisen or could be foreseen.

In this process Congress was aided by the spirit of compromise and ac- commodation in which the interested groups negotiated agreements among

themselves on the principles of the legislative provisions and on practical guidelines for their application.

A. 2. 6 CABLE TELEVISION SYSTEMS

During the early 1960s commercial enterprises began to be organized to

bring to subscribers, by means of new technologies, using special

antennas located on high points and a network of cables and amplifiers,

television broadcasts of stations whose signals could not be received

satisfactorily by the subscribers off-the-air because of the distance

or the hilly terrain between the station and the location of the subscribers. By the middle of that decade such commercial enterprises,

known as cable television or CATV systems, were proliferating rapidly

and expanding their operations to carry more, and farther distant,

broadcasting stations; and it had become apparent that a copyright problem of considerable magnitude was involved in their operation. Television broadcast programs commonly included performances of copyrighted

motion pictures, plays, music, and other works, for which broadcasters

obtained licenses from the copyright owners. Was the retransmission of

the broadcast programs by a cable system to its subscribers to be treated

as a further performance of the copyrighted works which infringed the

copyright owners' exclusive right of public performance?

The existence of this problem and its economic importance for copyright

owners and the operators of cable systems, and indirectly for broadcasters, had come to the attention of the House Subcommittee by the

time it held its first hearings, in 1965, on the initial bill for general

revision of the copyright law. The testimony at the hearings demonstrated

that the issue was highly controversial, and that it involved many ramifications pertaining to the economic position and potential growth of

cable systems, and their potential impact upon broadcasters as well as copyright owners. It was also evident that the copyright problem was complicated by being intertwined with the problems of communications

policy relating to the nations' broadcasting system that were dealt

with by the Federal Communications Commission.

A-53
In 1966, after its hearing had been completed, the House Subcommittee

formulated a complex set of provisions for inclusion in the revision

bill by which it proposed to reconcile the divergent views and needs of

the interested parties. The Subcommittee recognized that the copyright

problem could not be resolved by a uniform rule under which all cable

retransmissions would be an infringement, or not an infringement, of

copyright; it proposed that in some situations retransmissions by a cable system would be exempt from copyright, in certain other situations their retransmissions would be subject to copyright, in still

other situations their retransmissions (of broadcasts from another area)

would become subject to copyright only if they were given advance

notice that a local broadcasting station had an exclusive license to

show the program in the local area, and in yet other situations (where

they brought the broadcasts of distant stations into an area not adequately served by local stations) they would be liable only for payment

of a reasonable license fee.

Meanwhile, the problem was brought before the courts in the case of

United Artists Television, Inc ., v. Fortnightly Corp . , where a cable

system brought to its subscribers the television programs of several

stations whose signals could not be received satisfactorily by the

subscribers because of the intervening mountainous terrain. The copyright owners of motion pictures shown in the broadcasts retransmitted

by the cable system sued the system for infringement. The District

Court (255 F. Supp. 177, S.D.N.Y. 1966) held that the retransmission

constituted infringement of the copyright owner's exclusive right of

public performance. On appeal, the Circuit Court of Appeals reached

the same conclusion (377 F. 2d 872, 1967). Both the District and Circuit Courts considered this case to be parallel with those decided a generation earlier, particularly the Remick , Jewel 1 -LaSal le , and SESAC

cases (reviewed above in the portion of this report dealing with radio

and television broadcasts); in those earlier cases, broadcasts of copyrighted works, and the public diffusion of receptions of such broadcasts, were held to be infringing public performance. Of particular

interest here is the philosophical approach stated in the District

Court opinion in the Fortnightly case as to the judicial application of

the 1909 Copyright Law to the new technology of cable retransmission of

broadcasts

:

"The updating of statutory language to accommodate it with

current technological advances is part of the genius of our

law to adapt and to grow. The achievements of modern science

and technology surpass the imagined marvels of the philosopher'

stone and Aladdin's lamp. The practical necessities of such

an age require judicial recognition of the contemporary meaning of the words of the Copyright Act...

A-54
"It is hardly conceivable that Congress intended the statute

to be read with a strangling literalness so as to require it

to be amended on a month-to-month basis as the means of keeping pace with science and technology. The responsibility of

keeping the Copyright Law a living law devolves primarily,

though not exclusively, upon the courts whose traditional

function of statutory interpretation and construction, if effectively performed, will achieve in great measure the desirable object of accommodating the statute to the realities of

modern science and technology."

The decision of the District and Circuit Courts in this case was destined,

however, to be reversed by the Supreme Court: Fortnightly Corp . v. United Artists Television, Inc ., 392 U.S. 390 "(1968)1 To the surprise

of most commentators, the Supreme Court held, in a 5 to 1 decision, that

the retransmission of broadcasts by the cable system to its subscribers

did not constitute a performance of the works in the broadcast within

the meaning of the Copyright Act. The Supreme Court approached the

question by saying:

"At the outset it is clear that the petitioner's systems did

not 'perform' the respondent's copyrighted works in any con- ventional sense of that term, or in any manner envisaged by

the Congress that enacted the law in 1909. But our inquiry

cannot be limited to ordinary meaning and legislative history,

for this is a statute that was drafted long before the development of the electronic phenomena with which we deal here. In 1909 radio itself was in its infancy, and television had not

yet been invented. We must read the statutory language of 60

years ago in the light of drastic technological change."

Nevertheless, the Court held that the cable retransmission was not a "performance" under the Act. It reasoned:

"Broadcasters have judicially been treated as exhibitors, and

viewers as members of a theater audience. Broadcasters perform. Viewers do not perform. Thus, while both broadcasters

and viewers play crucial roles in the total television process, a line is drawn between them. One is treated as active

performer; the other, as passive beneficiary.

"When CATV is considered in this framework, we conclude that it

falls on the viewer's side of the line. Essentially, a CATV

system no more than enhances the viewer's capacity to receive

the broadcaster's signal; it provides a well-located antenna

with an efficient connection to the viewer's television set."

A-55
In his lone dissent, Justice Fortas agreed with the lower courts that the

precedents of the Jewel 1 -LaSalle and SESAC decisions should be followed

here. He observed that any decision of the Court either that CATV

systems were liable for copyright infringement, or that they were not -- had dangerous implications for one party or the other, and commented:

"Our major object, I suggest, should be to do as little damage

as possible to traditional copyright principles and to business

relationships, until the Congress legislates and relieves the

embarrassment which we and the interested parties face."

Justice Fortas said that the majority opinion abandoned the teachings of

the precedents "in an attempt to foster the development of CATV", and

he had noted earlier that "it is darkly predicted that the imposition

of full liability upon all CATV operations could result in the demise of

this new, important instrument of mass communications," The majority

opinion, in a footnote, said that the result of following the Jewel 1 - LaSal le decision here would be such "as retroactively to impose copyright

liability where it has never been acknowledged to exist before." These

brief quotations suggest a plausible explanation of the surprising

result reached by the majority, namely, the argument which was made by

the cable system in this case that a holding of infringement would subject existing cable systems generally to retroactive liability of such

aggregate magnitude as to destroy many of them.

It should be noted specifically that both the majority and dissenting

opinions in the Supreme Court decision in Fortnightly , as well as the

lower court decisions, took cognizance of the ongoing consideration by

Congress of the copyright problem of cable retransmissions, in the context of the general revision of the copyright law, and suggested that

the problem in its complex and varied aspects called for resolution by

Congress in the manner permitted by the flexibility of legislative

improvisation. (We have already seen the same thought echoed in the

Court of Claims decision in Williams and Wilkins.)

A few years later, in 1974, another case involving the copyright liability

of CATV systems was before the Supreme Court. In this case, Teleprompter

Corp . V. CBS , 415 U.S. 394, the cable system, using microwave relay

equipment, brought to its subscribers the signals of far distant broadcast stations that could not have been intended to be received by them.

(We leave aside the other issues in this case that are not relevant here.)

The District Court in which this case began held ( CBS v. Teleprompter , 355 F. Supp. 618, S.D.N.Y 1972) that the Supreme Court decision in

Fortnightly applied here; it considered the function of the cable system

in importing distant signals to be no different in essential character

from the function of the system in the Fortnightly case as analyzed by

A-56
the Supreme Court. The Circuit Court of Appeals held otherwise (476 F. 2d 338, 2d Cir. 1973); it thought that the Fortnightly decision of the

Supreme Court established the governing rule where the CATV served to

bring the signals of a local broadcasting station to persons in the

adjacent community who were prevented from receiving them directly only

because of topographical conditions. When the CATV imported distant

signals, the Circuit Court held, it did more than merely providing an antenna service; it brought the broadcast programs to a new audience

that could not have received them even with an advanced antenna such

as CATV used in the community, and in doing this it was "functionally

equivalent to a broadcaster and thus should be deemed to 'perform' the

programming distributed to subscribers on these imported signals."

The Supreme Court, in its majority opinion, agreed with the District

Court's view that its ruling in the Fortnightly case applied to the

CATV importation of distant signals since, it thought, the function of

the CATV in providing viewers with the means of receiving broadcast

signals is essentially the same. The majority opinion also rejected

the argument that copyright liability should be imposed upon the importation of distant signals because the CATV was thereby diluting the

value of the copyright owner's market for licensing broadcasts by stations in the area to which the distant signals were imported.

Three Justices dissented strongly, two of them not having participated

in the Fortnightly decision. The dissenters indicated that they

thought the Fortnightly decision itself was wrong, but that, accepting

that decision now, the importation of distant signals presented a different case in which the CATV was functionally equivalent to a broadcaster. In one of the two dissenting opinions, by Justice Douglas with

the concurrence of Chief Justice Burger, it was said:

"The Copyright Act... gives the owner of a copyright 'the ex- clusive right' to present the creation 'in public for profit'

and to control the manner or method by which it is 'reproduced.

A CATV that builds an antenna to pick up telecasts in Area B and then transmits it by cable to Area A is reproducing the

copyright work not pursuant to a license from the owner of the

copyright but by theft. That is not 'encouragement to the

production of literary (or artistic) works of lasting benefit

to the world' that we extolled in Mazer v. Stein...

"

. . .Rechannel ing by CATV of the pirated programs robs the copyright owner of his chance for monetary reward through advertising rates on rebroadcasts in the distant area and gives those

monetary rewards to the group that has pirated the copyright."

A-57
Again in the several opinions in the Teleprompter case, as in Fortnightly , the courts called for Congressional action as the way to resolve the

complex issues of cable TV transmissions of broadcast programs. As the

Circuit Court of Appeals put it:

"The complex problems represented by the issues in this case

are not readily amenable to judicial resolution... We hope

that the Congress will in due course legislate a fuller and

more flexible accommodation of competing copyright, antitrust, and communications policy considerations, consistent

with the challenge of modern CATV technology."

What we see reflected in these disparate decisions in the Fortnightly

and Teleprompter cases is, first of all, the realization that the basic

issue of the copyright liability of cable systems for their transmission

of broadcast programs cannot be resolved satisfactorily by the simple

yes-or-no answer of a judicial decision, but requires a multi-faceted

formulation that can be molded only through the legislative process.

Further, inasmuch as the courts must decide particular cases presented

to them in the meantime, we see a conflict among the judges between the

desire to extend the principles of the copyright law as it exists so as to give the copyright owners the benefit of the economic value of their

works as used in a new medium, and the desire to promote the development

and growth of the new medium for the benefit of the public by shielding

it from the heavy burden that would be imposed by holding it fully and

retroactively liable for copyright infringement.

A. 2. 6.1 The Copyright Act of 1976 . As we have already noted, bills for

the general revision of the copyright law, including proposed provisions

on the CATV problem, were under consideration by Congress during the

time that the Fortnightly and Teleprompter cases were making their way

through the courts. The controversy over the CATV issue was so intense

that when the revision bill first reported out by the House Judiciary

Committee was debated by the full House in 1967, the opposition to the

CATV provisions was strong enough to force the proponents of the bill to

agree to deleting the entire section dealing specially with CATV transmissions, and the bill was passed by the House without any resolution of

the issue. For several years thereafter the revision bill languished

in the Senate, mainly because of the intractable dispute over the CATV

issue.

We will not tract the twists and turns taken in the provisions of

the successive revision bills dealing with the CATV problem; they were changed substantially from the version in the bill of one year to the

bill of the next. Nor will we recount the series of regulations proposed and issued by the FCC to control the carriage of broadcasts by

A-58
cable systems or the steps by which the interested parties -- copyright

owners, CATV operators, and broadcasters -- ultimately reached agreements on the essential points of a legislative solution. What finally

emerged was a complex and highly detailed set of provisions in section

111 of the revision bill based on two main premises: That commercial

cable systems should have a compulsory license for those retransmissions of broadcasts that were authorized by the Federal Communications

Commission, and that they should pay copyright royalties in a lump sum under a formula fixed initially in the statute. Omitting many of the

details in the complicated structure of section 111, the Copyright Act

of 1976 provides in main substance that:

-- A cable system may obtain a compulsory license to retransmit the broadcasts of those stations whose signals the

system is authorized to carry by the FCC. It obtains the

license by filing certain pertinent information in the

Copyright Office.

-- A cable system will be fully liable for copyright infringement if it willfully or repeatedly retransmits the

signals of a broadcast station that the FCC has not authorized it to carry, or if it willfully alters the content

of a broadcast program or the accompanying commercial

advertising.

-- Under the compulsory license the cable system must deposit

semiannually with the Register of Copyrights a statement

of account giving the specified information needed to

determine the sum it is required to pay as the royalty fee

for the preceding six months. The royalty fee is computed

on the basis of specified percentages of the gross

receipts of the cable system from its subscribers for its

retransmission service; the percentages are fixed on a sliding scale according to the number and character of

distant stations whose nonnetwork programs are imported by

the cable system, with a special fee schedule provided for

smaller systems.

-- The aggregated royalty fees are to be distributed, as determined by the Copyright Royalty Tribunal (established

under sections 801-810 of the Act), among the copyright

owners who file claims for their works that were included

in the nonnetwork programs of distant broadcast stations

carried by the cable systems. The Copyright Royalty

Tribunal is also authorized to review and adjust the royalty rates from time to time under standards stated in

the Act.

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A. 2. 7 MICROFILM, VIDEOTAPE, AND COMPUTER PROGRAMS

When the Copyright Office first received, as a deposit for copyright

registration, copyrightable textual material on microfilm, it had to

make a decision on what appeared, at least at first glance, to be a doubtful question: In view of the 1908 decision of the Supreme Court

in the White-Smith case -- holding that a "copy" of a work had to be

visually perceptible -- could microfilm reproductions of a work qualify

as the "copies" required by the 1909 statute to be deposited for registration? The effect of the White-Smith ruling had been avoided in subsequent legislation and court decisions dealing with sound recordings,

but the ruling itself had never been overturned.

The work could not, of course, be read from the microfilm with the naked

eye. It could, however, be made plainly visible and readable by placing

the microfilm in a reader, a device that magnified the text in the

microfilm. On this ground the Copyright Office decided that the Whi teSmi th ruling on piano rolls of music, which could not have made the

music visually perceptible by any means and was not intended to do so,

did not preclude its acceptance as a "copy," of a microfilm from which

the textual work was intended to be, and could be, made visually readable

with the aid of a device readily available for that purpose.

The Copyright Office was presented with the same question again when it

first received, for copyright registration, a motion picture produced on videotape. Nothing could be seen on the videotape itself, but when used

in a projector designed for the purpose the videotape would reproduce

plainly the visual images constituting the motion picture. Following

its reasoning with respect to copyrightable text on microfilm, the

Copyright Office concluded that it would accept videotape recordings as deposit "copies" of motion pictures for purposes of copyright registration.

The Copyright Office was faced once more with a similar question when it was asked to register copyright claims in computer programs embodied in

magnetic tape. On the preliminary question of whether the program itself, consisting of a series of instructions by which a computer could

be made to operate as directed, was a copyrightable work, the Copyright

Office took the position, in substance, that if the instructions would

constitute a copyrightable work if printed in the form of a book, they

would be copyrightable in the form of a computer program. The question

remained of whether the program in the form of punched card or magnetic

tape, from which the instructions could not be read, was acceptable for

copyright registration in view of the Whi te -Smith ruling. The Copyright

Office concluded that its reasoning with respect to microfilms and

A-60
videotape should be extended to the punched cards or magnetic tape

bearing the copyrightable program, since the copyrightable series of

instructions could be made readable by the human eye in the printout or projection from the computer. It may be noted that the Copyright Office

announced its conclusions regarding the acceptance of computer programs

for copyright registration in a circular (No. 61, issued initially in

1964) expressing some doubt about its conclusions in the absence of any

court ruling on the precise questions involved, and stating that it would

require the deposit of a printout or other readable form of the program,

in addition to copies of the form in which the program was published, in

order to identify the copyrighted content of the program.

The foregoing account illustrates how the Copyright Office may play a role in the adaptation of the copyright law to new technologies. Its

conclusions concerning the copyrightabi 1 i ty and registrability of works

embodied in microfilms, videotapes, punched cards or magnetic tape have

not been tested in the courts but have generally been accepted and

followed in practice by the groups concerned.

The new Copyright Act of 1976 removes any lingering doubt as to copyright

protection or registrability of works embodied in forms which the work

is not visually perceptible but from which it can be made perceptible

by the use of a machine or device. As we have noted earlier, the new

Act, in section 101, defines "copies" as meaning:

"material objects... in which a work is fixed by any method now

known or later developed, and from which the work can be perceived, reproduced, or otherwise communicated, either directly

or with the aid of a machine or device."

A-61
PROVIDING TECHNOLOGICAL EXPERTISE TO THE JUDICIARY

The following discussion is responsive to the task as stated in these

terms

:

"Discuss the utility of institutionalizing, by any appropriate

new means, the provision of technological expertise to the

judiciary with specific application to copyright litigation."

It is inherent in our judicial system that the courts may be called upon

to render judgment in an infinite variety of cases involving some element of technology based on the various physical and social sciences.

Thus, in particular cases the court may need to be informed, on an ad

hoc basis, of the fundamental theories and operating principles and

mechanisms of a scientific technology involved in the issues it must

decide.

Over the years procedures have been instituted whereby such information,

to the extent considered necessary, is furnished to the courts. It is

characteristic of the adversary process in our judicial system that the

parties to litigation are expected, through their counsel, to present

testimony to the court -- including testimony by experts in a specialized field of knowledge where necessary -- explaining the salient facts

in the case, the issues they raise, and the rationale advanced for the

proposed decision. Witnesses offered as experts in a particular field

of knowledge are required to be qualified as such, and their examination and cross-examination, including questioning by the judge, are expected to elicit the technical intelligence needed by the court to

render an informed decision. Also, in the course of a trial or hearing,

the court may be given a physical demonstration of the operation of a technological device or process.

Courts are also given memoranda and briefs prepared for counsel for the

parties, which purport to explain fully and persuasively the factual

data -- including the technical information considered pertinent --, as well as the legal analysis and arguments, that make up the case for

each party. And the court, if it feels the need for further information, may call for the submission of additional memoranda or briefs on specified subjects. In cases of general importance the courts often

receive informative memoranda and briefs also from interested persons or organizations other than the parties to the case. And, of course,

judges may gain the information they need through their own research or through research conducted for them by their aides.

A-62
The procedures mentioned above comprise those most generally used to

inform the courts of the facts and issues that must be known to them as the bases for their judgments, and those procedures have apparently been

found adequate for the purpose in most litigation, including the usual

run of copyright cases in which such technologies as may be involved are

old and so well known as to be taken for granted.

If, in extraordinary cases, other means are needed to provide technological expertise to the judiciary, there are several prototypes that

might be adapted to serve that need. Thus, in a few areas of the law

where the cases involve technical questions of a specialized character,

special courts have been established to decide controversial issues:

for example, there is a special Court of Customs and Patent Appeals for

the review of contested rulings by the Patent Office on the validity of

patent claims, as well as rulings by the Customs Bureau on customs matters; and a special Tax Court has been established to decide cases involving liability for Federal taxes. Special courts have also been

established in the States to deal with certain classes of social problems, notably juvenile and domestic relations courts. Judges of these

special courts are expected to be or to become experts in the particular

field within their jurisdiction.

Another means that might be employed to provide the courts with expertise in scientific or other technical fields is to have specialists in

those fields attached to the staff of the court or otherwise serving as consultants to one or a group of courts on a regular basis. As an instance of this, many juvenile and domestic relations courts and some

criminal courts have specialists, such as physicians, psychologists, and

social workers, serving as members of their staff or as consultants to

conduct examinations or investigations and advise the judges. It may not

be practicable to staff the Federal courts with experts in the various

branches of science and technology, but perhaps they could be called in

as consultants as and when needed.

The evolution of regulatory and similar administrative agencies of the

Government also suggests ways that might be developed to provide the

courts with technical information. Those agencies are somewhat com- parable to courts in that they exercise quasi-judicial functions in

interpreting the broad provisions of statutes and applying them to

specific situations. To assist in their performance of these functions

the agencies employ specialists in various fields to assemble information on technical subjects and to evaluate the significance of that

information for the guidance of the agency in making decisions. It

might be feasible to make arrangements whereby the expertise of the various Government agencies could be made available to the courts in a regularized manner.

A-63
Are special institutions or procedures such as those mentioned above

needed in copyright litigation involving new technologies for the

production or use of copyrighted works? This comes down to a matter of

opinion on which analysts of the question may differ. We believe the

answer is: no. As we see it, the judicial decisions in copyright cases

as exemplified by those reviewed earlier in this study -- (and they are more concerned with technological aspects than are the bulk of copyright

cases) indicate that the courts have been adequately informed,

through the judicial processes and procedures now used, on the new technologies involved, to enable them to reach intelligent and appropriate judgments.

It is evident that patent law, for example, deals essentially with products and processes of the physical sciences and technology, so that a fairly thorough knowledge of those fields is required in deciding many

of the questions that arise under the patent law. But the copyright law

is quite different in the nature of its subject matter -- works of

authorship -- and in its central concerns with the reproduction and dissemination of such works; the technologies involved in the means of

reproduction and dissemination appear to be no more than incidental to

the main issues which relate to the economic and social values of such

works and their uses. So, it is generally enough, in copyright cases,

for the court to be informed of the basic features of the technologies

involved; the court does not need to acquire the detailed knowledge in

depth of an expert in the technology.

This last observation is well illustrated by the Fortnightly case: The

District Court devoted twelve pages of its opinion to a detailed exposition on the technological processes involved in the cable system's

retransmission of broadcast signals, as throwing light on the question

of whether the cable system merely relayed those signals or transformed

them into new signals constituting a new performance of the content of

the program (though this was not the sole basis for the District Court's

decision). Both the Circuit Court of Appeals and the Supreme Court

disavowed this technological analysis as a basis for deciding the issue;

instead, they looked at the functional purpose and effect of the re- transmission to decide whether it was a performance comparable to that

of a broadcaster (as the Circuit Court held) or was merely a passive aid

to the viewer's reception of the broadcast (as the Supreme Court held).

Commentators have criticized some court decisions in one copyright case

or another as reflecting the court's lack of understanding of certain

principles of the copyright law; but it would be hard to find any com- plaints that the courts have reached erroneous conclusions because they

did not understand the technologies involved in the use of copyrighted

works

.

