How does fair use policy in copyright law affect markets for the production and distribution of creative works? As we come to the end of Fair Use Week, it’s a good time to highlight a report by the Phoenix Center for Advanced Legal and Economic Public Policy Studies, titled “Fair Use in the Digital Age,” that offers interesting insights into how we can optimize fair use to promote fair markets. The report takes aim at stakeholders in the entertainment and media sectors who call for weaker copyright protections at a time when the creative industries are already being undercut by spiraling digital piracy that shows no signs of abating. The report creates an economic model that opens new vistas for economically sound fair use policy in high-production-cost creative industries. And its application would help judges and lawmakers approach fair use questions in a consistent and empirically sound manner, free from the rhetoric that swirls around much of today’s fair use debates.

The concept of “fair use” in the U.S. carves out exceptions and limitations to copyright’s exclusive property rights by allowing copyrighted works to be used in certain circumstances without permission or compensation. Some other countries—like Australia and New Zealand—have an analogous carve-out in the concept of “fair dealing.” U.S. copyright law sets out four factors that must be analyzed on a case-by-case basis to determine whether a particular use constitutes a fair use. In “fair dealing” countries, specific uses that are permitted are enumerated by statute. In theory, both fair use and fair dealing are subject to statutory construction and judicial interpretation, and can be given wide or narrow berth. In practice, though, proponents of the U.S. version argue that fair use offers greater “flexibility” to allow the use of copyrighted works without permission or compensation.

“Fair Use in the Digital Age” constructs an economic model of exceptions and limitations to copyright under fair use that focuses on the goal of incentivizing the creation of new works. The objective behind the report is to determine an “optimal” level of fair use (or fair dealing) – i.e., a level in which some appropriation can occur without significantly impairing the rights and returns of copyright owners. The report finds that “optimal” fair use should be more constrained when: (i) the cost of the original work is high; (ii) the size of the market for the original work is small; (iii) piracy and other forms of leakages—which reduce the market potential for the original work—are large; (iii) the cost of distributing secondary works is lower; (iv) small amounts of transformation matter a lot to consumers; and (vi) the fixed cost of producing  secondary works is smaller.

The report seeks to “analyz[e] fair use formally and rationally.” In so doing, it concludes that “much of the advocacy for broader exceptions in copyright law is misguided.” The report argues forcefully that the characteristics of digital technologies that fair use advocates look to when calling for expanded “flexibility” actually suggest that we should be reducing exceptions and limitations to copyright. This holds particularly true in smaller markets, which tend to have high rates of copyright misappropriation and higher enforcement costs. While calling for further research on the matter, the report marks a noteworthy step in analyzing fair use rationally and carefully, and offers a clear and reasonable economic model for keeping fair use well-determined, well-designed, and fair.