5 III THE COURT OF APPEALS' DECISION FINDING THE SALE AND HOME USE OF VTRS ILLEGAL HAS A FAR REACHING EFFECT ON INDUSTRY The Court of Appeals' decision holding VTR use by consumers to be copyright infringement and Petitioners liable for contributory infringement is of critical importance to the consumer electronics industry in general, and to the home video recording industry in particular. Over three million VTRs have been sold in the United States 10 at a range in retail price between $500 and $1,600.11 Thus, over ten million Americans now use a VTR in their homes and have invested well over two billion dollars in VTRs, and at least half as much in related products such as video tapes and video cameras.12 The VTR's popularity has also had a positive economic effect on many sectors of the economy. Millions of dollars have been spent on advertising VTRS and prerecorded tapes.13 Thousands of video specialty stores have opened to serve the VTR user.1 In addition, the VTR has opened a large and lucrative multimillion dollar market for prerecorded programming producers, such as respondent MCA, Inc.15 10 THE HOME VIDEO & CABLE REPORT, March 8, 1982, at 3. 11 Federal Communications Commission-Network Inquiry Special Staff, Appendix by D. Agostino "Home Video: A Report on the Status, Projected Development and Consumer Use of Videocassette and Videodisc Players" (1980) p. 34. 12 Id. at 35. 13 Nine major sellers of VTRs spent more than $44,000,000 on VTR advertising during a five year period prior to June 1980. ADVERTISING AGE, June 2, 1980, at 67. 14 It is estimated that 2,000 to 3,000 video specialty stores opened in 1980 alone. THE HOME VIDEO REPORT, March 30, 1981 at 1. 15 The International Tape/Disc Association bestows a "Golden Videocassette Award" to each prerecorded movie which has achieved 96-601 0-82-84 6 Sales of VTRS continue to increase. In 1981, VTR sales jumped more than 61 percent over those in 1980.1 Absent adverse judicial or legislative intervention, it is expected there will be about 20 million VTR homes by 1986.17 The Court of Appeals suggests that the District Court, in fashioning a remedy, should consider whether to enjoin the sale of VTRS, levy a continuing royalty, or impose statutory damages (Pet. App. at 28-29). These penalties would be crippling, if not fatal, to the growing VTR industry. Worse, the Court of Appeals has directed the District Court to impose this punishment with little consideration to the viability of a billion dollar industry which employs tens of thousands of Americans and without regard to the millions of consumers who own or plan to buy a VTR.18 IV THIS COURT SHOULD RESOLVE THE ISSUE OF A. The Traditional Fair Use Doctrine The fair use doctrine is entirely equitable. Iowa State University Research Foundation, Inc. v. American Broadcasting Co., 621 F.2d 57, 62 (2d Cir. 1980). As this Court has explained, the copyright laws reflect a "balance of competing claims upon the public interest: Creative work is to be . . . rewarded, but . . . must ulti $1 million in video cassette sales. As of this writing, 109 Golden Videocassette Awards have been granted. MCA Videocassette Inc. has received 21 of these. 16 THE VIDEO RETAILER, March/April 1982. 17 Variety, Jan. 6, 1982 at 1. 18 The Court of Appeals all but conceded that its decision will have a disastrous effect on the industry with its assertion that "the continued profitability of appellees' businesses is of secondary concern" (Pet. App. at 29). 7 mately serve the cause of promoting broad public availability Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975). "Since the issue of fair use is one of fact. . . the ["] clearly erroneous["] standard of review is appropriate." MCA, Inc. v. Earl Wilson, 1981 COPYRIGHT LAW DECISIONS ¶ 25,287 at 16,582 (2d Cir. 1981). Here, the Court of Appeals did not declare any of the trial court's findings to be clearly erroneous. B. The Court of Appeals' Intrinsic Use Rule The Court of Appeals, however, in a major departure from existing law, has declared that no balancing test should be employed with regard to VTRS. It ruled that a so-called "intrinsic use" cannot be a fair use regardless of the balance of the equities (Pet. App. at 18). The Court of Appeals defined an intrinsic use as a use of the copy for the same purpose that the original served. In reaching this ruling, the Court of Appeals acted in express conflict with the decision of the Court of Claims 19 and the factual findings of the trial court and in derogation of the principles