Tuesday, December 12, 2006

Of the case for fair use: digital distribution of course materials: market dysfunction

4. Market Dysfuntion

Although one might characterize engaging copyright owners with just such an aggressive argument [the circular reasoning -- it's all fair argument, see earlier post] as fighting fire with fire, it seems to me an extreme case to make, and as indicated above, an easy case to get around because of the ease of manipulating the four factors. After all, publishers are likely to be able to show real harm to established markets from the hypothetical Electronic Distribution uses I have described. Any court employing a market failure analysis would be hard-pressed to find the use fair: there simply is no market failure, and there are probably demonstrable lost revenues. A court that believes it is important to preserve existing revenue streams in iterative contexts can easily characterize the first three factors to favor getting permission. VoilĂ : End of circularity problem.

One could take a different tack, however. One could try to convince the court that even though there is a functional market for paying permission (in other words, that there is no absolute market failure), that should not be the end of the inquiry.

In fact, total market failure is not the only market failure. One can argue that market dysfunction also is market failure – and if it can be demonstrated, it should tip the fourth factor towards fair use without having to insist that lost revenues are always logically irrelevant in a nonprofit context. Although this is theoretically appealing and would appeal to the nonprofit educational and library communities, there is scant evidence that it would prove persuasive in this context. Nonetheless, it is worth our consideration.

Market dysfunction occurs when particular kinds of transactions other than those frustrated by high transaction costs do not occur as often as they should and therefore justify a finding of fair use. Normally markets give us good information about what people want, and vendors can use that information to decide where to invest their resources. But if a market is in effect misrepresenting what people want, we cannot count on it for this information. Vendors will not fill a need if they do not know it exists, or if they do not recognize the size of the potential market. Market dysfunction can happen when people forego a purchase because the price is too high. One example is where society benefits from the use an individual makes but the parties to the transaction cannot factor this benefit into their bargain. The vendor tries to charge a price that reflects the overall societal benefit, but the buyer will not, perhaps can not, pay that much. So some clearly socially beneficial transactions will not take place if an individual is expected to pay a price that reflects value he personally does not receive, value that benefits society overall.

The use of articles and book chapters by teachers in classrooms and by academic scientists in university labs illustrates just such a dysfunctional market. Educators, their students, academic researchers as well as their academic employers often cannot afford costly permission fees or database licenses, yet these uses would yield very high social benefits, far exceeding the benefit the individuals themselves derive. Conversely, the social detriment resulting from a decision not to use materials because they cost too much is significantly higher than the detriment to a particular individual who foregoes a use. If this social value weighs in favor of fair use as a counterbalance to the copyright owner’s database and license revenue losses, it is at least conceivable that a court could conclude that such uses should be termed fair even following a microeconomics theory. Thus society would receive the diffuse benefits of those educational uses regardless of the institutional inability to pay by permitting them as fair uses.

So, characterizing the educational and research markets as dysfunctional may be an appropriate and promising argument, but winning that argument will be challenging. As Wendy Gordon cautioned, courts that follow market failure reasoning will be urged to err on the side of letting markets work, to whatever extent they can, rather than to “tax copyright owners to subsidize impecunious but meritorious users in the guise of maximizing value.”[1] This description of fair use as a “tax” on copyright owners is repugnant to fair use supporters, but it is easy to understand from a market failure perspective: if your initial premise is that copyright owners are entitled to all they can conceivably get, fair use quite directly harms them by taking money out of their pockets and must be as narrowly construed as possible. In fact, our own university presses can amply demonstrate how directly economically threatened they are by the loss of these revenues, so again, it would be a hard case to make that the diffuse social benefit outweighs such demonstrable harm.

Another challenge in making a cogent market dysfunction argument is definitional: When is a university, a library or a research institution unable to pay? When is a price too high? Which institutions would qualify to exercise fair use of which materials? Who would set the “fair” prices, or would there simply be no price at which a poor school might be required to pay?

These challenges suggest that within the market failure framework, market dysfunction provides at most a theoretical relaxing of a narrow scope for fair use. Courts have not been willing to embrace this theory so far. Winning this argument would require an advocate who can envision a creative application, one that appropriately tailors the relief to need (does Harvard need this exception? does the University of Ohio? how about Florida State?), without undermining the incentive for publishers, many of whom desperately depend on permission revenues. The exception would also have to take into consideration the relative importance of the educational market to the publishers affected by its exercise. In its nuance, it sounds more appropriate for a legislative “financial hardship exception,” than a court-crafted financial hardship application of the fair use test. But, legislation that favors anyone other than copyright owners is unlikely to survive the legislative process, as we all must recognize. Failing these efforts, perhaps the argument could be successfully pressed in negotiations with publishers or their representatives regarding pricing and business models.[2]

[1] Gordon, Fair Use as Market Failure, p. 1632. Her point is that courts should not interfere in a working market, even if it is not working perfectly, and even if the interference is designed to subsidize a worthy cause – in this case, financially strapped educators, libraries, and researchers.

[2] As CCC is in the early stages of developing an educational blanket license, educators and libraries might urge that pricing should be based on many factors, among them what the institution has already licensed, and institutional ability to pay.

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