A-64
lUZlnllZ :rc:S;r^Sht:dtrt^luTM5'r/" -production or of the issues in copyr qht ca^e? If decisive

pertinent facts of a else tS the 'a??!^?! "^^^ t"-<n9 the

to provide the court with a? mnrh If ^'"^ adequate

the technologies involved

information as it needs concerning

A-65
THE COPYRIGHT LAW IN RELATION TO COMPUTERIZED

INFORMATION SYSTEMS

A. 4.1 BACKGROUND

A. 4. 1.1 Legislative History . During the initial hearings in the House

of Representatives in 1965 on the bill for general revision of the

copyright law, some sketchy testimony was presented on the problems

then anticipated concerning the use of copyrighted works in computer

systems (Hearings on H.R. 4347, 89th Cong.). In its Report in 1967

based on those hearings (House Report No. 83, 90th Cong.) the House

Judiciary Committee said:

"Although it was touched on rather lightly at the hearings,

the problem of computer uses of copyrighted material has

attracted increasing attention and controversy in recent

months. Recognizing the profound impact that information

storage and retrieval devices seem destined to have on authorship, communications, and human life itself, the committee

is also aware of the dangers of legislating prematurely in

this area of exploding technology."

Even while it spoke of legislating prematurely, the Committee went on

to express these opinions:

"Thus, unless the doctrine of fair use were applicable, the

following computer uses could be infringements of copyright

under section 106: reproduction of a work (or a substantial

part of it) in any tangible form (paper, punch cards, magnetic tape, etc.) for input into an information storage and

retrieval system; reproduction of a work or substantial parts

of it, in copies as the "print-out" or output of the computer;

preparation for input of an index or abstract of the work so complete and detailed that it would be considered a "derivative work"; computer transmission or display of a visual

image of a work to one or more members of the public. On the

other hand, since the mere scanning or manipulation of the

contents of a work within a system would not involve a reproduction, the preparation of a derivative work, or a public

distribution, performance, or display, it would be outside

the scope of the legislation."

These problems of computer uses of copyrighted works were discussed

thereafter at much greater length during the Senate hearings in 1967 on

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the general revision bill (Hearings on S. 597, 90th Cong.). The testimony at those hearings on behalf of authors and publishers generally

argued in support of the opinions stated in the House Committee Report

(No. 83). The testimony on behalf of user groups, especially academic

users, was critical of those opinions; suggested that some uses of

copyrighted material in computer systems should be exempt from copyright control, and insisted that it was premature to reach any legislative conclusions on the issues. There were suggestions by some witnesses on both sides that many of the controversial aspects of the

problem coulJ be resolved if a central "clearinghouse" system could be

established to license computer uses of copyrighted works on a mass basis

upon payment of preestabl ished royalties.

Subsequently a consensus developed among the interested groups that the

problems of computer use required further study before they could be

dealt with satisfactorily in legislation. Two legislative provisions

emerged from that consensus. One was the provision to establish the

National Commission on New Technological Uses of Copyrighted Works

(CONTU) which was enacted on December 31, 1974 as part of Public Law

93-573. This act states:

"The purpose of the Commission is to study and compile data

on

:

(1) the reproduction and use of copyrighted works of

authorship --

(A) in conjunction with automatic systems capable of

storing, processing, retrieving, and transferring

information, and

(B) by various forms of machine reproduction...

(2) the creation of new works by the application or intervention of such automatic systems or machine reproduction."

The Commission is to make a final report within three years (by December

31, 1977) with its recommendations as to "such changes in copyright law

or procedures that may be necessary to assure for such purposes access

to copyrighted works, and to provide recognition of the rights of copyright owners."

The second provision resulting from the consensus among the parties con- cerned was section 117 of the new Copyright Act of 1976, providing in

substance that the law pertaining to computer uses of copyrighted works

A-67
in effect on December 31, 1977 (the day before the new Act becomes

effective) would continue to be in effect under the new Act. Section 117 states that the new Act --

"does not afford to the owner of copyright in a work any

greater or lesser rights with respect to the use of the work

in conjunction with automatic systems capable of storing,

processing, retrieving, or transferring information, or in

conjunction with any similar device, machine, or process, than

those afforded to works under the law, whether title 17 or

the common law or statutes of a State, in effect on December 31, 1977, as held applicable and construed by a court in an action brought under this title."

What the applicable law now in effect may be is uncertain, but it appear

to be unlikely that any major issue of computer use of copyrighted works

will require a decision in the very near future.

A. 4. 1.2 Interested Groups . The wide range of interest groups having a financial, professional, or service interest in the generation, dissemination or use of scientific and technical information that might be

used in computerized systems is reflected in the list of persons and

organizations by or for whom testimony was presented on the issues of

computer uses, or whose interests were referred to, during the Congressional hearings on the copyright revision bills. The interest groups

identified in those hearings and in other literature on the subject

include:

-- Authors of textual, graphic, and other kinds of works in

the various field of science and technology.

-- Commercial publishers and nonprofit publishers (such as scientific societies) of journals in the various fields of

science and technology. These journals appear to be the

copyrighted works most used in scientific and technical

research.

-- Commercial publishers and nonprofit publishers (such as university presses) of books, monographs, graphic and

other materials of a scholarly or informational character.

Included here would be the publishers of cyclopedic works

and educational materials.

-- Producers and publishers of compilations of bibliographic

and factual data.

-- Libraries, especially large research, university, and

industrial libraries.

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-- Educators and students, especially at the college and

university levels.

-- Industrial and nonprofit research organizations and individual researchers, including professional practitioners

and societies, in the various fields of science and technology.

-- Producers of computer hardware and software.

-- Organizers and operators of computerized information service

systems

.

— Commercial indexing and data search services.

-- Other specialists in computer and information technologies.

These groupings could, of course, be arranged in many other ways, and

there is considerable overlap among the groups as listed above. For

example, educators or researchers may also be authors; some journal

publishers also publish compilations of data; and a future may be

envisioned in which publishers or libraries are also the operators of

computerized information service systems.

A. 4. 2 SCOPE OF THIS SECTION

A. 4. 2.1 Computer Programs . We have referred above, in section A. 2.7

of this r-eport, to the availability of copyright protection for com- puter programs. The broad question of protection for computer programs

was not intended to be a primary subject of this report; but it is tangential to some of our main subjects; and we will supplement the earlier

reference to their copyrightabil ity with a brief review below, in

section A. 4. 3, of the extent of protection afforded to computer programs

by copyright. Because, as we shall see, copyright protection is limited

essentially to copying the program as written, broader protection under

patent principles, extending to the process or algorithm embodied in

the program, has been advocated by some parties but has been opposed

by others. The issues of protecting computer programs under patent

principles, or by contracts based on the law of trade secrets which

some program producers have relied upon, are completely outside the

scope of this report.

A.4.2.2 Data Bases . The much-heralded "information explosion" -- the

massive proliferation of published material during the last few decades -- has greatly emphasized the need of scientific and technical

A-69
researchers for two capabilities; first, they must be enabled to learn

of, and to segregate from the steadily growing flood of published material, principally journals, those particular articles that appear to

be pertinent to their fields of research and to their current inquiries; and second, having identified the articles that appear to be pertinent, they must be enabled to obtain copies of those articles for

study.

The conventional effort to meet the first need — identifying the pertinent articles -- has been to compile and publish in printed form

various kinds of bibliographic indexes and abstracts of the mass of

published articles. These bibliographic publications have been indispensable research tools; but even in any one specialized field, a researcher seeking comprehensive coverage of the pertinent sources would need to review a number of indexes and collections of abstracts,

which he would generally not be able to do efficiently and might often

not be able to do at all, because of the high cost of acquiring all or most of the relevant bibliographic publications, and because it

would take too large a portion of his working time to review all of

the accessible bibliographic publications and identify the articles of

interest to him.

Computer technology has offered a means of solving this problem. Bibliographic indexes and abstracts can be prepared or reproduced in the

form of machine-readable data bases and placed in computerized information systems. Such computerized systems make it possible for a re- searcher to find and select, quickly and with a high degree of accuracy,

from the mass of articles indexed and abstracted in the data bases,

those which appear to pertain to the particular subject of his research.

A large assemblage of data bases, coupled with a modern telecommunication system and available terminals, can enable researchers located at a distance to make a fairly comprehensive search, in a very short time,

of the published articles in their specialized fields.

Several such data base systems are now in operation and some of them

include copyrighted data bases leased by the system from the copyright

owners. Data base systems of this character present prime examples of

computerized information systems using copyrighted material. Many of

the copyright questions that are seen as likely to arise in connection

with the use of copyrighted material in computer systems can be posed

in the context of data base systems. Those questions will be considered

in relation to data base systems in section A. 4. 4 of this report.

A.4.2.3 Supplying Copyrighted Documents . The second of the researcher's

needs — to obtain the full text of the articles he finds pertinent --

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presents a different situation. Even though the costs of computer

storage of textual materials can be expected to be reduced very

substantially over the next decade or two, the cost of full -text com- puter storage might still be extremely high as compared with other

effective means of storing a library of many articles from which copies

could be provided as needed. Such other methods would include, for

example, the storage of articles in microform from which reproductions

(either in microform or in printed pages) could be supplied readily

and at small cost by mail.

It seems highly probable that the supplying of copies of journal articles as needed by researchers will continue, for a long time to come,

to be a function primarily of the publishers or their licensees.

Several commercial organizations, operating under licenses from a large number of publishers, are now in the business of supplying copies

of documents on order. A few of these organizations provide a data

base search service, and supply copies of documents in conjunction with

that service. Such arrangements will probably expand.

Insofar as publishers and their licensees do not fulfill the function

of supplying copies of documents adequately and expeditiously, libraries will no doubt continue to be called upon to supply "photocopies".

(Perhaps a library maintaining a large collection of journals will be

an adjunct to a computerized data base system.) In that case, the

copyright questions relating to the supplying of copies of articles to

researchers will be those pertaining to library photocopying. We have

already referred briefly to the copyright aspects of library photocopying in section A. 2. 5 of this report. Further consideration of

that subject is beyond the scope of this report, except for the related

matter (which pertains also to computer storage and retrieval of copyrighted works) of the possibility of establishing central clearinghouses

for the mass licensing of copyrighted works for reproduction. The

subject of clearinghouses will be considered in section A. 4. 6 of this

report.

As indicated above, it does not seem likely that computer storage of

any large mass of documents will be common in the foreseeable future . However, there have been a number of instances of full -text input

of copyrighted works into computers for various purposes such as analysis or indexing of the work, or reproduction of all or parts of

the work for review. And there are a few instances of computer storage

for retrieval of a fairly large volume of documentary material. Some

computerized law research services, for example, contain the full text

of many statutes and court decisions (which, it may be noted, incidentally, are not subject to copyright) together with related notes, abstracts, and commentaries (which may be subject to copyright).

A-71
We shall assume that full -text input of some kinds of copyrighted

material will become more common eventually. As previously mentioned,

many of the copyright questions that might arise in connection with

full -text storage of copyrighted works will be similar to those that

will be discussed in the context of data base systems in section

A. 4. 4 below. The questions that we see pertaining specially to fulltext storage and retrieval will be reviewed in section A. 4. 5.

A. 4. 3 COPYRIGHT PROTECTION FOR COMPUTER PROGRAMS

As we have noted earlier, in section A. 2. 7 of this report, computer

programs (i.e., the series of instructions which are considered to

constitute a literary work) are subject to copyright protection. The

doubt that was previously expressed about their copyrightabil ity

(stemming from the fact that in the machine-readable form in which

programs are distributed they are not visually perceptible) has been

removed by the new Copyright Act of 1976, especially by section 102(a)

which reads:

"Copyright protection subsists, in accordance with this title,

in original works of authorship fixed in any tangible medium

of expression, now known or later developed, from which they

can be perceived, reproduced, or otherwise communicated,

either directly or with the aid of a machine or device."

The protection afforded to computer programs by copyright, however, is

limited. The exclusive rights of a copyright owner to "copy" and

"publish" his work, as provided in section 1 of the 1909 Copyright Act

still in effect, would apply to computer programs. These same rights

are embraced by the provisions in section 6 of the new 1976 Act giving

the copyright owner the exclusive rights to "reproduce the copyrighted

work in copies" and to "distribute copies ... of the copyrighted work

to the public."

What constitutes "copying" or "reproduction" may be a matter of fine

distinctions. Infringing reproduction would, of course, include full,

literal copying of the work as written, but it is not confined to

this. Copying of a substantial and material part of a work would be

an infringement, and so would copying with slight changes. Tracking of

the substance and sequence of the steps set forth in a program may

constitute infringement, even though many superficial changes are made

(as in an effort to disguise the fact of copying).

On the other hand, it is a basic principle of copyright law that the

ideas or concepts embodied in a work, even if they are original with

A-72
the author, are not protected against use in the independent work of

another author. In other words, it is only the author's original

"expression" or exposition that is protected against copying. Copyright does not preclude others from using the know-how they learn from

a copyrighted work in their own works. Thus, in the case of computer

programs, copyright would not protect the processes or techniques

developed to make the program operative and revealed in the program.

This is reflected in the provision in section 102(b) of the new 1976

Act reading:

"In no case does copyright protection for an original work

of authorship extend to any idea, procedure, process, system,

method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work."

The protection afforded by copyright against reproduction may be of

little or no significance with respect to programs designed specially

for a particular user. Such protection may be quite valuable, however, for a program that would have a market of many users and could

be reproduced cheaply in the absence of copyright.

A. 4. 4 DATA BASE SYSTEMS

A. 4. 4.1 Copyright Protection for Data Bases

A. 4. 4. 1.1 Copyrightabi 1 i ty . Data bases are compilations of data

consisting typically of bibliographic indexes -- words and phrases

identifying the subject content of published documents -- and abstracts

of documents describing their subject content more fully. Data bases

may also consist of compilations of factual data such as mathematical

or scientific formulas or statistical tables. Compilations of various

kinds of data are traditional subjects of copyright protection. Both

the Copyright Act of 1909 (in sections 5(a) and 7) and the new Act of

1976 (in section 103) mention compilations explicitly as a category of

copyrightable works. In section 101 of the Act of 1976 a "compilation"

is defined as "a work formed by the collection and assembling of preexisting materials or of data that are selected, coordinated, or arranged in such a way that the resulting work as a whole constitutes

an original work of authorship."

As reflected in this definition, the authorship that makes a compilation copyrightable lies in the labor, skill, and judgment involved in

A-73
selecting the pertinent data and organizing and arranging the mass of

selected data into a systematic and useful whole. Thus, while the

individual items in a compilation are not subject to copyright in themselves, the collection as a whole, or any segment of it large enough

to be the product of selection and organization by the author, would

be protected by the copyright against unauthorized reproduction.

Compilations of various kinds of data -- including bibliographic indexes

and abstracts -- are well known as printed publications and have generally been copyrighted in that form. A number of them are now being

issued also in machine-readable copies and this trend seems to be growing. It is now possible also to compile indexes and other data by the

use of computers, and there is no apparent reason why a data base so compiled, in machine-readable form, would not be copyrightable.

As reported in the February 1977 issue of Information Action (a publication of the Information Industry Association) : "the number of data

bases available for on-line access has doubled in the last year...

In 1965, 24 machine-readable, bibliographic data bases covering 880,000

documents existed. In 1975, the total was over 160 covering 46 million

documents."

Many of the existing data bases are covered by copyright but others are

not. Several of them have been produced by the U.S. Government and

are therefore not copyrightable. Some producers of data bases apparently rely upon their contractual arrangements with the systems to which

their data bases are leased for protection of their proprietary rights.

~ , A. 4. 4. 1.2 Copyright Notice on Data Bases . In order to maintain

copyright protection, the published copies of a work are required by

the statute to bear a notice of copyright in a prescribed form,

"affixed to the copies in such manner and location as to give reasonable notice of the claim of copyright" (Act of 1976, section 401).

Some commentators have anticipated difficulty in meeting this requirement in the case of machine-readable copies such as magnetic tapes.

Their concern on this score may have been due in large part to the less

flexible language of the notice provisions in the 1909 statute (section

20) which was phrased in terms of printed publications. In any event, we see no real difficulty in affixing the required notice to the magnetic tapes (or other machine-readable copies). The notice could be

incorporated in the system software so that it would appear in any

printout. And even assuming that an eye-readable notice should be

affixed to the tape copies, it seems reasonable to expect the tape

copies, or a container in which they are housed, to bear an eye-readable

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label showing the title which identifies the work on the tape; the

copyright notice could readily be placed on that label. It might be

added that any special problems regarding the placement of the notice

on tape copies could be resolved under the Act of 1976 by the Register

of Copyrights who is authorized (by Section 401(c)) to prescribe

"specific methods of affixation and positions of the notice on various

types of works that will satisfy this requirement."

A similar problem concerning the copyright notice occurs when some

part of a data base is printed out from a computerized system in re- sponse to a user's inquiry. It is not clear whether the notice would

be necessary on each reproduction of a relatively small number of

items in a data base. It is arguable, we believe, that the reproduction of a small part of the collected data is not such a published

copy of the work as would call for the notice; and this argument would

be more cogent where the subscribers to the computer system's service

were informed in advance that certain of its data bases were copyrighted. If it is thought to be necessary or advisable to have the

notice appear on each printout of any part of a data base, this appears

to be feasible. The data base would normally be identified by its

title in the printout, and the computer could be programmed to include

the copyright notice in every printout of the title.

A. 4. 4. 1.3 Deposit of Copies for Registration . Registration of a copyright may be essential to its effective enforcement against

infringers. Under the Act of 1909, registration is a prerequisite to

maintaining a suit for infringement (section 13) and it facilitates

proof of the validity of the copyright claim (section 209). The 1976

Act has provisions to the same effect (sections 411 and 410(d)), and

provides in addition that awards of statutory damages and attorney's

fees (special remedies that make enforcement of the copyright more

effective) are to be granted only when registration has been made (section 412).

To make registration, the deposit of two copies of the work as published

is required under both the 1909 Act (section 13) and the 1976 Act

(section 408(b)). That requirement has been met readily for printed

compilations of data, and printed copies would apparently suffice for

deposit where the compilation has also been produced as a data base in

machine-readable form. But if a data base were prepared only in

machine-readable form, the deposit of copies could be troublesome, or

at least burdensome, if, as the 1909 Act has been thought to require,

the copies deposited had to be visually perceptible. The resolution of

this problem has been made possible by the provisions in the Act of 1976

(section 408(c) reading --

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"The Register of Copyrights is authorized to specify by

regulation the administrative classes into which works are

to be placed for purposes of deposit and registration,

and the nature of the copies or phonorecords to be deposited

in the various classes specified. The regulations may

require or permit, for particular classes, the deposit of

identifying material instead of copies or phonorecords..."

A. 4. 4. 1.4 Supplements to Update Data Bases . Bibliographic data

bases must be brought up to date from time to time by adding to them

new index entries and citations for more recently published articles.

Some observers have seen difficulties in complying with the requirement

for deposit of copies with respect to such supplemental additions.

Printed publications with supplements issued serially, such as looseleaf information services, are well known. The usual procedure for

them has been to publish each supplemental issue as a new work in itself with its own copyright notice, and to deposit copies of each supplemental issue for registration as a separate work. Alternatively,

an entire new edition of the work as revised to include the supplemental additions could be published, and copies of the new edition

could then be deposited. Either of these procedures would seem to be

feasible for supplements compiled periodically for addition to a data

base, though the latter procedure of publishing an entire new edition

may be expensive.

It might be noted also that when supplemental items are merged into a computer-stored data base, coverage of the new material by copyright

might require changing the year date in the copyright notice appearing with the data base in its earlier form. But even if the notice is

left unchanged, copyright protection of the content of the data base

in that earlier form would not be affected, and this may be adequate

protection for all practical purposes as long as the newly added material could not be used without some of the earlier material. When

the volume of new material added by updating over a long period of

time becomes a major part of the entire data base, reissue of the data

base in a new edition might be found appropriate.

A. 4. 4. 2 Compiling Data Bases

A. 4. 4. 2.1 Bibliographic Indexes . The process of compiling bibliographic indexes involves the following steps: obtaining copies of the

documents to be included in the index, scanning those documents and

selecting from them the key words and phrases to be listed in the index

as subject headings, perhaps inserting other subject headings judged

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by the compiler to be needed as cross-references, and arranging the

subject headings together with citations to the documents in an alphabetical or other orderly arrangement. Traditionally, this process has been, and generally still is, performed manually through

the exercise of human effort and skill, and the completed index is

published in printed form.

It is now possible to perform this process and prepare an index of some quality by using a properly programmed computer, but with this

difference: The documents to be indexed must be in machine-readable

form to be processed by the computer.

As long as the indexer uses authorized copies of copyrighted documents,

there is ordinarily no copyright problem in the manual compilation of

a bibliographic index. Scanning of the copies, the extraction of key

words and phrases as subject headings, and the arrangement of those

headings with citations to the documents, do not constitute infringement of the copyright. No copy of the substance of the document is

made in this process, nor would the resulting index be considered an infringing copy or derivative work since it would not convey the essence or meaning of the work embodied in the document.

Similarly, if a machine-readable copy of a copyrighted document used

for indexing by a computer was obtained from the publisher,* preparation of the index by the computer would seem to involve no infringing

act. A publisher who supplies a machine-readable copy of a work to a computer operator would impliedly authorize the use for which it was

intended: Its input into the computer. The subsequent processing of

the document by the computer in indexing it would be the same in

character as the processing done in manual indexing, which, as pointed

out in the preceding paragraph, would not involve any infringement of

the copyright.

When a machine-readable copy is made available by the publisher, it

would seem reasonable to expect the computer operator to acquire such a copy for his machine indexing. But if, instead, he chose to make his own machine-readable copy (which would seem to be unlikely since making

* The references made here and below to the publisher as the supplier

of copyrighted material assume that he is the copyright owner or the agent of the copyright owner.

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his own would usually cost more than obtaining one from the publisher),

he would then be making a reproduction of the document in apparent

violation of the copyright owner's exclusive right to "reproduce the

copyrighted work in copies" (Act of 1976, section 106 (1)).

If a machine-readable copy is not made available by the publisher of a copyrighted document, an indexer would appear to be unable to use a computer in indexing that document unless he obtained permission from

the publisher to make and use a machine-readable copy. To seek permission from a large number of individual publishers could be a very

time-consuming and costly procedure, so much so perhaps as to discourage

computer indexing of any large number of documents. Some persons interested in fostering the development and use of computers have suggested

that in this situation, the making of a machine-readable copy and its

input into the computer for the sole purpose of preparing an index

should not be regarded as an infringement but should be treated as a fair use. They argue that, as long as the publisher does not offer

such copies, making one for a use which is not itself an infringement

would not injure the copyright owner in any way and would not displace the potential sale of a copy of the work. In fact, they say,

the inclusion of the work in the index would create some demand for

copies. Alternatively, some of the same persons suggest, the statute

should provide for a compulsory license to make and use a machinereadable copy in situations of this character.

A. 4. 4. 2. 2 Abstracts in Data Bases . Bibliographic data bases may

include, in addition to index headings and citations, abstracts of

the contents of the cited documents. These abstracts aid the researcher

in determining more precisely the relevance to his subject of the

documents cited in connection with the pertinent index headings.

