We’d like to thank co-authors Kyle K. Courtney and David R. Hansen for permission to re-post the following article, which originally appeared on the Copyright at Harvard Library blog on March 1, 2019.

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One of the beautiful things about fair use is how it can soften the copyright act, which is in many ways highly structured and rigid, to provide flexibility for new, innovative technology.

To understand how, it’s worth appreciating the structure of the Copyright Act. If you look at the table of contents of Chapter 1 of the Act (“Subject Matter and Scope of Copyright”), you see the first several sections define basic terms such as copyrightable subject matter. Included in that first half of the chapter is Section 106, which defines the exclusive rights held by rights holders: the right to control copying, the creation of derivative works, public distribution, public performance, and display.  In the bottom half of the Act, Sections 108 to 122 provide for a wide variety of limitations and exceptions to those owners’ exclusive rights. These exceptions are largely for the benefit of users and the public, including specific exceptions to help libraries, teachers, blind and print-disabled users, non-commercial broadcast TV stations, and so on.

Then, there’s fair use. As if perfectly positioned to balance between the broad set of rights granted to owners and the specific limitations for the benefit of users and the public, “fair use” is codified in Section 107, though it really isn’t a creature of statute. Fair use is a doctrine, developed by courts as an  “equitable rule of reason” that requires courts to “avoid rigid application of the Copyright Statute when on occasion it would stifle the very creativity which that law was designed to foster.” In that role, fair use has facilitated all sorts of technological innovations that Congress never could have anticipated, allowing copyrighted works and new technology to work together in harmony.

One particularly innovative system developed to enhance access to works is “controlled digital lending” (“CDL”):

CDL enables a library to circulate a digitized title in place of a physical one in a controlled manner. Under this approach, a library may only loan simultaneously the number of copies that it has legitimately acquired, usually through purchase or donation….[I]t could only circulate the same number of copies that it owned before digitization. Essentially, CDL must maintain an “owned to loaned” ratio. Circulation in any format is controlled so that only one user can use any given copy at a time, for a limited time. Further, CDL systems generally employ appropriate technical measures to prevent users from retaining a permanent copy or distributing additional copies.

While the courts have yet to weigh in directly on the CDL concept, we now have some guidance from a case in the Second Circuit Court of Appeals, Capitol Records, LLC v. ReDigi Inc. This case is about the development of an online marketplace created by ReDigi, which facilitated the sale of “used” mp3 music files. Capitol Records sued ReDigi, alleging that ReDigi infringed its exclusive rights to reproduction and distribution when it attempted to use a particular transfer method to sell the used mp3s.

The Court of Appeals upheld a lower court ruling that the doctrine of first sale is only an exception to the public distribution right and, therefore, does not protect digital lending because, in that process, new copies of a work are always made.

The court also rejected ReDigi’s fair use assertion. It found that the use was commercial in nature, was considered non-transformative, and replicated works exactly and precisely; simply put, they created mirror image copies of existing digital files.  Further, though the libraries associations in their briefs had raised the issue of a nexus of connection between fair use and specific copyright exceptions, such as Section 109 and 108, as an extension of Congressional policy that should influence the fair use analysis, the court did not discuss that argument.

That the court ruled ReDigi, a commercial enterprise, had interfered with the market for iTunes-licensed mp3s and their effort was not a transformative fair use, comes as no surprise to most lawyers and copyright scholars.

However, the decision, written by the creator of the modern transformative fair use doctrine, Judge Pierre Laval, contains several important lessons for CDL.

Transformative Use

First, the case raises a significant question as to whether CDL of digitized books may be “transformative” in nature. In the decision, examining the first factor, Judge Leval explains that a use can be transformative when it “utilizes technology to achieve the transformative purpose of improving delivery of content without unreasonably encroaching on the commercial entitlements of the rights holder.” For physical books, especially those that are difficult to obtain, this application of “transformative use” has a direct correlation to the core application of CDL.

Further, this quote interprets another critical technology and fair use case from the U.S. Supreme Court, Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), famously called the “Betamax case.” Since its decision in 1984, the Sony ruling helped establish and foster the creation of new and vital technology, from personal computers and iPods to sampling machines and TiVo. This Sony quote was most recently used in another Second Circuit case, Fox News Network, LLC v. TVEyes, where the same court laid out this particular reading of Sony. So, ReDigi here is drawing upon the precedent of two important transformative fair use cases to make its point. Under this transformative use definition, CDL should be determined to be transformative by the courts, especially if the commercial rights of the rights holder are not unreasonably encroached.

Therefore, while the court found ReDigi’s use to not be transformative, the Second Circuit opened the door for continued technological development, especially for non-commercial transformative uses under the first factor, like CDL. In fact, according to several scholars (Michelle Wu, Kevin Smith, Aaron Perzanowski), this creates a much stronger argument that CDL would be ruled a transformative fair use by a court.

