Monday, November 13, 2006

Of the case for fair use: digital distribution of course materials -- Market Failure

The Economics of Copyright Law and the Concept of Market Failure

Wendy Gordon can be credited with suggesting in the early 1980s that courts seemed to be using a sort of rough economic calculus to make decisions in fair use cases.[1]

She hypothesized that market failure theory could account for their results, and in fact, the presence or absence of a market failure could predict when courts would likely find a use fair.[2] As she described it, a court would first establish that there was a market failure then balance injuries to the copyright owner against benefits to the user if the right to make the use were determined to be fair. A fair use would imply that the court had concluded that overall, permitting the use without permission would be socially desirable. But even with a market failure and a socially desirable use, the court should still go on to ask one more question: will a finding of fair use substantially injure the copyright owner’s incentives by depriving him of some source of revenue he might otherwise have obtained? In other words, if the court ruled against fair use, and in the wake of the court decision the parties would get together and find a way to “cure” the market failure, generating substantial revenues for the copyright owner, it would be wrong to say that the use should be fair. So, the court would conclude in such a case that the use should not be fair.[3]

This may sound complicated, but as a practical matter, the economic concept of market failure now provides a simple way to judge fair uses. Under this theory, only if the market completely fails to facilitate a socially beneficial transaction (the “use” of another’s work in this case) between what would otherwise have been a willing buyer and seller of rights, should courts recognize the use as fair and thereby limit the scope of the copyright monopoly. In concrete terms, a court following market failure theory would find that a nonprofit educational use were fair only if it were impossible or very difficult for a user to make the use if she had to get permission from the copyright owner. For example, a court would find a use fair where the user cannot find the copyright owner, or if the work involves multiple rights-holders who cannot be identified, or if the copyright owner does not respond to requests to use her work, all situations where a requirement to get permission will result in the user foregoing the use, with no benefit to the owner.[4] We might call this “narrow market failure theory” because it recognizes only a narrow, one might say one-dimensional, definition of fair uses: those justified by market failure due to current and likely continuing, unacceptably high transaction costs.[5]

Market failure could be less strictly interpreted but so far courts have not given it a more generous scope. Markets do not fail only when there are high transaction costs. Generally, however, courts do not find that mere market dysfunction, that is, facilitating some but not the optimal number of transactions, justifies limiting the scope of the copyright monopoly.[6]

Courts using the narrow market failure approach generally conclude that if a market can or even could facilitate the theoretical transaction, it should. For example, if it is possible to license a use, it should be licensed (that is, not characterized as fair). Any revenue a copyright owner can get, she should get. It is easy to see how courts tend to expand rights rather than limit them when they start with the assumption that the copyright owner is ordinarily entitled to all revenue for all substantial uses of his works.[7] They believe that expansive rights will achieve the goals of copyright in a manner consistent with our market-based economy. Markets should be allowed and encouraged to work, and it just seems right that an author (or more often the company that owns her copyright) should receive whatever revenues the initial effort may ultimately be capable of generating.[8] The changes in copyright law in the twentieth century reveal a dramatic expansion of copyright owners’ rights, premised on these assumptions.[9] Looked at in this way, it is not that hard to understand why those arguing for limits on the monopoly, or put another way, those arguing for generous interpretations of fair use in iterative use contexts, lose most of the time.[10]

[1] Gordon, W. J. (1982). Fair use as market failure: A structural analysis of the Betamax case and its predecessors. 82 Columbia Law Review 1600.

[2] A market failure here means that there is a malfunction in the normal way markets bring buyers and sellers of products, services and rights together. Usually, if there is demand for a good or service, in a free market, someone will see the opportunity and provide the good or service. If a person tries to offer a good or service that no one wants, the effort will not succeed. The “failure” occurs when there is demand, but no one steps up to provide the good or service.

[3] Gordon, Fair Use as Market Failure, pp. 1614 - 1622.

