Nonetheless, exhaustion has become controversial as of late, with many commentators and copyright owners arguing that it is nothing more than a legacy loophole or market inefficiency that allows consumers to make unauthorized uses of intellectual property rightly controlled by the copyright owner. And in recent years, rights holders have taken aggressive steps to undermine exhaustion and weaken consumer property interests in an effort to shift the property balance in their favor. They have argued that exhaustion does not apply to goods imported into the United States 4 or to copies manufactured abroad; 5 they have developed technologies to block the resale and use of pre-owned media; 6 they have used spurious complaints to remove legitimate used items from secondary markets like eBay. 7 These efforts have met with mixed success.
But two legal and technological trends have proven much more effective in curtailing exhaustion and threatening consumer interests. The first is a set of copyright holder efforts that seek to redefine the notion of ownership by characterizing certain consumer transactions as licenses even when they "buy" the work. Second, technology has shifted consumer purchases in copyright markets away from tangible copies. Rather than picking up books and records from store shelves, we stream, download, and store content in the Cloud. These shifts have created something of a crisis for the exhaustion doctrine. In an economy premised on tangible goods, exhaustion is a concept so deeply engrained that it often goes unnoticed. But in the digital marketplace we increasingly occupy, exhaustion risks being dismissed as an anachronism, a concept that simply can not be ported into the economy of bits. According to copyright holders, you do not own the digital media you purchase online. 8 According to the Ninth Circuit, you do not own the plastic disc on which your software programs are encoded. 9 And according to General Motors and John Deere, you do not own the software embedded in your car or your tractor. 10 In short, the very notion of personal property is under attack.
This chapter, building on our earlier work, attempts to find a way forward for the exhaustion doctrine. 11 We suggest that the equilibrium between personal and intellectual property enabled by exhaustion depends on assumptions about the copyright future resale opportunities increase consumers' willingness-to-pay for new copies of videogames and elimination of used markets would reduce publisher profits on average by 10 percent per game); Hsunchi Chu & Shuling Liao, Buying While Expecting to Sell: The Economic Psychology of Online Resale, 63 J. Bus. Res. 1073, 1073-78 (2010), available at http://dx.doi.org/10.1016/j. jbusres.2009.03.023 (finding significant estimated resale return to be a positive influence over consumer purchasing decisions). marketplace that are quickly becoming outdated. And we argue that consumer rights must be preserved, but in a manner that recognizes the differences between digital and analog distribution.
The exhaustion doctrine had a long history before the U.S. Supreme Court first applied it to copyrighted works in Bobbs- Merrill. From the Court's perspective in 1908, the questions of personal property and copy ownership were simple ones. The Court understood that a publisher's attempt to restrain subsequent alienation of books through a printed notice did not undermine the personal property interests of book owners. 12 Despite the publisher's attempt to limit resale, those who bought books owned them. 13 A century later, the question of whether unilateral restrictions announced by copyright holders are sufficient to subvert copy ownership has become plagued by confusion and uncertainty. In large part, that uncertainty emerged from disputes over computer software. This section describes the courts' treatment of copy ownership in the software cases and offers two explanations for their endorsement of efforts by copyright holders to characterize software transactions as licenses rather than sales.
Disputes over copy ownership arise in two related contexts in software copyright law. Sections 109 and 117 of the Copyright Act both offer copy owners defenses for otherwise infringing acts. Again, the first sale doctrine allows for resale or other distribution of a copy by its owner. 14 Section 117 offers targeted protection to owners of copies of computer programs, permitting them to make copies or adaptations essential to the use or backup of the program. 15 Under both of these exhaustion rules, the core question is the same: whether the defendant is the owner of a copy of the software program.
