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No, that is not at all what the decision says. There's a 4-factor test for "fair use". Market harm is just one of them. The court found IA failed all 4 tests. That's the ballgame: if your copying is (1) unauthorized and (2) not fair use, it's infringing. There's no "library exception".
> There's no "library exception".

The copying only exists on a technical level because digital stuff is weird. Only one copy is usable at a time.

So either IA is guilty of copying because of a technicality, or normal libraries are only allowed because of a technicality/exception. (Because normal libraries fail the transformation test, they fail the amount copied test, they fail the expressive nature test, and they fail the market impact test.)

I want to believe the former is correct. Either way I believe there should be a way for IA to access that same "this isn't considered copying" territory somehow.

Libraries are not allowed to do what IA did!
I'm talking about what libraries are allowed to do, the non-digital version of lending. It fails every fair use test, but they're allowed to do it.

The only difference is whether technically copying happens, because controlled digital lending has the same results as a system that involves no copying. It doesn't have the common definition of copying where two people can access two copies at the same time.

If IA came first, and libraries came second, would we refer to libraries as having a technicality/exception that lets them be legal?

Though I suspect that if libraries were invented right now they'd be declared illegal.

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