Is the Digital Revolution Going to Kill Fair Use?

Stephen Carlisle September 3, 2014

Earlier this year, the Supreme Court of the United States decided the case of Kirtsaeng v. John Wiley & Sons, Inc., ¹ and held that section 109 of the Copyright Act, also known as the “first sale doctrine,” applied to physical copies of books which were acquired abroad. ² I spoke about this holding with an old friend from law school, who represents a major book publisher. His opinion was that the holding would ultimately not cause much harm to the publishing business, as everything was moving to “e-books,” which were going to be acquired online, under a license, rather than a sale. This is the model that the computer software industry has been riding for years. Since your copy of your computer program was acquired by license, not by sale, you have no right of resale. ³

It has also been held that the first sale doctrine does not extend to digital files. ⁴ The holding was made narrowly, namely that the first step in “reselling” a digital file was making an unauthorized copy. ⁵ Yet the court could have reached the same conclusion by holding that a purchase from iTunes is a license, not a sale to which the first sale doctrine would not apply in any event.

So, since we now know that the first sale doctrine does not apply to the digital realm, is the doctrine of fair use the next to go? It seems that the movement in that direction has already been made.

Kevin Smith holds a position equivalent to mine at Duke University, where he is the Scholarly Communications Officer. ⁶ He recounts in his blog an attempt by Universal Music Group to restrict library uses of a recent recording by Gustavo Dudamel and the Los Angeles Philharmonic of Hector Berlioz’s famous work, the Symphonie Fantastique. ⁷ Sold only as a digital download from iTunes, it is licensed for “personal use” only. ⁸ Under Section 108 of the Copyright Act, a library has certain rights to make archival copies of sound recordings. However, the Copyright Act also provides that this right can be superseded by “contractual obligations assumed at any time by the library or archives when it obtained a copy or phonorecord of a work in its collections.” ⁹ So, it would seem that the license would cancel out the statutory rights granted to the library by Congress. Mr. Smith goes on to recount efforts of the University of Washington to get UMG to license the recording, which was met with restrictions that only 25% of the work would be licensed for a $250 “processing fee” with additional charges to come. ¹⁰ That’s pretty outrageous for a musical work which is in the public domain, for which there are numerous other recordings available. ¹¹ So, any library wishing to have a good quality recording, will avoid this recording completely.

So what about educational exemptions? Section 110 allows me to perform complete works in the course of face-to-face teaching activities. Am I now prevented from doing so because of the restrictions that it be for personal use only? Section 110(2), also known as the TEACH Act allows me as a not for profit educational institution to digitally transmit all of a non-dramatic musical work. Is this now off the books as well? And, ultimately, what of fair use itself?

Section 107 provides for two general areas in which the exclusive rights of copyright give way to larger concerns. The first of this is free speech, so the section provides that uses for purposes of criticism, commentary and news reporting are all favored. The second area is education, so purposes such as teaching (including multiple copies for classroom use), scholarship and research are all favored uses. In Cambridge University Press v. Becker, three scholastic textbook publishers sued the Board of Regents of Georgia State University for 126 counts of copyright infringement. ¹² All of the counts were excerpts from books that were digitized and placed online. While the Court found the uses were fair use in all but five cases, the question arises: if the books had been obtained electronically, and by license not by sale, could the publishers in effect have said “No copying allowed,” “Not even a little bit” and “Fair use defense is hereby waived?”

Two Circuit Courts of Appeal have considered the question of whether a license, as opposed to a sale, can effectively waive the right of the licensee to engage in fair use. Both have answered the question in the affirmative. ¹³

The two cases involved reverse engineering of computer programs. Reverse engineering has been held to be “fair use” under the Copyright Act. ¹⁴ The licenses for both programs prohibited reverse engineering by the licensee. The defense claimed that the breach of contract claims for violating the “no reverse engineering” portion of the license, were effectively pre-empted by Federal Copyright Law. ¹⁵ “A state cause of action is preempted if: (1) the work at issue is within the subject matter of copyright as defined in §§ 102 and 103 of the Copyright Act, and (2) the state law created right is equivalent to any of the exclusive rights within the general scope of copyright as specified in § 106.” ¹⁶ The Court of Appeals for the Federal Circuit explained it this way:

“The Copyright Act provides that “all legal or equitable rights that are equivalent to any of the exclusive rights within the general scope of copyright … are governed exclusively by this title.” 17 U.S.C. § 301(a) (2000). The First Circuit does not interpret this language to require preemption as long as “a state cause of action requires an extra element, beyond mere copying, preparation of derivative works, performance, distribution or display.” ¹⁷

Applying this to the reverse engineering cases, reverse engineering is not equivalent to any the exclusive rights of Section 106 and therefore not pre-empted by the Copyright Act. The partial dissent in Baystate went even further: “I nonetheless agree with the majority opinion that a state can permit parties to contract away a fair use defense or to agree not to engage in uses of copyrighted material that are permitted by the copyright law, if the contract is freely negotiated.” ¹⁸ This holding was later cited adopted in full by the Eighth Circuit, ¹⁹ and the District Court for the Western District of Texas. ²⁰

Applying this rationale to other uses, a violation by a licensee of an agreement not to use a computer program to process data by third parties was not pre-empted by the Copyright Act. ²¹ Similarly, a license agreement not to make commercial use of a database licensed for consumer use only, was also not pre-empted. ²²

