Copyhype

Many of the leading artificial intelligence developers have trained their generative AI models on copyrighted materials without the permission of the copyright owners. As courts and the Copyright Office have examined whether such use should be allowed under fair use, some have considered the fact that these tools can quickly generate works that may not be similar in the legal copyright sense to the training works, but nevertheless compete with the original works because they are close substitutes. Recognizing this harm under fair use is not, as some have responded, an improper expansion of the scope of copyright protection. Rather, it is a reasonable calibration of a purposefully flexible doctrine to a novel technology.

Kadrey v. Meta

Earlier this month, lawyers for a group of authors squared off against lawyers for Meta in front of Judge Chhabria in a federal district court in California to argue about whether the use of copyrighted works without permission from the copyright owner to train a generative AI models should be allowed under the law. There have been over 40 lawsuits filed since January 2023 from copyright owners against various AI developers over this issue. Kadrey v. Meta is the first one to reach a hearing on the merits of the copyright and fair use issues.

Fair use, of course, requires courts to consider and balance four factors to determine whether the use of a copyrighted work that would otherwise be infringing should be permitted. The fourth factor, “the effect of the use upon the potential market for or value of the copyrighted work”, is the most important factor,¹ Andy Warhol Found. for the Visual Arts, Inc. v. Goldsmith, 598 U.S. 508, 555 (2023); Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 574 (1994); Harper & Row, Publrs. v. Nation Enters., 471 U.S. 539, 566 (1985) (“This last factor is undoubtedly the single most important element of fair use”). and it typically involves courts looking at whether the new use would usurp sales or licenses of the original work, or undermine markets for derivative works.

During the hearing Judge Chhabria carefully and thoughtfully prodded the lawyers on their arguments. While questioning Meta’s attorney, Chhabria focused in on the ability of generative AI models to quickly produce coherent and humanlike textual material, a function that courts have not yet considered in a fair use case—and he asked why the impact of this feature should not be considered under the fourth fair use factor.

“You have companies using copyright-protected material to create a product that is capable of producing an infinite number of competing products,” said Chhabria. “You are dramatically changing, you might even say obliterating, the market for that person’s work, and you’re saying that you don’t even have to pay a license to that person. I just don’t understand how that can be fair use.”²Blake Brittain, Judge in Meta Case Warns AI Could ‘Obliterate’ Market for Original Works, Reuters (May 1, 2025), https://www.reuters.com/legal/litigation/judge-meta-case-weighs-key-question-ai-copyright-lawsuits-2025-05-01/.

Copyright Office

Shortly afterward, the U.S. Copyright Office issued a pre-publication version of its report on copyright and artificial intelligence, covering generative AI training. Like Judge Chhabria, the Office considered the impact of generative AI outputs generally on the market of individual copyrighted works. It concluded, among other things, that courts should consider the harms caused where a generative AI model’s outputs, even if not substantially similar to a specific copyrighted work, compete in the market for that type of work. The Office rejected calls to read the fourth fair use factor too narrowly.

The statute on its face encompasses any “effect” upon the potential market. The speed and scale at which AI systems generate content pose a serious risk of diluting markets for works of the same kind as in their training data. That means more competition for sales of an author’s works and more difficulty for audiences in finding them. If thousands of AI-generated romance novels are put on the market, fewer of the human-authored romance novels that the AI was trained on are likely to be sold. Royalty pools can also be diluted.

“Market dilution”

Professor Pam Samuelson has said, “Congress expected the fair use doctrine to evolve when it passed the 1976 Act, and evolve it certainly has.”³Pamela Samuelson, Possible Futures of Fair Use, 90 Wash. L. Rev. 815, 863-64 (2015). It makes sense that the doctrine’s evolution would continue when confronted with the use of copyrighted works to train generative AI models, a use that is not closely analogous with uses in existing fair use precedent.

Almost immediately after release of the Copyright Office report, there was a strand of criticism of the Office’s “market dilution” conclusion that, as I discuss below, misconstrues (inadvertantly, perhaps) the fair use framework. The result is an argument that may seem superficially compelling but upon closer examination is a logical fallacy.

The following are presented as illustrative examples of this argument:

• Granting copyright holders the ability to stop AI’s generative function because it creates new, noninfringing works would expand the limited monopoly of copyright far beyond its permissible bounds. … copyright is limited to infringement of specific works—and does not give any right to copyright holders to monopolize methods for creation or to prevent general competition in the marketplace presented by noninfringing but competing works.⁴Edward Lee, Fair Use and the Origin of AI Training (February 01, 2025). Houston Law Review (forthcoming 2025).
• The ‘market dilution’ theory is definitely novel — and inconsistent with what SCOTUS has held to be the proper scope of the copyright monopoly. An author cannot get a vague proprietary claim to the whole market for a particular type of work simply by producing individual works of that type.⁵Annemarie Bridy (@annemariebridy), Bluesky (May 21, 2025), https://bsky.app/profile/annemariebridy.bsky.social/post/3lot4u3ej2k2c.

Essentially, the argument states that allowing courts to consider market dilution under the fourth fair use factor is synonymous with extending an author’s exclusive rights over competing but noninfringing works.

This is a classic strawman argument. The rebuttals are correct in stating that copyright protection does not extend beyond infringement of the specific work. The flaw is conflating the scope of infringement with the fair use analysis.

The copyright owner’s complaint against AI developers is that their work was used without permission to train an AI model. Their prima facie claim is complete when it’s been shown that a developer has encroached on one of the exclusive rights protected by copyright, a showing that is easily established, given that the training process will involve at least one reproduction of a copyrighted work.⁶U.S. Copyright Office, Copyright and Artificial Intelligence: Part III – The Use of Copyrighted Works in Training AI Models 26 (Pre-Publication Version) (2024). That’s it. The only thing left at that point, absent an affirmative defense, is to determine remedies.

Fair use is an affirmative defense.⁷Andy Warhol Found. for the Visual Arts, Inc. v.
Goldsmith, 598 U.S. 508, 547 n.21 (2023); Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569, 590 (1994); Harper & Row Publishers, Inc. v. Nation Enters., 471 U.S. 539, 560 (1985). The burden of proof is on the defendant.⁸This is a fundamental principle that has been established since ancient times. See, e.g., Dig. 22.3.2 (Ulpian, Ad Edictum 69) (“Ei incumbit probatio qui dicit, non qui negat.”). As part of that defense, a defendant must show that “the effect of the use upon the potential market for or value of the copyrighted work” has not prejudiced the copyright owner.

In other words, in this context, the copyright owner is not asserting a claim that the scope of their copyright enables them to block competing but non-infringing works. They are asserting simply that an AI developer has copied their work for training, which constitutes infringement. It is the AI developer who is claiming that this use should nevertheless be excused despite the clear prejudice it will cause authors of the original works.

While novel, I think it’s reasonable to consider the impact that a tool that can generate a nearly limitless number of non-infringing but competing outputs will have on the market for the original work when analyzing whether to allow the use of the work without permission. I think the statute is even broader in this regard than the Copyright Office suggests in its discussion. The statute not only encompasses any effect on the potential market, it also encompasses any effect on the “value of the copyrighted work.” Both the markets for and value of works could be obliterated by generative AI outputs.

The consideration of “market dilution” under the fourth fair use factor is thus not an expansion of copyright’s scope but a careful calibration of the privilege to use copyrighted works without permission to ensure that the use does not prejudice the rights of creators and undermine the public interest.