Economic Analysis of Fair Use Exception in Intellectual Property

Abstract

Economic analysis invariably defends fair use by showing its beneficial externalities—such as increasing knowledge, lowering transaction costs, driving innovation, and raising consumer well-being. Although critics suggest that fair use depletes revenue streams, empirical evidence and case law demonstrate that fair use widens, rather than narrows, market opportunities. Properly regulated, fair use supports a balanced Intellectual Property (“IP”) regime, benefiting both copyright owners and society.

Introduction

The World Trade Organization (“WTO”) defines IP rights as: “Intellectual property rights are the rights given to persons over the creations of their minds. They usually give the creator an exclusive right over the use of his/her creation for a certain period of time.”^[1]

IP grants a legal monopoly to a creator who has applied their mind to come up with an innovation for a defined duration. By enabling creators to recover costs and earn from their innovations through exclusive rights, IP laws encourage further innovation.

This system fosters an environment conducive to creativity by ensuring recognition for those who contribute to the advancement of art, technology, and knowledge. However, no IP right is absolute. Certain exceptions—such as for education, research, or compelling public interest—permit limited use of IP.

This paper focuses on the fair use exception available to copyrights.

It begins by outlining exceptions to IP rights in India, particularly fair dealing under Section 52 of the Copyright Act, 1957. It then distinguishes between the broader concept of “fair use” and the narrower “fair dealing” exception.

Part IV explores the rationale behind the need for fair use exceptions. Part V analyzes the economic implications and counters the perceived risks associated with this exception. Finally, Part VI concludes with a summary of key findings and their broader significance.

Exceptions to the IP Rights in India

According to Section 52 of the Copyrights Act, 1957, fair-dealing allows for limited non-commercial usage for the purposes of education, research, criticism, etc. Certain uses of copyrighted works do not constitute infringement, including:

• Private or educational use^[2]
• Criticism and news reporting^[3]
• Judicial and legislative purposes^[4]
• Library preservation^[5]
• Specific uses of computer programs^[6]
• Architectural works^[7]

No IP right is absolute. Though the ‘fair-use exception’ applies only to copyrights, certain exceptions codified in other IP laws allow their use without it being considered an infringement of IP rights.

The Bolar Provision^[8] makes exceptions to patent infringement for the use, sale, and export of a patented invention only for the purpose of securing regulatory approval in India or elsewhere. This enables generic manufacturers to conduct research, testing, and regulatory submissions prior to the patent’s expiration, so they can enter the market immediately after expiry without delay.

Other instances wherein the use of patented property without obtaining a compulsory license is not considered infringement include:

• Government use of a patent for governmental purposes with reasonable compensation^[9]
• Experimental and research use^[10]
• Temporary use of a patented invention in foreign ships, aircraft, or land vehicles^[11] while passing through Indian territory

Under the Trademarks Act, 1999, some uses of a registered trademark are not considered infringement, including:

• Use of the mark for making honest and fair use of goods or services^[12]
• Use to denote product features such as quality or origin^[13]
• Use subject to conditions or limitations^[14]
• Resale of lawfully obtained goods carrying the mark^[15]
• Use on compatible goods or accessories^[16]
• Sale of goods already put into the market by the proprietor or with their consent, unless the condition of the goods has been changed^[17]

*Kindly note that the scope of this paper is limited to the economic analysis of the fair use exception under various Copyright laws*

Difference between Fair-Use and Fair-Dealing

The concepts of “fair use” in the U.S. and “fair dealing” in India, while both allowing limited use of copyrighted material without permission, differ significantly.

In the U.S., “fair use”, as defined by Section 107 of the Copyright Act^[18], is determined using a flexible four-factor test. This allows broader interpretation and adaptation to new technologies.

In contrast, Indian “fair dealing”, as defined by Section 52 of the Copyright Act^[19], is stricter and lists specific permissible uses such as study, criticism, and news reporting.

This paper examines the economic implications of the fair use exception to copyright in different countries. Since the fundamental economic consequences of “fair use” and “fair dealing” are essentially analogous, these terms are used interchangeably for the purpose of this paper, unless distinctions between the two are explicitly addressed.

The Need for Fair-Use Exception

The need for fair use was first felt because copyright laws grant authors exclusive rights to their works, promoting creativity and innovation. However, unrestricted control may hinder access to information, research, and cultural advancement.

Promoting access to education and knowledge is the main rationale for fair use. It enables researchers, educators, and students to use content for non-commercial academic purposes, making education more inclusive and accessible. Fair use also prevents ideas from being monopolized, ensuring the spread and development of basic ideas while protecting expressions through copyright.