Typically, the abstracts in a data base are similar to a table of con- tents in that they are brief identifying statements of the subjects

dealt with in the document. Such abstracts of copyrighted works do

not reproduce the substance of the work and would not be a substitute

for the work in conveying the essential information to be derived from

reading the document itself. Accordingly, it would seem that such

abstracts, like indexes, may be made freely without regard to the

copyright in the work.

On the other hand there are so-called "abstracts" that are really

synopses or digests of the substance of the document, conveying that

substance so fully that a researcher's need for the information in

the document might be satisfied by his reading of the "abstract" alone.

This kind of synoptic abstract would seem to constitute a derivative

work under the definition in section 101 of the Act of 1976 reading in

part:

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"A 'derivative work' is a work based upon one or more preexisting works, such as ... (an abridgement (or) condensation ..."

A person who makes an "abstract" amounting to a condensation of a copyrighted work infringes upon the exclusive right of the copyrightowner

to "prepare derivative works based upon the copyrighted work" (Act of

1976, section 106 (2)).

It is evident that there will be difficulty in some borderline cases in

determining whether a particular abstract would be considered a mere non-infringing identifier of the subjects covered in a document, or an infringing condensation of the document.

The author abstracts accompanying many copyrighted articles are often

sufficiently full in themselves to be protected as a copyrighted com- ponent of the work, so that their unauthorized reproduction would

infringe the copyright.

In sum, the compiler of a data base would risk being charged with copyright infringement if his data base included abstracts prepared by

him that could be considered condensations of copyrighted works, or included author abstracts of some length.

A. 4. 4. 3 Putting Copyrighted Data Bases into Computer Systems

A. 4. 4. 3.1 Where Publishers Offer to Supply Machine-Readable

Copies . As shown by the preceding examination of the operation of

existing computerized information systems, machine-readable data bases

are being produced by many of the publishers of the compiled indexes

and abstracts making up the content of those data bases, and the com- puter systems obtain their data bases from the publishers. Under this

established business practice, the rights of the system to use the

data bases and supply information extracted from them to their subscribers, and the compensation to be paid to the publishers, are settled by the contracts between the parties. As such contracts become

common, a standard pattern of terms and conditions, shaped by the industry needs and experience, can be expected to evolve. The recognized

copyright problems that would otherwise be involved in the use of copyrighted data bases in computerized systems would generally be resolved

by such contracts. Nor would these copyright problems arise in those

instances where the computer systems are operated by the publishers

themselves.

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To be most effective, a bibliographic data base system should cover the

literature in any particular field of information as comprehensively

as possible. The rapid expansion of published information has been,

and no doubt will continue to be, accompanied by a corresponding expansion in compiled indexes and abstracts. As computerized data base

systems become more highly developed and more commonly used, the publishers of more of the printed compilations of bibliographic data will

no doubt make them available in machine-readable form to meet the demand

for their use in computerized systems. To the extent that this occurs,

the copyright problems pertaining to the use of data bases in such systems will continue to be settled by contractual arrangements.

Where the publisher offers to supply a machine-readable copy of a copyrighted data base wanted by an operator for inclusion in his system, we suggest that the operator should be expected to obtain it from the publisher. For the operator to make his own machine-readable copy in that

situation should constitute an infringement.

A. 4. 4. 3. 2 Where Publishers Do Not Offer Machine-Readable Copies . It may be supposed that instances will arise in the future when a large computerized information system, seeking comprehensive coverage

of some field, will wish to include in its data bases certain copyrighted compilations of bibliographic data that have been published

only in printed copies. No more than a few publishers would be involved

at any particular time and the system operator could identify them

readily. It would therefore seem reasonable in such cases to expect

the system operator to deal directly with the individual publishers.

The operator could ask the publisher to make and supply a machinereadable copy of the compilation for the operator's use under a con- tract, or, as an alternative, to grant permission to the system operator to make his own machine-readable copy for such use. It seems probable that one or the other of such requests would be acceded to by

the publisher upon terms mutually agreed to.

But suppose further that the publisher refuses to accede to either

request, or simply fails to respond to the system operator's inquiry.

In light of the value for research of having comprehensive coverage

in data base systems, there would seem to be a valid argument in favor

of providing some kind of compulsory license to permit a system operator to make and use a machine-readable copy of a copyrighted compilation of data where the publisher refuses or fails to provide such a copy or to grant permission to the operator to make one for his own

use, within a reasonable period of time after being requested to do so. Under the compulsory license, of course, the system operator would be

required to pay equitable compensation to the publisher.

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A. 4. 4. 3. 3 Where Third Persons Offer to Supply Machine-Readable

Copies . A machine-readable copy of a copyrighted data base is not

likely to be available to the operator of a computerized system from

a source other than the publisher (or his agent). Publishers who

supply machine-readable copies for use in such systems will normally

not sell a copy to a system operator so as to give him ownership of

it, but will lease it to him under an arrangement which expressly con- fines its use to that system and precludes its being made available

to anyone else. This practice is necessary because of the so-called

"first sale doctrine" which is well established in the copyright law.

Under that doctrine, the copyright owner's control over the distribution of copies of his work ends, with respect to any particular copy,

when he makes the first sale of that copy. The doctrine is reflected

in section 109(a) of the Copyright Act of 1976 which reads:

"...the owner of a particular copy or phonorecord lawfully

made under this title, or any person authorized by such

owner, is entitled, without the authority of the copyright

owner, to sell or otherwise dispose of the possession of that

copy of phonorecord."

How the "first sale doctrine" operates is best illustrated in the familiar setting of the sale of a copy of a book by the copyright owner. The purchaser of that copy becomes its owner. He is precluded by the

copyright law from reproducing the work in other copies (either in its

original form or in a derivative form) and from performing or displaying the work publicly (except as specially permitted by the copyright

statute); but as the owner of the particular copy purchased, he is

free to sell, lend, destroy, or otherwise dispose of that particular

copy as he sees fit.

Machine-readable data bases have no use other than in computerized

information systems, and the number of prospective customers for copies

is limited. The publisher must therefore seek to prevent the system

operator to whom he supplies a machine-readable copy from passing that

copy on to another system operator. This is done by leasing copies

under specified restrictions against allowing others to use them.

If leasing copies in this manner, rather than selling them, is known to

be the usual practice, a system operator who is offered a machinereadable copy of a data base by another system operator, or by anyone

other than the publisher, would have reason to be suspicious of the

legitimacy of such offer. He would therefore be required to investigate the offeror's right to claim lawful ownership of the copy and to

dispose of it, and he would subject himself to liability if he obtained

the copy from an offeror who was acting in violation of the rights of

the copyright owner.

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Even assuming that a system operator could lawfully obtain a machinereadable data base for use in his system from someone other than the

publisher, he would probably have little or nothing to gain from doing

so. He would still need to input the data base into his system and

to provide the output of material from the data base to the users of

his system. It seems virtually certain that at some stage during

these operations he would have to deal with the publisher to obtain a license for these uses of the data base. The terms of the license

might well be much the same as if he had leased the data itself from

the publisher.

A. 4. 4. 3. 4 Input of Data Base as Use Subject to Copyright . As we

have observed above, in the usual case where the operator of a com- puterized information system obtains a machine-readable data base

from the publisher, the copyright license he might need to use the

data base in his system would no doubt be included in his lease agreement with the publisher. This would apparently be true also in the

situation mentioned above where a system operator arranges with the

publisher of a printed compilation of data to make his own machinereadable copy for use in his system.

There may be some special circumstances in which a system operator

acquires a machine-readable copy of a copyrighted data base without

having obtained a license for its use in his system. As an example

of this unusual situation, we have mentioned above the possibility of

an operator's acquiring a machine-readable data base from a person

other than the publisher. The question would then arise as to whether

the system operator should be required to obtain a license from the

publisher before he puts the data base into his system or need only

arrange thereafter to pay the publisher for output.

In the extended discussion of a similar question heretofore (in relation to full-text input of documents), it has generally been agreed

that the copyright owner of works placed in and retrieved from com- puter systems should be entitled to compensaion for such use of his

works. Differing views have been expressed, however, as to whether the

copyright owner should be entitled to payment for input or only for

output. The arguments advanced in the past discussion for free input

have been concerned largely with the input of documents for experimental

purposes during the developmental stages of computer systems, or for

non-infringing purposes such as analyzing or indexing a work which do

not entail any reproductive output of the work.

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With regard to bibliographic data bases, the only purposes of their

input into a computerized system is to make them available for output

in pertinent portions in response to inquiries. Assuming that the

copyright owner is entitled to payment, at some stage of the inputoutput process, for the use of his data base in the system, three

considerations seem to us to be of prime importance:

(1) It is more practical for the parties concerned to agree

upon the payment to be made, and the other conditions

relating to the use of the data base in the system,

before the process of use begins -- that is, before

input. This would be true even if the amount to be paid were made dependent in part upon the volume of output.

To defer negotiating the terms and conditions of use

and payment until after the operator has incurred the

trouble and expense of input could be awkward and perhaps abortive if the parties then find it difficult to

reach an agreement.

(2) Where the data base is not obtained from the publisher,

he would not be assured of learning of its use in the

system, and would not be able to exercise any control over its use, unless the system operator is required to

deal with him before input takes place.

(3) There may be room for dispute as to whether the output,

which would ordinarily consist of no more than a fragment of the content of the data base, amounts to a fair

use rather than an infringing reproduction of the work.

(We shall have more to say about this later.)

These three considerations, among others, would seem to justify the

conclusion that a license to use a copyrighted data base in a computer

system should be negotiated before input.

A. 4. 4. 4 Output from Data Base

A. 4. 4. 4.1 Normal Output . The output of material from a data base

in a computerized system may be in the form of a printout ("hard

copy") or in the form of a display on a cathode ray tube (CRT). There

was formerly some question as to whether a CRT display of copyrighted

material would constitute an infringement of the copyright owner's

exclusive right to make a "copy" of his work. But the new Copyright

Act of 1976 provides, in section 106(5), that the public "display" of

a work, such as would appear on a CRT, is among the exclusive rights

of the copyright owner; and under the definition in section 101, a

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display is made "publicly" if (among other things) it is transmitted

"to the public, by means of any device or process, whether the members of the public capable of receiving the ... display receive it in

the same place or in separate places and at the same time or at different times."

The output of material from a data base will usually consist, in each

individual instance, of no more than a few of the great mass of index

entries, citations, and abstracts making up the copyrighted compilation

of data. As mentioned earlier, it may be contended that the extraction

of a few such items from a data base is a fair use rather than an infringement of the copyright. To appraise this contention, the criteria of fair use as stated in section 107 of the Act of 1976 should be

recal led:

"In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall

include--

(1) the purpose and character of the use, including

whether such use is of a commercial nature or is

for nonprofit educational purposes;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in

relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for

or value of the copyrighted work."

It may be conceded that the taking of a few items from a data base by

an individual researcher on any one occasion may meet the criteria of

fair use. The posture of the system operator, however, appears to quite

different in this regard. The operator is supplying many portions of

the work, though each may be small in itself, to many persons; the

aggregate is quite substantial. He does so for commercial purposes.

The repeated use of the work in small portions is the normal use for

which the work was intended. And finally, since such output fulfills

the user's need for the work, it displaces what might otherwise be

potential sales of copies of the work.

In sum, while the output of a small fragment of a data base on any one occasion would have the indicia of fair use, the aggregate of the output

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of fragments on many occasions in the operation of a computerized

system can be seen to constitute an infringing activity for which a license from the copyright owner should be required.

Here again, the matter of copyright infringement by the system operator

will be set at rest where the operator contracts with the publisher

for use of the data base in his system. It may be assumed that such a contract would cover output as well as input. In the lease agreements

known to us for the use of data bases in computerized systems, provision is made for an initial payment to the publisher for the lease of

the data base and additional periodic payments based upon the volume of

output.

A. 4. 4. 4. 2 Extraction of Bulk of Data Base by User of System . A

different question may arise in relation to the users who extract data

base material from a computerized system. The system will ordinarily

provide users with the capability of extracting as much of the material

in a data base as they wish and are willing to pay for. It is conceivable that an individual user might take out an entire data base, or so much of it as to constitute an infringing reproduction usable as an abbreviated data base in itself. He might do so, for example, in

order to have his own data base for his future use, or to supply a data

base for use by others.

The act we are assuming here by the user may be characterized as a theft of the data base and is clearly an infringement of the copyright.

The problems are practical ones: what can be done to prevent such a theft, and how can it be detected?

The answers appear to lie in the way the system deals with its users

and the way it monitors the volume of their uses. In current practice,

as we understand it, a system will make some provision, in its agreement with each user, that purports to limit the extent of the material

to be taken from any data base, and to restrain the user from supplying

the material taken to anyone else. Moreover, since the fees charged

for use of each data base in the system are based on the length of

time that the user is on-line, or on the number of items included in an off-line report, the system must keep records of the extent of uses made of each data base. If the recorded use of a data base seems sus- piciously excessive, the system could report the facts to the publisher

for further investigation. Publishers might require, in their con- tracts with system operators, that such cases be reported to them.

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Another factor serving to inhibit the theft of a data base by the on- line user of a computerized system, under present-day conditions, is

the very high cost of using the system for the length of time it would

take to do so. It might be less expensive to lease the whole data

base from the publisher.

A. 4. 4. 5 Exclusive and Compulsory Licenses for Use of Data Bases . In some instances publishers of data bases have leased them exclusively

for use in one computerized information service system, thereby making

them unavailable for use by any other such system. This practice of

exclusive licensing may have either of two results that might eventually prove to be undersirable.

First, if each of several competing systems has its own exclusive group

of data bases in some particular subject area, no one system will be

able to provide researchers with comprehensive coverage of that area. The consequent necessity for searching through more than one system -- perhaps through several of them -- will probably diminish the convenience and effectiveness and increase the cost of bibliographic searches,

as compared with a single search through one comprehensive system.

Second, exclusive licensing of data bases may tend to foster the mono- polization of data base search services by one or two giant systems.

Whether the prevention of such a monopoly or the regulatory control

of a permitted monopoly as a public service organization, would be

preferable is an open question.

From the standpoint of providing maximum service for researchers, and

at the same time preventing the development of a monopoly in the

business of providing bibliographic search services, the ideal situation might be the development of a number of competing systems each of

which can offer comprehensive coverage of any subject area. One way of

encouraging such a development would be to provide for a compulsory

licensing scheme under which a data base made available for use in any

one system would thereupon become available for use in all other

systems

.

A compulsory license of this character would be similar to the one (the

first of its kind) that was established by the Copyright Act of 1909

for the making of mechanical sound recordings of copyrighted music.

(See sections A. 2. 3.1 and A. 2. 3. 2 of this report.) In that precedential

case the compulsory license scheme was prompted by the threat of a monopoly being established in the manufacture of such recordings of

music. This and other compulsory licensing schemes will be discussed

later in section A. 4. 6. 3 of this report.

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Whether a compulsory licensing scheme for the use of data bases in

computerized information systems is needed, and whether it would be

desirable, are debatable issues. There is no doubt much to be said in

favor of allowing market forces to operate normally in the leasing

of data bases and the development of information systems. We merely

mention the proposition of compulsory licensing here as a possibility

that may be worth consideration in the future.

A. 4. 5 FULL-TEXT STORAGE AND RETRIEVAL OF DOCUMENTS

A. 4. 5.1 Preliminary Observations . A few years ago there was a good

deal of speculative discussion of the possibility that, at some time in

the future, computer technology will have developed to such a farreaching extent that computer systems might become the principal storehouse of the world's published knowledge. In this dream of a brave

new era, computer systems were pictured as replacing printed copies

of books and journals as the primary means of recording and disseminating works of authorship. Computer systems, in conjunction with

modern communications technology, would then become the main source of

documents for reference or reading.

By now, this dream has receded into the far distant future. It is

generally acknowledged that the full-text storage of a large mass of

documents in a computer system would be far too costly to be feasible

now or in the predictable future. And as long as copies of documents

are made readily available in some other manner -- as in printed or photocopied pages or in microform reproductions --, there would be no apparent reason to incur the very high cost of using computers for

full-text storage and retrieval of a vast collection of documents.

To a limited extent, however, some complete documents are now being

put into computer systems for various purposes, and this practice may

well expand rapidly in the coming years. Moreover, it may be important

to consider now the problems that can be anticipated with respect to

the future possibility of computer storage and retrieval of the fulltext of copyrighted documents on a large scale.

The anticipated problems relating to the use of copyrighted documents

in computer systems have been discussed at some length in the Congressional hearings on the copyright revision bills, especially in the

Senate hearings in 1967, and in more recent articles. The discussion

of those problems has been concerned primarily with the following

questions:

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(1) Under what conditions should the input of copyrighted

documents into a computer system be deemed to infringe

the copyright?

(2) Under what conditions should the output of such documents

or portions of them from the computer system be deemed

to infringe the copyright.

(3) Where permission from the copyright owner is required

for the use of a document in a computer system, should

such permission be obtained before input, or should it

suffice to obtain permission before output?

A. 4. 5. 2 Input and Output of Documents as Infringement . It will be perceived that, in the main, the questions concerning the input and output

of copyrighted documents are substantially the same as those pertaining

to the input and output of copyrighted data bases. In fact, data

bases are a category of complete documents in themselves. Accordingly,

the discussion of these questions above in relation to data bases would

be applicable to the storage and retrieval of the full text of copyrighted documents in computer systems. As to input, see sections

A. 4. 4. 2.1 and A. 4. 4. 3.1 through A. 4. 4. 3. 4. As to output, see sections

A. 4. 4. 4.1 and A. 4. 4. 5.

One difference, however, may be noted. Whereas the output from a data

base will usually consist of a few only of the mass of items in the

copyrighted compilation of data, the output in the case of a document

will ordinarily be of the entire work. In the latter case there would

be no question of fair use. However, the user of a computer system

could not be charged with infringement for his extraction from it of a complete copy of a copyrighted document as long as the system is authorized to provide its users with such documents. But if he then used

the copy so extracted to make further copies of the document, he would

thereby be infringing the copyright. And if a person not entitled to use the system did so surreptitiously to produce copies of copyrighted

documents, he would be committing an infringement of the copyright as well as an offense against the system itself. It seems likely, however,

that wrongful acts of this nature would often escape detection. (Cf.

section A. 4. 4. 4. 2.)

One more point is in order here. We suggest that a publisher would be

well advised, when he licenses the input and output of copyrighted

documents in a computer system, to require the system to have its com- puter programmed to reproduce the copyright notice on each reproduction

of the work as output. (Cf. section A. 4. 4. 1.2.)

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A.4.5.3 Input or Output as Occasion for Obtaining License . We have

adverted earlier to the discussion, in the 1967 Senate hearings on the

copyright revision bill and elsewhere, of the question whether the input

of a copyrighted document into a computer system should require a lic- ense from the publisher, or whether input should be free though a license

will be required for output. The arguments advanced for free input,

enunciated mainly by members of the academic community, may be summarized as follows:

(1) Works may be put into computers for the purpose of a noninfringing manipulation of the work within the com- puter that will not result in any output of the work

itself. Known examples include the analysis of the

text of a work to show the characteristics of an author's

style or the frequency of word uses, or the preparation

of a concordance or index. Input for such noninfringing

purposes should be exempt from copyright.

(2) Input should be regarded as being merely the means of

making a work available to users, i.e., as being comparable to the noninfringing act of placing a copy of a work on the shelves of a library.

(3) Even when a work is input for the purpose of making it

available for output, its output may never be requested.

(4) Input of itself does not affect the publisher's market

for copies of the work.

(5) The copyright license fees payable to the publisher

should be based on the volume of output. No separate

fee should be charged in addition for input.

In refutation of those arguments, and in support of the proposition that

a license should be obtained before input, the following contentions

have been made on behalf of authors and publishers:

(1) Input for any purpose entails the machine-readable reproduction of the work. Such reproduction and input of the

work constitute a valuable use of the work, whatever the

purpose may be. There is no valid basis for exempting

such reproductions from the exclusive right of the copyright owner to make copies of his work.

(2) Libraries are generally expected to buy copies of the

published works they place on their shelves. Likewise,

computer systems should be expected to obtain the

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machine-readable copies they need for input, or to

obtain licenses to make them, from the publishers. If

free input implies that computer systems are free to

make their own machine-readable copies, the publisher's

potential market for such copies would be destroyed.

(3) When output is contemplated, input of itself, by making

copies of the work available as output, displaces potential sales of printed copies of the work.

(4) Licensing before input is necessary to enable the publisher to know that the work is being used in the system and to see that appropriate arrangements are made to

compensate him for such use.

(5) Since a license will admittedly be required for output,

practical considerations dictate that the terms of the

license, including the basis for assessing fees, should

be settled between the parties before input is effected.

As may be perceived from our earlier discussion relating to the input

of data bases, in section A. 4. 4. 3. 4, we are inclined to believe that

the weight of the argument comes down on the side of requiring lic- enses to be obtained before input.

A. 4. 6 BLANKET LICENSING AND COMPULSORY LICENSING FOR REPRODUCTION OF

DOCUMENTS

A. 4. 6.1 Need for Blanket Licensing Mechanism . The ideal of providing

researchers, through computerized data base systems, with bibliographic data relating comprehensively to all the published documents

pertaining to any particular fields of science and technology has been

mentioned in section A.4.2.2 of this report. Also mentioned there and

in section A.4.2.3 is the further need of the researcher to be able to

obtain expeditiously copies of the documents he identifies as being

pertinent to his inquiry. And we noted that the documents needed for

scientific and technical research are now mainly articles published

in journals.

If and when computer storage of documents should become practicable on

a sufficiently large scale to comprise complete libraries of virtually

all the documents in any subject area, there will be a compelling need

for some mechanism that will facilitate obtaining the licenses required

for input and output of the mass of copyrighted documents in such a com- prehensive library.

A-90
Meanwhile, the problem of supplying researchers with copies of documents on a comprehensive scale through other, existing sources,

including libraries and other information centers, is already with us.

(We have suggested earlier, in passing, that the time may not be too

far off when such document supply centers will be operated in conjunction with, or as adjuncts to, computerized data base systems.) A few

commercial organizations now supplying copies of copyrighted journal

articles have succeeded in arranging for licenses from a large number

of publishers. Libraries have been supplying photocopies of articles

from journals in their collection but, with respect to copyrighted

material, they have usually purported to do so within the limited

scope of fair use.

It is generally recognized that, for a document supply center wishing

to provide copies of articles from a large number of journals, the

process of seeking out, and obtaining licenses individually from, each

of the many publishers involved could be so time-consuming and costly

as to be impracticable. (At any rate, this is the widely and firmly

held consensus notwithstanding the success of at least two commercial

suppliers of copies of journal articles -- University Microfilms and

the Institute for Scientific Information -- in obtaining such licenses

for a large number of journals.) It is also generally agreed that the

publishers of copyrighted journals are entitled to be paid for reproduction of their articles (except for the limited reproduction permitted as fair use)

.

With two objectives in mind -- namely, to facilitate the mass licensing

of copyrighted material for reproduction by document supply centers,

and at the same time to provide for compensation to the publishers -- it has been urged that "clearinghouses" be organized through which

blanket licenses could be obtained for an entire catalog of the copyrighted journals of as many publishers as can be brought within the

organization, and lump-sum payments could be made for distribution

among the publishers.

