Fair Use and Bad Faith Are Not Mutually Exclusive According to the Second Circuit

The "fair use doctrine," articulated in 17 U.S.C. § 107, embodies the idea that persons should be free to use portions of copyrighted works for the purposes of comment, criticism, news reporting, teaching, scholarship, research and other "transformative" uses. In other words, although a person engages in conduct that involves verbatim copying of a copyrighted work, the person is exempt or immune from a charge of copyright infringement because of the socially important nature of the use.

On April 20, 2004, in affirming a district court's denial of a preliminary injunction in a copyright infringement action, the Second Circuit Court of Appeals held that a finding of bad faith on the part of the alleged infringer did not automatically preclude a finding that the alleged infringer's actions satisfied the fair use factors of 17 U.S.C. § 107. NXIVM Corp. v. The Ross Institute, -- F.3d --, 2004 WL 837928 (2d Cir. 2004).

In that case, the plaintiffs provided a course manual to each of the paid participants in their "Executive Success" seminars. Each page of the manual contained a copyright notice, and all seminar participants were required to sign non-disclosure agreements, which purported to prohibit the attendees from sharing the manual or techniques taught in the seminar with anyone else. The Ross Institute ran two non-profit websites used to criticize and share information about cults and other groups accused of mind control. Ross also ran a for-profit "cult deprogramming" business, which is how Ross learned about the plaintiffs. Ross obtained a copy of the manual from a former participant and provided it to two mind control experts, who each prepared a report analyzing and critiquing the manual and the plaintiffs. The reports, which Ross posted on his websites, quoted from the course manual as part of their analyses and critiques. At least one of the reports at issue acknowledged that the plaintiffs had "intellectual property rights" in the manual. The plaintiffs sued Ross, the former participant and the two experts for copyright infringement and other causes of action, and moved for a preliminary injunction on the copyright infringement claim.

In opposition to the plaintiffs' motion for preliminary injunction, the defendants asserted that their activities were protected by the fair use doctrine. Fair use analysis has generally looked to four factors: "(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." 17 U.S.C. § 107. In order to satisfy the analysis, defendants have not needed to show that all or even a majority of the factors weighed in their favor. Rather, all of the factors have been weighed in light of the purposes of the copyright laws.

The core of the appeal, according to the Court, was the proper weighing of the first factor of the fair use analysis. Although it decided that the district court did not properly weigh all of the relevant subfactors, the Court held that the ultimate finding that the defendants would likely succeed in proving fair use was correct and, therefore, the denial of the preliminary injunction was proper. Specifically, the Court found that an "integral part of the analysis under the first factor" was the "propriety of the defendant's conduct" or the defendant's bad faith, which the district court failed to consider. The defendant's alleged bad faith was the acquisition, distribution and/or use of the manual in violation of the non-disclosure agreement and the copyright notice. However, the Court further found that the reports, which quoted liberally from the manual, were for purposes of social criticism, commentary and/or scholarship and were, therefore, "transformative." Transformative uses, particularly those involving criticism, have generally satisfied the first fair use factor.

Surprisingly, this was the first appellate decision to squarely address the role of bad faith in the fair use analysis. In holding that bad faith is but one of many factors in the fair use analysis, the court insured that the exception would not swallow the rule. Indeed, as Judge Jacobs so aptly noted in his concurrence, "[b]ad faith is a slippery concept in the copyright context. It (i) is difficult to define, (ii) may be impossible to detect, and (iii) given weight, may lead to the suppression of transformative works that are valuable to the expansion of public knowledge." Any other decision would impact the already delicate balance between the protections afforded by the Copyright Act and those afforded by the First Amendment.