Ah, yeah, I think you've misunderstood the implications of what I've suggested; from your tone, I think you'll find a corrected interpretation both more and less radical.
JSTOR sends messages into the marketplace that they are a faithful steward of the public domain, but knows that its TOS a) prevents unrestricted access to the public domain, and b) knows that a US Attorney will prosecute violations of that TOS as felonies requiring several years in prison; I argue that their speech does not match their actions and that this is dishonest. Aggravating this, the extreme negative consequences of taking them at their word (as Aaron did) is why I've selected to say that their actions probe the depths of intellectual dishonesty.
Full-text search, like printing, is a value-added service. There is no reason to keep public domain works hostage by the threat of sending people like Aaron to jail for decades just so that they can offer FTS. If JSTOR wants to offer FTS or other services on the corpus of public domain works, let them charge for access to those services.
An existence proof: arXiv offers bulk download access to the works in their repository (~490GiB) via Amazon S3 Requester-Pays buckets [1]. The requester is paying Amazon, not arXiv; so, arXiv doesn't earn "pennies per article", it earns nothing. Incidentally, arXiv also provides full-text search [3].
Let's talk about capacity planning. Let's guess that average size of a digitized journal article is 5 MiB, that comes out to ~361 TB, or $44,400 to stream from S3. The at-rest cost of those articles is far lower because there are far fewer articles than downloads (I don't have a number, but would you argue otherwise?).
My proposal: JSTOR removes its watermarks and puts all public domain works and associated metadata into S3 Requestor-Pays buckets. They finance their operations by selling non-public-domain works and value-added services like FTS at a price the market will bear.
Earnings made by restricting bulk access to public domain works is blood money. Watermarking these documents is confusing - no one seems to have answered my questions about whether they are claiming a new copyright.
[1] http://arxiv.org/help/bulk_data_s3
[2] https://forums.aws.amazon.com/ann.jspa?annID=386
[3] http://arxiv.org/find