There are two existing types of blanket licensing mechanisms in other

areas that might serve as prototypes for the blanket licensing of

reproduction of copyrighted journal articles. One is a voluntary type

of clearinghouse established by the copyright owners of musical com- positions for licensing public performances. The other is a compulsory

license plan established by the new copyright statute to permit the

use of copyrighted works en masse, upon payment of lump-sum royalties,

by CATV systems, jukebox operators, and educational broadcasters. We

shall now look at these two types of blanket licensing mechanisms in

turn.

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A.4.6.2 Voluntary Clearinghouses . Possibilities for establishing a voluntary clearinghouse for the blanket licensing of copyrighted

journal articles for reproduction have been under discussion, off and

on, for a number of years. The development of an acceptable plan has

been found to be beset with many difficulties. Two or three fairly

detailed plans have been proposed in outline and put aside as unsatisfactory. The discussions so far have hardly gone beyond attempts to

explore some of the possible bases on which such a clearinghouse might

be organized and operated, and to expose the difficulties that might be

encountered in establishing a workable mechanism.

A. 4. 6. 2.1 ASCAP and BMI as Models . In the discussions referred

to above, the clearinghouses operated by the American Society of Composers, Authors and Publishers (ASCAP) and Broadcast Music, Inc. (BMI),

have frequently been cited as possible models that might be adaptable

for the blanket licensing of reproduction rights in journal articles.

ASCAP is a voluntary membership association of writers and publishers

of copyrighted music. It was established to license and enforce the

rights of its members collectively in public performances of their

music. A few statistics taken from recent reports will indicate the

size and effect of its operation. Its membership consists of about

18,500 writers and 5,300 publishers of music. Its catalog of musical

compositions is constantly growing, and the number of compositions

covered by its licenses (a figure that is not announced) must now be

well in excess of a million. Its gross revenues from domestic licenses

is now over 80 million dollars per year, and from foreign licenses is over 13 million dollars per year. Its cost of operations in recent

years has run to about 19 or 20 per cent of its gross revenues. The

remainder of about 80 per cent is distributed among its writer and

publisher members under a rather complex formula in which the principal

basis for allocation is the estimated number of performances of each

member's works.

ASCAP issues licenses to a number of different classes of users. The

largest users, from which it derives a major portion of its revenues,

are the radio and television networks. Other classes of users include

local broadcasters, music and dance halls, orchestras and bands, hotels

and restaurants, wired music services, business establishments, etc.

ASCAP announces periodically a schedule into which its users are divided.

As required by consent decrees of the United States District Court for

the Southern District of New York, it must license all qualified applicants, all licensees in the same class are charged the same fees, and

any licensee or applicant may request the Court to review the fees

charged.

A-92
The royalty fee payable by a user is a flat sum per year for a blanket

license permitting his performance of any and all of the music in

ASCAP's catalog. Broadcasting networks supply ASCAP with logs identifying the compositions performed by them, and ASCAP conducts a sampling

of performances by some of its other licensees, and these are the bases

for ASCAP's determination of the allocation of its net revenues among

its members.

Two other organizations also license performances of music on a blanket

basis in much the same manner as ASCAP. One of them is Broadcast Music,

Inc. (BMI), which rivals ASCAP in the size of its operation. BMI is an incorporated organization which represents about 30,000 writers and

10,000 publishers of music in licensing a collective catalog of their

copyrighted music. Its catalog is reported to contain one million

compositions, and its gross revenues are about 50 million dollars per

year. Its payments to its members are based on contracts which are designed to distribute among them the net revenues of BMI after deductions from the gross for its expenses and reserves. Its fees charged

users, like those of ASCAP, are a lump sum per year and are uniform for

all the users in any class.

The third organization licensing performances of a collective catalog

of music is SESAC, Inc., a commercial company that contracts with

another smaller group of writers and publishers to license their copyrighted music. Its catalog is a relatively small one of special kinds

of music. Statistics concerning the size of its operation have not

been determined. Its fees charged licensees are also fixed at a lump

sum per year.

The effectiveness of ASCAP and BMI may be attributable in large part

to the following factors:

(1) The copyright owners of music have realized that they

cannot enforce their performance rights individually.

They have therefore felt compelled to join in collective organizations that can monitor and license perfor- mances for all of them as a group. As a result, the

combined membership of ASCAP and BMI, together with the

relatively small number of those affiliated with SESAC,

comprise the copyright owners of virtually all music

copyrighted in the United States.

(2) Users who obtain a license from each of the three organizations are virtually assured of the right to perform

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(except for dramatic performances which these organizations do not license) any and all of the compositions

they might choose to perform.

(3) Licensees are not burdened by the necessity for maintaining records of the compositions they perform. Fortunately for ASCAP and BMI, the largest source of their revenue from licenses, the broadcasting networks, do

maintain logs of the compositions they perform and supply

those logs to the organizations. Those logs, plus a limited amount of sampling of the performances by other

licensees, are sufficient for allocation of the fees collected by ASCAP and BMI among the individual copyright

owners.

(4) Licensees are required to pay only a lump-sum royalty

fee annually in a predetermined amount.

How far can these factors -- universal coverage; ease for users in

obtaining licenses and in accounting and paying for their uses; and

the ability of the organization without too much cost, to distribute

its revenues among the copyright owners on an equitable basis -- be

duplicated in an organization for the blanket licensing of copyrighted

journal articles? The answer to that question may determine the

feasibility of establishing such an organization.

A.4.6.2.2 Problem Areas . Attempts to plan a clearinghouse for the

blanket licensing of reproductions of journal articles run into a num- ber of problems. We are not undertaking to offer solutions to those

problems, or to propose any plan for such a clearinghouse. We shall

merely mention some of the major problems and some suggested approaches

to meeting them.

Perhaps the most difficult set of problems relate to reconciling several

imperatives: The basis on which licensees pay fees must be kept simple

to avoid expensive record-keeping; some information as to the identity

of the journals used and the number of uses may be needed to determine

how the fees collected are to be distributed among the publishers; the

operating expenses of the clearinghouse must not be so high as to consume too much of the fees collected.

Assuming that the sum to be paid by a licensee as fees is to be related

to the volume of reproductions made by him, how is that sum to be

assessed? To require licensees to keep records of each reproduction of

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individual articles would probably be excessively burdensome. For the

purpose of assessing the fees, perhaps it would suffice to have the

licensee report only the total number of units (e.g., articles or

pages) reproduced by him from all of the journals in the aggregate.

This would leave the problem of how the clearinghouse is to determine

what portion of its net receipts is to be distributed to each of the

publishers. Perhaps a limited amount of sampling would be enough for

this purpose. For example, each licensee might be asked to keep records

of the articles he reproduces during a short period of time such as one

or two weeks each year. Or those licensees only who are known to be

the large volume users might be asked to keep such records for somewhat

longer periods of time. Or perhaps such records kept by the licensees

could be dispensed with entirely if it were assumed that the proportionate volume of reproductions by all users from any one journal is

roughly equivalent to the proportionate volume of its subscriptions or

sales. And other alternatives could no doubt be thought of.

If record-keeping by the clearinghouse as well as by the licensee can

be kept to a minimum, there would seem to be a fair prospect that,

with fees fixed at appropriate but reasonable amounts, the clearinghouse would have enough net revenues to give publishers a significant

return.

Several other problems that may need to be resolved can be mentioned:

-- The publishers of scientific and technical journals (which we assume to be the material for which a clearinghouse

is most urgently needed) will have to be persuaded to join

the clearinghouse. Inclusion of nearly all of them may be

necessary to provide adequately comprehensive coverage.

If it can be shown that the proposed clearinghouse is

likely to become profitable within a few years, it should

not be difficult to enlist the publishers.

-- Some library groups have objected that blanket licensing

may result in their paying for what are now fair use reproductions. Perhaps the license fees can be so adjusted ad

to overcome this objection.

A clearinghouse licensing reproductions from most of the

existing copyrighted journals may be charged with operating as a monopoly under the antitrust laws. This problem

might be resolved by appropriate legislation granting an exemption, or by negotiations with the Department of Justice. . Precedents for a statutory exemption from the

A-95
antitrust laws are now found in the Copyright Act of 1976

(sections m(d)(5)(A), 116(c)(2), 118(b) and 118(3)(1)),

with respect to copyright owners or users acting as a group, or through a common agent, in negotiating and agreeing upon royalty rates and the distribution of lump-sum

royalty receipts among the members of the group.

A. 4. 6. 3 Compulsory Licensing . Compulsory licensing was originally provided for in the Copyright Act of 1909 as a device for preventing the

establishment of a monopoly. One manufacturer of phonorecords of

music, anticipating that the law would be revised to give the copyright

owners of music a new exclusive right to make recordings of their

music, had obtained agreements from the major music publishers to give

him exclusive rights to record all the musical works in their catalogs.

To prevent this potential monopoly. Congress provided in Section 1(e)

of the Act of 1909 that once the copyright owner permitted one company

to make a recording of his music, anyone else was permitted to make a similar recording upon payment of two cents per composition for each

record manufactured.

One result of this compulsory license provision has been the establishment of a central agency -- the Harry Fox Office -- through which most

of the music publishers issue licenses for the recording of individual

compositions. Record companies generally obtain such licenses from

the Harry Fox Office instead of exercising the compulsory license under

the terms of the statute, because the licenses issued by that Office

are more favorable than the statute in several respects.

The Harry Fox Office is an example of a centralized agency for licensing

the works of a number of publishers. It is no doubt more convenient

for licensees than would be the case if (without the compulsory license)

they had to negotiate for licenses with each publisher separately. But

it should be noted that the Harry Fox operation is not an example of

blanket licensing. It issues licenses for individual compositions as requested. It has a standard form of license agreement and a fixed

schedule of royalty fees applicable to all the compositions alike, but

licensees may, and often do, negotiate with the Office for reduced fees

in special cases.

The new Copyright Act of 1976 provides for compulsory licenses of a different character in three situations: For the performance of

music in jukeboxes, for CATV retransmissions of broadcast programs,

and for the use of certain works in noncommercial broadcasting. These

are examples of blanket licensing. The purpose of the compulsory

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license in these three instances is not to prevent a monopoly, but is

to avoid the difficulties that the user groups would encounter if they

had to obtain licenses from and pay fees to the individual copyright

owners.

A. 4. 6. 3.1 The Compulsory License for Jukeboxes . The Copyright

Act of 1909 contained a specific exemption for the performance of

music on coin-operated machines (popularly called "jukeboxes"). This

has been cited for many years since as an outstanding example of shortsighted legislation. During the hearings in the 1960s on the copyright

revision bills, it became evident that the Congressional committees

had concluded that jukebox operators should pay for their use of copyrighted music. Obtaining licenses would present no great problem for

jukebox operators since they could obtain blanket licenses from the

three performing rights licensing organizations (ASCAP, BMI, and

SESAC). But, as the jukebox operators demonstrated, to require them

to keep records of their performances of each composition would impose

a tremendous and costly burden on them.

To avoid this difficulty. Congress provided, in section 116 of the Act

of 1976, for a compulsory license under which jukebox operators may

use any copyrighted music in their machines, for which they are to pay

annually a single lump-sum royalty. To obtain the compulsory license,

the jukebox operator is required to file in the Copyright Office information identifying himself and his machines, and to deposit the royalty

payment with the Register of Copyrights. The operator is then given a certificate for each machine which he must affix to the machine.

The royalty is fixed in the statute at $8 a year per machine. The

copyright Royalty Tribunal (established under sections 801-810 of the

Act) is authorized to adjust the royalty rate periodically upon petition by any of the interested parties.

Distribution of the accumulated royalty fees among the copyright owners

(after the deduction of certain expenses) is to be made by the Copyright Royalty Tribunal on the basis of claims filed with it by the

copyright owners. There is a provision in the statute allowing persons

who may have claims to have access to the licensed machines and the

opportunity to obtain information, "by sampling procedures or otherwise,"

pertinent to their claims.

It may be observed that the appropriate distribution should not be difficult to determine in this case because the great bulk of the royalties

will be payable to the three performing rights licensing organizations.

A-97
and specific provision is made for an agreement among them as to their

respective pro rata shares. The three organizations have indicated

that they are confident of being able to reach such an agreement.

A. 4. 6. 3. 2 The Compulsory License for CATV Systems . We have

already outlined, in section A. 2. 6.1 of this report, the provisions of

section 111 of the Copyright Act of 1976 under which cable television

systems are given a compulsory license for their retransmissions of

broadcast programs containing copyrighted works. To recapitulate the

essential features of the compulsory licensing arrangement:

-- The compulsory license covers the broadcasts of all

stations whose signals the cable system is authorized

by the FCC to carry.

-- To obtain the compulsory license, the cable system is

required to file in the Copyright Office a statement

identifying its owner and the broadcasting stations whose

signals are regularly carried by it. The Register of

Copyrights may, by regulation, require the filing of

further information if found to be necessary.

-- The cable system is to deposit with the Register of Copyrights semiannually a statement of account showing (1) the

number of its channels used for retransmissions and the

broadcasting stations whose programs were retransmitted,

and (2) the number of its subscribers and the gross amounts

paid by them to the system for its retransmission service.

The Register of Copyrights may by regulation, require additional data to be furnished.

-- The cable system is to pay to the Register of Copyrights

for each semiannual period a single royalty fee computed

on a sliding scale of specified percentages of its gross

receipts from subscribers for its retransmission service.

-- The aggregated royalty fees (after certain expenses are deducted) are to be distributed by the Copyright Royalty

Tribunal on the basis of claims filed by copyright owners whose works were included in the nonnetwork programs of

distant stations carried by the cable systems.

-- The Copyright Royalty Tribunal is authorized to review and

adjust the royalty rates from time to time, under standards

stated in the Act, upon petition by any interested party.

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The task of the Copyright Royalty Tribunal in determining how the

aggregated fees are to be distributed among the claimants will probably

be more difficult here than in the case of jukeboxes. The copyright

owners whose works are used in broadcast programs are large in number,

and their works are diverse in character. This problem may be eased

somewhat by a provision in the statute that claimants may lump their

claims together and may agree among themselves as to their division of

the aggregate sum paid on their claims.

A. 4. 6. 3.^ The Compulsory License for Noncommercial Broadcasting . The Copyright Act of 1976 makes noncommercial broadcasters liable for

their performances and displays of copyrighted works (with certain

exceptions not pertinent here) for which they have heretofore claimed

to be exempt from liability. The noncommercial broadcasters argued

before the Congressional committees considering the revision bills,

that with respect to certain kinds of works at least, the process of

obtaining licenses for their use of copyrighted works individually

would be extremely difficult and costly. Congress was persuaded to

include in the 1976 Act, in section 118, a compulsory license for the use by noncommercial broadcasters of published nondramatic musical

works and published pictorial, graphic and sculptural works (and for

certain educational uses of recordings of their broadcast programs con- taining such works)

.

The compulsory license provisions in section 118 of the Act for non- commercial broadcasting are quite different from those relating to

jukeboxes and CATV systems. The terms and conditions of the compulsory license under section 118 are not spelled out in the statute,

but are left for the Copyright Royalty Tribunal to establish.

Section 118 contemplates that copyright owners and noncommercial broadcasters, or groups of them on either side, may negotiate their own licensing agreements, and these are given effect. For those instances

where no such voluntary agreement is made, the Royalty Tribunal is to

establish the "rates and terms" for the permitted uses of the specified

categories of copyrighted works by the broadcasters, after considering

proposals submitted to it by any interested parties and the rates for

comparable circumstances under existing voluntary license agreements.

The rates and terms for the compulsory license are to be reviewed and

prescribed anew by the Tribunal every five years.

No express provision is made for the collection and distribution of

royalty payments. It is provided that the Tribunal is to establish

"requirements by which copyright owners may receive reasonable notice

A-99
of the use of their works under this section, and under which records

of such use shall be kept" by the broadcasters. Apparently, the copyright owners or their group agencies are expected to collect their

own royalties.

A. 4. 6. 4 Concluding Comments . If a voluntary clearinghouse satisfactory to both copyright owners and users can be organized, that would

seem to be preferable over a statutory compulsory licensing scheme.

A voluntary clearinghouse would be more nearly in accord with the basic

philosophy of copyright which contemplates that the author should have

control over the use of his work. Congress seems to have demonstrated

its preference for voluntary licensing arrangements in the provisions

of section 118 of the Act of 1976, suggesting that the copyright owners

and noncommercial broadcasters should try to negotiate voluntary agreements between themselves, and giving such agreements effect over the

compulsory licensing scheme to be devised by the Copyright Royalty

Tribunal. Perhaps the most important consideration is the greater

flexibility of a voluntary arrangement and its easier accommodation,

by negotiations between the groups concerned, to experience and changing

circumstances.

A- 100
SUPPLEMENT 1 STI TECHNOLOGY

S.l INTRODUCTION

The conceptualization of the characteristics of STI Systems is important in order to develop an understanding of their capabilities as they

might impact copyright law issues. As we have seen in Section 2, the

development of new technologies has oftentimes raised serious legal

issues in defining the applicability of these new technologies within

the existing bounds of copyright law.

The development of computer technology has led a variety of organizations to incorporate the computer as an essential element of the

organization resources. At first, the computer was used mainly as a tool to replace human resources in time consuming repetitive tasks.

Within a relatively short time period, advances in electronic technology led to more and more applications for which computers offered

benefits to increase the operational scope of organizations. One such

application, the scientific and technological information (STI) System

will be described in detail, and a brief history of some of its salient

characteristics will be presented.

STI facilities may be broadly divided between those organizations which

create STI data bases and those who disseminate the information to the

general public. Both types of organizations require a basic hardware/

software configuration in order to support STI applications. The major

elements of such configurations are:

0 A central processor

0 On-line storage devices

0 Data entry devices

0 Data storage devices

0 An operating system

0 A data base management system

0 Miscellaneous application programs

S. 2 THE STI FACILITY

A-101
S.2.1 CENTRAL PROCESSORS

The central processor found at a typical STI facility is a large-scale

general purpose computer. A minicomputer, although it possesses con- siderable power, is not compatible as central processor for STI applications, at present. The use of minicomputers is limited by the

demands of the users, which require relatively short response times to

their inquiries and technology limitations to efficiently manage a large on-line data base. Computers of similar size are being used by

creators and disseminators of STI Systems.

S.2.2 DISC STORAGE

The amount of information contained within a single data base is usually

quite large. The Chemical Abstracts Condensates contain over 1.6 million items. The storage capacity of a large general purpose computer

(core) is too small to store the data base in its main memory. Disc

storage is therefore required to extend the storage capacity. Although

information stored in core can be accessed within microseconds, while

a disc operates in milliseconds, the impact upon a user is minimal .

A single disc may contain 5 million characters of information. A character is usually defined as equivalent to a single letter, number or punctuation identifier. However, since a record (of information) is

composed of several letters, words, and other identifying information,

a single disc can contain only part of the very largest STI data bases.

An STI system therefore will often contain several disc packs, each

disc pack consisting of approximately 8 discs. In this manner, the

capacity of the STI system has been increased several times over the core storage available within the central processor.

S.2.3 DATA ENTRY DEVICES

Another essential element of an STI system is data entry devices. They

may be CRT (cathode ray tube) terminals, punched card readers, or paper

or magnetic tape units. A distinction needs to be made between organizations which create STI data bases and those which operate on-line

retrieval services. In the former case are organizations such as Chemical Abstracts who compile, edit, and organize STI data bases. Data

base creation requires a staff which can punch or type in monthly updates to add to the existing data base. In this instance, a CRT or punched card facility is most appropriate. This method would be too

costly for on-line search and retrieval services. They receive the

data base or monthly update on magnetic tape. The tape is mounted and,

through a software package, the information is used to update their on- line (disc) data base.

A-102
S.2.4 MAGNETIC TAPE

Creators of STI data bases also have a requirement for magnetic tape

units as well as the on-line search services. Magnetic tape is a sequential storage medium; that is, to locate information, the entire

tape may need to be read. Even with a high speed tape drive, this

process can average 2-5 minutes. This is not suitable for on-line

searching, whereas a disc can locate information with 75 msec. Magnetic tape is more often used for archival storage as its price is

less, and the capacity, depending upon the tape, is nearly equal.

Older editions of the data base can be conveniently stored on magnetic

tape. Two other uses are made of magnetic tape editions of the data

base. First, data base copies are usually maintained in case the

on-line data base is accidently destroyed or damaged. Second, a magnetic tape is easier to ship to STI data base leasors than a disc.

Discs are more fragile and require careful packing to insure against

damage.

S.2.5 HIGH SPEED PRINTERS

A high speed printer is usually found at most computer facilities,

including those which contain STI data bases. They serve two main

purposes: First, to provide a hard copy of information from STI systems when the volume is large or the user has no hard copy capabilities of his own. Additionally, the maintenance of the data base may

involve a detailed examination of portions of the data base. In these

instances, a hard copy is more useful than access through a CRT.

Other computer hardware may also be found at an STI facility. Data

communications equipment such as modems, front-end processors, and

multiplexers which allow remote users to access the STI data bases,

will be found where on-line search services are offered.

S.2.6 SOFTWARE

In addition to computer hardware, software is also required to control

and search for information contained within STI data bases. Software

can be defined as the programs that direct computers to perform specific functions. A software package is a computer program or set of

programs designed to perform one or more well defined functions. Of concern to this discussion are mainly the "systems package." Systems

packages are programs or sets of programs that make it possible to use a computer more conveniently or operate it more effectively. Included in this category are both operating systems and data base management systems.

A-103
The operating system, sometimes called the executive, manages the

computer resources and permits the user to interact with the system.

Initial access to a STI on-line system is under the control of the

operating system. Almost all user-oriented systems have an operating

system; however, in the case of STI systems, limits are placed upon

what the user may do. For example, unlike timesharing computer systems,

the user cannot create his own programs or modify the stored data

bases. In a STI environment, the user can gain access only to STI data

bases and issue commands relevant to the use of the computer for access

or search of the data base.

Once an appropriate STI data base is selected for searching, the user

is placed under control of a data base management system (DBMS). It

is the DBMS that actually examines the data base to determine if the

user's specified parameters can be matched by the stored information

within a STI system.

The method of operation while under the control of a DBMS system in a STI environment is to define identifiers or descriptors upon which a search is based. Examples of descriptors are:

0 Author's name

0 Subject

0 Title

0 Key word

Searching can be quite complex according to the sophistication of the user and the DBMS system.

Figure I is a functional schematic of a STI facility and shows the

layout and interconnection of the hardware.

S.3 STI ON-LINE DATA BASES

In order to limit the discussion of STI systems, we will confine our- selves to describing the services offered by on-line search services.

Figure II contains a description of the STI data bases offered. The

information contained within each data base is limited to descriptive

information of articles published in scientific and technical journals.

Some data bases contain brief abstracts of the articles cited. At

A-104
A-105
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A-106
present, no full -textual materials are stored by on-line search

services. The reason is both technological and economic. The on-line

storage capacity required for complete textual storage of all scientific

and technical journals currently indexed by STI data bases would be

very large. Information is largely alphabetic characters, which at

present, are not efficiently stored by current computer technology.

Economically, the cost of operations would increase substantially. In

addition, the utilization of the computer storage resources would

decrease, due to the existence of stored texts that might be accessed

on an infrequent basis. The computer-based information system which

is based on high speed data manipulation and an ability to perform

repetitive iterations on large volumes of information does not function

well in an environment which demands large storage capacities.