Courts have struggled to answer this seemingly straightforward question, adopting a range of inconsistent approaches without clearly embracing any underlying principle. 16 The least nuanced cases allow copyright holders to avoid exhaustion by unilaterally declaring that they are licensing, rather than selling, their products. 17 As long as they utter the "magic words," copyright holders can control copies even after an apparent sale. 18 Other courts probe the specifics of license terms more meaningfully, holding that where an agreement specifies a fixed duration, requires ongoing payments, or the return or destruction of the copies, they are licensed not sold. 19 Still other courts have turned to the Uniform Commercial Code to decide whether defendants hold title to their copy. 20 Finally, some courts have been willing to look beyond licensing terms and formal title transfer to interrogate the nature of the transaction between the rights holder and consumer. Transactions characterized by single payments and perpetual rights of possession and use have been deemed sales regardless of the rights holder's contentions to the contrary. 21 According to the Second Circuit, it would be "anomalous for a user whose degree of ownership of a copy is so complete that he may lawfully use it and keep it forever, or if so disposed, throw it in the trash" to be treated as a non-owner. 22 The question is "whether the party exercises sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy." 23 Without a consistent rule, or at least clear competing theories, the copy ownership cases are difficult to reconcile. Their seemingly ad hoc outcomes offer consumers little certainty or predictability about their rights in the copies they acquire. For most of the twentieth century, courts would have rejected out of hand the contention that a printed notice attached to a chattel could prevent a transfer of ownership. But today courts entertain and often accept that very characterization, particularly in cases involving software.
One reason courts may be more tolerant of limitations on consumer ownership in this context is the sense, however vague, that software is somehow different; that the rules that govern ownership of other copies (and chattels generally) do not apply to the thoroughly modern stuff that is computer software.
The Ninth Circuit offers the clearest illustration of this sort of software exceptionalism. On June 7, 2010, Judges Canby, Callahan, and Ikuta heard oral arguments in two cases, both of which turned on the question of copy ownership. 24 Both involved the allegedly unlawful resale of copies of protected works in violation of the terms of license agreements. And in both cases, the copies were lawfully made and the licenses imposed similar restrictions. But the court reached very different conclusions relying on two seemingly inconsistent approaches. One case was about software; the other was not.
UMG and other industry insiders. 25 The defendant purchased used CDs from local record stores and resold them on eBay. He argued that as the owner of the discs, his resale was protected by the first sale doctrine. But the record label insisted that Augusto was not the owner of those discs because of a notice printed on the discs declaring that they were the property of the label. Despite the label's insistence, the Ninth Circuit held that title to the discs transferred to their recipients upon delivery and, eventually, to Augusto, entitling him to invoke the first sale doctrine. 26 Vernor v. Autodesk centered on the resale of software discs. 27 Autodesk argued that the notice accompanying its discs meant that customers who paid thousands of dollars for a copy of its software did not own those discs, but merely "licensed" them. Rather than apply the rule that governed Augusto, however, the court announced a three-part test that asks: first, "whether the copyright owner specifies that a user is granted a license"; second, "whether the copyright owner significantly restricts the user's ability to transfer the software"; and third, "whether the copyright owner imposes notable use restrictions." 28 Since the terms contained the necessary language, the court concluded that Autodesk owned the discs.
The court applied two very different frameworks in these cases. In Augusto, it focused on the practical reality of the transaction, regardless of the purported licensing terms. But in Vernor, it was concerned almost exclusively with the text of the license. What's more, if we apply the Vernor test to the facts of Augusto, each prong is satisfied: UMG characterized the transaction as a license; it prohibited recipients from transferring the discs to others; and it confined them to "personal" use of the discs. 29 This inconsistency suggests that the Ninth Circuit has created two parallel regimes for distinguishing licenses from sales. In software cases, it applies a test that turns on factors entirely within the control of the rights holder. In non-software cases, it adopts a more consumer-friendly approach that turns on the nature of the transaction.
