Fair Use and Market Failure: Sony Revisited

Abstract

In 1984, by the margin of a single vote, the Supreme Court of the United States ruled in Sony Corp. v. Universal City Studios, Inc. that the home-taping of a copyrighted television broadcast for purposes of time-shifting constituted a fair use under the Copyright Act of 1976. Since that time, economic and legal commentators have generally justified the decision in terms of market failure. If time-shifting were not a fair use, the reasoning goes, then a license would be legally required; yet, the transaction costs associated with negotiating individual time-shifting licenses would prove prohibitive. As a result, the market for time-shifting licenses would likely fail, justifying the Court's finding of fair use. There is just one problem, however: the majority opinion in Sony neither expressly embraced a market failure rationale, nor referred to the potential for prohibitively high transaction costs as a justification for the Court's fair use outcome. Rather, the Court embraced a balancing approach to fair use issues. Eschewing any undue reliance on the four statutory factors found in section 107 of the Copyright Act, the Court balanced directly what the public had to gain and what it had to lose from allowing unauthorized time-shifting to continue. Concluding on the evidence presented that the public had more to gain than it had to lose, the Court held that unauthorized time-shifting constituted a fair and hence non-infringing use. Unfortunately, the market failure reinterpretation has effectively concealed Sony's true rationale and sharply limited its potential reach. Properly understood as a balancing of the competing public interests at stake, Sony becomes both: (i) more consistent with present economic understanding of the conditions necessary for optimal private market production of a public good; and (ii) generally applicable to a wide range of fair use issues.

Keywords: copyright, fair use, public goods

JEL Classification: H41, D62