S.4 COMPUTERIZED STI SYSTEMS

After review of the collected information of new technologies and copyright and computerized STI systems, we have determined that three

characteristics of computerized STI systems merit further discussion.

They are the development of:

0 On-line storage (disc)

0 Efficient data base management systems

0 Access to computers through data communications networks

Without these three technological enhancements to computers, the possibility of computerized STI system would have been too costly to operate and too difficult to manage. Together, these mechanisms provided

the users of STI systems with a methodology that made more information

available, at a faster speed, and with a decrease of human resources.

In comparing these innovations, specifically in the area of STI systems, it is helpful to consider the library as the opposite extreme of

a computerized STI system. Given a sufficiently large library with

adequate resources, the results of a scientific search would be similar to that accomplished by a computerized STI system.

A library, where a literature search is conducted of relevant journals,

is an inherent part of the scientific and technological method. To

satisfy the researcher's need to obtain information, he could either

browse through the library stacks or rely upon extracting information

sources from compilations of abstracts of scientific journal (i.e.,

chemical abstracts). The process required considerable time as the

A-107
compilations were limited in indexing methods to principally the subject

matter and the author(s). In addition, libraries, except the very largest, did not always contain the range of information required to meet

the needs of a variety of researchers. To complete an in-depth literature search might require visits to one or more libraries. Thus,

from the researcher's point of view, the library, as a non-computerized

STI system, was difficult to use; time consuming; not readily available; often incomplete, and subject to errors and omissions. However,

the library, as an STI system, was not without some merits. It provided,

through browsing, a means to circumvent the limitations of cataloguing

reference material or compilations of abstracts. Furthermore, full text

storage of books, periodicals, and journals at a library allowed the

researcher to investigate in-depth his topic of interest.

The development of an on-line disc storage medium provided the capability

to extend the total storage capacity of a computer system. Prior to the

development of disc technology, the computer had to contain information

within its main memory or retrieve information from a magnetic tape.

The main memory was limited in size, although information within it could

be accessed within microseconds. As noted earlier, magnetic tape could

hold sufficient material to develop a computerized STI system but, as

a sequential access medium, each search would require the time consuming

process of reading the entire tape.

The development of disc technology meant that the computer system could

not only accommodate the large volumes of information required to

establish computerized STI systems, but each information record could

be found within a short time frame. A disc is a random access storage

device as opposed to a magnetic tape which is sequentially accessed.

Thus, key characteristics of computers, speed and high volume data

manipulation, were matched, in part, to the pragmatic requirements of a computerized STI system.

While disc storage brought a high volume on-line capability to computer

systems, the search for information contained within data bases needed

a specific applications program to perform the search. Programs already

existed for data base manipulation. Until the state-of-the-art

advanced, data base management systems were designed for specific operations. Referring to the original STI system, the library, this was equivalent to each library having its own card catalog. Books could not

be transferred to another library with recataloguing, and each researcher

would need to be knowledgeable of several library systems. Within each

library "management system" the ease of the system would also vary depending upon the creativity of the system designers. The resulting non- consistencies led to the development of general purpose data base management systems.

A-108
This technology is the second key element of computerized STI systems

because it provided a means of organizing information and searching

information so that several users could use the system simultaneously.

Its organizational structure was flexible so that data bases could be

created from a variety of sources. This was important since formats

of STI data bases vary according to the type of data base. The con- tent of a scientific data base would vary from that of an economic data

base, etc.

Data base management systems search through data bases using a variety

of methods. Most are based on an indexed system in which certain key

words or identifiers are examined, rather than each record. In this

manner, time is conserved and the computer resources are utilized more

efficiently.

The user makes use of key words to describe a subject, author or interest area. The data base management system can then determine if a match (hit) occurs with the contents of the data base. The data base

management system is quite powerful since it permits the search words

to be combined with Boolean Algebra Logic. This capability adds power

to the researcher's ability to clearly identify the search topic.

A skilled computerized STI user can perform complex searches using the

Boolean operators. The result is that the computer STI system user

has reduced his search time considerably over using a library and

increased his ability to find information.

The third key element which enhanced the development of computerized STI

systems is development of data communications systems which enable many

widely geographically dispersed users to access an STI system concurrently. Without a data communication network, the users would be limited

to those at or nearby the STI facility. Economically, this perspective

would not justify the large hardware/software costs and data base lease

rates required to establish an STI facility. Data communications has

allowed the linking together of many remote users into a market large

enough to support the operating costs associated with large general purpose computer systems.

The area of data communications includes both the network of dedicated

or leased lines and the specialized communications hardware/software.

At present on-line communications speed are relatively slow (in the

order of 30 characters per second). Higher speeds, although technically

available, require costly line conditioning equipment. In addition,

A-109
with the current STI systems, the results of a search are usually no more

than a few pages of information. Large volumes can be directed to the

high speed printer at the STI facility; where the cost is less than on- line printing. If full text retrieval were available under present con- ditions, the costs of high speed communications and printing at the

user's location would require a careful evaluation as to whether the

text was time critical. This situation, of course, could change if the

economics of STI system user were reduced. At present, it appears that

30 characters per second communications speeds are sufficient for most

STI system users.

A-110
APPENDIX B

THE ROLE OF TRANSACTION COSTS IN THE

DESIGN OF ROYALTY PRICING SCHEMES FOR STI

by

Y. M. BRAUNSTEIN* and J. A. ORDOVER*

NEW YORK UNIVERSITY

*The views presented in this paper are solely those of the authors and

do not necessarily represent those of New York University.

B-1
B.l INTRODUCTION

In this paper, we shall discuss various schemes for collection of

royalty payments for reproduction of scientific and technical information (STI). We shall concentrate on the costs that accompany the en- forcement of royalty price schedules. These costs are referred to in

the economic literature as transaction costs. These costs have to be

included in the design of actual pricing schedules. Indeed, a major

argument for excluding certain users from payment is that the transaction costs associated with the collection of payment from these uses exceed the benefits of doing so. We would expect that such arrangements can be worked out between the users and sellers without a neces- sary intervention of the legislature or the courts.

B.2 PRICING SCHEMES

B.2.1 BLANKET LICENSE SYSTEM

The blanket license system involves a set payment to the owner of a copyright. Once payment is made, an unlimited amount of photocopying

can be done.

There are two species of blanket licensing:

(i ) direct licensing;

(ii) clearinghouse licensing.

Under (i) the owner of the copyright negotiates directly with the user of a journal /I ibrary for a fee. Under (ii) the copyright owner negotiates indirectly through the clearinghouse which pools various copyrights. System (ii) is analogous to the one employed in the music

area.

Comparative economics would seem to favor the second variant. The

major saving is in transactions costs: both in the case of a publisher

negotiating agreements with a multitude of users and in the case of the user (library) negotiating with a multitude of copyright holders.

Another major saving for the user results from a reduction in the num- ber of payments that will have to be made. A similar reduction exists

on the publisher's side. There are, however, important additional

costs that appear if (ii) is used, rather than system (i). The major

new cost is associated with the necessity of monitoring the photocopying

in individual libraries in order to determine an equitable distribution

of the proceeds. Those costs may be significant. According to their

own estimates, ASCAP's transaction costs amount to approximately

20 percent of their gross revenue. Such costs would not be expanded

under the direct licensing scheme. This is not to say that the direct

licensing scheme does not require some monitoring of use, since under

this scheme the extent of use will be important in setting the fee.

B-2
Overall, however, we suggest that the monitoring costs ought to be

significantly lov;er under (ii) than (i).

What is the economic impact of a blanket fee? In the limit it may not

affect the amount of photocopying. This perhaps paradoxical result

will be obtained if the library finances the cost of the photocopying

permission fee by means of a lump sum (i.e., poll) tax which is levied

uniformly on both users and non-users of the photocopying privilege.

The poll tax places, however, an undesirable burden on non-users who

are, in effect, called upon to subsidize the users.' On equity

grounds the poll tax is clearly undesirable. Whether it should be

implemented depends on how much the society would suffer from a reduction in socially desirable photocopying, which indubitably would occur

if user fees were employed. Since unquestionably, a good deal of

photocopying does not have any benefits over and above those that ac- crue to the researcher himself, arguments from both efficiency and

equity standpoints would support our preference towards user fees. It

should be noted that if a library utilizes the user fee to collect the

revenue, it commits resources to generating the same information that

is necessary under the per-use license. If it is believed that the

collection costs associated with the user fee are excessive, then at

the risk of some unfairness a lump-sum tax ought to be imposed. The

lump-sum tax is in essence in use now; all faculty members, students,

and others contribute at least part of the library budget either in

the form of lower salaries or higher tuition fees. Such payments are clearly independent of the use a parti cul ar individual makes of the

library resources.

B.2.2 PER-USE LICENSE

The efficiency of per-use licensing depends on the expense associated

with monitoring the use. Herein lies the main disadvantage of the peruse license over the blanket license. The costs of monitoring are technologically determined. At present these costs are probably high

in the area of journal use, but relatively low in the area of bibliographic and data base use. Furthermore, the costs will depend on how

coarsely use is defined. For example, different user fees may be

imposed on recent journal copies as opposed to older copies. Medical

journals may have different user fees than physical science journals,

etc. The finer the partitioning of users, uses, and used objects, the

better will the pricing system function as a signal towards efficient

allocation of resources. Those gains in al locative efficiency must be

weighted against the attendant information costs.

B.2.3 TWO-PART TARIFFS

The third system is a combination of the two preceeding ones. The

two-part tariff pricing scheme involves a fixed entry fee, independent

of use, and the per-use price. ^ Such a system is currently employed

B-3
by the telephone company, for example, which charges a connection fee

as well as the per-call charge. Such pricing systems have been recom- mended for industries in which production costs involve a substantial

fixed cost element and in which, as a consequence, socially desirable

pricing at marginal cost is not feasible in that it does not cover the

total cost of output. A form of the two-part tariff would be a system

whereby a library would purchase the license to photocopy by purchasing

the hard copy of a journal and also pay a fee for each photocopy of an article from a journal in its collection. This would suggest that a pure per-use license is difficult to conceive of because the hard copy

price of a journal is in fact an entry fee. (And we note that often

libraries pay higher subscription prices than do individuals.) This

may be so, but we prefer for reasons of taxonomy to think of the entryfee component as being an expl icit payment for the right to photocopy.

It is clear that the current system does not fit neatly into either of

these three categories of exclusion/collection mechanisms. There is in

the library price an implicit component of a license to photocopy. But

the extent of photocopying which such a license allows is not clear

since the meaning of "fair use" is not apparent to either the publishers or to the librarians. Publishers expect some recompense for photocopying of their journals when such photocopying violates the existing

statute. This brings on the element of the per-use license discussed

above with an additional complication that some forms of use are exempt from that license, the "educational exemption" for example.

The first step in thinking about the appropriate form of a new copyright

law should involve a clear understanding of the kinds of pricing

mechanism that ought to be employed. This outline provides a basic

classification scheme. In the next section, we shall begin to assess more precisely the various transactions costs associated with the three

fundamental pricing mechanisms. [Note that for ease of exposition we have not followed here a suggestion often found in the literature that

per-use and blanket mechanisms are but degenerate forms of the two-part

(or multi-part) tariff system.]

B.3 ESTIMATING TRANSACTIONS COSTS

Although economic efficiency can be improved by the institution of

per-use charges, it is obvious that some resources must be used to collect these charges. These "transactions costs" that are associated with

an "exclusion mechanism" may be a negligible or significant sum relative

to the charges that are imposed. In this section, we shall develop

alternative estimates of their magnitude.

Exclusion mechanisms are the procedures by which one can determine who

is using a good or service and then bill them for that usage. The difficulties of establishing such mechanisms have been cited as part of

the rationale for the collective provision of public goods. At the

present time there is a large but unknown amount of photocopying of

B-4
copyrighted works. The following estimates are cited merely to shed

some light on the magnitude and distribution of photocopying,^

1. 27.5 billion paper copies were made by photo-copiers and

photo-duplicators in the U.S. in 1967.

2. Approximately 60 percent of the material copied by libraries

is copyrighted.

3. Of the photocopying done in libraries:

a. the journal-to-book ratio was 9:1;

b. the majority of items were scientific and technical;

c. over 80 percent was less than five years old;

d. 5 percent of the publishers produced 40 percent of the

material being copied.

Currently, almost none of this photocopying results in an associated

royalty payment or license fee.

A similar situation exists with the use of computer data bases. These

data bases may contain scientific, economic or statistical data,

bibliographic material, or medical and legal information. In many

cases the data has associated with it computer software to facilitate

access and use. There are a variety of existing agreements by which

the creator of the data base collects for its use either directly from

the customer or from one or more of the computer system operators who

provide access to the data base.

As we described above, in both the photocopying and computer data base

areas the economic issues are the comparative efficiencies of free provision versus the implementation of user charges, and the relative

magnitudes of the collection and enforcement costs (the transactions

costs). ^ These costs will depend on whether blanket licenses or peruse licenses are utilized.

The obvious archetypes of the blanket license are those employed by

the performing rights societies (e.g., ASCAP and BMI). Here, a clearinghouse is employed to facilitate the contracting arrangements. The

proposed Australian copyright royalty collection operation that re- sulted from the Morehouse decision will operate in a similar manner.

(The decision in the Morehouse case was that libraries in Australia

are responsible and liable for photocopying of copyrighted works done

on in-library copying machines.

)

Usually ASCAP' s operating costs are less than 20 percent of revenue,

.'he Australian publishers association has predicted that the costs of

their monitoring activity, analysis, and transactions will be

B-5
approximately A$.01 per page (one Australian cent per page), 5 In both

systems, a significant part of the cost is the monitoring of usage

(what is performed or copied) so that the revenues can be divided

among the copyright holders.

In looking for archetypal billing and collection systems for per-use

charges, we found two different industries with well -developed and

possibly interesting accounting and billing mechanisms, computer

"service bureaus" and local telephone operating companies. One large

service bureau organization estimated that the costs of monitoring use,

accounting, billing, etc., generally are 15 to 18 percent of total

costs. On the other hand. Pacific Telephone Company (which has com- plex multi -message unit charges for local calls) records shows that all

accounting operations amounted to only 3 percent of company expenses

for 1975. (Both the Accounting Department expenses and total expenses

included all current and capital items. See Fig. B.l.)

The greater the amount of information collected, stored, and analyzed,

the higher the costs. For example. New York Telephone does not, as a rule, itemize "message unit" calls on either residential or business

customer bills. However, now they must provide such a list to the

customer on demand if the customer is willing to pay the extra cost

($1.50 for residential customers and $1.50 plus $.25 per each extra

page for business customers ).6

An important point to remember is that in neither case do these costs

include the expense of determining how to pay out the revenues. These

disbursement costs will be related to the degree of accuracy required

(i.e., sampling vs. 100 percent monitoring) and the frequency distribution of the copyright holders. Recent data from the British Lending

Library (BLL) indicates the skewed nature of the frequency distribution. 7 Their survey indicated that of 14,967 serial titles, the top

210 titles accounted for 20 percent of the demand for photocopies and

the 6,000 least requested titles accounted for the last 10 percent of

the demand. 8 The cumulative distribution curve is shown in Figure B.2.

Figure B.3 lists the 15 most "popular" titles.

Although the BLL is a "library of last resort" for academic libraries,

it is a major resource for the specialized industrial libraries who

comprise a majority of their borrowers. Therefore, we can assume that,

although the BLL data may not characterize the photocopying in the

U.S. in an unbiased manner, the U.S. data will also exhibit a high

degree of skewness. Depending on the exact nature of the payment

algorithm, this skewness can lead to either lower or higher costs in

the distribution of royalties to copyright holders. The existence of

a high threshold number of copies per time period -- unless X copies

per month are made, no royalty payments are distributed -- coupled with

the skewed distribution could reduce transaction costs in the same way

that "deductibles" do for an insurance policy. On the other hand, in

the absence of a threshold number, quite large samples may be required

to capture the copying of the more obscure works.

B-6
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B.4 REFERENCES

1. Compare A. A. Alchian and H. Demsetz, "Production, Information

Costs, and Economic Organization," American Economic Review 62

(December 1972), 777-795 and 0. E. Williamson, Markets and Hier- archies; Analysis and Antitrust Implications (New York: The Free

Press, 1975) , on the desirability of user fees in profit and non- profit organizations.

2. The desirability of two-part tariffs from the standpoint of both

profits and consumers' welfare is demonstrated in R. D, Willig,

"The Pareto Domination of a Uniform Price by a Non-linear Outlay

Schedule," mimeo. Bell Laboratories, Holmdel, New Jersey (1976).

3. All are taken from N. L. Henry, "Copyright, Public Policy and

Information Technology," Science 183 (1974), 384-391.

4. One can also examine the income distribution effects, if any, of

the alternative means of distribution.

5. Presentation of David Catterns to the National Conmission on New

Technological Uses of Copyrighted Works, Washington, D. C,

December 19, 1975. Currently the rate of exchange is A$1.00 = U.S. $1.24 (September 1976).

6. New York Times (November 5, 1975), p. 54.

7. M. B. Line and D. N. Wood, "The Effects of a Large-Seal e Photocopying Service on Journal Sales," Journal of Documentation 31:241

(1975).

8. Ibid . , 239.

B-10
APPENDIX CI

ON THE OPTIMAL PROVISION OF JOURNALS QUA EXCLUDABLE

PUBLIC GOODS: SUMMARY AND MAJOR FINDINGS

by

J. A. ORDOVER* and R. D. WILLIG*

NEW YORK UNIVERSITY AND BELL LABORATORIES

*The views presented in this paper are solely those of the authors and

do not necessarily represent those of New York University or Bell

Laboratories.

Cl-1
In this paper we provide the theoretical model of a firm which

produces a commodity that is sold both to individuals and to institutionsThe latter extend the services of the commodity to a large collection of

users. The focus of the paper is on the pricing rules that the firm

should follow in calculating the prices for individual users and for

institutional users. As the by-product of the analysis, we provide

strong arguments for levying user charges on those who avail themselves

of the institutionally-held unit of the commodity.

In the paper we use journal publishing as a perfect example of

the industry which serves both individual and multi-user (institutional)

markets. As we shall see, the analysis presented here can be extended

rather easily to advanced computerized scientific and technological

information systems.

The major problem raised in the paper is how the fixed cost com- ponent of the total produetton costs sfiould Be spread among the two

classes of buyers. There already exists a well-established theory

which bears directly on that issue. In brief, the theory prescribes that

in the market in which demand is not very responsive to price changes,

the price should be higher than the one charged to the buyers in the

market in which the demand is highly responsive to price variations.

This is known in the literature as the inverse elasticity rule, since

demand elasticities are precisely the measures of responsiveness of demand to price changes. The implication of this inverse elasticity formula is tPiat a proportionally larger share of the fixed cost should be

shifted onto those buyers vvho do not substantially reduce their purchases when price is raised above some initial level.

This rule is, however, applicable only if there are no cross- market effects. But those effects are present whenever a change in the

price charged in one of the markets affects the demand in the other

market. If, for example, an increase in the institutional price leads some of the institutional buyers to discontinue their purchases, one would expect an increase in the demand by individuals. Our task in the

paper is, therefore, to provide workable rules which would be applicable

in the case of cross-market price effects since we believe that such

effects are present in the industries which provide scientific and

technical information.

The value of workable pricing rules or formulas, like the

inverse elasticity rule, is two-fold. First, they enable the decisionmaker to ascertain what variables in the model are of particular

importance in the process of price setting. Second, they enable the

decision-maker to conduct a rough test on how the current prices compare

to those at which profits would be maximized.

It is, of course, unrealistic that the firm could ever hope to

exactly set optimal (i.e., profit-maximizing) prices. Nevertheless,

using the optimal price formulae as a guide, the management can concen- trate on collecting that data which will be most useful in the process

of setting prices. For example, as the name suggests, the inverse

Cl-2
elasticity formula identifies demand elasticities as being the focal

points in the process of setting prices. Our analysis also uncovered

additional variables which previously escaped the attention of the

analysts. We find that in the model considered in the paper, the best

(profit maximizing) prices are quite sensitive to the value of the

variable which we term "the average number of potential subscribers".

Roughly speaking, this variable measures the average number of additional

private purchases that would be gained from those institutions that would

discontinue their purchases in response to a small change in the

institutional price of the commodity. To illustrate the concept, let us assume that an increase of one dollar in the institutional price induces

six institutions to discontinue their purchases. This, in turn, induces

two users from each institution to purchase the commodity. In this

example, the average number of potential subscribers is two. If we were

to change the hypothetical data somewhat and assume that there would be

no new private buyers from four of those institutions, the value of the

average number of potential subscribers would drop to two-thirds.

We have been able to show that if for a wide range of prices

offered in the two markets the average number of potential subscribers

exceeds one, the institutional price ought to exceed the private price

irrespective of the elasticities of demand in the two markets. This

result is of some interest because in some situations the values of the

elasticities of demand in the private and institutional markets may not

be known while the firm may have some information from its marketing

surveys on the numbers of potential subscribers.

It must be admitted that sophisticated pricing rules like the one presented in this paper require significant amounts of information for

their implementation. However, as we indicated earlier, the optimal

price rules can be employed to test whether current prices can be

improved upon yielding higher net income for the firm or higher net

benefits for the product's users. For the purposes of this test much

less detailed knowledge of market demands is required. The test is

particularly simple for the firm which is not currently price discriminating between its institutional and individual customers. In this

situation, it is very easy to show that in most circumstances price

discrimination in favor of individual buyers would be desirable from the

standpoint of profits and the welfare of the consumers as a whole. When

the firm already has a two-tier price scheme, our tests enables the

decision-maker to ascertain whether the current spread between the two

sets of prices should be widened or narrowed.

There is no need to give here a detailed exposition of the price

adjustment test since the test is described at great length in the paper.

It is important, however, to reiterate that the procedure for price

revisions developed in the paper relies wholly on the information that

should be easily available to those responsible for price decisions. If

such information is not currently available, it can be obtained from the

existing data, using standard econometric techniques which we have

discussed elsewhere.

Cl-3
It may be useful at this point to restate the motivation behind

the analysis of Sections II and III of the paper. Our most abstract

consideration was to extend the economic analysis of optimal pricing to

those situations in which significant cross-market effects of pricing

decisions are present. Although there are already some pricing rules

which are applicable to that case, these rules are not easily interpretable even by a theorist. Furthermore, they are formulated in ways

which are not particularly helpful to those who will in the end use them for actual pricing decisions. Hence, our second objective was to

derive a set of guidelines to be followed by those who are responsible

for deciding on prices for scientific and technical information. We

strived to make a strong case for imaginative pricing and we argued

that price discrimination between various classes of buyers is not only

desirable for profits but perhaps paradoxically, also for the users of

information as a whole.

Section II of the paper presents, we believe, a strong case for

allowing the producers to employ sophisticated pricing policies and to

have protection via copyright for their product. If the production of

sceintific and technical information did not involve a fixed cost com- ponent, then economic theory would indicate prices closely to the

incremental (marginal) production costs. When fixed costs are present,

however, at prices equal to marginal costs, the firm cannot cover its

total costs. Consequently, prices must deviate from incremental costs.

In Sections II and III, we show what directions those deviations from

marginal costs should take. It would be unfortunate if the producers

and disseminators of information were to be prevented from employing

those sophisticated pricing rules for the purposes of recovering their

fixed costs.

