Fair Use and Market Harm: Use It or Lose It?

Fair use is complicated. Anyone with a passing familiarity with copyright law will tell you so. The doctrine, originally a judicial creation, was codified by Congress as Section 107 in the Copyright Act of 1976. According to Section 107, “fair use of a copyrighted work . . . is not an infringement of copyright.”

But how do we determine whether a use is a fair use? There is no bright-line rule. Instead, Section 107 sets forth several non-exclusive factors that should be given consideration, such as:

(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.

Congress believed that “the endless variety of situations and combinations of circumstances that can rise in particular cases preclude[d] the formulation of exact rules in the statute. . . [C]ourts must be free to adapt the doctrine to particular situations on a case-by-case basis.” H.R. Rep. 94-1476, at 66 (1976).

To say the application of fair use has been varied would be quite an understatement. Courts disagree on which of the above factors should be given the greatest weight. Compare Kienitz v. Sconni Nation LLC, No. 13-3004 (7th Cir. Sept. 15, 2014) (finding that of the fair use factors, “the most important usually is the fourth (market effect)”) with Cario v. Prince, 714 F.3d 694 (2d Cir. 2013) (holding the first fair use factor – whether a use is “transformative” – is the most important). And commentators cannot even agree as to whether fair use is a right or a privilege.

Instead of addressing which fair use factor should be given the greatest weight, this post only aims to examine the application of the fourth fair use factor – the effect of the disputed use upon the potential market for or value of the copyrighted work. In particular, how the Eleventh Circuit (mis)applied that factor in its recent decision Cambridge Press v. Patton, et al., No. 12-14676 (11th Cir. Oct. 17, 2014) (often referred to as the Georgia State University e-reserve case) and the repercussions it may have on creator rights.

For the unfamiliar, in 2008 three academic publishers (Cambridge University Press, Oxford University Press, and Sage Publications) filed suit against Georgia State University for copyright infringement. The publishers alleged that the University had encouraged professors to use copyrighted works in digital coursepacks, as opposed to print coursepacks, to avoid the payment of permission fees (a license) to the publishers.

The district court ruled that the University’s practice was a fair use. Many copyright scholars, however, felt the court’s reasoning was suspect. While the court analyzed the four factors set forth in Section 107, it conveyed equal weight to each factor and made its final determination by simply tallying which party had the most fair use factors in their favor. Moreover, in its evaluation of the third fair use factor – the amount and substantiality of the portion used – the court created a bright-line rule, holding that if the amount of copying fell within 10% of the original or one-chapter, then the third factor favored a finding of fair use.

Unsurprisingly, the publishers appealed the district court’s ruling to the Eleventh Circuit. In an eagerly anticipated decision, the Eleventh Circuit unanimously reversed the district court’s decision. The Court ruled that the district court erred “by giving each of the four fair use factors equal weight, and by treating the four factors mechanistically” instead of undertaking a “holistic analysis” and carefully balancing the four factors. Cambridge Press at *110. In addition, the Court held that it was error for the district court to adopt the 10% of one-chapter bright-line rule to analyze the third factor. Instead, the court should have evaluated the amount taken from a qualitative and quantitative perspective to determine whether the copying “was reasonable in light of the pedagogical purpose of the use and the threat of market substitution.” Id. at *111.

While, on its face, the decision was a victory for the publishers, the majority’s analysis of the fourth fair use factor left the publishers’ chances of success on remand quite murky. (Judge Vinson, who authored a separate concurrence, also took issue with the majority’s application of the principle of “media neutrality.”)

In its evaluation of the fourth fair use factor, the Eleventh Circuit analyzed the digital licensing market available for the publishers’ works. It held:

We note that it is not determinative that programs exist through which universities may license excerpts of Plaintiffs’ works. In other words, the fact that Plaintiffs have made paying easier does not automatically dictate a right to payment. “[A] copyright holder can always assert some degree of adverse [effect] on its potential licensing revenues as a consequence of the secondary use at issue simply because the copyright holder has not been paid a fee to permit that particular use.” The goal of copyright is to stimulate the creation of new works, not to furnish copyright holder with control over all markets. Accordingly, the ability to license does not demand a finding against fair use.

Nevertheless, “it is sensible that a particular unauthorized use should be considered ‘more fair’ when there is no ready market or means to pay for the use, while such an unauthorized use should be considered ‘less fair’ when there is a ready market or means to pay for the use. The vice of circular reasoning arises only if the availability of payment is conclusive against fair use.” Put simply, absent evidence to the contrary, if a copyright holder has not made a license available to use a particular work in a particular manner, the inference is that the author or publisher did not think that there would be enough such use to bother making a license available. In such a case, there is little damage to the publisher’s market when someone makes use of the work in that way without obtaining a license, and hence the fourth factor should generally weigh in favor of fair use. This is true of Plaintiffs’ works for which no license for a digital excerpt was available.

Id. at 95-96. But see id. at 96 n. 32 (“Of course, it need not always be true that a publisher’s decision not to make a work available for digital permissions conclusively establishes that the publisher envisioned little or no demand, and the value of the permissions market is zero.”)