If these divergent approaches are motivated by software exceptionalism, the court's basic intuition is easy to forgive. Software is different from other sorts of copyrighted works in important ways. First, software code is not written for its aesthetic beauty; it is written to do work. This deeply functional nature of software code is difficult to square with copyright law's exclusion of any "procedure, process, system, [or] method of operation." 30 Second, copies of software have little intrinsic value. Unlike a book or painting, you can stare at a CD-ROM or floppy disk all day and learn nothing about the work it contains. The value of a copy of a program is only realized within a computer's operating environment, where running the program requires the creation of additional copies. Augusto, supra note 24, 628 F.3d at 1177-78. The Ninth Circuit attempted to distinguish Augusto and Vernor on the grounds that UMG, unlike Autodesk, had no mechanism in place to enforce its restrictions. Ibid. at 1183. But Autodesk likewise lacked any means of terminating consumers' possession of the discs. Vernor, supra note 24, 621 F.3d at 1107. Third, licensing has been a component of software transactions since mass markets for programs emerged. By introducing licensing at the outset, the software industry helped shape the expectations of consumers and courts. A key feature of early software licenses was "the provision that the developer retains title to-that is, licenses and does not sellthe individual copy of the program itself." 32 Those provisions were, and are, a strategic effort to undermine exhaustion, control secondary markets, and limit competition. 33 These characteristics might help to explain software exceptionalism, but they don't justify it. First, the imperfect fit of software within the copyright system suggests we should be particularly careful about strategies that would enable copyright holders to leverage their statutory rights in a way that harms consumers. Second, section 117 of the Copyright Act strongly suggests that consumer ownership and exhaustion are more important given the need to copy and adapt computer programs. Third, the fact that software licenses are commonplace tells us very little about the wisdom of allowing them to undermine ownership. But these three characteristics are not the whole story. As the next section explains, the tendency to embrace "licensing" particular copies has its roots in a deeper uncertainty about the nature of property rights.
In the century separating Bobbs-Merrill from the contemporary debate over copy ownership, our understanding of property has undergone a dramatic shift, from the certainty of Blackstonian absolutism to the more equivocal bundle of rights. Despite the merits of a more nuanced relational theory of property, that shift enabled a blurring of the distinction between property and contract, which in turn bolstered efforts to redefine copy ownership through licensing terms.
Early twentieth century thinking was dominated by a tradition rooted in natural rights and encapsulated in Blackstone's oft-quoted-if oft-misunderstood-description of property as "that sole and despotic dominion which one man claims and exercises over the external things of the world, in total exclusion of the right of any other individual in the universe." 34 Within that framework, property rights were rights in things, held by a single owner, with a nearly absolute right to exclude. 35 Beginning with Hohfeld's taxonomy of jural relations, however, our picture of property became more complex. Hohfeld advanced the idea that property rights were not rights in things, but rights against people. 36 a property regime, apply to a much larger, less specific class. 37 A property right, then, does not describe the relationship between an owner and a thing, but the aggregation of relationships between individuals. Decades later, Honoré's eleven incidents of ownership further disaggregated our notion of property into discrete component parts, no one of which is necessary for ownership. 38 Taken together, these insights form the core of the "bundle of rights" conception of property that largely defined property orthodoxy in recent decades. 39 Critics charge that this view results in a notion of property that is infinitely malleable, 40 lacking any core or essence, 41 conceptually unmoored, 42 fragmented, 43 and ultimately meaningless. 44 If property rights are nothing more than a collection of relationships between individuals, infinitely divisible and alienable, and if we lack any articulable criteria for which discrete rights render one an owner, property lacks any distinctive character that sets it apart from other modes of allocating resources.
Capitalizing on this perceived breakdown, some economists offer a reassuringly simple take on the role of property. From this perspective, property rights do little more than establish default entitlements to be allocated through private bargaining. 45 If property rights are nothing more than in personam rights writ large, property law should embrace the same flexibility and granularity we see in the realm of privately negotiated agreements. 46 And if so, property rights become indistinguishable from contractual ones. 47 Once property is viewed from this angle, the use of standardized contractual terms to "license" a tangible copy looks less like an anomaly inconsistent with the hundreds of 37 Ibid. years of common law rejecting equitable servitudes on chattels, and more like an example of property formalism yielding to market efficiency.
Copyright law lends itself to the bundle of rights characterization, and perhaps by extension, to the substitution of property rights with contractual ones. The exclusive rights of a copyright holder are an explicitly enumerated bundle. 48 And those rights are infinitely divisible, as the Act makes clear. 49 Given the malleability of this bundle, copyright's notion of ownership of the work is correspondingly fuzzy. If copyright holders are free to disassemble and parcel their rights into any configuration they choose, granting some rights to use the work while withholding others, it is easier to understand how courts might buy into the myth of licensing particular copies of the work. Why should rights holders be denied the flexibility to distribute copies to the public while retaining ownership of them if the function of property rights is merely to set the stage for private bargaining?