Section V and Appendix I deal directly with the problem of

whether user charges ought to be levied on those who use the

institutionally owned excludable public good. This question is

directly relevant to the discussion of copyright royalties. The first

argument for user charges is entirely consistent with that encountered

above. We argued earlier that the burden of defraying the fixed cost

component of the total production costs should be allocated to the

various classes of users according to well-defined principles (the

inverse elasticity rule, for example). The question may be raised as to why the users of the institutionally-owned excludable public good

should be exempted from sharing in that burden. The answer is, of

course, that they should not. It is conceivable that those user charges should be "low". But our theory says that if those charges

should be low, it is not necessarily because the cost to the society

of an additional use of the institutionally owned excludable public

good is also very small, perhaps even zero. Rather, the argument for

no user charges ought to be based on the empirically verifiable

proposition that the demand for institutional use is highly elastic

with respect to user charges. (This demand should not be confused

with the demand by institutions for the commodity in question. Undoubtedly, the two demands are related in some way.) When, a small

increase in these charges above zero would discourage so many users

CI -4
that the additional revenue gained from user charges would not be sufficient to justify the collection costs, user charges are not desirable

It is those who oppose the introduction of user charges, however, who

must provide a positive showing that the collection costs are prohibitive, for otherwise the implications of economic analysis are quite

clear: carefully structured user fees are a rational and desirable

method of defraying at least some part of the fixed costs incurred in

production and dissemination of scientific and technical information.

The second argument for user charges is less complex. An

imposition of user charges would discourage some use of the units of

the commodity owned by the institutions. Some of these discouraged

users would enter the private market. By increasing private demand,

they would stimulate production of the commodity, thus driving down its

average cost. Some of those gains could then be passed on to the

buyers in the form of lower prices, yielding concomitant improvement

in the dissemination of the product.

The reader will have noted that in this summary of the paper, we

have dealt with the class of excludable public goods. The discussion

in the paper is couched specifically in terms of scientific and technical journals. We differentiated in the paper between personal and library subscriptions and argued strongly for the imposition of user charges on those who utilize the library copy by, for example, photocopying articles from a journal. We built our argument on a very

general proposition which asserts that no group of consumers should be

exempted from financing some part of production costs unless reasons of

equity, costly collection, or significant positive externalities stop

us from doing so. The formulae for prices presented in the paper apply

when those objections to the use of prices as rationing devices are not

present. 1

Those formulas and the arguments behind them apply not only to

journals. Instead of journals, we can imagine a system in which the

publishers do not provide hard copy to the subscribers but rather video

discs or tapes of journals. Those discs or tapes can then be read

using minicomputers and/or display consoles. In such a hypothetical

system, we would again have at least two-tier price structure: one

See J. A. Ordover and R.D. Willig, "On the Role of Information

in Designing Social Policy towards Externalities," Center for Applied

Economics, Discussion Paper #76-03, New York University, for the

discussion of the case in which there are external effects. Those

effects exist whenever the societal benefit from a given activity

exceeds the private benefit that accrues to the person who undertakes

that particular activity. It may be argued that the users of

scientific and technical information generate significant positive

externalities. If so, then perhaps information should be made freely

available to all users and not only to those who use it in the library.

Cl-5
price for individual subscribers and another for institutional subscribers including libraries. In addition, in accordance with our

theoretical analysis, user charges will be levied as well. Indeed, in

this modified system, user charges are even more desirable than in the

presently extant system. This is so because the collection costs would

be much lower if the information were transmitted through computer.

Cl-6
APPENDIX C2

ON THE OPTIMAL PROVISION OF JOURNALS QUA

EXCLUDABLE PUBLIC GOODS

by

J. A. ORDOVER* AND R. D. WILLIG*

NEW YORK UNIVERSITY AND BELL LABORATORIES

*The views presented in this paper are solely those of the authors and

do not necessarily represent those of New York University or Bell

Laboratories. Authors' names are in alphabetical order.

C2-1
TABLE OF CONTENTS

SECTION DESCRIPTION PAGE

I. Introduction C2-3

II. Optimal Subscription Prices C2-6

III. Determining Best Price

Adjustments From Current Data C2-14

IV. Profit and Welfare-Optimal

Choices of Provision Modes C2-20

V. Welfare and Profit Effects of

Library Usage Fees C2-24

Appendix 1. The Ramsey Suboptimality of Perfect

Purveyance of Excludable Public Goods C2-32

Appendix 2. Multidimensional Characterization

of Library Populations C2-35

Footnotes C2-38

References C2-40

Figures C2-41

C2-2
I. Introduction

There are many interesting and important policy issues surrounding

the provision of technical journals that arise from the simple fact

that journals can, at once, be offered to the reading public through

libraries and through personal subscriptions. It is said, for example,

that publishers are experiencing increasing difficulty in recovering

their "first copy costs" (set-up costs) due to the rapid growth of

reprography. Recognition of this new problem has lead to intense

public debate over copyright protection against uncompensated private

dissemination of reproduced library materials.^ There is a related

accelerating trend towards the establishment of a dual pricing structure by publishers -- high rates for library subscriptions and lower

rates for personal ones.

In this paper we analyze the socially optimal provision of such

goods as journals which can be viably used in either the private or public modes. This is the class of "excludable public goods," which

we take to be characterized by the following canonical properties:

(a) There exists a technology of public provision of the good

under which the marginal user costs are zero.

(b) The good can be replicated, so that private provision is

feasible.

(c) The subjective value of the good to consumers is greater in

the private mode than it is in the public mode.

Properties (a) and (b) together say that the good can be feasibly

offered to consumers in either or both modes. We define the public

mode as the uncongested use of a single unit of the good by many con- sumers, irrespective of whether or not a user fee is levied. In con- trast the private mode presupposes exclusive use of a unit of the good

by each consuming agent. Of course, if consumers were indifferent

between obtaining the good in the two modes, then consideration of

profit or social welfare would dictate the production of only a single

unit to be shared by all users, and the standard public goods analyses

would apply unchanged.

It is property (c) that captures the hitherto analytically

ignored characteristic of journals which leads to its bifurcated provision and to the concomitant policy issues.^ Given (c), there is a tradeoff between the convenience of the private mode and the economy of

the public one. Theoretical and practical questions arise as to the

determination of the modes of delivery and the associated prices that

are optimal for welfare and for profits. These are the central concerns of thi s study. Throughout the paper, to make our analysis

Note: Superscripts refer to Footnotes beginning on page C2-38.

Bracketed numbers refer to References beginning on page C2-40. Numbers

in parentheses refer to equations in the text.

C2-3
clearer and more relevant to current policy issues, we cast our discussion in terms of journals. Nonetheless, our results apply to

any excludable public good.

We work with the simplest model rich enough to reflect these

issues. Each agent is characterized by his benefit from consuming the

good via the private and public modes, B and B - T respectively. Thus

T is the money-scaled subjective cost of patronizing the public mode

over and above that of the private mode. For example, T might measure

the inconvenience of library use.

The set of all agents is exogeneously partitioned into heterogeneous groups, each served by at most one public facility (library).

The joint distribution of B and T in the group with characteristics

vector m is given by h(B,T,m), while the distribution of m over all

groups is f(m).

We assume that the production technology of the good exhibits

increasing returns to scale. Thus, with C(Q) denoting the cost of

producing Q units, C(Q) > QC'(Q); the revenue from marginal cost pricing cannot cover production cost. This assumption reflects the setup

costs significant for public policy towards the publishing industry.

We abstract, however, from costs of library operation and construction

and from the concomitant overhead allocation problem. Thus, we assume that every group of agents has access to one and only one already

established and noncongested library facility, and we focus on the

potential acquisitions by the libraries of a particular journal.

Section II studies the personal and institutional subscription

prices that are optimal for profits and that are optimal for welfare

under the Ramsey nonnegative profit constraint.^ Here we assume that

libraries are perfect (Samuel sonian [10]) purveyors of the public good

to their user populations. That is, they levy no use fee and they

finance their acquisitions through lump sum contributions. Further,

a library subscribes to the journal if and only if the total willingness to pay of its population exceeds the institutional subscription

price. This model gives special structure to the market demand

elasticities which are crucial for the determination of the optimal

prices.

We see that the ratio of the optimal deviations of the prices

from marginal cost depends on the ratio of the own price elasticities

of library and personal subscription demand, the ratio of library to

personal subscriptions, and, the newly identified variable, the average number of potential personal subscribers who are users of the marginal libraries. However, the application of this Ramsey rule requires

global information on the behavior of these critical functions of the

prices. Unfortunately such data are unavailable.

Therefore, in Section III, we study the use of current values of

the variables for the determination of the local price adjustments

C2-4
which are best for welfare, while leaving profit unchanged. The

same expression for the ratio of the deviations of Ramsey optimal

prices from marginal cost can, when evaluated at current prices, be

meaningfully compared with the ratio of current deviations. In particular, for reasonable and representative values of the current parameters, a journal currently setting equal personal and library subscription prices should move to a higher relative library price. Using

analogous tools, it is shown that such a move would also be of benefit

to a profit oriented publisher.

We apply these methods in a pilot study of the 1975 prices of

five economics journals. We find that for four of them, welfare can be improved without loss of publisher profit by simultaneously increasing the library subscription price and decreasing the personal subscription price. Further, the hypothesis of profit maximization can be

rejected for these journals.

In Section IV we investigate the profit and welfare optimal

distribution structures. Numerical simulations show, for example, that

profit maximization can lead to total exclusion of private subscriptions when break-even constrained welfare maximization implies the

complete exclusion of library subscriptions. We identify some of the

qualitative factors that generate such divergences between the profit

and welfare optimal distribution structures. The total welfare loss

from monopoly provision can be decomposed into the components which

are attributable to incorrect prices and to incorrect structure. In

the aforementioned example, it is the latter which are most significant. Generally, however, the welfare effect of constraining a profit

maximizing publisher to provide the welfare optimal distribution modes

can be negligible, or worse, perverse.

In Section V we study the economic impact of the introduction of

a library usage fee, paid to the publisher, perhaps as a copyright

royalty. We show that under weak and plausible conditions, net welfare, consumer welfare, and profits can all be increased by the implementation of such a fee, when accompanied by appropriate decreases in

the subscription prices. Thus, we identify the difficult policy problem of how to tie such price decreases to the extension of copyright

protection to library usage.

Appendix 1 shows the Ramsey suboptimal i ty of the libraries behaving as perfect purveyors of their public good journal copies. While

each population prefers to finance library subscriptions with lump-sum

taxes, they all benefit from collective adherence to a rule specifying

that usage fees partially finance library acquisitions.

Throughout the paper, the analysis is performed with library

populations indexed by a scalar, m, over which the relevant functions

are assumed to be monotone. Appendix 2 shows how this model can be

considerably extended to allow for a multidimensional characterization

of library populations, without any loss of the analytic power of the

C2-5
one dimensional representation. We feel that the analytic techniques

presented in Appendix 2 can be used to gainfully enrich diverse one dimensional models found in the literature.

II. Optimal Subscription Prices

In this section we determine the rules that characterize the

profit and constrained welfare optimal personal and institutional

prices under the assumption that the institutions are perfect purveyors

of the excludable public good to their populations. We build up from

a detailed model of individual behavior.

Each agent is described by three characteristics: the unique

library population to which he belongs, his benefit, B, measured in

money units, from the use of a library copy of a journal, B - T. Thus

T can be interpreted as the money value of all psychic and pecuniary

costs of using the library, exclusive of any user fees. B and B - T are income independent and, as such, are also independent of any money

expended for personal subscription, use fees, or lump-sum library

taxes. (That is, utility functions are linear in money.)

Each agent faces a personal subscription price, p^. If he belongs

to a group whose library does not own the journal, he will subscribe

himself if and only if B ^ Pg. If, however, he does have access to a library copy, then his chosen mode will be the one yielding the highest

net benefit. He will buy a personal subscription if B >_ Ps and T ^ Pg

(B-pj >_ B-T). He will be a library reader if B - T ^ 0 and T £ PsOtherwise, he will choose not to read the journal.

It will be useful to dichotomize the library readers into the

potential subscribers, for whom B ^ p^ and T <_ Pg, and the perusers,

for whom B < Ps and T £ B. The latter group, unlike the former, would

not buy personal subscriptions at pg, were the library to discontinue

its subscription. Figure 1 depicts the aforementioned groups as regions in B, T space.

The library indexed by the parameter m serves a group of agents

characterized by the histogram function h(B,T,m). The library, acting

as a perfect purveyor, will subscribe if the aggregate willingness to

pay, WP, of its population covers the institutional subscription price

Pl_. WP can be expressed as tjie difference between the population's

aggregate net benefits with (V) and without (V_) the library subscription

exclusive of the lump sum payments which sum to PL.

C2-6
(1)

V(p^,m) =

.00 (B-p^)h(B,T,m)dTdB + (B-T)h(B,T,m)dTdB

P

P3 rB

0

(B-T)h(B,T,m)dTdB,

0

Reading left to right, the integrals measure the net benefits of the

personal subscribers, the potential subscribers, and the perusers,

respectively.

(2) V(p^,m) =

,00 (B-Pg)h(B,T,m)dTdB

Here, without a library subscription, the only readers are those with

personal subscriptions. Finally,

(3) WP(p^,m) = V(p^,m) - V(p^,m) =

P3 rB (B-T)h(B,T,m)dTdB

.00 (p^-T)h(B,T,m)dTdB.

P

^ 0

Thus, the personal subscribers contribute nothing to WP, and the

perusers are willing to pay their full benefit, net of inconvenience,

B - T. However, the potential subscribers add only the difference

P5 - T between their evaluations of the library inconvenience and the

money cost of a personal subscription^.

Using the willingness to pay concept, we can identify the libraries

which are just indifferent to acquiring the journal. Such marginal

libraries will be denoted by the index m*. with

(4) WP(Pg,m*) = p^.

For convenience, we take m to be a scalar index defined so that the

WP function is increasing in m. (In Appendix 2 we show how to arrive

C2-7
at our results with a mathematically more satisfying representation of

multidimensional ly differentiated libraries.) Letting f(m) be the number of population groups with characteristic m,

(5) f (m)dm

is the total number of subscribing libraries.

S Denoting by N the total number of personal subscribers, publisher

profits are

(6) = p^N^ + p^^N*- - C(N^ + N^).

Total social welfare generated by the journal in question, given by the

sum of producer's surplus and consumers' surplus,^ is denoted by

W = V + TT, where

(7) V

=

,00

m'

(V(p3,m) - p^)f(m)dm +

|-m*

0

\/(p^,m)f (m)dm.

Now, we can turn to the choice of p^ and P[_ which maximizes W subject to the constraint that tt ^ 0. Forming the Lagrangian, i=W + ATr = V+ (a+1)tt, we investigate the necessary first order con- ditions for positive optimal prices:

(8) - + (A+1)

ap<

and

3p^ 9P|_ 9p^

Calculating from (7), (2), and (1), we have

= 0

= 0.

3V_

ap, f (m)dm - 1^ [V(m*) - dp,

V(m*) - P|_]f(m*)

C2-8
However, because of the definitions of m* and WP, (3) and (4), the

second term is zero and we are left with this familiar version of

Roy's Law^

(9)

3P,

Similar calculations yield

(10)

3V_

dp,

Routine differentiation of the profit function (6) gives this

solution to the simultaneous equations of (8), where c denotes the mar- ginal cost C (N^+nL):

(11)

Pl-c

Pc-C

-X

x+1

1 L S S L -N

-N

N

f Ll

Here, subscripts S and L denote partial derivatives with respect to

PS and PL. Of course (11) is the standard Ramsey rule for optimal

deviations of prices from marginal costs under the nonnegative profit

constraint."^ If the cross demand partials are zero, then (11) reduces

to the familiar inverse elasticity rule.^ In the present form, (11) is

not very illuminating. A more useful formulation can be derived by substituting into it detailed relationships among the partial derivatives

of demand extracted from the underlying model.

Working from (5), we obtain

(12)

9m*

9P3

f(m*)

Implicit differentiation of (4) gives

(13)

and

9m* ^

9Pi

1 gWP

9m

9m*

_3PS_

9m*

9P,

9 m* ^ aPc

9WP

- 9P3

C2-9

9WP

9P3 W

9m
Note that |~- > 0. by construction, so that (12) and (13) imply that

< 0. Turning back to the definition of WP in (3), we calculate

(14)

3WP

3P3

Ps

h(B.T,m*)dTdB = PN''(ni*).

0

This is just the number of potential subscribers who frequent each

marginal library. Together, (12), (13), and 04) yield

(15) = - PN^(m*)N[] > 0.

The number of personal subscribers in a population, m, with a

subscribing library is

(16) '(m) = h(B,T,m)dTdB,

Ps 'Ps

and, without a subscribing library,

(17) W =

fOO h(B,T,m)dTdB.

Ps

'

Differentiating the total number of private subscribers.

(18)

m' N^(m)f(m)dm + l^(m)f(m)dm:

m'

with respect to p^, which affects only the set of subscribing libraries

C2-10
(19)

- f(m*)[N^(m*) - N^(m*)]

L 3p

L

dp.

f(m*)

fPc

Pq

'

h(B,T,m*)dTdB = ^

f (m*)PN^(m*)

9p^

Now, together with (15) and (12), (19) reveals that

(20) 1^ = = - PN^(m*)N|; >_ 0.

The relationships in (20) are both surprising and useful. Personal

and library subscriptions are gross substitutes, provided there are potential subscribers in the marginal libraries.^ Despite the fact

that the demand for library subscriptions is determined by the simultaneous collective decisions of many population groups, while

results from the individual decisions of the agents, the Slutsky

symmetry of the demand cross-parti als (with no income effects) is

preserved.

S

It remains only to investigate the behavior of N with respect to

changes in p^. Working from (18),

(21) = |^f(m*)(NS^m*) - N^(m*))

N^(m)f(mjdm + N5(m)f(m)dm

m'

We denote by the negative terms in the brackets which represent the

derivative of N with respect to p^. holding constant the set of subscribing libraries. Using (13), (T4), and (19), we have

9nr

3Pc

f(m*)(N^(m*) - N^(m*)) = -N3PN^(m*).

Thus, (21) can be rewritten

(22) N3 = - N3PN^(m*) + £ N3 < 0.

C2-11
Together, (22) and (18) yield considerable insight into the

structure of demand and the optimal prices. Note first that the

Jacobian,

of the map giving N and N as functions of ps and p^ is an NP matrix

(i.e., the principal minors alternate in sign from negative, for the

1x1 minors, to positive). This is so because both N§ and Np are negative and, using (20) and (22),

^

+ (PN^(m*))^NL - N}](PN^(m*))^ > 0,

Thus, the interrelated demands for library and personal subscriptions

are "normal" in the sense of Sandberg [llj. If ps and PL change, the

demand for at least one of the goods moves normally, in the opposite

direction to the movement in its price. For example, if both prices

rise, both demands cannot simultaneously increase. We think the fact

that and comprise a normal demand system is a confirmation of the

plausibility and applicability of the model. Further, the NP property

of the demand Jacobian may be a useful restriction on estimated demand

equations.

Turning to the optimal price rule, we note first that at the

profit constrained welfare optimum, both ps and p|_ are strictly above

the marginal cost, c. This follows from (11) in that N^nL - N^N^ < 0

and -N^n"- + H^H^ < 0; N^N^ - N^N^ > 0, by (23); and finally X >. 0 by

the Kuhn-Tucker conditions. Moreover, if A were 0, ps

= c = pl, which,

by the assumed increasing returns, would leave costs uncovered and

violate the constraint tt ^ 0. Thus A > 0, p^ > c and p^ > c.

Now we can delve into the determination of the optimal ratio.

Pi -c

p E ——, and rewrite the basic equation (11) several ways to expose

P3-C

the roles of the underlying variables of the model. Rearrangement of

C2-12
(11) yields:

(24)

Using (22),

(25)

P

= Pc-c

S L S S

P = -N3N'- + N^N^

Now, substituting (20) into (25) and rearranging yields

(26)

It follows that

p = PN^(m*) + -p

L S

J

+ PN^(m*)N^/N^^

•

'^S L PN"'(m*) < p < PN^(m*) + ^

-3

Thus, PN (m*) >_ 1 would immediately imply that p > 1, that the optimal

library price exceeds the optimal personal subscription price.

Now, to contrast the formula for p with the classic inverse 3 . elasticity rule, divide the numerator and denominator of (24) by N Nl"

and use (20) to get

Nc/N^

-f-L + PN^(m*)

(27) p = ill ^

1 + PN^(m*) ^

Of course, if PN^(m*) = 0, then the cross-elasticities vanish and

(Pl-c)/P| S S S

(p,-c)/p, = T ' ^^^'^^ =

J

L C2-13
and

Otherwise, the needed modifications in (27) require only the number of

potential subscribers and the ratio of the number of library to

personal subscriptions.

III. Determining Best Price Adjustments from Current Data

There is considerable methodological difficulty in deriving

from (26) and (27) insights that are relevant to current practices

of journal pricing. The variables (elasticities, circulations, and

number of potential subscribers) to which the formulae relate p are

all to be evaluated at the to-be-determined prices. This endogeneity,

endemic to necessary first order conditions, means that the optimal

prices can only be determined as the solutions to simultaneous

equations whose global behavior is almost impossible to deduce from

available local data. Further, intuitions that we may have concerning

current values of the variables governing p cannot be logically

utilized via such first order conditions as (26) and (27) to illumine

the optimal prices. We cannot use a comparison, for example, of

(N^/nS) / [n[;/N^) across journals to deduce from (28) a comparison of

the corresponding optimal values of p. The relevant quantities to

compare, holding other components of (27) equal, are the values of

(n^/NSJ/[n[-/N^J at the different optima. But these, themselves, are the objects of interest.

Fortunately, there is an analytic line of inquiry which

circumvents these conceptual difficulties. We can ask for the direction

of change from the current prices which is best for social welfare

while preserving the current level of profit. It can be shown^° that

P. -c if the current p = is greater than the current value of \i) (defined

Ps"

in (24)), then the best, profit constrained, directiqn of change

required that p, be lowered and p^ be raised. Inversely, if, at current

levels, p < i];, then pl should be raised and p^ lowered. It should be

emphasized that these calculations do not necessarily indicate the

relationships between the current and the optimal prices. Instead,

they give the best local price adjustments that can be determined

from strictly local information on the relevant functions.

From this point of view, ijj, calculated at current values of the

variables, can indeed be meaningfully compared with the current ratio

Pi -c Since both (26) and (27) give expressions equal to 4^* they can

serve as vehicles for the application of current data to the study of

C2-14
present journal prices, yielding recommendations for the best direction

of change. It now becomes meaningful to investigate the behavior of

\l) with respect to its component variables. This is not the standard

comparative statics technique which requires consideration of the

feedback between the underlying parameters and the consequent optimum

at which the equations are evaluated. Instead, we study the level of

iiy always evaluated at current prices, as a function of the values its

parameters could take on as they pertain to different journals. Here,

these parameters need not be viewed as functions of prices, as they

must in comparative statics (with prices endogeneous) , because the

prices are themselves parametrical ly fixed at their currently realized

values.

We shall first utilize this novel and powerful technique to

establish conditions under which it can be unambiguously asserted

that welfare would increase (without affecting profits) by introducing

a positive margin between currently equal library and personal subscription prices. This assertion can be made if the current value of

ijj for a particular journal, with p^ =

P|_, exceeds 1. For this

journal, the current p is equal to 1, less than 4), indicating that

P|_ should be raised and p^ lowered.