In academia, where scholars must evaluate and build on existing literature, fair use is crucial. It prevents over-enforcement in insignificant and non-commercial contexts, such as school projects, where licensing would be burdensome and economically inefficient.

Thus, the fair use exception helps address market failures such as monopoly and information asymmetry.

Fair use aligns with the principles outlined in Article 13 of the TRIPS Agreement^[20], which permits limited exceptions to copyright infringement as long as they do not exploit the work or unreasonably harm the author’s rights. Fair use is, therefore, a vital legal principle that balances societal needs and creators’ rights, promoting innovation, learning, freedom of speech, and technological progress.

Perceived Risks of the Fair-Use Exception

The perceived risks of “fair-use” exceptions are manifold. First, it is generally believed that fair use permits limited use without compensating the owner (the free-rider problem), which can lead to financial losses, both to the economy (as it reduces the incentive of potential creators to develop something new) and the IP-owner. I submit the following counter-arguments.

1. Transformative Works and Innovation Fair-use exceptions allow the production of transformative works (parodies, criticisms, etc.), promoting a dynamic marketplace for creativity. New markets encourage independent creators, leading to cultural and economic diversity. The following examples demonstrate how transformative uses aid the economy:
   1. Computer programs: Software reverse engineering and interoperability exceptions spur innovation. In Google LLC v. Oracle America, Inc. [21], the U.S. Supreme Court ruled that Google’s use of Java APIs was fair use. Many open-source projects replicate APIs to allow interoperability. A study found that open-source contributions add €95 billion annually to the EU economy [22].
   2. Parody: In Campbell v. Acuff-Rose Music Inc [23], the US Supreme Court held that commercial parody may be fair use under Section 107 of the Copyright Act [24].
   3. Architecture: Kota’s Seven Wonders Park in India boosts tourism by replicating world monuments. It creates jobs, educates the public, and qualifies as fair-dealing under Indian copyright law [25].
      
      *Kindly note that most architectural marvels are pretty old and their copyright may have expired*
       
2. Reducing Transaction Costs Without fair-use, educators would face lengthy procedures to obtain copyright permissions. Fair-use simplifies access, avoiding the “tragedy of the anticommons” [26] and promoting a more informed society. Education, being a public good, raises human capital. In University of Oxford v. Rameshwari Photocopy Services [27], the Delhi High Court held photocopying for teaching is not copyright infringement under Section 52(1)(i) [28]. Similarly, digital libraries foster education and access to information. In Authors Guild v. HathiTrust [30], US courts upheld fair use for digital preservation. Critics argue libraries hurt book sales. However, Pew Research [31] shows library-users are more likely to buy books. In 2011, 54% of print readers and 61% of e-book readers preferred buying books.  
3. Enhancing Democracy and Public Participation Fair-use applies to legislative and judicial works, reducing information asymmetry and promoting transparency. In Wheaton v. Peters [32] and Banks v. Manchester [33], the US Supreme Court confirmed that court opinions are not copyrightable. India’s Copyright Act, 1957 also brings judicial and legislative rulings under fair-dealing [34].  
4. Economic Contribution A 2017 report by the Computer & Communications Industry Association [35] found that fair-use industries contributed $5.6 trillion to the US economy and supported 18 million jobs. Fair-use drives internet-based businesses and consumer benefits.
    
5. Fair-Use as a Marketing Tool Fair-use through critical reviews builds consumer interest. Reviews serve as previews, boost sales, and expand the audience. Viral online reviews further amplify this effect. According to a study, featuring songs in the Billboard Music Year-End Charts (2006–2015) increased prior work sales [36].
    
6. Concerns About Abuse A common concern is the misuse of fair-use for unauthorized copying. Courts have set limits:
   • Four-Factor Test (US):
     • Purpose and character of the use
     • Nature of the copyrighted work
     • Amount and substantiality used
     • Effect on market value
     In Sony Corp. v. Universal City Studios [38], private time-shifting was held non-infringing, but commercial copying drew penalties. Courts have protected photocopying under Section 107 [39].
      
   • India: Section 52 of the Copyright Act, 1957 prohibits excessive reproduction [40], unauthorized commercial use [41], public performance [42], digital storage [43], or derivative works [44].
      
   • New Zealand: In Longman Group Ltd. v. Carrington Technical Institute [45], the court held that pre-prepared course packs went beyond educational fair-use. Reproductions must be part of active instruction, not substitutes for original texts.

Moreover, studies show that excessive reproduction is more driven by piracy and ease of copying than by fair-use [46]. Potential misuse should not prevent legislation to resolve systemic issues. Instead, safeguards must be implemented.