Courts have endorsed attempts to characterize purchases as licenses in the software context, but have proven far less open to that characterization when it comes to movies, music, and books. 50 This fact might suggest that the effects of the software licensing paradigm will be contained. But there are two reasons to think this licensing model will have ripple effects across the copyright economy.
First, the copyright marketplace is rife with examples of rights holders and their intermediaries insisting that consumers do not actually own the copies they buy. According to Amazon's Terms of Use for the Kindle Store, consumers who hit the "Buy now with 1-click®" button do not own a copy of the book they download. 51 This is at odds with what consumers reasonably understand the word "buy" to mean. Apple's iTunes Store, the largest music retailer in the world, is somewhat more conflicted in how it characterizes transactions with consumers. 52 After describing those transactions as "purchases" and noting that "[a]ll sales . . . are final," Apple insists that consumers agree not to "rent, lease, loan, sell, [or] distribute" their purchases. 53 These efforts are not confined to digital downloads. Beachbody, the makers of the popular P90X home workout routine, insists that its customers do not own the DVDs they purchase from the company's website. According to the Beachbody Terms of Use, "[y]ou may not, without the express written permission of Beachbody or the respective copyright owner . . . sell [or] resell . . . services or products obtained through [its] Sites." 55 Beachbody has aggressively targeted individual consumers who resold legitimate copies of its DVDs on eBay, threatening litigation and demanding exorbitant compensation. 56 It is easy to understand why Beachbody would want to prevent customers from reselling their workout videos after their New Year's resolve runs out. As reasonable as three easy payments of U.S.$39.95 may be, 57 used DVDs on the secondary market would introduce unwanted downward price pressure. What is harder to see is how this restraint on alienation can be squared with the principle of exhaustion or consumer property interests more generally.
Second, the gap between software and other classes of copyrighted works is shrinking. In its early days, software was a thing unto itself the copyright landscape. But as traditional forms of expression-books, music, visual art-become more interactive, they are becoming indistinguishable from software. The line between programs and data has always been a largely artificial one. 58 But today that distinction is increasingly blurred. Some videogames are best described as interactive films. 59 E-books offer levels of responsiveness to user input impossible with the printed page. 60 And artists like Jay Z, 61 Lady Gaga, 62 and Bjork 63 have all released new music embedded in smartphone applications. This blurring renders efforts to maintain the current bifurcated approach to licensing untenable. That problem is compounded by the shifting nature of the copy itself.
The copy, needless to say, has been an essential concept in the law of copyright for centuries, and part of copyright law in the United States (U.S.) since its inception. Central to contemporary copyright thinking is the notion that copies and their statutory companions, phonorecords, are material objects distinct from the intangible works that the copyright grant is meant to encourage.
Much like the once clear, but increasingly opaque notion of ownership, the copy is now a concept plagued by uncertainty. Changes in storage and distribution technologies alongside shifting media consumption patterns have profoundly altered the way in which we interact with copyrighted works. The tangible copy, once the primary means of distribution, has been displaced by cloud storage, streaming, and software-as-a-service.
Copies were once finite, stable, and valuable. But the unitary copy-the hardcover, the LP, the film reel-has been largely displaced. Today's marketplace is characterized by ubiquitous, temporary instantiations of works. Copyright law has struggled to assimilate these developments. This section first describes those changes and then turns to the efforts by courts to make sense of them and their implications for the distinction between the copy and the work.