[4] This total market failure scenario also characterizes the circumstances currently applicable to “orphan works,” and suggests that if pending legislation to address the social need to utilize orphan works fails to pass, users who take reasonable steps to determine that a work is orphaned can probably rely on fair use to make many uses of it. But, fair use is not so certain a defense as the limitations on liability that Congress is considering in the orphan works bill. [cite] Nonetheless, there may be institutions and individuals willing to move forward with some uses of orphan works relying on fair use.

[5] Id.

[6] Gordon, Fair Use as Market Failure, p. 1618 - 1619, 1630 - 1632; Loren, L. P., Redefining the market failure approach to fair use in an era of copyright permission systems. 5 J. Intel. Prop. L1. Market dysfunction is discussed more fully in the next section of the paper.

[7] Gordon, Fair Use as Market Failure, p. 1651; Lemley, Free Riding at p. 1041 - 1042.

[8] Goldstein, Copyright’s Highway.

[9] Vaidhyanathan, Copyrights and Copywrongs; Litman, Digital Copyright; Lessig, The Future of Ideas & Free Culture; Goldstein, Copyright’s Highway; Lemely, id.

[10] Texaco; Kinko’s; Michigan Document Services.


Claire said...

Very interesting, Georgia. And I've always wondered how much the for-profit status of the three losers you cite in #10 was a factor. Nimmer's "fairest of the fair" article offers a very broad comparison of a large number of fair use cases but I wasn't able to identify a not-for-profit thread in those. Very interested to see where this is going.

Georgia Harper said...

Claire, thanks for your comment, and the observation that most cases deal with for-profits is a good one. Nonprofits don't get sued alot (thank goodness...). This has, I think, always given us reason for optimism, that it would be different for us. In fact, that's precisely the premise I'm sort of testing with this article. I wanted to see what kind of case it would take to win, what we would need to claim and support to win, and most importantly, how likely the argument would be *to actually win.* I hope you'll read on.

Anonymous said...

I'd suggest adding a qualifier like 'good faith' in the sentence that reads: "...use fair where the user cannot find the copyright owner..." I've had people say they've tried to find a copyright owner and given up after one simple email was returned to sender.

Also, you probably will address this, but what about ths situation in which the copyright owner refuses to give permission as in the 2 Live Crew case.. "Acuff Rose's agent refused permission, stating that "I am aware of the success enjoyed by `The 2 Live Crews', but I must inform you that we cannot permit the use of a parody of `Oh, Pretty Woman.'"

-Mary M

Anonymous said...

Oops - never mind. I didn't see that you had an earlier post discussing parody and defining "iterative" uses.
-Mary M

Kevin S said...

I wish I could argue that your analysis of the way courts currently approach these issues is unnecessaily gloomy, but I think it is accurate. I would note, however, that subsequent discussions by Prof. Gordon about market failure might indicate ways to move courts away from the narrow focus on transaction costs you describe. Gordon has rejected this narrow reading of her 1982 article and discussed much more clearly in later work the "non-monetizable interests" that might lead to market failure because the social value is so great that society can not "safely rely on the bargain between owner and user to acheive social goals." As an example, she suggests educational uses for which the user would not pay any transaction fee. If the choice is between allowing the beneficial use as a fair use or the use simply not happening, the market has failed even if a licensing mechanism already exists.

It is a good thing that non-profits don't often get sued, but if that day comes, Gordon herself seems to point the way to make a market failure argument in favor of these iterative educational uses.

I am citing two articles by Wendy Gordon here; "Market Failure and Intellectual Property," 82 Boston L. Rev. 1031 (2002) and "Excuse and Justification in the Law of Fair Use," 50 J. of the Copyright Soc. 149 (2003). I have conflated several different points to make this argument, so am open to correction about how I have interpreted her work.

Georgia Harper said...

Kevin, thanks for the citations to Gordon's more recent works. I had read the one of excuse and justification, but not the other one, so I'll have a look at that.

In a later post, I will be addressing the issue of market dysfunction. I recognize that it might hold some promise, though I think it's a long shot. Thanks again.