The Court’s analysis, however, distorts the fair use inquiry required by the Copyright Act.

Congress unambiguously stated that courts should consider the impact a disputed work would have on “the potential market for or value of the copyrighted work.” But the Eleventh Circuit’s logic creates a presumption that ignores potential markets by presuming that the copyright holder’s lack of presence in a market indicates that there is no value to derive from that market.

The implications of such a presumption are quite troubling. If any untapped market is a market that the copyright owner has deemed to lack value, then any use of the copyrighted works in those markets could not deplete the work’s value. That essentially renders the term “potential” in Section 107(4) moot as only a market where the work is not currently utilized in is a potential market and, according to the Eleventh Circuit, those markets have, at best, a de minimis value.

For purposes of illustration, consider the impact the Eleventh Circuit’s holding, when taken to its logical conclusion, would have on the film industry. Studios often utilize a “standard release” model where a film is first released in movie theaters for an exclusive period of time. Thereafter, the film is made available for purchase on home video platforms (such as DVD) or digital download and that period will often be exclusive to those markets. Then, the film is made available through video-on-demand or streaming services and, eventually, broadcast television.

Do Disney and Marvel Studios believe that Guardians of the Galaxy, its epic summer blockbuster that has grossed over $770 million theatrically worldwide, will have no value on home video platforms? According to the Eleventh Circuit, it must be, as the film has yet to be released on home video, leading to the presumption that the “publisher did not think that there would be enough [demand for] such use to bother making a license available.”

Obviously most would acknowledge that Disney and Marvel Studios believe the film will be (significantly) valuable in the home video market, so why the staggered release schedule? A simultaneous multi-platform release of the film might jeopardize the overall profitability of the work, while a staggered release is the best means to extract the most value from the work. In the film industry, downstream markets (home video, streaming services, and television licensing) often provide the bulk of returns on the work to the author over the long run, but box-office performance drives public perception of and future interest in the film and future interest. That perception impacts the downstream demand for the work, the value or price-point of downstream licensing deals, and the ability to secure future financing for subsequent studio projects. A simultaneous release may also cause the work to cannibalize its own profits if the different markets could act as substitutes for one another. If the goal of copyright law, as the Eleventh Circuit acknowledges, is to stimulate the creation of new works, then it is paramount to protect the release model (and downstream potential markets), even if it delays the license of the work to other platforms.

Some would be quick to point out that the Eleventh Circuit only raises the presumption of no market harm when there is no current market and that the copyright owner may rebut that presumption with evidence to the contrary. But how do we determine which markets possess potential value streams that would result in substantial market harm to the copyright owner if the disputed work or practice are found permissible?

Do we look at industry practice? Returning to the film industry, while the standard release model is common, simultaneous or direct-to-video release does occur. Instead, should we look at common markets to which copyright owners often expand? Well, in the publishing industry, print and digital releases are quite common. And, in Cambridge Press, the three publishers had already released some works digitally, but the Court still found that the evidence indicated the digital market had no value. Moreover, the digital coursepacks did substitute for the original print market “that had previously required the payment of permission fees[.]” Id. at *120 (Vinson, J., concurring). Lastly, how should copyright owners react to new, burgeoning platforms? Are copyright owners required to utilize those new platforms even if the value is speculative?

Thus, the Eleventh Circuit’s decision threatens to impose an affirmative requirement on copyright owners to license their works across markets and media platforms lest they risk an adverse finding of fair use. This requirement essentially converts a copyright owner’s exclusive bundle of rights under the Copyright Act to a mere right of first refusal.

“[A]lthough dissemination of creative works is a goal of the Copyright Act, . . . nothing in the copyright statutes would prevent an author from hoarding all of his works during the term of the copyright.” Stewart v. Abend, 495 U.S. 207, 228-29 (1990). In fact, the Act’s grant to the author of a limited monopoly over use of the work was to motivate creative activity that would eventually pass to the public. See Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984). The Eleventh Circuit gives little consideration to this delicately struck balance by requiring copyright owners to “use it or lose it.” This proposition proves particularly worrisome for smaller content creators who may lack the desire, resources, insight, or opportunity to utilize their works in certain markets or mediums or those creators simply wishing to develop a better appreciation for their works’ true value.

To its credit, the bulk of the Eleventh Circuit’s decision is a well-reasoned analysis of the fair use doctrine and its proper application in light of the goals of copyright law. The Court properly recognized that certain factors in the analysis support a finding of fair use (educational) and others that do not (non-transformative). And while the market impact analysis, as interpreted by the Eleventh Circuit, may not prove dispositive to the district court’s finding on remand, the Court’s reasoning threatens to unbalance the fair use analysis and prejudice content creators. It will be interesting if the Eleventh Circuit agrees and grants the publishers’ en banc appeal.

For those who may be interested, check out this article about an author’s perspective on the process and concerns of licensing a novel for film. You can also read my earlier post on the fair use defense in the case of digitization projects.

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