underlying the fair use doctrine enunciated by Congress and the Judiciary. The result, when combined with the Court of Appeals' novel and draconian expansion of the contributory infringement doctrine, is a major assault on copyright law under the new Act, and a direct threat of extinction for the VTR industry and inevitable disruption of other industries which also make possible intrinsic uses, e.g., photocopiers and audio tape recorders. While apparently recognizing that the fair use doctrine requires "balancing the equities" the Court of Appeals refused to employ the normal balancing test because it felt that such balancing was "hostile . . . to the rights of copyright holders" (Pet. App. at 18). The Court of Appeals felt that "[n]ew technology. places 19 Williams & Wilkins Co. v. United States, 487 F.2d 1345 (Ct. Cl. 1973), aff'd by an equally divided court, 420 U.S. 376 (1975). 8 a strain upon the fair use doctrine" and implied (with apparent disfavor) that new technology would generally be classified as a fair use if the balancing test were used. Id. The fear that the copyright holder will "lose" is not a principled reason for not employing the balancing test that has always been the heart of the fair use doctrine. Moreover, substituting a mechanistic rule that an intrinsic use "precludes" a finding of fair use with regard to new technology (Pet. App. at 18) is contrary to the express will of Congress. As the House Report accompanying the 1976 Copyright Act explained: General intention behind the provision The statement of the fair use doctrine in section 107 offers some guidance to users in determining when the principles of the doctrine apply. However, the endless variety of situations and combinations of circumstances that can rise in particular cases precludes the formulation of exact rules in the statute. The bill endorses the purpose and general scope of the judicial doctrine of fair use, but there is no disposi tion to freeze the doctrine in the statute, especially during a period of rapid technological change. Beyond a very broad statutory explanation of what fair use is and some of the criteria applicable to it, the courts must be free to adapt the doctrine to particular situations on a case-by-case basis. Section 107 is intended to restate the present judicial doctrine of fair use, not to change, narrow, or enlarge it in any way. H.R. REP. No. 94-1476, 94th Cong., 2d Sess. 66, reprinted in [1976] U.S. CODE CONG. & AD. News, 5680. Congress did not share the Court of Appeals' hostility to new technology. It directed a flexible, case-by-case balancing process such as the trial court employed in finding fair use. Congress deliberately eschewed in 9 flexible rules-of-thumb of the kind relied upon by the Court of Appeals. The Court of Appeals also failed to explain why an intrinsic use should preclude fair use. An intrinsic use, in certain circumstances, may yield smaller benefits than other uses, but the normal balancing test would take account of such a reduction in benefits. It cannot be gainsaid that new technology employing intrinsic uses, e.g. VTRs and photocopiers, are perceived by consumers as being tremendously beneficial. Indeed, it is precisely because the Court of Appeals feared that VTRS would be found so beneficial that it refused to "balance the equities" (Pet. App. at 18). The Court of Appeals attempted to picture its actions as the product of judicial restraint and deference to Congress, but its actions belie its characterization. The Court of Appeals refused to employ the case-by-case balancing process mandated by Congress with regard to new technology and fair use because the Court of Appeals made a policy judgment that such a process would prove too "hostile" to copyright owners. This is a classic example of a court substituting its policy judgment for that of Congress. The Court of Appeals acknowledged that its intrinsic use rule was contrary to Williams & Wilkins Co. v. United States, 487 F.2d 1345 (Ct. Cl. 1973), aff'd by an equally divided court, 420 U.S. 376 (1975). The Court of Appeals attempted to savage that decision by stating that it "has been appropriately regarded as the 'Dred Scott decision of copyright law'" (Pet. App. at 15, quoting Nichols, J. in dissent, 487 F.2d at 1387). This ad hominem attack ignores the fact that Congress essentially adopted the Williams & Wilkins Co. decision in Section 108 of the Copyright Act of 1976 (the "Act"), 17 U.S.C. § 108, and took the four illustrative fair use factors listed |