The copyright statute does not prohibit all copying of copyrighted material. The fair use doctrine is codified under section 107 located here. Section 107 does not provide any "bright line" rules regarding what is or is not fair use but rather lists the factors that courts consider when performing "fair use" analysis. The factors are as follows: (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;(2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.
If fair use is found then no compensation is due the copyright holder. Essentially this means that a non licensed use of the work is allowed as a matter of right. However, this right is only determined once a court has found the use to be fair (i.e. only after the copyright holder has brought a cause of action). The factors above are analyzed as part of a "balancing test" with no one factor controlling. Each factor is considered briefly below. Courts will often weigh one factor more than another depending on the specific context of the case before them. The analysis is highly "fact dependent" and therefore outcomes are difficult to predict. The best guide to a potential outcome lies in comparison of the current factual context with established precedent (see Case Law Summary for additional information). It should be noted that the factors are illustrative and not exhaustive. Courts are free to consider other relevant factors, although there is empirical data that suggests that they rarely do so.
Factor 1: the purpose and character of the use
The first factor looks at whether the use in question provides some benefit to the public consistent with the constitutional intention of the copyright statute (i.e. does the use further the "progress of the arts" by providing some additional value?). A key consideration under Factor 1 is whether the current use is transformative as opposed to derivative. Remember that part of the "bundle of rights" that a copyright holder has is the right to make derivative works. It appears that the "transformative" analysis is now more controlling than whether or not the use is commercial, at least with respect to this factor. If a work is found to be transformative then there is some empirical data to suggest that fair use will be found. Parodies of the original work are often found to be transformative and therefore protected under the fair use doctrine.
Factor 2: the nature of the copyrighted work
The second factor looks at whether what was copied was protected (e.g. the creative aspect of the work) or unprotected (e.g. facts and ideas contained within the work). However, these are not the sole considerations. In general (but with some exceptions), a copyright holder is entitled to the first publication of his work, even if what was copied subsequently (but prior to the holder's first publication) would be "fair use." This is the basic holding from Harper & Row v. Nation Enterprises (USSC 1985). That said, the lower courts have subsequently gone both ways regarding the published versus non-published issue, post Harper. This re-emphasizes the highly fact specific nature of the analysis.
Factor 3: the the amount and substantiality of the portion used in relation to the copyrighted work as a whole
The third factor addresses both the quantity of the work copied and the "criticality" (i.e. to the original work) of what was copied. The latter is often discussed in terms of whether the "heart of the work" was copied, and does not necessarily refer to a large quantity. Even a small quantity can comprise the "heart of the work," or in other words, the "essence of the work." Generally, apart from the essence question, courts are more apt to find fair use when a small part of the work has been copied (e.g. a small quotation from the original work). When the entire work was copied there is empirical data to suggest that a plaintiff will prevail. Similarly, when a court finds that the essence of the work was copied (regardless of quantity) then the plaintiff is likely to prevail.
Factor 4: the effect of the use upon the potential market
The fourth factor has to do with whether the plaintiff can "show the court the money." Here the plaintiff must show either that the use has already hurt the market for the original work, or whether, if such use were widespread, it would harm the potential market of the original work. While none of the four factors is independently controlling, there is empirical data to suggest that the party that prevails on Factor 4, nearly always prevails with respect to the "fair use" argument. That is, if the plaintiff can show that the market for the original work (or the potential market) is damaged by the defendant's use, then the plaintiff is likely to prevail. Conversely, where the defendant can show little or no damage to the market, then the defendant prevails.
Comments: As a practical matter (as alluded to above), the "right" of fair use is only available to a defendant in a law suit as an "affirmative defense." Which means that the defendant can raise this defense after litigation has commenced, and if the defendant's assertion is correct, then they win. But as many small businesses (and individuals) have realized, "winning" is relative, given the costs associated with defending a suit. It is often (nearly always) more cost effective to either license the use, or refrain from using the work at all. Of course, if your use falls within those categories of uses that are not problematic (e.g. educational or journalistic uses) then you are likely to be on safe legal ground. But, the reality is, with respect to other types of uses, you should err on the side of caution. As a general rule, a fair use defense is only available to those with "deep enough pockets" to assert it. In addition to "deep pockets," there should be, from a business perspective, some economic justification for doing so. Additional information regarding fair use can be found on Stanford's Copyright & Fair Use page.
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