Conclusion

Fair-use fosters creativity and public welfare. It supports cultural diversity, independent creators, and new markets. It improves knowledge dissemination, reduces transaction costs, and addresses monopolization of ideas.

Legal safeguards address concerns about misuse. Both Indian and US laws limit fair-use strictly. Piracy, not fair-use, is the main source of infringement. Fair-use should be preserved as a progressive legal tool to support transparency, democratic engagement, and knowledge-driven growth. End Notes:

1. World Trade Organization, ‘Overview of the TRIPS Agreement’ <https://www.wto.org/english/tratop_e/trips_e/intel1_e.htm> accessed 5 April 2025.
2. Copyrights Act, 1957, s.52(1)(a).
3. Copyrights Act, 1957, s.52(1)(a)–(b).
4. Copyrights Act, 1957, s.52(1)(d)–(h).
5. Copyrights Act, 1957, s.52(1)(n)–(o).
6. Copyrights Act, 1957, s.52(1)(aa).
7. Copyrights Act, 1957, s.52(1)(r), (u).
8. Patents Act, 1970, s. 107A.
9. Patents Act, 1970, s. 100.
10. Patents Act, 1970, s. 47(3).
11. Patents Act, 1970, s. 49.
12. Trademarks Act, 1999, s.30(1).
13. Trademarks Act, 1999, s.30(2)(a).
14. Trademarks Act, 1999, s.30(2)(b).
15. Trademarks Act, 1999, s.30(3).
16. Trademarks Act, 1999, s.30(2)(d).
17. Trademarks Act, 1999, s.30(4).
18. Copyright Act, 1976 s. 107.
19. Copyrights Act, 1957, s.52.
20. Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement), Article 13.
21. Google LLC v. Oracle America, Inc., 593 U.S. 1 (2021)
22. OpenForum Europe, Open Source Study – OpenForum Europe (OpenForum Europe 2022) <https://openforumeurope.org/open-source-impact-study/#:~:text=The%20study%20estimates%20that%20open,its%20political%20and%20investment%20culture> accessed 28 March 2025.
23. Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994)
24. Supra Note 7
25. Copyrights Act, 1957, s.52(1)(r), (u)
26. Michael Heller, ‘The Tragedy of the Anticommons: A Concise Introduction and Lexicon’ (2013) 76 MLR 6 <https://scholarship.law.columbia.edu/faculty_scholarship/1778>, accessed 28 March 2025.
27. The Chancellor, Masters & Scholars of the University of Oxford v. Rameshwari Photocopy Services, 2016 SCC OnLine Del 6229.
28. Supra Note 19.
29. UNESCO and IFLA, IFLA/UNESCO Public Library Manifesto 1994 (UNESCO 1994) <http://www.unesco.org/webworld/libraries/manifestos/libraman.html> accessed on 25 March 2025.
30. Authors Guild v. HathiTrust, 755 F.3d 87 (2d Cir. 2014).
31. Rainie, L, ‘7 Surprises About Libraries in Our Surveys’ (Pew Research Center, 30 June 2014) <https://www.pewresearch.org/short-reads/2014/06/30/7-surprises-about-libraries-in-our-surveys/> accessed on 31 March 2025.
32. Wheaton v. Peters, 33 U.S. (8 Pet.) 591 (1834).
33. Banks v. Manchester, 128 U.S. 244 (1888).
34. Supra Note 4.
35. Szamosszegi, A, McCleary, MA, Computer & Communications Industry Association, and Capital Trade, Inc, Fair Use in the U.S. Economy (2017) <https://ccianet.org/wp-content/uploads/2017/06/Fair-Use-in-the-U.S.-Economy-2017.pdf> accessed 21 March 2025.
36. Schuster, W. Michael and Mitchell, David M. and Brown, Kenneth, ‘Sampling Increases Music Sales: An Empirical Copyright Study’ (August 4, 2018). 56 American Business Law Journal 177 (2019), <https://ssrn.com/abstract=3226292> accessed on 23 March 2025.
37. Supra Note 18.
38. Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984).
39. Supra Note 18.
40. Copyrights Act, 1957, s.52(1)(i).
41. Copyrights Act, 1957, s.52(1)(aa)(ii), (l).
42. Copyrights Act, 1957, s.52(1)(l).
43. Copyrights Act, 1957, s.52(1)(b).
44. Copyrights Act, 1957, s.52(1)(v).
45. Longman Group Ltd. v. Carrington Technical Institute Board of Governors, (1991) 2 NZLR 574
46. unfoldlaw.in, ‘Digital Piracy and Copyright Infringement’ <https://unfoldlaw.in/digital-piracy-and-copyright-infringement/> accessed 5 April 2025.