For notational convenience, let

k

= -r , n = \ and Z = PN^(m*)

Using the representation of i|; given by the right hand side of (27),

^ k + Z

(28) , - 4^

which reduces to

^

=

k + Z

1 + Zn

when Pl = PS"

C2-15
Thus, ij; > 1 is equivalent to (k-1) + Z(l-n) > 0. This condition

will be met whenever the circulation ratio, n, is less than 1 and the

ratio of the elasticities, k, is greater than 1. The meager empirical

evidence suggests that k is significantly larger than 2, for all

journals studied. Further, the best available data indicates that

n < 1 for a majority of technical journals. Thus a finding that

i) > 1 for a journal with = pl would not be surprising, and the

policy recommendation to differentiate the subscription prices,

Pl > Ps» would be rigorously justified.

For journals already charging differentiated prices, the

investigation of the best direction of price changes requires more current information. If k, n, and Z were known, then the test is just

p < However, Z may be more difficult to estimate than are k or n. Nevertheless, we can use (28) to determine the minimum value of

over all Z >^ 0, as a function of k and n. If for a particular

journal it should be the case that p < ^m-jn, then surely p < and

the recommendation to increase p|_ and decrease p^ would follow.

Holding p^, P5, k, and n constant, (28) shows that ^ is either

monotone decreasing or increasing in Z as (pi /ps)nk is greater or less

than one. In the latter case, ij^^in - (Pi/Psik. In the former case, we

need an upper bound on Z to establish a Tower bound on i).

Together, (20) and (22) yield

(29)

Substituting this uppen bound for Z into (28) gives

(30) for nk > 1 min

C2-16
Note further that the expression given for i/j^iin (^0) is an increasing function of k. Hence a perceived lower oound on k can be

substituted into (30) to yield ip^^^ as a function of the directly

observable values of P|_, p^, and n. Moreover, by equating (30) to p, we can solve for the unique value of k, k*, for which p =

il^min.

(31) k* = — np'

It follows that if k > k*, and if the condition for the validity of

Pl

(30), nk >_ 1 , is satisfied, then p < il^^in* ratio of P|_ to p^

should be increased.

We now apply these methods in a pilot study of the 1975 prices

of five economics journals: Quarterly Journal of Economics (QJE);

American Economic Review , together with the Papers and Proceedings , and

the Journal of Economic Literature (AER) ; Journal of Political Economy

(JPE); Ec'on'omi c~lnqui ry 1 EI ) ; and the Journal of Economic Theory (JET).

The prices, taken from the public record, pertaTn to all issues

published in 1975. For the association journals (AER and EI), P3 was taken to be the membership fee, and we ignore any benefits and costs

of membership unrelated to the journal subscriptions. Circulation

figures, and N^, were obtained directly from the editorial offices.

The marginal costs were calculated form the formula,

^

10,000 .825 + .564 In

S L 1000

+ .870 In

annual pages

100

and then inflated by 25 percent. These data appear in columns 1-6 of

Table 1. Column 7 holds p, the ratio of the deviations of the

subscription prices from marginal cost, which is to be compared with

P|

For each of the five journals, — nk > 1 for k > 2, and so we can

Ps

presume^^ that (30) applies. Column 8 lists the values of i).

computed from (30) with the underestimate of 2.0 used for k. Column 9

exhibits k*, the value of k which would make li^^-jp = p.

These calculations suggest that p is indeed well below for all

the journals but JET. Both intuition and the evidence support the

contention that the own price elasticity of personal subscriptions is more than twice that of library subscriptions. With k > 2, both

columns 7 and 8 show that the values of p are below those of ip min' The

policy conclusion is that net consumer welfare can be increased,

while the levels of publishers' profits are maintained, by simultaneously

increasing pj^ and decreasing p^, for QJE, AER, JPE, and EI.

C2-17
—I

CO

«— LT) <3\ «^ 0 *

r~~ r~- r~ r— CTi r—

II 00 LO CM r>« 00 <=*^ c 1

^J CM CM E o u 0 CO U5 00 1 1 0 «>^ 0 CTi _J

a. Q. r— CM CM CM CM

tn 00 tCM un

00 1

Ln CO 0 u • • • • • LO 00 r~

(/I V£> 0 00 0 CO

<u 00 CO r— 1

cn VD CM CO 00

(T3 rv Q. ro

2: CM ro cy> 0 CM CO "d- ^ CO

_l 0 0 0 0 0 0 0 + Ln in 00 un

un 00 CO

CM 0 0 0 0 0 ID 0

_J • • • • • Q. 0 0 CT> CM C\J 0 0 0 0LT) Q. ID CO LO •=d^ CM 1

CO

UJ LU \-

cn •"3 UJ Q- 1—t

LU

c=y =c -D LU "3 •

S4_J n3

S-cu1 > _J

(JE0

c:0

LlI 01

roc

s-30

0) +JTJ • <o Q.

</) 11 cnc c

•1— •r- a E

<u

<uu0 0

s- D_ x: 0 S C S_

fO 0

4-

LO

s- Jii cuQ. <4- <a 0

Cl. OJ

I/) -0 > 0 OJ c x: 1—1

1—

C2-18
For JET, Table 1 shows that it is unlikely that p < ii.mm' Since — nk > 1, is decreasing in Z, and (28) yields (i^mav = TT" k.

Ps p^^ Ps

Since -— = 2, p < ^p^^^ for k > 1.5. Thus, for reasonable values of k,

lilaX

li'niin < P ^ ^max» cannot reject the hypothesis that the

subscription prices of JET satisfy the optimal ity conditions. In fact,

rearrangement of (28) shows that p = if k and Z satisfy k = 1.5 + 6Z.

It is certainly plausible, for example, that Z = .5 and k = 4.5.

Thus far we have studied welfare maximization, and our concern with

profits has been restricted to the constraint of nonsubsidized

viability of the publisher. However, these very same tools can also

be usefully applied to the study of profit maximization.

The first order conditions for the choice of P|_ and p^ which is

optimal for profits can be expressed as

(32)

Pl - c

Ps - c

-1

L S SI

K -N

-N

,S

This matrix equation can be derived from (11) by letting A <». This

follows heuristical ly from observing that as x grows large, the Air term

dominates the W term in the Lagrangian underlying (11), and, in the

limit, maximization of L is tantamount to the maximization of it.

It is evident from (32) that a necessary condition for the current

levels of p. and p^ to be profit optimal is that p = iJj. Thus the results

displayed in Table 1 can be interpreted as evidence that all the

journals but JET are neither successful profit maximizers nor constrained welfare optimizers.

However, with the profit objective function, inequality between

p and ^ cannot be utilized to determine the best direction of price

change without either further information or additional assumptions.

Algebraic manipulation of (32) reveals that

(33) as 9Pc ^ 9Pi

C2-19
One interesting application of (33) concerns a publisher who is currently

charging a profit optimal nondiscriminating price (p^ =

P|^ and p = 1).

At these equal prices, |^ + |f- = 0. It follows then from (33) that

if, at current values, > 1 = p, then -r^ > 0 and < 0. In such a dp^ dPg

case, increasing Pj^ and decreasing p^ would definitely increase profits.

Together, (32) and (11) show that prices which are profit optimal

and prices which are profit constrained welfare optimal both satisfy

the condition p = ^. However, it is also evident from the equations

and from common intuition that the former prices will both be larger

than the latter. Of course, this is a reflection of the well-known

welfare loss due to profit maximizing monopoly behavior.

IV. Profit and Welfare Optimal Choices of Provision Modes

In the present context, new and significant questions arise: Is

there an additional welfare loss caused by the monopolist choosing a socially suboptimal set of provision modes? Will the monopolist

refuse to make the journal available to libraries or perhaps to

personal subscribers? Might these also be the constrained welfare

optimal choices of provision modes?

In one sense, these structural questions can be viewed from the now familiar standpoint of pricing. Clearly, P|_ or pc can be set high

enough to drive to zero library or personal subscription demand.

However, this view obscures the causal economic forces. Indeed, the

very form and interpretation of the \i) function changes with the

provision modes generated by the changing levels of p<> and p. . There

are several cases to consider.

First, suppose P|_ were set well above the willingness to pay of

all library populations. Then, of course, n'- = 0 and Ni- = 0. It

follows from (20) that here = = 0. Thus, in this case, the

publisher effectively faces only the market for personal subscriptions

and consequently, the public good aspect of the situation is absent.

By lowering p. to the level of the maximum (over library populations)

willingness to pay, the publisher gains that amount, less the marginal

cost, while losing Po - c for each prospective subscriber in that

'library population. It is they who leave the personal subscriptfon

market in favor of utilizing the newly acquired library copy. The

welfare effects are the gains, B - T, of each peruser who now has access to a library copy, the cost c of providing that copy, and the

ambiguously signed T - c of each subscriber. The profit impact of

opening the library market is also ambiguous.

C2-20
As p. drops further, these processes continue with additional

libraries acquiring the journal, becoming negative and with and

becoming positive. This is the case in which both provision modes

are fully operative and the formulas (11) and (33) govern the optimal

prices.

Only the library mode is operative when p^ is set above the reservation prices of all agents. In this case there are no personal

subscribers and no potential subscribers using the libraries. The

profit maximizing publisher sets the monopoly level for p, , viewing

the libraries as the only effective market.

As P5 falls to the level of the largest B in the population, two

different cases can occur. If the agent with the maximal B has T > B

> c, then he will purchase a personal subscription, whereas previously,

when p^ was higher, he was neither purchasing nor using the library.

In this case, both profits and welfare unambiguously increase with the

opening of the personal subscription market. At such a set of prices,

the library and personal subscription markets are both operative, although

decoupled from one another. This is so because there are no potential

subscribers, and hence, from (15), = = 0.

If, instead, the agent with the maximal B has B > T, B > c, then

the reduction in p^ to just below the level of his B does not induce him

to switch from library use to a personal subscription. Yet, his

willingness to pay for the library copy is diminished. This can cause

the set of subscribing libraries to shrink, an unfortunate eventuality

for both welfare and profits. However, as pq falls further, new

personal subscribers appear and both the welfare and profit effects

are ambiguous.

Hence, little can be said at this level of generality about the

welfare or profit preferabi 1 i ty of the diverse market structures we

have identified. To investigate the question of whether the welfare

and profit rankings of the different market structures agree, and,

further, to gain insight into the economic causes of such disagreement,

we have resorted to a class of numerical examples.

The mathematical model used in the simulations is a simplified

version of the one employed in Sections I and II. Production cost

is <t> + cQ. We assume that, in the B,T space, agents are uniformly

distributed over a parallelogram. Their benefits from reading lie

between zero and B"^^^. B^^^x is finite and greater than the constant

marginal cost c of producing a journal copy. Agents with some particular value of B have inconvenience costs uniformly distributed

between Tq + aB and T-| + aB. The parameter a, constrained to be

between zero and one, reflects the dependence on B of the mean

conditional inconvenience cost. If, for example, a were zero, the mean Inconvenience cost would be independent of the value of B. The

assumption that a does not exceed one is introduced so as to ensure that

at least for some values of personal subscription prices there will be

library readers. Figure 2 depicts the special assumptions made about

C2-21
the distribution of benefits and inconvenience costs. One shortcoming

of the uniform distribution is that with it we cannot generate the

interesting case of market decoupling in which both n'- and are positive but = = 0.

In order to simplify calculations even further we assume that all

libraries are identical, characterized by the same histogram function

h(B,T). As a consequence of this homogeneity, we cannot use the

formulae derived from (11) to calculate the profit-constrained welfareoptimal personal and library subscription prices. Given p^, the

willingness to pay and, hence, P[_ are uniquely determined. Thus, it

is no longer possible to simultaneously satisfy the first-order

conditions and the profit constraint. However, in the mixed case, when

both subscription markets are opened, the constrained welfare-optimal

personal subscription price, pg, is the smallest Ps ^ c which allows

the resulting profits, including P|_, to be nonnegative. The welfareoptimal mode of provision of the joujjnal is then obtained by comparing

the level of total welfare at P3 = pg and p|^ = HP with that attained

when p^ is set at the average cost and no library copies are provided.

In all the calculations, social welfare is measured as the difference

between the total gross benefits accruing to readers and the total

production costs.

In the simulations we use as a benchmark the case in which

provision of both personal and library subscriptions is optimal for

profit maximizing publishers as well as for welfare maximizing publishers

A profit maximizng publisher will be in this mixed provision mode if

and only if at least some agents with the maximum value of B have

inconvenience costs higher than this B. The mixed mode is welfare

optimal if the total willingness to pay (for the library copy) of

agents with T <_ c ps exceeds the sum of the marginal cost of the

copy, c, and the fixed cost, <i>.

Working from the benchmark situation in which the mixed mode is

preferred by both types of publishers, we investigate whether other

configurations of rankings of the market structures can be generated

by suitable changes in the values of the parameters B"^^^, Tq, T-] , a, c and 4>.

The striking result is that, for some parameter values, the

welfare and profit rankings of provision modes are diametrically

opposed. Profit maximizing publishers would sell only to libraries,

while constrained welfare maximization requires that only personal

subscriptions be sold.

This extreme scenario is caused by two fundamental properties of

the distribution of agents. The first is the small willingness to pay

of those who would patronize the library when p^ is set at c (or

as close to c as possible) by the welfare optimizing publisher. This

can be the result of only a small number of agents having T < c, or of

C2-22
a tight positive association between B and T (B s T so that B-T z 0)

of those with T < c. In such cases, welfare is served by foregoing

library provision of the journal.

The second critical property is the lack of a strong positive

association between the B's and T's of the high B agents. With many

agents having a large B-T, the aggregate willingness to pay is large,

in the absence of a personal subscription alternative. The publisher

is able to appropriate all of this surplus via the P|_ collected from

the perfectly purveying library. If, however, personal subscriptions

were to be offered, then the willingness to pay of the high B, low T, now potential subscribers would be diminished from B - T to p^ - T.

The counter-balancing profit increase arises from the high B, high T

agents whose new contribution to profit as a personal subscriber,

P3 - c, is larger than the old willingness to pay, max(B-T, 0). The

profit losses outweigh the gains, and the profit maximizing mode is

library subscriptions only, if there are more high B-low T than high

B-high T agents.

These two properties of the distribution of agents can be generated

in our simple model by setting T^ close to c, a small, and Bj^^^ large

relative to Jy Less delicacy is required to generate the case in which

welfare prefers both modes while profit maximization excludes private

subscriptions. It is also possible to generate the case in which, due

to a strong positive correlation between B and T, profits are maximized

by the exclusion of library sales.

Numberical simulations confirm our expectations that different

provision modes may emerge from profit and welfare maximization. It

is therefore important to know whether the loss in social welfare

from the presence of monopoly can be significantly diminished by

constraining the monopolistic publisher to the socially optimal mode.

Governmental intervention into the structure of provision modes is

desirable whenever the mixed mode is socially preferred, while the

profit-maximizing provision is restricted solely to individual

subscribers. In this case, there can be a significant gain in welfare

resulting from the establishment of proper provision modes, even though

the profit-maximizing firm will not charge the welfare optimal personal

and library subscription prices. Simulations show that without libraries,

at profit optimal personal subscription prices, social welfare is

approximately one-third of the maximum welfare attainable under the

mixed mode. If the monopolist is constrained to operate within the

mixed mode, social welfare increases, often up to 70 percent of the

maximum attainable level. The reduction in profits that results from

the constraint imposed on the profit-making publishers is, in most cases,

substantially less than the improvement in coi^sumer welfare.

C2-23
Unfortunately, however, regulation of the provision mode offered

will be ineffectual in the most intuitively plausible case of profit

maximization excluding personal subscriptions while welfare optimization

requires both provision modes. Here, to satisfy a mixed mode constraint,

the profit oriented publisher need only set p^ low enough to attract

a few personal subscribers. The welfare effect of opening such an unattractive market would be minimal.

Curiously, simulations reveal the possibility of perverse effects

of mode regulation. If a profit maximizing firm which desires to

exclude personal subscriptions is forced into the welfare optimal mode

of excluding library sales, it may then set its profit optimal p^ so high that all welfare gains from proper structure are thereby nullified.

Thus, the partial correction of a market distortion through regulation

of the provision structure may worsen, rather than improve welfare.

V. Welfare and Profit Effects of Library Usage Fees

In this section we study the economic impact of the imposition of

a fee for the use of library journals. We maintain our underlying

assumption that the journal is an excludable public good, so that the

marginal cost of usage in a library is zeroo Nonetheless, it is

conceivable that a positive usage fee (greater than the associated

marginal cost) is both welfare and profit desirable. This is so because such a fee would discourage library use, and, in the previous

section we uncovered instances in which the very existence of library

subscriptions was baneful to profits and welfare.

When the usage fee is paid to the journal publisher, it can be

interpreted as a royalty payment to the owner of the copyright. Thus we feel that our analysis can illumine the current debate over the

appropriate extent to which copyright law should apply to library use. We find that, under weak and plausible conditions, a positive usage

fee is indeed optimal when welfare is maximized subject to the profit

constraint. Further, under these conditions, without a profit

constraint, the introduction of a usage fee, accompanied by an appropriate change in P|_, will increase both profits and net welfare.

Moreover, if a profit maximizing publisher is given the right to

charge a small use fee, then there exist accompanying reductions in

Pl and P3 under which both profits and consumer welfare increase.

However, it must be recognized that such adjustments in PL and p^ are not necessarily in the interest of the publisher.

It is straightforward to incorporate a usage fee, p^, into our

model. With a library available, an agent will purchase a personal

subscription if B > p^ and P3 < T + p^,. He will be a prospective

subscriber (and library reader) if B > p^ and T + p^^ < p^. The

other library readers, the perusers, are those with B < p^ and

T + p < B. Figure 3 pictures these regions of B, T space.

C2-24
The willingness to pay of the library population m is now, given

that we exclude the trivial case of p^^ >_ p^.

(34) WP(p3,p^,m)

Ps-Pu

P3 JO

(Ps-T-Pjj)h(B,T,m)dTdB

Pu

'

B-p

(B-T-p^)h(B,T,m)dTdB .

Its derivative with respect to p is minus the number of library

readers. This is the function or p^ and p^^ given by

fPs-Pu

(35) LR(p3,p^,m) = h(B,T,m)dTdB

'Ps

'

B-P.

h(B,T,m)dTdB.

Pu

'

The derivative of the willingness to pay with respect to p^ is still

the number of prospective subscribers, now given as

(36) PN^(P3.p^^.m)

Pc-P

"^u h(B,T,m)dTdB . Pc

'

The marginal library, m*, is now the function of p^, Pl, and

p^j given implicitly by

(37) WP(p3,p^,m*) =

P|_

C2-25
Its derivatives with respect to the prices are

(38)

am* _

3Pj_

"

3m

3m*

3P3

PN^(m*)

3WP

3m

and

3m* _ LR(m*)

3p " 3WP

3m

(39)

Consumer welfare, V, is now given by

m* ''p^- Jo

V

= (B-T-p^)h(B,T,m)f(m)dTdBdm

f°° fPt

•'m*

B-P.

(B-T-p^)h(B,T,m)f(m)dTdBdm

>0O rCO

m* J

(B-p2)h(B,T,m)f(m)dBdTdm

- Pi

,»00 •m* .00

f (m)dm + 'm* ^ 0

• 0

'

(B-p3)h(B,T,m)f(m)dBdTdm .

The first three terms capture the net benefits respectively of the

prospective subscribers, the perusers, and personal subscribers in

populations with libraries. The fourth term is the total payments for

library subscriptions, and the last is the net benefits to personal

subscribers in nonlibrary groups. Differentiation shows

(40)

^Pu 9P, ^

*

C2-26
and

9PS

Here, LR is the total number of library readers.

(41) LR(m)f{m)dm .

N is as previously, and

(42)

1* J

h(B,T,ni)f(m)dBdTdm

»oo

0

• 0•

h(B,T,m)f(m)dBdTdm .

Profit now includes the revenue from the usage fees:

(43) TT = p^LR^ + Pj_N^ + p^N^ - C(nW).

We are now equipped to study the welfare and profit effects of

the introduction of a positive usage fee. These are reflected in the

behaviors of the V and tt functions at p^ = 0. Consider the introduction

of a small p^^ accompanied by a decrease in P|_ which exactly compensates

the users of the marginal library. Together, these price movements

leave the set of subscribing libraries unchanged. The ratio of such

price changes is computed from (38) as:

(44)

dp^

dp;

3m*/ 3

P

3m*/9p^ = - LR(m*)

m'

C2-27
The resulting rate of change of profit can be calculated from (43) and

(38) to be

(45)

3p ap

u

9lT ap,

r dp^

dp~

m*

>

LR^ - LR(m*)N'- + A

where

(46)

f(X> fOO A = (Pg-c)

J m* . h(B,p<,,m)f(m)dBdm

With p^ > c, A >_ 0, and

condition that

au

9P. will be positive under the plausible

(47) Lr"'"/n'- > LR(m*) .

This just says that the number of journal readers in the marginal

library is less than the average number of journal readers in the

subscribing libraries.

The effect of the compensated change in p^, on net welfare is

(48)

a(V+Tr) ^

a(V+TT)

9 P. ap,

dp,

dp. m'

= A

Equation (46) shows that this is positive if p^ > c and if there are

any potential subscribers with T = P3. These agents are indifferent

between library use and subscription purchase at p^ = 0. When Py is

increased, they are induced to buy personal subscriptions, with no welfare loss. However, these new purchases increase profit by A. Thus,

given that A > 0, net welfare can be strictly increased by implementing

a positive usage fee. Moreover, given the likely condition (47), the same set of price changes will also increase the publisher's profits.

C2-28
Here, the potential increase in net welfare from the introduction

of Pu > 0 is driven by the increase in profit. However, if society

grants the right to levy a usage fee to a profit maximizing publisher,

then there are accompanying decreases in P5 and PL which will result in

improvements in both profit and consumer welfare. With both P5 and p|_

(45) shows that

0. If

set to maximize tt at p^ = 0, dv/dp^ 3TT/apj^ = 0.

with A > 0 and (47) satisfied, dn/'dp. = 0 implies that 3it/3p >

lr'

-dp dp > 0, then =

3tt 3P. dp +

^u

3^

9Pc

dp- > 0. Also.

dV =

9P. dp +

'^u

3V

9P<

dPc = dp.

dp

> 0

Thus, there exist finite changes in p^ and P5 which increase both -n and V. Similarly, it can be seen that there is a decrease in p|_ which

makes both the publisher and the consumers prefer a positive usage

fee.

Nevertheless, it is problematic whether the profit maximizing

publisher would find it in his own interest to effect these requisite

price reductions if he were to be granted the right to collect a usage

fee. In response to the increase in demand for personal subscriptions

resulting from the newly positive pu, the publisher may well find it

profit optimal to raise P5. He may be willing to allow m* to increase

instead of lowering p|_ to keep the number of library subscriptions

constant. In short, consumer welfare may be lowered by allowing a profit minded publisher to charge a usage fee, even if its level is

governmental ly set.