Dramatic improvements in computational capacity and storage, along with increasingly fast and pervasive data connectivity, allow consumers to acquire, store, and access media in new ways. We can download our media collections to computers and mobile devices. We can choose between Cloud storage services from Amazon, Apple, Dropbox, Google, and Microsoft, among others, at nearly no cost. Amazon's MP3 Store enables consumers to buy, save, and play their purchases directly from its Cloud Player without ever downloading a permanent file to their laptop or mobile device, let alone handling a plastic disc. 64 Software-as-a-service offerings, like Adobe Creative Cloud, prove that the functionality that once local copies provided can be achieved by remotely accessing data. 65 These technological developments have been accompanied and partly driven by changing consumer preferences. The skyrocketing popularity of subscription streaming services like Netflix and Spotify demonstrate that many consumers would rather access a library of streaming titles than purchase tangible copies. These changes offer great promise to consumers. But they also threaten to destabilize our understanding of the copy and its place in the copyright system. This risk is evident in a number of recent cases. In Cartoon Network v. CSC Holdings, Inc., the court had to decide whether instantiations of a work were too temporary to count as copies. 66 Cablevision was sued for offering consumers a Remote Storage Digital Video Recorder system (RS-DVR) that functioned similarly to a set-top home DVR but stored programs centrally at a Cablevision data center. The RS-DVR system briefly loaded videostreams into its buffer memory, for as much as 1.2 seconds before relaying the data to hard drives that stored recorded programs. Cartoon Network alleged this 64 See Get Started at Amazon MP3, Amazon, www.amazon.com/b?node=2658409011. buffering infringed their copyrighted television programs. The case turned on whether the buffer data were fixed in a tangible medium and met the statutory definition of copies. Unlike earlier courts, the Second Circuit recognized that fixation entails two distinct requirements. First, the work must be sufficiently embodied to be perceived, reproduced, or communicated. And second, that embodiment must persist for more than a transitory duration. Because "[n]o bit of data remains in any buffer for more than a fleeting 1.2 seconds . . . [and] each bit of data here is rapidly and automatically overwritten as soon as it is processed," the court was satisfied that the "works in this case are embodied in the buffer for only a 'transitory' period" and thus not copies. 67 Although we applaud the Second Circuit's careful statutory and factual analysis, it highlights an important conceptual difficulty for copyright law. If, as the court rightly concluded, buffer data are not copies, what exactly are they? They are not the intangible work, but seem to occupy some interstitial space within the copy/work dichotomy. The uncertain status of embodiments like these suggests a growing difficulty in identifying where copies end and where non-copies begin. And if copyright law cannot tell us what embodiments even count as copies, copy ownership faces a significant challenge.
In Capitol v. ReDigi, we saw yet another challenge to our understanding of the copyor in this case, the phonorecord. 68 There, ReDigi created a platform for the resale of preowned digital music. If a consumer who bought a copy of "The Sign" by Swedish pop group Ace of Base from the iTunes Music Store in a fit of 1990s nostalgia later regretted that purchase, ReDigi would allow her to recapture some of her investment by transferring her interest in the song to another equally nostalgic buyer. According to ReDigi, its software verifies that the music was legitimately purchased before uploading the seller's file to its Cloud Locker, where the file is stored until purchased by another user. The technical design of ReDigi's upload process introduces an important wrinkle in the copyright analysis. ReDigi argues that the upload does not create a new copy, it merely migrates the file from one location to another. As each packet of information that comprises the file is uploaded to the Cloud, it is deleted from the user's local drive. And "at the end of the process, the digital music file is located in the Cloud Locker and not on the user's computer." 69 Finally, the software deletes any additional local copies, mimicking the consequences of an analog sale, a transfer of ownership that terminates the rights of one party and establishes the rights of another. Capitol Records sued ReDigi for reproducing its protected works. The question was whether the copy on ReDigi's server should be understood as distinct from the one on the seller's hard drive, or instead, as a single copy that was moved from one storage location to the next.
The court held that the migration process created a new material object and thus, a new phonorecord. 70 In doing so, the court drew a sharp distinction between the copyrighted sound recording-the work-and the "appropriate segment of the hard disk"-the phonorecord. 71 According to the court, this conclusion was not only demanded by the Copyright Act, but dictated by the limits of technology. 72 But far from confirming the alignment of the rules imposed by the law of physics, the ReDigi opinion underscores the mismatch between our current technological capability and copyright law's preoccupation with the unitary copy. Digital consumers are awash in a sea of copies. Copies flit into and out of existence. They are created, used, discarded, and created yet again. Cloud computing and streaming free us from the burden of the unitary copy. Consumers no longer need to lug their digital media collections with them everywhere they go; they simply need a data connection. The notion that we can identify the particular copy that a consumer purchased from iTunes is hard to square with the reality of networked distribution. Yet the ReDigi court felt a need to pin the tail on the proverbial donkey and identify particular phonorecords within the ReDigi system.
