<i><b>Commentary:</b></i> Should the Music Stop for iTunes?

Fair Use and iTunes

There are at least two key differences between fair use and the iTunes contract. First, many commentators consider the fair use scope to be broader than the scope granted under the iTunes contract, covering a much broader amount of uses. Second, the borders of the fair use scope are fuzzy, coming from one of those 'all things considered' multi-factor legal tests, while the scope defined in the iTunes contract is precise in limiting the amount of copying to a specific number.

The rub is that the doctrine of federal pre-emption, which stems from the Constitution's Supremacy Clause, speaks very forcefully about the consequences of such a conflict between a federal law, in this case copyright, and a state law, in this case enforcement of the iTunes contract under California state law. Following established precedent, the state law may be unenforceable when it conflicts with the federal law. Taking these strong versions of fair use and pre-emption arguments at face value, the contract on which the iTunes business model largely depends may actually be void.

Pre-emption and Misuse

What is more, as the Estate of James Joyce has recently seen through its lawsuit with Stanford University professor Carol Shloss, misuse may arise when a copyright owner attempts to extract through contract a promise to avoid uses that otherwise would be allowed under the federal regime's fair use doctrine. Applying this logic to the iTunes deal may make it a good target for a misuse argument as well. This matters a great deal because the punishment for misuse can be severe, including unenforceability of the copyrights connected to the misuse if owned by the one committing the misuse, as well as potential exposure to the treble damages provisions of antitrust law.

This strong reading of the arguments about pre-emption and misuse likely strikes many of us as wrong, as a matter of policy. Consider a more concrete example relating to contracts over real property, such as the sale of half of a parcel of land where the half that is sold is encumbered by a negative easement, such as a promise not to build a factory that produces smelly emissions. Restrictions on emissions to protect the environment generally are seen as the body of federal environmental law. The doctrine of conflict pre-emption might allow the contract term limiting use of the property, which is a matter of state law, to be pre-empted and thus left unenforceable. A savvy buyer of the half parcel could then argue that it is a misuse of that property right for its owner to have used it to attempt to extract the environmental promise in the first place, thereby making unenforceable the property right in the entire parcel. This would be a neat trick for buying the whole by paying even less than fair market value for unrestricted use of the half. This type of bizarre result is exactly what follows from the very rigid nature of the copyright rules about fair use, pre-emption and misuse.

Copyright and iTunes

Indeed, concerns about such extreme outcomes may be one reason why music downloads have been provided by a middle man like Apple, rather than the owner of copyrights in the content that is the focus of the deal, like artists, producers and other long-established music distributors. Just like the accommodation transferors often used to structure complex transactions in other settings, it might make sense for all involved in iTunes to have kept the copyright owners separate from the potentially misuse-generating contract terms of the iTunes customer agreements. If this is right, then avoiding the risk of misuse may be one reason so many record labels and other big content companies have decided to 'let' Apple play such a big role in the online music world.

Why haven't other players raised these challenges to iTunes? One answer may be that any iTunes competitor also would likely have to rely on similar contract provisions.

In the final analysis, we may not know how well these arguments about fair use, pre-emption and misuse will play out until someone decides to bring suit. But in the meantime, the high stakes of potentially void contracts and unenforceable copyrights may rationally be deterring a host of enterprises from entering this market. If that's right, then a major threat to competition in the online music market may not be the lack of enforcement of antitrust laws, as suggested by those favoring the recent European actions against iTunes. Instead, the culprit may be the very clumsy and potentially devastating rules of the copyright game itself.

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F. Scott Kieff is a law professor at Washington University in St. Louis and a Research Fellow at Stanford University's Hoover Institution where he runs the Hoover Project on Commercializing Innovation.

Debates over intellectual property rights often heat up around confrontations between those wanting more protection and those wanting less. But perhaps more attention should be paid to the detailed structure of legal rules governing these assets as they are actually used in real-world transactions.

One IP contract that has touched millions of consumers is Apple Inc.'s music license for iTunes, which purports to govern the use consumers can make of the music they download from Apple to their computers and iPods. That contract highlights some too-often-overlooked interactions among the laws governing copyright fair use, misuse and federal pre-emption of state law.

