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I've heard of the "police state", but what's a place called that's run by lawyers?
Lawyers act on behalf of clients that can afford to employ them, so I'd call it a plutocracy.
A bureaucratic totalitarianism. It's not actually run by the lawyers, it is run by the bureaucrats, and the lawyers gain excessive power by being the only ones able to negotiate the system. We're almost to the end state now, another two or three decades at the outside and you won't be able to do anything without official permission.
How does an automated process like the one that killed this feed determine fair use? And if it can't, then how can fair use work at all on the internet? Is the fair use exemption effectively over?
The problem is that "fair use" is the purview of the courts. Yes, there's this thing called 'common sense' that you and I have and can see what fair use should be. But there's no legal definition that is satisfactory for determining fair use in advance. So, the copyright holder sues, you pay for your defense, the court says "fair use" and everyone goes on their merry way (except poorer. which in the case of individuals is typically unacceptable, so they cave to settlement and a "fair use" defense is obliterated.)

But what's really obnoxious is this: the streaming feed of the Hugo Awards that was killed was better than fair use, it was licensed use. The automated systems have absolutely no way of determining who has licensed content and who has not.

Fair use only works as a get-out-of-lawsuit card in copyright infringement cases. It does not work like constitutional/human rights do - nobody is forced by law not to interfere with your exercising of fair use.

Autobot killed your fair-use transmission? That's too bad.

The automated processes are not required by law. Youtube's was put in place as a result of a lawsuit with Viacom (and to prevent future lawsuits as a CYA move). The DMCA only requires that a site take down a file after receiving a sworn statement from a copyright holder. There is no legal obligation for a site hosting user-provided content to actively police the content.
Try to capture a stream of video or a screenshot in most operating systems, and the OS declines to do so or produces a blurred or blacked-out display.

This really surprised me. I'm right up there with the other tinfoil-hat wearers, but it'd never even crossed my mind that this might happen because of copyright infringement concerns. Can anyone confirm this claim by the Economist is correct?

They might be misunderstanding how video overlay acceleration works. http://en.wikipedia.org/wiki/Video_overlay
From what I recall, modern graphics hardware has little or no support for video overlays. The fastest and easiest way to display video on modern systems is actually to feed it through the standard 3d-accelerated compositing stack, which means that it shows up in screenshots just like everything else. Some content providers don't like this because it provides a way to capture the video, so they insist on graphics hardware manufacturers providing some method of displaying video that blocks screen capture; if any modern graphics cards do support overlays it's almost entirely for DRM purposes rather than acceleration.
I'm not so sure of that. Try playing a video on Windows XP with a cloned display. In some cases, the video will play on one screen, but not the other.
HDCP-protected content won't play to a non-HDCP device, and the consortium wouldn't license HDCP for use on a capture device since the whole point is to prevent copying. So you can't use a video capture card to record the output of a blu-ray, for example.
No idea what this refers to; I've never had a problem screen-capping video on Mac OS, even from DVDs or sites like Hulu.

I can't screen cap on Windows XP but I think that is because of how Windows XP composites Flash video.

Using Mac DVD Player.app, Grab or some other Apple app rudely refused to take screencaps while DVD is on. Non-Apple apps worked, though. This was years ago, when I still watched DVDs.
Hopefully the software will be enhanced to block more of the political campaigns and advertisements as this might have two positive effects. 1) we wouldn't have to be constantly inundated and 2) the politicians might actually begin to understand the impact of the laws they're subjecting us to.

Sigh ... Or they'll just exempt themselves again.

They'll just rule that political speech is always free speech and can never infringe on copyright.
This could be used as a denial of service. Show up at an event, play some copyrighted crap, instakill transmission.
Particularly music from a company with a history of very harsh enforcement.