Finally, in UsedSoft GmbH v. Oracle, the European Court of Justice approached the question of the identity of the copy very differently. 73 There, Oracle sued UsedSoft for allowing users to purchase second-hand software licenses. Oracle claimed that when these consumers subsequently downloaded the software from its servers, along with patches and updates, they illegally reproduced the code. The Court rejected this theory, holding that the doctrine of exhaustion applied not only to the initial download, but to all subsequent updates and patches, even if downloaded by a subsequent user. The court reasoned that the sale was not tied to a particular download or copy, but rather extended to any "functional equivalent" so long as payment was initially made to Oracle. 74 In other words, the Court was less concerned with particular copies, that is, particular downloads to particular material objects, than it was with the rights of subsequent transferees to access the work. If exhaustion applied, it did so regardless of the identity of any particular copy. 75 Together, these cases signal a growing uncertainty about the definition of the copy and the legal status of those instantiations of a work that occupy that middle ground between the tangible copy and the intangible work. Historically, copyright law has conceptualized consumer rights as situated in particular copies. As the role of the unitary copy is diminished, the exhaustion principle and the values it serves are at risk.
Without a stable understanding of the copy or a meaningful notion of copy ownership, copyright law's exhaustion doctrine, as it has been historically understood and applied 72 Ibid. at 649-50 ("This understanding is, of course, confirmed by the laws of physics. It is simply impossible that the same 'material object' can be transferred over the Internet."). A subsequent decision by a German court has clarified that UsedSoft's interpretation is based entirely on art. 51 of the EU Computer Programs Directive and therefore would not apply to other types of digital copyrighted works, such as e-books. See Case No. 4 O 191/11, Landgericht Bielefeld (LG, German Regional Court) (Ger.), available at www.boersenverein.de/sixcms/media. php/976/LG_Bielefeld_vom_05.03.13_Klage_Verbraucherzentralen.pdf. rights holder. 79 This ensures that the rights holder receives a measure of compensation sufficient to justify its investment. In this way, copy ownership functions as a limit on copyright holder authority, but one that respects the incentive structure of the copyright system.
Creative incentives are not an end unto themselves. 80 As Jessica Litman put it:
[t]he most important reason we encourage creators to make, and distributors to disseminate, works of authorship is so that people will read the books, listen to the music, look at the art, and watch the movies . . . That is the way that copyright law promotes the Progress of Science. 81 Copyright law has developed a number of tools-limited duration, fair use, statutory licenses, and other exceptions and limitations-meant to serve these two seemingly inconsistent objectives. But it relies primarily on market mechanisms to both encourage creation and ensure consumption. Consumer participation in the copyright market is crucial.
Copy ownership benefits the copyright system as a whole. The practical and legal advantages that copy ownership extends to consumers provide strong reasons to participate in lawful markets for copyrighted content. In order for copyright incentives to do their job, consumers must be willing to pay supra-competitive prices for protected works despite their widespread availability at near-zero marginal cost. The struggle facing the copyright system is convincing consumers that a lawful copy is more desirable than an unlawful one. The most obvious way to do that is through the "stick" of infringement liability.
But the "carrot" is equally important. A clear exhaustion principle that entitles consumers to use and alienate copies makes the value proposition presented by copyright compliance more attractive. Copy ownership and exhaustion offer consumers real value. They can resell the copy and recoup some of its value. 82 They can also preserve, loan, and modify their copy to suit their needs. 83 When lawfully available copies lack the freedoms consumers expect, they are less desirable. 84 And unlawful copies are necessarily more attractive in comparison. But when consumers can rely on getting something of value for their money, they are more likely to opt into the copyright economy. In short, first sale and related rights steer consumers towards lawful markets, those that promise compensation to rights holders. In doing so, consumer property rights help copyright law serve its dual objectives of incentivizing creative production and encouraging access to the resulting creative output.
