3. THE BALANCE OF THE COPYRIGHT – FAIR USE DOCTRINE
3.1 Market Failure Approach
3.1.1 Market Failure as Justification of Fair Use
Market failure approach is developing from a presumption that in a perfect competition marketplace,116 individual transactions serve both social needs and the needs of the individual persons participating. A person’s willingness to pay to
116 There are three perfect market conditions, or “conditions of perfect competition,” that
must be satisfied to result in an efficient solution. See id. at 1607. First, all cost and bene-fits must be borne by the persons within the transaction and not by persons external to it.
See id. (indicating that “external benefits” may affect a resource user’s “willingness to pay for the resource” and “might understate his ability to use the resource in a way that serves social needs”). Second, perfect market conditions also “require perfect knowledge;
for example, consumers must know the qualities and characteristics of all available prod-ucts, as well as the price and locations of the various sellers.” See id. at 1607-08. Finally, perfect market competition requires the absence of transaction cost. See id. (noting that
“it must be costless to obtain knowledge, locate all persons affect by a transaction, bar-gain over process and terms, and maintain an enforcement mechanism to ensure adher-ence to the bargain”).
use the resource reflects “social benefit” since each person is a member of soci-ety, so that voluntary transfers between individuals will create a socially desirable pattern of resource allocation.117 In this way, value, defined as “human satisfac-tion as measured by aggregate consumer willingness to pay for goods and ser-vices,” will be maximized.118 “Fair use is one label courts use when they ap-prove a user’s departure from the market.”119 As suggested by Professor Gordon, fair use should be awarded to the defendant in a copyright infringement action only when the market failure exists.
In Professor Gordon’s view, fair use doctrine has three straight-forward con-cerns: where (1) defendant could not appropriately purchase the desired use through the market; (2) transferring control over the use to defendant would serve the public interest; and (3) the copyright owner’s incentives would not be sub-stantially impaired by allowing the user to proceed, courts have in the past con-sidered, and should in the future consider, defendant’s use “fair.”120 To analyze when fair use is appropriate therefore should begin at identifying when flaws in the market might make reliance on the judiciary’s own analysis of social benefit appropriate.121
3.1.2 The Three-Step Test
To evaluate market failure, Professor Gordon provides a three-part test to analyze all fair use cases. The first prong of the test requires a court to evaluate the market and determine if a reason to mistrust it exists.122 “[A]n economic
117 Id.
118 Id. at 1606.
119 Id. at 1614.
120 Id. at 1601.
121 Id. at 1614.
122 Id.
justification for fair use exists only when the possibility of consensual bargain has broken down in some way.”123 Professor Gordon suggests that both the impossi-bility or difficulty in achieving a market bargain,124 and existence of external-ities, nonmonetizable interests, and noncommercial activexternal-ities,125 provide the causes of mistrust the market. When identifying the market failure, the most sig-nificant one is transaction cost.126 In the economic term, transaction costs in-cludes (1) search costs; (2) negotiation costs; and (3) enforcement costs.127 In some cases, it is impossible to locate who and where the author is; even when the author is known, to negotiate over the price and terms of the use is expensive and time consuming.128 If one of the parties didn’t perform the negotiated results, to enforce the contractual obligation would raise an additional cost. Because of these costs, the copyrighted work market can not always provide a social desir-able pattern for voluntary bargaining.
In the second part of the test, a court should determine whether “the transfer to the defendant is value-maximizing, as determined by weighing plaintiff’s in-jury against defendant’s social contribution.”129 When a court weighs plaintiff’s loss against the benefit of defendant’s use, it is making a comparison similar to
123 Id.
124 Id. at 1627-30.
125 Id. at 1630-32
126 Id. at 1628 (explaining that “As long as the cost of reaching and enforcing bargains is
lower than anticipated benefits from the bargains, markets will form. If transaction costs exceed anticipated benefits, however, no transactions will occur.”).
127 See COOTER & ULEN, supra note 1, at 88.
128 This is so called “tracing cost”: before using copyrighted work, the user must trace the
owner and obtain permission. Id. at 136.
129 See Gordon, supra note 76, at 1626. See also id. at 1615 (explaining that “If, when the
‘market failure’ were cured, the price that the owner would demand is lower than the price that the user would offer, a transfer to the user will increase social value.”).
that made by the participants in market transactions. By which, fair use implies the consent of the copyright owner by looking to whether the owner would have consented under ideal market conditions.130 Market failure creates such an exi-gency because, when market failure is present, it is impossible or undesirable to make dissemination of creative works, which depends solely on actual con-sent.131 Thus, where transfers will not occur because of market failure, courts should ask what the copyright owner would have consented to if he and the user had bargained in a functioning market situation.132
Finally, if the first two conditions are satisfied, the court should determine whether a fair use would cause the copyright owner substantial injury.133 If not, fair use should be awarded to the defendant.134 In the complete market failure situation, where no incentive purpose would be served by giving plaintiff protec-tion, and where no disincentive would be created by allowing defendant free use, logic suggests that the courts should then allow fair use.135 However, in the in-termediate cases of market failure, where the market cannot be relied upon to generate all desirable exchanges, but where some such transactions would be pos-sible, finding a use fair may result in some injury to relevant incentives because, for some users, fair use would substitute for purchase.136
130 Id. at 1616.
131 Id. at 1617.
132 Id.
133 This injury is referring to the lost revenue for the uses of a copyrighted work. See id. at
1651 (“[T]he economic approach to fair use presented in this article [Gordon, supra note 76] begins with the premise that a copyright owner is ordinarily entitled to revenue for all substantial uses of his work within the statutorily protected categories.”).
134 Id. at 1618-22.
135 Id. at 1618.
136 “In instances of intermediate market failure, both enforcement (a finding of infringement)
Going through the three-step test suggested by Professor Gordon, one can find that the main point of this market failure approach is: to determine whether a use is fair, courts should mimic the transaction which would occur in the perfect market. If the voluntary bargaining between the copyright owner and the user is possible, then courts should encourage the voluntary bargaining, rather then find a fair use. In summary, if the transaction cost is prohibitively high, and the courts can assume the copyright owner would consent in the absence of market barriers, and most importantly, that the finding of fair use would not serious injure the copyright owner’s incentive, then the existence of fair use is justified.137
Following this approach, one could say that if no market failure exists, i.e., if the prohibited high transaction cost is no longer considered as a barrier, then there will have no justification for the existence of fair use. That is because, in the perfect market, voluntary transactions will arise between rational, self-interested individuals, and thus create a socially desirable pattern of resource allocation which naturally maximizes society’s output based on the available resources. In the other word, there would be no justification for intervention – such as compel-ling transactions, i.e., fair use – to exist.