Fair Use as Innovation Policy

For IPSI Booklet 2024, I had the opportunity to revisit Fred von Lohmann's 2008 article “Fair Use as Innovation Policy”.

2008 seems now far away, but in the current EU policy environment, where innovation, competitiveness and knowledge seem to be keywords back in the political agenda, this article is relevant as ever. 

In short, von Lohmann demonstrates how fair use in the USA fulfills an essential innovation policy role. In contrast, I say, EU's inflexible copyright regime is the opposite: a conservative, anti-innovation regime by nature.

We can talk about the “The Future of European Competitiveness” all day long, but in copyright-related markets, we either introduce flexible norms or we will be keep falling behind the rest of the world.

(on this regard, see as well Knowledge Rights 21 on "The Need for New Thinking and Flexibility in Europe’s Information Ecology to Drive Competitiveness and Growth").

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Eduardo Santos on
“Fair Use as Innovation Policy”
by Fred von Lohmann in Berkeley Technology Law Journal (2008) 23(2)

With Silicon Valley as its symbol, the technological innovation capacity of the US enjoys worldwide recognition. What might be not so well known is the role that fair use plays in the US technological innovation policies, more precisely in copyright related markets. According to the US lawyer  Fred von Lohmann, however, fair use is no less than an "unsung hero in the tale of America's innovation economy".

The author bases his analysis on consumer changes in the US, regarding access to copyrighted works enabled by the emergence of products such as the audio cassette recorder, the videocassette recorder (VCR), the MP3 music player, and others, over the last few decades. These products created new ways for end users to enjoy copyrighted works, which required those users to be allowed to make private copies of copyrighted works they already owned.

However, at the time, it was far from certain that the fair use doctrine would find such new private copies lawful. Traditionally, the fair use doctrine in the US had developed around cases of new, transformative uses. These new consumer-made copies, instead, represented private, non-transformative, personal-use copies. In numbers, however, these new uses were already much more common than the traditional fair use cases. If they were considered fair use, this would mean an important paradigm shift for fair use.

The flexible nature of fair use allowed innovating companies to take risks and introduce in the market these innovations, even before the courts stepped in. These new products were spread all around the US households and were perceived as legitimate by the consumers, even before there was legal certainty about their lawfulness. The US law allowed the necessary space for these innovations to find their place, and eventually change the market as it was known. New markets were created, new remuneration models were developed, and new value was created for the consumers. When the courts stepped in, afterwards, they were able to make the fair use assessment from a more consolidated perspective of these new technologies, their advantages and disadvantages, including the economic impact on rightholder’s markets and the benefit for the end user. They were able to better grasp the new value that these technologies brought not only to consumers but also to rightholders - although often in ways that were very different from existing business practices.

Of course, not all innovation necessarily results in a benefit for the rightholders – some can be quite detrimental. But this ex-post approach allows innovating companies to demonstrate how new innovations can indeed bring value to existing works. Eventually, it allowed rightholders to find new models for remuneration, at a time they were struggling with traditional models. For example, VCR opened the way for home rental market, MP3 players opened the way for music stores like iTunes, and, eventually, streaming. This happened despite initial strong protests from risk-averse rightholders who would prefer to maintain the traditional business models they were familiar with. However, the pre-announced doom of the music industry never happened. In fact, years later, streaming would become the main source of revenue for the music industry.

Von Lohmann then uses the economical perspective provided by Clayton M. Christensen’s work on innovation, in which he observed that, for several reasons, true, disruptive, innovation comes mostly from new market entrants, not from dominant market players. As such, he argues, a main goal of an innovation policy should be to defend new market entrants. New companies need to be able to disrupt; protection of incumbents, on the contrary, prevents the most impactful innovations from taking place. As von Lohmann argues, a feature of fair use is to play an innovation policy role, allowing "breathing room" for innovation to take place. This "innovation first, regulate later" approach favors the US technological competitiveness globally. 

The technological innovations studied by von Lohmann would not have been possible without fair use, which means they would not have been possible in the European Union. Innovation is fast-paced, and law does not change so fast - specially with pressure groups defending established business models. Only after becoming widely accepted in the US these products arrived in the EU, and the EU lawmakers found a way to accommodate them.

The US copyright system developed its own way to find the proper balance between the interests of the rightholders and the US’s innovation objectives. Fair use allows the US to both reap the economic benefits of innovation and continue leading copyright related markets, permitting the creation of value to the consumers while also finding new revenue streams for rightholders in an ever-changing technological reality.

In contrast, Europe, even in the context of technological innovation policies, opts to give full precedence to rightholders interests. Any other interest, being innovation, public interest goals or other, is conceptualized in EU law as an “exception”. Unlike fair use, the regime of EU copyright exceptions is rigid and works ex-ante, giving no space for innovation to spur: only the strict uses already provided in the law are allowed; the change in the law must precede the innovation – which is an impossibility. And while it is true that the exceptions' regime provides more legal certainty, in innovative markets this simply translates to the certainty of legal impediment to innovation – at least to what Christensen considers the most impactful innovation: the one brought by new market entrants, which can disrupt existing business models. Instead, by giving full precedence to righholders’ positions, the EU favors – in Christensen’s economy terms – the protectionism of incumbents.

In short, the lack of EU innovation policies for copyright related markets becomes an economic disadvantage and a competitive handicap, compared to the US. On copyrighted related markets, the EU still holds a conservative, anti-innovation policy, where the rigid and strict copyright exceptions' regime offers zero space for innovating. In this light, the struggle of EU's tech innovation and competitiveness, in comparison with the US, is a rather natural outcome of the adopted policies.