Exhaustion also helps consumers navigate the marketplace for protected works by limiting information costs. Unlike contract law, which imposes no limits on creative permutations of rights, exchanges of property rights are limited to an identifiable number of standard forms. 85 This commitment to a closed set of property forms, or the principle of numerus clausus, not only helps distinguish property regimes from private contractual ordering, it is one of property's principle advantages. By favoring sales and discouraging idiosyncratic transfers of rights in copies, exhaustion rules limit information costs.
One justification for standardizing property transactions is a concern over restraints on alienation. 86 Unpredictable bundles of rights increase transaction costs in a way that could discourage transfers of property and hinder more valuable uses. Even setting aside the impact of idiosyncratic configurations of rights on parties to a transaction, nonstandard bundles impose information cost externalities on third parties. Even if "clear-eyed" parties with equal bargaining power agree to a bespoke bundle of rights, that choice has costs for other market participants who must investigate the details of property transactions with much greater scrutiny. Once on notice that property bundles deviating from the standard forms are accepted, those acquiring property interests or hoping to avoid infringing them, bear the burden of uncovering their potentially unique characteristics. 87 This concern is not new. 88 But it is a particularly pressing one today in markets for copyrighted works given the increasing complexity of license terms and the escalating information costs they impose. 89 The current iTunes terms are over 19,000 words, translating into fifty-six pages of fine print. If the Chief Justice of the Supreme Court cannot expend the effort to wade through those terms, we should not expect the average consumer to take on those costs either. 90 The numerus clausus principle avoids these problems by refusing to recognize certain transactional forms. 91 Assured that non-standard "fancies" are not lurking in the marketplace, parties are relieved of the burden of investigating the particulars of each transaction. Instead, they need only gather enough information to identify a property interest as fitting within one of the few established forms. Traditionally, those accepted forms have been limited with respect to real property, and constrained even more so when it comes to personal property. 92 But the numerus clausus principle is largely absent from intellectual property law. 93 Exhaustion, perhaps because it mediates the border between intellectual and personal property, is one notable exception. A functioning exhaustion rule-one that incorporates a robust notion of copy ownership-serves as copyright's expression to the numerus clausus principle. 94 Exhaustion is an effort to limit the permissible forms of transfers of copies and prevent the proliferation of idiosyncratic interests and the negative consequences that flow from them.
The statutory basis for this reading begins with the distribution right itself, which provides that copyright holders have the exclusive right "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." 95 This language suggests a bifurcated universe of copy transfer. First, we have transfers of ownership, which entail a perpetual right to possess and use the copy: sales or gifts. Second, we have transfers of limited duration: rental, lease, or lending. If we take exhaustion and numerus clausus seriously, transactions must fall within one of these two categories. Certainly, many licenses are easy enough to characterize as rentals, leases, or lendings. A consumer is not the owner of a book she borrows from the library. Nor does a Netflix subscriber own the physical or digital copies of movies she watches. Copyright holders, under our reading, retain considerable flexibility to devise subscription, streaming, and other business models not premised on the sale of copies. But distribution by license is not among the standard forms of transfers of copies recognized by copyright law. 96 Taken together, these three functions of copy ownership-safeguarding authorial incentives, encouraging consumer participation in copyright markets, and reducing information costs-explain why copyright law privileges copy owners over consumers at large. Next, we consider how to preserve those basic functions within a marketplace that deemphasizes the copy and a legal system that has diluted the notion of consumer ownership.
Although exhaustion has been tied to the copy historically, none of the functions detailed above are dependent on any particular medium of expression or method of distribution. These functions, like any property right, help define and structure the relationships between parties. All three are intended to construct a functioning marketplace in which creators and consumers are encouraged to participate. But the success of that market does not depend on the transfer of unitary copies. Instead, it depends on the exchange of rights between consumers and creators and an appropriate legal mechanism for ensuring the right balance between them.