C2-29
In contrast, consumer welfare is improved by the introduction of a usage fee when ps and PL are chosen optimally for net welfare subject

to the nonnegative profit constraint. To show this we view p^ as a parameter in the Ramsey maximization, and use the envelope theorem to

calculate the derivative of optimized net welfare with respect to p^^

at p^ = 0. This yields ^^p^^^* = |^ , where L is the Lagrangian of

^ u the program, evaluated at Pu = 0 and at the optimal ps, pl, and x. X is necessarily positive, since, otherwise, ps and p|^ would be set equal

to marginal cost and the nonnegative profit constraint would be violated,

Thus, the constraint is binding at p^ = 0 and it will continue to be so

dir* dV* dL

for small increases in p^. It follows that = 0 and = . With p^ = 0, recalling (46), " u u

(49) M_= -lrT + (x+1)

+ (p^-c)PN^(m*) 1^ f (m*) + A

^ ^Pu

At the Ramsey optimum.

(50) 1^ = -n"- + (X+1)

dp. (p,-c)|^f(m*)

+ (p3-c)PN^(m*) 1^ f(m*) = 0.

Multiplying (50) by LR(m*) and subtracting from (49) does not affect

9P.

the value of |^ . Then, (38) yields

u

A[LR^ - NkR(m*)] + (A+1)A . ^Pu

C2-30
This is strictly positive, given (47), since we showed in Section II that with = 0, the Ramsey optimal ps is greated than c, and this

suffices for A >_ 0. Hence, comsumer welfare is strictly improved by

vesting publishers with the right to levy usage fees, under the proviso

that library and personal subscription prices are set to maximize net

welfare subject to a profit constraint.

Let us review the insights for public policy gained in this

section. Overall, we find that a positive copyright usage fee is an instrument which is desirable for net social welfare when properly

employed. In particular, net welfare can be increased by the extension

of copyright protection to the use of journals in libraries if the

library subscription price is simultaneously reduced so as to maintain

the set of subscribing libraries. These same price changes also

raise publisher profit if the number of readers in the marginal library

is less than the average number of library readers. This gain in profit

is caused by the shift of marginal prospective subscribers into personal

subscriptions which are priced above marginal cost. There are also

counter-balancing (around p^^ = 0) effects on consumer welfare and

profit due to the usage fee payments.

Further, we have shown that a usage fee is a beneficial

instrument in the hands of a welfare minded price setter. Specifically, consumer welfare is increased by the introduction of copyright protection

to library journals when the subscription prices are chosen optimally

for net welfare, subject to a breakeven profit constraint. It can be

conceivably argued that nonprofit journal publishers do, in fact, seek

to set prices in this way. Then, for this major category of publishers,

our results may be interpreted to recommend library usage charges.

For profit maximizing publishers, moreover, the introduction

of a copyright fee can increase both consumer welfare and the level of

profits. However, this improvement in consumer welfare is predicated

upon the implementation of concomitant reductions in the library and/or

personal subscription prices. Such price reductions will not, in

general, be profit optimal, although, accompanied by the new usage fee,

they will result in higher profits than were previously attainable.

The challenge for public policy is to develop an institution which will

tie the consumer beneficial price reductions to the profit improving

copyright protection. The present analysis shows the existence of such

a compromise pricing package which will benefit both publishers and

readers.

C2-31
APPENDIX 1

The Ramsey Suboptimality of Perfect Purveyance

of Excludable Public Goods

In Section V we showed that full Ramsey optimal ity requires a positive usage fee. This is not too surprising since we are accustomed

to Ramsey optimal prices being above the corresponding marginal costs,

and here the marginal cost of an additional library reader is zero„

The usual reason for this result is that with increasing returns to

scale in production, prices must generally be above marginal costs for revenues to cover total costs.

Here, we show that perfect purveyance of excludable public

goods is Ramsey suboptimal for a new and different reason. We consider

a rule that each library must finance the proportion a of the

subscription price Pj_ by means of a use fee whose size then varies

over 1 ibraries:

Under this regime, with a > 0, the library does not perfectly purvey

the noncongested journal copy, and the use payments do not contribute

directly to cover the publisher's total costs. Yet, we shall see that

the Ramsey optimal value of a is positive. The sole effect of the

introduction of a positive a is to raise profit by the mark-up on the

personal subscription sales to the former marginal potential subscribers.

Because the profit constraint is binding, this profit increment enables

P5 and p. to be lowered, bringing profit back down to its previous level,

and increasing consumer welfare.

To establish this result, we note first that given (Al), m* is

implicitly defined by

(Al) p^(a,m)LR(m) = aP|_ .

(A2) WP[p^(a,m*),m*] = p^d-a) .

Differentiation yields

8WP

(A3)

dm*

da 3WP

3m ^ 3WP

ap

^am

C2-32
As before, d^P/dp^ = - LR, and, from (Al), at a = 0, apy/9a = P|_/LR.

Substituting these facts into (A3) gives, at a = 0,

(A4) dm*

3a

= 0

The derivatives of consumer welfare, V, with respect to a,

at a = 0, can be calculated from (39), recognizing that now p^^ is the

function of both a and m given by (Al).

The calculation shows that, at a = 0,

(A5)

3V

9a

= 0

Profit is now simply tt = p^N^ + Pi^n'- - C(N^+n'-), where and n'" are

given by (42) and (5), again remembering that (Al ) and (A2) give new interpretations to p and m*. Here, in view of the critical (A4),

calculation shows that at a = 0,

(A6) 3a

^" 3p^(0,m)

m' 3a

h(B,p^,m)f (m)dBdm

= Pi LRlmy

m'

h(b,P2,m)f (m)dBdm >_ 0

Applying the envelope theorem, as in Section V,

= 3^ = IV ^ /"I^^N > Q y^^-g inequality is strict whenever there

da 3a 3a ^ ^ 3a -

are any marginal prospective subscribers in any of the subscribing

libraries. In this case, Ramsey optimized net or consumer welfare is

strictly increased by the imposition of a positive a.

C2-33
It is interesting to note that each library population would

prefer to circumvent the positive a rule and to pay P|_ solely out

of the lump sum taxes characteristic of perfect purveyance. However,

each library population benefits from the decreases in p^ and P|^

which results from collective adherence to the rule.

C2-34
APPENDIX 2

Multidimensional Characterization of Library Populations

Throughout the paper, we have characterized library populations

by the scalar m, and have assumed that the willingness to pay is increasing in m. This is an overly restrictive formulation which, however,

finds frequent use in the literature. Here we show how the model can

be considerably extended to allow for a multidimensional characterization

of library populations, without at all affecting the power of the one- dimensional approach.

Let each library population be characterized by the vector m =

(m-| , mp, m^), where m^- represents the number of agents in the

population m of type i. Type i agents are themselves characterized

by the density function g-j(B,T). Thus, the histogram function of the

population m is

n (A7) h(B,T,m) e J m.g.(B,T) . i-1 ^

^

All population specific structural functions have their analogues

defined for each agent type. Thus, here, for example, we have an analogy to (3) the willingness to pay of a unit population of type i,

wp^-. Then,

n (A8) WP(m) = y m.wp. . i=l ^

^

A population, m, is marginal if

n

I m.wp. = p, . 1=1 ^

^

Because WP(m) is increasing in each component, by (A8), a population

purchases a library subscription if

C2-35
(A9)

P, - I m.wp.

L i=2 ^ ^

wp

Here, we have arbitrarily chosen to normalize on m-i . Now, m* plays the same central role as that played throughout the paper by m*. Thus, for

example,

(AlO) n"- = JO JO m|(m2,. . . ,m^)

f (m^ . . . ,m^)dm^dm2. . .dm^ .

A specific analytic gain from this more general specification is

the replacement throughout of the "number of potential subscribers in

the marginal library," PN^(m*), by "the average number of potential

subscribers in the marginal libraries ." To see this, calculate from

(AlO):

(All)

9p,

0 J

am^(m2,.

ap, m|(m2,. . . ,m^) ,m2,. . . ,m^ • dm« ... dm

n

3ir

3P3

am|(m2,. . . ,m^) /-

JO ap,

m|(m2,... ,m^),m2,... ,m^ • dm^ ... dm

d n

Now, working from (A9),

3m*(m2,. . . ,m^)

^

C2-36
Also,

3m| n

3

I m.pn.

i=2 ^

^

n

P| -

I nrwp.

L i=2 1

T pn^ wp^

3wp.

3 where we have used the fact that t = pn., the number of prospective

3P3 1 subscribers in a unit population of type i. Substituting (A9) into the

above gives

,,,,, a^tt-2'--%) Jr^^"L p.s,

3P< wp^ wPi

Substitution into (All) yields

3N^ _ ^

3p wp-i

1N_ - J_

9PS

' wp^

«00 >00

r f

• 0 0

(.00 .oo

i*{m2 m^),ni2,. . . f (•)dm2. . .dm^

Thus, we have 3N^/3ps/9N^/3Pl_ = PN (m*), the average number of

prospective subscribers_Jp the marginal libraries. When the basic model

is specified this way, PN^(m*) replaces PN^(m*) throughout. The same applies to all the concepts specific to marginal libraries.

C2-37
FOOTNOTES

1. This debate was stimulated by the celebrated case of Williams and

Wilkins v. U.S. [13]. Summaries of various arguments and positions

can be found in [12]

.

2. For example, the analysis of Y. Barzel [1] rested on the public

goods properties of the information disseminated in journals,

while it ignored the public nature of library journal collections.

3. It was Ramsey [9] who first studied welfare optimal prices under

such a constraint. See [2] for a cogent survey.

4. See Willig [14], for the development of this general approach.

5. Thus, throughout, we ignore distributional effects.

6. See Katzner [8] for a clear exposition.

7. See [4], for example.

8. This rule was popularized by [2].

9. S. Berg's important study of journal demand [3], overlooked this

effect.

10. See Willig [14].

11. See Berg [3]. Research in progress by Y, Braunstein et al. [6] seems to indicate values of k significantly above 2.

12. See Fry and White [7].

13. These data for AER and EI are annually released publicly. The

of QJE, refused to give any information, the editorial office

offered estimates of 1975 + and NL/N^.

14. This equation was estimated by Y. Braunstein [5], from a 1973

cross-section of 56 technical journals.

15. We assume here that the prices of all costly factors of journal

production rose by 25 percent between 1973 and 1975. Both the

Wholesale Price Index of book paper and the BLS index of printing

trades wages did increase by approximately 25 percent between

those dates.

16. See footnote 11

.

C2-38
Of course, the conclusions rest upon the empirically untested

model, and upon the numbers presented in Table 1. We regard this

as a pilot study, hopefully pointing the way towards a full blown

empirical treatment of both the model and the relevant parameters.

Note that (20) and (22) can be utilized to generate several

testable implications of the model.

C2-39
REFERENCES

[1] Y. Barzel , "The Market for a Semi public Good: The Case of the

American Economi c Review ," American Economic Review , September 1971,

61, 665-74.

" ~~~ ~~~

[2] W. J. Baumol and D. F. Bradford, "Optimal Departures from Marginal

Cost Pricing," American Economic Review , June 1970, 60, 265-83.

[3] S. Berg, "An Economic Analysis of the Demand for Scientific

Journals," Journal of the American Society for Information Science , January 1972, 23_, 23-29.

[4] M. Boiteux, "Sur la gestion des Monopoles Publics astreints

ci I'^quilibre budg^taire," Econometrica , January 1956, 24_, 22-40.

[5] Y. Braunstein, "Cost Data for Publication of Journals - Preliminary

Analysis," Discussion Paper No. 76-02, Center for Applied Economics,

New York University, 1976.

[6] Y. Braunstein, "Economics of Journal Provision," (in progress),

New York University.

[7] B. Fry and H. White, Economics and Interaction of Publisher-Library

Relationship in the Production and Use of Scholarly and Research

Journals , Final Report, NSF Grant GN-41398, November 1975.

[8] D. W. Katzner, Static Demand Theory . Macmillan: New York 1970.

[9] F. P. Ramsey, "A Contribution to the Theory of Taxation,"

Economic Journal , March 1927, 37_, 47-61.

[TO] P. A. Samuel son, "The Pure Theory of Public Expenditure," Review

of Economics and Statistics , November 1954, 36, 381-89.

[11] I. W. Sandberg, "Two Theorems on a Justification of the Multiservice

Regulated Company," Bell Journal of Economics , Spring 1975, 6_, 346-56.

[12] United States Senate, Committee on the Judiciary, 93rd Congress,

Copyright Law Revision , Hearings on S. 1361, July 3T~and

August 1, 1973.

[13] The Williams and Wil kins Co. v. The United States , 172 USPQ 670;

478 F. 2d 1345 (180 USPQ 49).

tl4] R. D. Willig, "The Economic Gradient Method," unpublished

manuscript.

C2-40
FIGURE 1

/

//

/

/

/

PERSONAL

SUBSCRIBERS

/

/

/

/LIB />ERUSERSRARY READERS

POTENTIAL

SUBSCRIBERS

Ps

C2-41
C2-42
FIGURE 3

/

/

/

/

/

PERSONAL

SUBSCRIBERS

/

/

/

POTENTIAL

SUBSCRIBERS

/'ERUSERS

C2-43

APPENDIX D

THE ROLE OF COPYRIGHT PROTECTION AND

0PTII1AL PRICING IN COMPUTERIZED STI SYSTEMS

by

YALE M. BRAUNSTEIN*

NEW YORK UNIVERSITY

*The views presented in this paper are solely those of the author and

do not necessarily represent those of New York University.

D-1
D.l INTRODUCTION

This paper will apply the optimal pricing considerations developed in

previous papers (Braunstein and Ordover [1976] and Ordover and Willig

[1976]) to hypothetical computerized STI systems. We shall examine

the economic basis for the imposition of a system of prices that takes

into consideration the relevant factors of supply (costs) and demand.

For those price systems to be employed, it is necessary that unauthorized access to the output of such a system (to the information) be

controlled. The method of exclusion of nonpayers will, in part, rely

on copyright protection. The effects of optimal pricing and copyright

protection on the economic welfare of society (measured by changes in

producers' and consumers' surplus) will also be discussed.

D.2 BACKGROUND

In the words of Baumol and Marcus [1973], "libraries and computers may

be considered two opposite polar cases among information channels from

the point of view of past and prospective cost behavior." The trends

in library and computer costs that they showed for the 1951-1969 period

(reproduced here in Figures D.l and D.2) have continued.

Currently certain library functions have been automated and now operate

in a resource-sharing mode for groups of libraries. A prime example of

this is the Ohio College Library Center which reduces unit costs by the

sharing of the labor-intensive cataloging function. (See Kilgour

[1972] and Hewitt [1976].) Similarly many libraries have switched to

bar code label identifiers for both their collection and their users.

The bar code reader is connected to a computer which processes and

stores the relevant information. This system replaces the previous

check-out, recall, return, and inventory systems and reduces both labor

needs and costs.

Another trend in libraries has been the increasing use of a variety of

microforms. The now standard-bound volume, be it a monograph or a journal, requires an inordinate amount of storage space. Even if the

average "hard-copy" volume requires only 0.02 cubic feet of shelf

space, a library with 200,000 volumes (not an unusual amount for a small college library) requires 4,000 cubic feet for their current

collection. (This calculation ignores the shelves, aisles, space for

readers, etc.) To this must be added new volumes which easily can result in a growth rate of the collection on the order of 4% per year

(Baumol and Marcus, p. 8).

D.3 MODERN STI SYSTEMS

In contrast to the current library practice of purchasing, storing,

and loaning "hard-copy" printed books and journals, we can envisage two

alternate systems. The first of these would consist of published

D-2
700

600

500

X

UJg 400

300

200 h

100

FIGURE D.l

UNIT COSTS IN FIFTY-EIGHT UNIVERSITY RESEARCH

LIBRARIES IN COMPARISON WITH WHOLESALE PRICE

INDEX, 1951-69

— — Index of total library operating expenditures

per student (1951=100)

Index of salaries (1951=100) /

Index of book expenditures (1951=100)

^* /

*/

Wholesale price index (1951=100) y /

y

1951 1955 1959 1963

I 1967

Source: W. J. Baumol and M. Marcus, Economics of Academic Libraries,

1973

D-3
FIGURE D.2

COMPARISON OF COST OF COMPUTATION

WITH WHOLESALE PRICE INDEX

10,000

1,000

100

XLUO

10

Wholesale price index

Cost of performing a fixed

set of computer operations

1951 1955 1959 1963 1967

Source: Baumol and Marcus, op. cit.

D-4
material disseminated in the form of either electronic tapes and discs or video tapes and discs depending on the nature of the content. In this system both the library and some individuals would have the appropriate play-back equipment. One prototype here is a video disc system

in which the video disc player has both addressing and "freeze"

capabilities.

The second system v;ould eliminate the distinct, loanable "volume" as we now know it. (This is in contrast to the type or disc system where

a volume is one or more tapes or discs.) Such a system might involve

the inputting of and storage of complete texts into a memory that is

quickly and inexpensively searched either by the user himself or by the

librarian as an intermediary. The recovered information can either

be displayed on a CRT console or hard copy can be produced.

Neither of these two systems pose any difficulties — conceptual or

real — for the optimal pricing rules described in our previous papers.

In fact direct analogies exist for each of the concepts in those papers.

The optimal prices depend on the costs of producing the information and

the copies of it, the (price) elasticities of demand of each of the

groups of information users for each of the products, and the cross- elasticities of demand (or, hopefully, some more operational measure of

the interrelationships of the demands).

In the first system one can expect to find a higher optimal price for

those copies of the discs or tapes that are sold to libraries than for

those sold to individuals. This is true, in general, if the elasticity

of demand of the individual buyers is higher (in absolute terms) than

that of the institutional purchasers. Possibly more interesting is the

conclusion of Ordover and Willig [1 976] that the institutional price

should be higher than the individual price i^ the average number of

"potential buyers" is greater than one, no matter what the elasticities

of demand may be. Here "potential buyers" are those members of purchasing institutions who would purchase their own copies if the institution switched from buying to not buying in response to an increase in

the institutional price.

Also in this system, with discs or tapes, there will be an increase in

economic efficiency if charges are levied for use of the library

copies. This charge might vary depending on whether the use was inhouse with library-provided readers, consoles, etc. or if the use were

external after the copy had been borrowed. The deciding factors would,

of course, be the relative costs to the library of in-house vs. external

use and, again, the elasticities of demand. The only factor that should

lead one to decide against such user charges would be if the transactions costs of levying and enforcing such charges were high relative

to the sums involved.

The second system -- the use of comouter memory and peripheral devices

to store the text and access it for each user -- is also amenable to

the pricing systems we have described. In such a system much more

D-5
complex pricing arrangements are not only possible but are, to some extent, already in use. For example, the contracts between the

bibliographic data base providers (e.g.. Chemical Abstracts, Medlars,

ERIC) and the on-line information system operators (e.g., Lockheed's

DIALOG and SDC's Search) often involve payments that are based on (1)

yearly basic charges, (2) the length of time users are connected to the

data base, and (3) the number of citations given to the users. The

monitoring of the usage and output is already quite sophisticated and

is relati vel

v

inexpensive.

It is optimal from the point of view of economic welfare for the data

base providers to be able to charge different prices to the systems

operators rather than, for instance, those they might charge to a private research organization. For such price discrimination to con- tinue, it is necessary that some restrictions be made on further resale

by the original purchaser. These restrictions are currently part of

the various contracts, but, if the number of systems and producers of

the information were to grow, it is obvious that at some point it is more economical to replace the individual contracts with a more comprehensive system such as a copyright licensing organization.

From this we can conclude that the growth of computerized information

systems will cause copyright protection of the information to be stored

in such systems to become more desirable for two reasons. First

economic welfare can be improved by reducing the need for individual

contracts between each producer of information and each system operator.

And second, the cost of monitoring usage to determine the proper

royalty payments is low in a high-technology system which relies on computer searching.

D-6
D.4 REFERENCES

W. J. Baumol and M. Marcus, Economics of Academic Libraries , Washington, D. C, American Council on Education, 1973.

Y. M. Braunstein and J. A. Ordover, "Economic Views of Copyright in

Scientific and Technical Information Systems," New York University,

1976; excerpts are in "The Role of Transaction Costs in the Design of

Royalty Pricing Schemes for STI," Appendix B, this report.

J. S. Hewitt, "The Impact of OCLC," American Libraries , May 1976.

F. Kilgour, et. al . , "The Shared Cataloging System at the Ohio College

Library Center," Journal of Library Automation , Vol. 5, No. 3 (Sept.

1972).

J. A. Ordover and R. D. Willig, "On the Optimal Provision of Journals

Qua Excludable Public Goods," Appendix C, this report.

D-7
NBS-1 14A (REV. 7-73)

U.S. DEPT. OF COMM. 1. PUBLICATION OR REPORT NO. 2. Gov't Acces.sion' BIBLIOGRAPHIC DATA No. SHEET NBS SP 500-17

3. Recipient's Accession No.

4. TITLF AND SUBTITLE

Copyright in Computer -Readable Works:

Policy Inpacts o£ Technological Change

5. Publication Date October 1977

6. Performing Organization Code

7. AUTHOR(S) j^^y Saltman 8. Performing Organ. Report No.

9. PERFORMING ORGANIZATION NAME AND ADDRESS

NATIONAL BUREAU OF STANDARDS

DEPARTMENT OF COMMERCE

WASHINGTON, D.C. 20234

10. Project/Task/Work Unit No. 6609414

11. Contract /Grant No. NSF-CA148

(SIS-74-14168)

12. Sponsoring Organization Name and Complete Address (Street, City, State, ZIP)

National Science Foundation

Division o£ Science Information

1800 G Street, N.W.

WashincTtnn. D.C. 7nqqn

13. Type of Report & Period Covered Final

14. Sponsoring Agency Code

15. SUPPLENftNTA'RY NOTES

Library of Congress Catalog Card Number: 77-14143

16. ABSTRACT (A 200-word or less factual summary of most si^ificant information. If document includes a significant

bibliography or literature survey, mention it here.) The findings, recommendations, and conclusions of a policy-oriented, multi-disciplinary study of copyright in computer- readable works are reported.

The foundations of copyright are examined for basic principles, and the theory of

public goods is applied to develop the rationale for copyright protection. The

judicial history of copyright in the twentieth century is reviewed with respect to

advances in information technology. The impact of technological change on judicial

decisionmaking in copyright is analyzed.

The problem of transaction costs in the marketplace for copyrighted works is

examined and methods for the reduction of such costs are described, Nfodels of

policymaking are developed which clarify the roles of interest groups and the

branches of Government, demonstrating their interactions and providing insights into

possible futures. j

1 Recommendations on the conditions of copyrightability for computer -readable data ' bases and computer programs are presented and are based on findings of basic

principles developed during the study and described in the report.

17. KEY WORDS (six to twelve entries; alphabetical order; capitalize only the first letter of the first key word unless a proper name; separated by semicolons

)

Computer; computer program; copyright; data base; economic efficiency; information

technology; policy analysis; policymaking; public goods; technological change; i transaction costs. (

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of interest to the consumer. Easily understandable language and illustrations provide useful background knowledge for shopping in today's technological marketplace.

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(FIPS PUBS)—Publications in this series collectively constitute the Federal Information Processing Standards Register. Register serves as the official source of information in the Federal Government regarding stand- ards issued by NBS pursuant to the Federal Property

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The following current-awareness and literature-survey

bibliographies are issued periodically by the Bureau:

Cryogenic Data Center Current Awareness Service. A

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