Market Harm

The Second Circuit held that the ReDigi system caused market harm under the fourth factor of the fair use statute. Again, this is not a surprise to the copyright world. The court found that the service provider had no actual control of the objects being sold and that it “made reproductions of Plaintiffs’ works for the purpose of resale in competition with the Plaintiffs’ market for the sale of their sound recordings.”

What does this mean for CDL’s analysis under the fourth factor? Here, again, based on the language of the ReDigi decision, CDL looks pretty different. The ReDigi resales were exact, bit-for-bit replicas of the original sold in direct competition with “new” mp3s online through other marketplaces, such as iTunes. The substitutionary effect was clear, especially since the mp3 format is the operative market experiencing harm. For digitized copies of print books used for CDL, the substitutionary effect is far less clear. With most 20th-century books—the books that we feel are the best candidates for CDL—the market to date has been exclusively print. For those books, some new evidence from the Google Books digitization project suggests that digitization may in fact act as a complementary good, allowing digital discovery to encourage new interest in long-neglected works.

CDL doesn’t compete with a recognized market. When a library legally acquires an item, it has the right, under the first sale doctrine, to continue to use that work unimpeded by any further permission or fees of the copyright holder. CDL’s digitized copy replaces the legitimately acquired copy, not an unpurchased copy in the marketplace. To the extent there is a “market harm,” it’s one that is already built into the transaction and built into copyright law: libraries are already legally permitted to circulate and loan their materials. The CDL “own-to-loan ratio” ensures that the market harm for the digital is the exact same as circulating the original item.

Again, the language of the ReDigi court should be examined closely. The court distinguishes substitutionary markets from those that are complementary and natural extensions of the use inherent with purchasing the original: “to the extent a reproduction was made solely for cloud storage of the user’s music on ReDigi’s server, and not to facilitate resale, the reproduction would likely be fair use just as the copying at issue in Sony was fair use.” Reading this language through the lens of CDL, a modern reproduction service, such as CDL, that further enhances the owner’s use of materials that were purchased under first sale or owned under other authorized means would also qualify as a fair use.

All in all, the ReDigi case most certainly does not settle the CDL issue; if anything, the specific language of the court emphasizes the potential for more non-commercial transformative uses like CDL.

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David Hansen is the Associate University Librarian for Research, Collections & Scholarly Communications at Duke University Libraries. Before coming to Duke he was a Clinical Assistant Professor and Faculty Research Librarian at UNC School of Law. And before that, he was a fellow at UC Berkeley Law in its Digital Library Copyright Project.

Kyle K. Courtney is Copyright Advisor and Program Manager at Harvard Library’s Office for Scholarly Communication (OSC). Before joining the OSC, Kyle managed the Faculty Research And Scholarly Support Services department at Harvard Law School Library.

We thank Krista L. Cox, Director of Public Policy Initiatives at ARL, for the following analysis, which originally appeared on the ARL Policy Notes blog. Authors Alliance submitted an amicus brief in support of fair use in the second appeal to the Eleventh Circuit in 2017, and we continue to track the progress of the case.

The long saga of the Georgia State University (GSU) e-reserves case continues as the Court of Appeals for the Eleventh Circuit reversed the district court’s ruling which had found that the vast majority of GSU’s use of works in its e-reserves constituted a fair use. This is the second time the Eleventh Circuit has reviewed the case, and the second time it has reversed.

In 2008, publishers sued GSU for copyright infringement, arguing that the use of unlicensed excerpts of copyrighted works in the e-reserves constituted infringement. GSU defended itself, relying on the right of fair use. In the first bench trial, the district court ruled in favor of fair use for 43 of the 48 cases of alleged infringement. The Eleventh Circuit reversed and remanded the case in 2014, directing the lower court to re-examine its weight to market substitution and re-evaluate the four fair use factors holistically, rather than taking an arithmetic approach (i.e., if three fair use factors favor the use, but one disfavors it, fair use should always apply). On remand, the district court re-evaluated the four factors and found that 44 of the 48 cases constituted fair use. In her analysis, Judge Evans assigned each factor a weight: “The Court estimates the initial, approximate respective weights of the four factors as follows: 25% for factor one, 5% for factor two, 30% for factor three, and 40% for factor four.” The publishers again appealed to the Eleventh Circuit, which heard the case in 2017. (Here’s a link to ARL’s amicus brief in the second appeal.)

On October 19, 2018, the Eleventh Circuit released its 25 page opinion—more than a year after hearing oral arguments in the case—finding that the district court again erred in its evaluation of fair use. The Eleventh Circuit suggests that the district court was only mandated to re-evaluate its analysis on the second and third factors, but had instead also re-evaluated its analysis on factor four (in which the district court found in the first trial that in 31 cases, the fourth fair use factor weighed against fair use).