But does this really settle the question? Consider the following proposition: In my license agreement, I provide that you as the licensee may not engage in any public negative commentary, negative news reporting or negative criticism of my book, musical composition, computer software and the like. This flies in the face of not only Section 107 of the Copyright Act, which specifically says one can engage in criticism of commentary of the work, and even borrow from the work to do so, but the free speech rights guaranteed by the First Amendment. Yet the case law may lead us to the conclusion that this is enforceable. The ability to engage in criticism and commentary is not equivalent to the rights contained in Section 106, and thus is not pre-empted by the Copyright Act. But can people really contract away free speech? Yes, this is done every day when legal disputes are settled and the parties agree not to disclose the terms of the settlement agreement to third parties, and not to discuss the terms publicly, and not to say disparaging things about the other party, with penalties for violations. ²³

What makes this scenario all the more likely is that virtually no one reads the license agreement before clicking “I accept.” Did you know that you are prohibited under the terms of the iTunes End User License Agreement (EULA) from using the iTunes software in the development of nuclear, chemical or biological weapons? Yes, you are. ²⁴

But the circumvention of a “no criticism” clause should be fairly easy, without having to go to Court over whether such a blatant overreach into restricting free speech would be found to be legal. I simply purchase a copy of the book, music or software, and then let you evaluate it. Since the license runs to me, not to you, you are free do so. “A copyright is a right against the world. Contracts, by contrast, generally affect only their parties; strangers may do as they please, so contracts do not create ‘exclusive rights.’”  ²⁵ One would hope that the potential for public backlash against a “no criticism license” would prevent someone from attempting this, but my guess is that somewhere down the road someone is going to try it.

The more real possibility is that the ability of a downstream user to engage in fair use by making excerpts is going to be threatened by the use of restrictive licensing. This is one of the latent underpinnings of the Georgia State case. Remember that all 126 counts were related to material that was digitized and placed online. ²⁶ Additionally, the not listed, but nominal Plaintiff in this action was the Copyright Clearance Center, a business devoted to selling digital excerpts of textbooks, who was paying 50% of the legal fees incurred by the Plaintiffs. ²⁷ The outcome was a rather stinging defeat for the Plaintiffs. Only five uses by Georgia State were found to be infringing, due to the application of the laws regarding fair use. The case is now on appeal to the Eleventh Circuit. Should the Eleventh Circuit largely affirm the judgment of the District Court, I will guess that an effort will be made to reduce fair use by restrictive licensing.

Under Section 107, I as an educator am allowing to make “multiple copies for classroom use,” as long as the use is not so expansive as to violate the four factors which govern fair use. In addition, Section 110 (2), known as the TEACH Act, allows me to place reasonable and limited excerpts online for students enrolled in my class to use. So now, in order to protect their market share, will the textbook publishers provide in their e-book licenses that no copying and no excerpts are allowed at all, no matter how small? Will this stand up to a legal challenge?

As discussed above, the Courts have said that you can contract around fair use, but only if the contract restriction is not equivalent to one or more of the exclusive rights under Section 106. Then, the Copyright Act will pre-empt the State breach of contract claim.

So, if a publisher were to place a restriction that no copying and no excerpts were to be allowed, and digital excerpts could not be made nor posted for teaching purposes, this would seem to be equivalent to three of the exclusive rights: 106 (1) [the right] to reproduce the copyrighted work in copies or phonorecords; the publication right of 106 (3) namely [the right] to distribute copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership, or by rental, lease, or lending; and 106 (5) in the case of literary, musical, dramatic, and choreographic works, pantomimes, and pictorial, graphic, or sculptural works, including the individual images of a motion picture or other audiovisual work, [the right] to display the copyrighted work publicly.

Since the downstream restrictions would be largely equivalent to the exclusive rights protected by Section 106, then the Copyright Act would pre-empt the license agreement, and the ability to claim the protections of fair use would be revived. Please don’t get too excited, for there is a way around this.

When I was in private practice, I issued countless licenses for client’s songs to be recorded by others, known in the music business as a “mechanical license.” The inherent problem was what to do if someone stopped paying the client. The rate for mechanical licenses was pennies, just 9.1 cents per copy sold. So, unless a huge amount of copies were sold, and not paid for, it would not be worth going into Court for breach of contract. The solution to this was to provide in the license that if payment was delinquent, that the license could be cancelled. If the license was cancelled, and the record company continued to distribute copies of the song, this would constitute copyright infringement, with the potential for statutory damages being now available.

This is the tactic that I believe the publishers will take. And I don’t think that I’m giving away any great ideas, the publishers have smart lawyers on their staffs as well.

The license will contain language to the effect that, if violated, the publisher has the right to cancel the license. If cancelled, then the educational institution would then have to delete all electronic copies and excerpts for the digital e-book, sound recording, computer program or what have you from its computer networks. You can’t keep the copies, because remember this is a license to use, and not a sale, and the first sale doctrine does not apply. Failure to do so, and continued use of the previously licensed materials, would constitute actionable copyright infringement, with no fair use defense, because there would be no copies which were lawfully retained.

So, the possibility that licensing will put a hamper on fair use is more than mere speculation. It’s just a matter of time before some publisher is going to try this. Will the economic reserves of the publisher be enough to stave off the backlash from the major universities?

The solution is not readily at hand. Though Congress is looking to revamp the Copyright Act, it would be a tough sell to lobby for a remedy to something that is not yet a problem. So, I guess we’re just waiting for that shoe to drop.