The copy, because of the technological limitations that prevailed for most of copyright's history, was a helpful tool for calibrating those incentives. Ownership of a copy served as a sort of "talisman" that reassured courts that a defendant's behavior was not a threat to the system. The copy was a token representing a set of rights that entitle copy owners to make otherwise prohibited uses of a work, not because the copy itself has any special inherent virtue, but because it signifies that those uses satisfy a broader set of policy considerations. But the copy can no longer serve that role effectively. Courts need a new way to think through conflicts between the rights of consumers and the rights of creators. We can take away the copy, and we can even dispense with the preoccupation with ownership, so long as we have some other means of verifying that consumers stand in a privileged relation to the work.
The distinction between rights to the copy and rights in the work, and the related conceptual division between personal and intellectual property, have been useful constructs in copyright law. But both have served as proxies for a more complicated calculus weighing the respective rights of creators and consumers. These heuristics helped courts and policy-makers balance those competing interests without undertaking an individualized analysis of the impact on the incentives and costs associated with each contested use. But at the same time, those heuristics have obscured the policy considerations that underlie the contest between intellectual and personal property rights. And because of shifts in technology and the marketplace, those proxies are an increasingly unreliable measure of the interests they once incorporated. Although the Copyright Office continues to see it as a "defining element" of exhaustion, the copy looks increasingly like a "mere relic." 97 Thinking about the copy as a proxy ultimately reveals how little separates personal and intellectual property rights. At bottom, the difference between personal and intellectual property is simply who prevails. When the interests of consumers are given more weight, we speak in terms of personal property. When the interests of copyright holders carry the day, we invoke intellectual property. But the rights themselves are not qualitatively different. The rights to distribute, reproduce, and display, for example, are equally at stake in both personal and intellectual property. Nor can one meaningfully distinguish between these two categories by insisting that personal property concerns copies while intellectual property protects the work. Tying the consumer's right to her particular copy has been a convenient and easily understood way of articulating the limits of the consumer's rights to exploit the underlying work. But it doesn't change the fact that intellectual and personal property regulate the same sets of behaviors and relationships.
Characterizing the statutory interests that the Copyright Act establishes for creators and consumers as "property" ultimately states a conclusion about the degree to which the law will vindicate them. 98 But that label alone does not help us resolve conflicts between those rights. Proponents of broader and stronger intellectual property protection frequently leverage the rhetorical force of the property label. 99 By recognizing that both creators and consumers can lay equal claim to the property mantle, policy-makers might be better equipped to thoughtfully consider the merits of proposals which expand intellectual property.
Exhaustion rules allocate usage rights to a defined group of consumers to make particular uses of a work without the permission of the copyright holder. But that allocation is constrained in important respects. Gifts, lending, and resale are limited to the number of copies acquired. 100 Public displays are limited to the location where the copy is housed. 101 Archival copies cannot be retained after the transfer of the originally acquired copy. 102 In each case, these rights and their limitations are justified in reference to a set of underlying policy considerations rooted in costs and incentives.
Historically, copy ownership has served a dual role in this system. It has identified the class of consumers granted these usage rights. And it has helped to define and reinforce the limitations of those rights. For the reasons we have documented here, copy ownership can no longer effectively serve those functions. Copyright law needs a new way to identify this class of consumers. And it needs to formulate new limitations on consumer usage rights that are sensitive to the three policies we have described and their application to a marketplace defined by digital distribution.
Elsewhere, we have argued that courts and policy-makers should replace the current rigid statutory exhaustion rules with a more flexible approach. In deciding whether a transaction triggers exhaustion, we suggest courts consider three key factors: the duration of consumer possession or access; whether the payment structure is one-time or ongoing; and the characterization of the transaction communicated to the consumer, including whether it is referred to as a sale or purchase in marketing materials. 103 Once exhaustion is triggered, courts need to decide whether particular uses of a work are within its scope. 98 See Arnold S. Weinrib, Information and Property, 38 U. Toronto L.J. 117, 120 (1988) ("It also makes plain the conclusory nature of the term 'property': it is a legal characterization, a statement that the court has chosen to assign a particular form of protection to the interest in question." (footnote omitted)); Jeremy Bentham, The Theory of Legislation 113 (C. K. Ogden ed., 1950) ("Property and law are born together, and die together. Before laws were made there was no property; take away laws, and property ceases."). Perzanowski & Schultz, supra note 2.