Check out Reducing Digital Copyright Infringement Without Restricting Innovation by R. ANTHONY REESE and MARK A. LEMLEY on SSRN. Here is the abstract:
Suing actual infringers is passe in copyright law. In the digital environment, the real stakes lie in suing those who facilitate infringement by others. There is of course a good reason copyright owners are filing such suits. They see themselves as under threat from a flood of cheap, easy copies and a dramatic increase in the number of people who can make those copies. The high volume of illegal uses, and the low return to suing any individual, make it more cost-effective to aim as far up the chain as possible. From the perspective of the movie industry, it's easier and more effective to shut down Napster than to sue the millions of people who traded files illegally on Napster. So far, the courts have been willing to go along, shutting down a number of innovative services in the digital music realm.
In this article, we argue that unrestricted liability for anyone who is in any way involved with copyright infringement is a bad idea. Indirect liability is a continuum, in which acts most closely related to infringement and with the fewest affirmative benefits are the easiest to condemn. Going after makers of technology for the uses to which their technologies may be put threatens to stifle innovation. The fundamental difficulty is that while courts can make decisions about direct infringement on a case-by-case basis, lawsuits based on indirect liability necessarily sweep together both socially beneficial and socially harmful uses of a program or service, either permitting both uses or condemning both.
Optimal digital copyright policy would do two things: stop deterring innovators, and permit cost-effective enforcement of copyright in the digital environment. In this paper, we suggest at least two possible alternatives that might provide ways out of the digital copyright morass. Both alternatives stem from the basic economics of copyright enforcement. It is not currently cost-effective for copyright owners to sue individual infringers, because there are tens of millions of them, because lawsuits are expensive, and because each infringer would be liable only for minimal damages. They are happy to sue facilitators instead, because there are fewer of them and both damages and the benefits of injunctive relief are substantial. Copyright owners have no incentive to permit optimal innovation by facilitators, because they do not benefit from that innovation except indirectly. Individual infringers in turn have no incentive to change their behavior or to subscribe to fee-based services, because they suffer none of the costs of infringement.
One solution is to change the incentives of individuals. Because individual users of peer-to-peer (p2p) networks know that it is extremely unlikely they will be sued, economic theory suggests that the only way to effectively deter infringement is to increase the effective sanction substantially for those who are caught. Were the government to begin criminally prosecuting selected users of peer-to-peer services - or were the RIAA to sue end users in earnest - it could have a substantial deterrent effect on many illegal users. Selective prosecution has other advantages as well - the government could target the relatively few keystone providers of illegal files on p2p sites, and those are precisely the users who are least likely to be engaged in fair use. While particular prosecutions won't stop illegal file trading altogether, copyright owners have never been able to prevent all piracy. All they need to do is reduce piracy enough that they can make a return on their investment.
Another solution is to change the incentives of copyright owners to sue individual infringers by reducing the cost of such a suit. One such approach would be a levy system. Levies on equipment or services have the virtue of permitting automatic collection of royalties, reducing the enforcement cost dramatically, but at the cost of taxing legal as well as illegal uses. A levy solves the enforcement problem at the front end, but it is similar in many ways to the current approach of suing facilitators. The main difference is that under a levy system the copyright owner is protected by a compulsory license rather than a property rule.
An alternative proposal to reduce the cost of enforcement is to create some sort of quick, cheap arbitration system that enables copyright owners to get some limited relief against abusers of p2p systems. The existing domain name trademark arbitration system is a model in some respects - its speed and low cost - but a cautionary tale in others - its lack of process protections. Such a system would permit low-cost enforcement of copyright infringement against direct infringers, reducing the need for content owners to sue facilitators. Relative to levies, an arbitration system would trade off some increase in cost for accuracy, targeting only those making illegal uses rather than all users of computers or p2p networks. It would be fairer than selective criminal prosecution, because the burden would fall more evenly on each wrongdoer, rather than imposing stark punishment on a few in order to serve society's interest in deterring the rest. The system could also be designed to improve accuracy relative to the binary choice the courts face in indirect infringement cases today. We could design the system so that it is limited to clear cases. We could also build in a defense for arguable fair uses, so that a user who could prove they were space-shifting CDs they already own would have a defense.