Most copyright commentators view the doctrine of fair use as ensuring that a broad and somewhat fuzzy scope of copying is exempt from copyright infringement. But a customer's contract for iTunes service essentially allows the customer to copy a song only a small, specified number of times ' for instance, in its current terms of service, iTunes says a user can burn an audio playlist only up to seven times.

Fair Use and iTunes

There are at least two key differences between fair use and the iTunes contract. First, many commentators consider the fair use scope to be broader than the scope granted under the iTunes contract, covering a much broader amount of uses. Second, the borders of the fair use scope are fuzzy, coming from one of those 'all things considered' multi-factor legal tests, while the scope defined in the iTunes contract is precise in limiting the amount of copying to a specific number.

The rub is that the doctrine of federal pre-emption, which stems from the Constitution's Supremacy Clause, speaks very forcefully about the consequences of such a conflict between a federal law, in this case copyright, and a state law, in this case enforcement of the iTunes contract under California state law. Following established precedent, the state law may be unenforceable when it conflicts with the federal law. Taking these strong versions of fair use and pre-emption arguments at face value, the contract on which the iTunes business model largely depends may actually be void.

Pre-emption and Misuse

What is more, as the Estate of James Joyce has recently seen through its lawsuit with Stanford University professor Carol Shloss, misuse may arise when a copyright owner attempts to extract through contract a promise to avoid uses that otherwise would be allowed under the federal regime's fair use doctrine. Applying this logic to the iTunes deal may make it a good target for a misuse argument as well. This matters a great deal because the punishment for misuse can be severe, including unenforceability of the copyrights connected to the misuse if owned by the one committing the misuse, as well as potential exposure to the treble damages provisions of antitrust law.

This strong reading of the arguments about pre-emption and misuse likely strikes many of us as wrong, as a matter of policy. Consider a more concrete example relating to contracts over real property, such as the sale of half of a parcel of land where the half that is sold is encumbered by a negative easement, such as a promise not to build a factory that produces smelly emissions. Restrictions on emissions to protect the environment generally are seen as the body of federal environmental law. The doctrine of conflict pre-emption might allow the contract term limiting use of the property, which is a matter of state law, to be pre-empted and thus left unenforceable. A savvy buyer of the half parcel could then argue that it is a misuse of that property right for its owner to have used it to attempt to extract the environmental promise in the first place, thereby making unenforceable the property right in the entire parcel. This would be a neat trick for buying the whole by paying even less than fair market value for unrestricted use of the half. This type of bizarre result is exactly what follows from the very rigid nature of the copyright rules about fair use, pre-emption and misuse.

Copyright and iTunes

Indeed, concerns about such extreme outcomes may be one reason why music downloads have been provided by a middle man like Apple, rather than the owner of copyrights in the content that is the focus of the deal, like artists, producers and other long-established music distributors. Just like the accommodation transferors often used to structure complex transactions in other settings, it might make sense for all involved in iTunes to have kept the copyright owners separate from the potentially misuse-generating contract terms of the iTunes customer agreements. If this is right, then avoiding the risk of misuse may be one reason so many record labels and other big content companies have decided to 'let' Apple play such a big role in the online music world.

Why haven't other players raised these challenges to iTunes? One answer may be that any iTunes competitor also would likely have to rely on similar contract provisions.

In the final analysis, we may not know how well these arguments about fair use, pre-emption and misuse will play out until someone decides to bring suit. But in the meantime, the high stakes of potentially void contracts and unenforceable copyrights may rationally be deterring a host of enterprises from entering this market. If that's right, then a major threat to competition in the online music market may not be the lack of enforcement of antitrust laws, as suggested by those favoring the recent European actions against iTunes. Instead, the culprit may be the very clumsy and potentially devastating rules of the copyright game itself.

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F. Scott Kieff is a law professor at Washington University in St. Louis and a Research Fellow at Stanford University's Hoover Institution where he runs the Hoover Project on Commercializing Innovation.