With the increasing advancement of technologies and methods for transmitting digital information, copyright holders often seek enforcement in markets in which they do not actively participate. Professor Jane Ginsburg framed this issue in terms of how courts balance between giving copyright owners compensation and control in enforcement when there is substantial but not direct impact on the holder's market.

When ...technology develops a new mode of exploitation that does not supplant known markets for the work ...when copyright owners appear to be endeavoring to prevent the dissemination of that technology, Congress will split the difference between copyright owners and other(s)... by providing for compensation, but not for exclusive control over the new exploitation... where the new mode of exploitation threatens to replace or substantially compete with traditional markets, and when the new markets are ones the copyright owners seek to exploit, Congress will provide ...exclusive rights. Copyright and Control over New Technologies of Dissemination, 101 Colum. L. Rev. 1613, 1630 (2001)

As Ginsburg's framework maps to the market impact prong of the fair use test, one wonders what similar inquiry would look like aimed at another fair use prong. And who better than Professor Mark Lemley to step up to the plate. Recently, Lemley addressed enforcement in markets where copyright owners do not participate along the transformative fair use prong. Should a Licensing Market Require Licensing? (July 2006), Stanford Public Law Working Paper No. 917161. Consistent with Ginsburg's work, Lemley shows how the compensation and control distinction is significant in transformative fair use cases where use of copyrighted works occurs in markets untapped by the copyright holder.

The licensing market cases provide a perfect vehicle for dividing those rights. If the only reason a use is considered unfair is because the copyright owner could have gotten paid to permit that use, that argument may... justify compensating the copyright owner for that “loss,” but it does not justify giving the copyright owner control over the defendant’s use. 3.

...(where) the defendant’s use is transformative ...the defendant has contributed original creative expression. If the copyright owner is willing to license that expression, the defendant ...(may)... have to pay. But if the copyright owner isn’t in fact willing to license – if, having been given control, they will seek to stop the defendant’s use – the rationale for declaring the use unfair in the first place collapses. 18.

The title of the article is a bit puzzling. Lemley talks about how copyright owners can stop use of their works even where there is no direct injury by simply offering to charge for those uses or striving to develop the licensing market. He suggests that when fair use is not found, but a transformative use has societal value, that compensation to the copyright holder via compulsory licensing may be an option, and thus licensing would not be necessary in the licensing market. Yet Lemley described Judge Kaczynski's position on fair use roughly in these terms but cautions that he would "not go that far." If anyone else can clarify the article's title, let me know.

Worthy of note is that Lemley points out compulsory licensing has been discussed regarding illegal P2Ps and other situations, but the fact that ruffian P2Ps have not made substantial efforts to curb piracy or even collaborate with content holders in their concerns, would probably not constitute the kinds of situations where compulsory licensing is called for.

Lemley is careful to qualify his argument by saying that protecting transformative fair use concerns should not override market impact analysis when there is direct or substantial injury to the copyright holder. The market impact prong of the fair use test is widely believed to be the most important prong. It is reasonable that Lemley would agree with Ginsburg's general argument that enforcement should support compensation for use in peripheral markets and control against displacing markets.

...ex post compensation may be insufficient to deter conduct that causes harm and has no redeeming social value... There will be many circumstances in which even a derivative market should be supported by a property rule, perhaps because there is no established market for the licensing of derivatives of that work, so that compelling licensing would undermine the incentives associated with exclusivity. 17.

An intriguing part of Lemley's paper is his argument against the “lost licensing revenue” theory, where copyright owners claim loss because they "could have" licensed to the user. Lemley does not question situations where copyright holders participate in a market, nor that courts need to preserve the incentive for copyright owners to develop and enter into new markets. Lemley's skepticism of the lost licensing revenue theory appears to reflect his belief that transformative prong defenses should benefit from careful consideration as the market impact prong may too easily shirk fair use or overcompensate a copyright holder if it resides on the theory. Lemley believes that since the theory has analytical limitations it should be used cautiously and not tip the market impact prong over the transformative prong.

The “lost licensing revenue” theory is ultimately circular. Whether a use is fair depends on whether the copyright owner loses anything from the use, but under (recent case law) whether the copyright owner loses anything from the use depends on whether the use is deemed fair; only if it is not a fair use would there be licensing revenue to lose. 9

....courts have sought to avoid the circularity problem by limiting claims for lost licensing revenue to “traditional, reasonable, or likely to be developed” licensing markets but this effort is likely to be unavailing. 9.

It is almost impossible that Lemley disagrees with the importance of the lost licensing revenue theory as a market ordering concept, as he would certainly recognize that if copyright owners can only claim revenue loss in markets they participate in, with the fluidity of markets in the Internet era, copyright holders may find others using their assets to create markets and effectively pre-empting them from entering and leveraging their copyrights in those markets, thereby isolating copyright holders to their current revenue streams- an untenable view as it would give free-loaders incentive to create business models based on others' intellectual property assets and encourage users to not pursue licensing from copyright owners.