Additionally, the Eleventh Circuit points out that “The district court again applied a mathematical formula in its overall analysis of fair use,” which it had been instructed against. Although the district court couched the given weights as “initial” and “approximate,” the Eleventh Circuit found that the district court only adjusted these factors in four instances and di not adjust the other factors in the overall analysis. Thus, “We conclude that the district court’s quantitative rubric was an improper substitute for a qualitative consideration of each instance of copying in the light of its particular facts.” The Eleventh Circuit has remanded the case, directing the district court to use a holistic approach to fair use, and avoid any mathematical approach with respect to the four factors.

Another issue the Eleventh Circuit opinion addresses is whether the cost of purchasing licenses affects the third factor; the district court in the second trial considered the price of use on two ocassions. The Eleventh Circuit rules that price should not be taken into account when evaluating the amount and substantiality of the portion of the work used.

While the Eleventh Circuit reversed and remanded on the above issues, it affirmed the district court’s decision not to reopen the record. Publishers in 2015 filed a motion to reopen, asserting the need to introduce “Evidence of GSU’s ongoing conduct (e.g. its use of E-Reserves during the most recent academic term)” as well as evidence of the availability of digital licenses. Here, the Eleventh Circuit notes that this decision is within the discretion of the trial court.

Kevin Smith posted about the GSU case on In the Open, with an excellent summary of what the Eleventh Circuit’s opinion (as well as its last opinion) does not do, and what, as a result, the publishers have lost on:

…But the big principles that the publishers were trying to gain are all lost. There will be no sweeping injunction, nor any broad assertion that e-reserves always require a license. The library community will still have learned that non-profit educational use is favored under the first fair use factor even when that use is not transformative. The best the publisher plaintiffs can hope for is a split decision, and maybe the chance to avoid paying GSU’s costs, but the real victories, for fair use and for libraries, have already been won.

Today, the Library of Congress adopted exemptions to section 1201 of the Digital Millennium Copyright Act (DMCA) that prohibits circumvention of technical protection measures. As a part of this rulemaking process, Authors Alliance petitioned to renew the existing exemption that allows authors to bypass encryption to make fair use of film clips in nonfiction multimedia e-books offering film analysis, and we additionally advocated to modify the exemption to allow for the use of film clips in e-books for purposes other than film analysis and in fictional works.

We are pleased to report that the Library of Congress renewed the existing multimedia e-book exemptions and expanded the exemption to all nonfiction multimedia e-books (that is, the exemption is no longer limited to multimedia e-books offering film analysis). The Acting Register of Copyrights found that examples presented in our comments showed a variety of uses of short excerpts in nonfiction multimedia e-books to provide criticism or commentary beyond film analysis and also found that the brevity and transformative nature of the proposed uses favor an exemption because these uses are unlikely to substitute for the original work. The Acting Register concluded that an expansion to all nonfiction multimedia e-books is unlikely to harm, and may increase, the availability of copyrighted works and that the proposed uses will facilitate criticism, comment, teaching and/or scholarship.

The Acting Register declined to recommend to expand the exemption to cover fictional e-books, finding that the record lacked sufficient evidence demonstrating a need to expand the current exemption. We are disappointed that the Copyright Office and the Library of Congress passed on the opportunity to extend the exemption to authors of fictional multimedia e-books, such as fanfiction authors, whose transformative expression fits within the fair use doctrine.

We are grateful to the student attorneys and their supervisors at the Intellectual Property, Arts, and Technology Clinic at UC Irvine School of Law and the Samuelson-Glushko Technology Law & Policy Clinic at University of Colorado School of Law for their work supporting this exemption.

Stay tuned for additional analysis of the 1201 rulemaking for multimedia e-books from the student attorneys at UC Irvine and Colorado Law.

In December 2017, Authors Alliance submitted comments to the U.S. Copyright Office in support of a modified exemption to Section 1201 of the Digital Millennium Copyright Act (DMCA) for multimedia e-books. The proposed modification would broaden the application of the current exemption (which allows for lawful circumvention of digital rights management technologies in non-fiction works offering film analysis) to embrace fictional e-books and e-books on subjects other than film analysis. This would allow a more diverse group of creators, such as fanfiction authors, to access the clips they need from DVD and Blu-ray discs to make fair use of video clips in their e-books.

Responses to that initial comment were filed last month. Now, joined by the American Association of University Professors, Organization for Transformative Works, the Interactive Fiction Technology Foundation, and Professor Bobette Buster, we have in turn submitted reply comments as part of the U.S. Copyright Office’s seventh triennial rulemaking process for 2018. The full text of the comment is included below.

Our comment explains that creators are interested in exercising their fair use rights by engaging in criticism and commentary in their creations, and it provides evidence that creators of content have been and will continue to be harmed absent the proposed modification to the current exemption.

Our advocacy in this area is ongoing. In 2015, as part of the sixth triennial rulemaking, Authors Alliance traveled to Washington, DC to testify in hearings before the U.S. Copyright Office. We will do so again in April of this year and will keep our readers updated on that testimony, as well as the results of the seventh triennial rulemaking.

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