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Google should use this as a precedent for storing the works of books in a database for search purposes.
Google wouldn't be that crazy, surely. Imagine the copyright outrage, the legal fees, and the obvious need to track down authors all over the world.

Why such a fantasy would cost them $125M at least!

that is nothing compared to what they could gain
They can't, really. This case focused at times on the fact that you could never actually see the papers on the website. Google wants to display content of books, so this case is inapposite.
Yeah you're right that's why I said for search purposes. Still, I'd like to see if the music industry would let me keep an archive of all of their songs (without paying for any) just for sound analysis.
Cool! I always thought that the copyright claims against Turnitin.com were a classic example of a "strike suit," a bogus legal claim to shake down a defendant for a monetary settlement.
Maybe, but the claim isn't that bogus - the students haven't given Turnitin.com rights to use their work especially for monetary gain.
I heard a lot from one of the students when he was first publicizing his lawsuit on another Web forum. His dad was a lawyer, and it was painfully apparent that they were constructing outlandish hypothetical harms to students in an online statement they wrote about why what Turnitin.com does was so evil, in their opinion. He finally shirked away from the online discussion on that forum after getting lots of counterargument from fully grown and very experienced lawyers who poked holes in his claims. I see the court system on both the trial level and appellate level have done the same. My impression at that time, and my impression today, is that the case was made up in an attempt to make some easy money--just the sort of lawyer behavior that should be decried by hackers everywhere.
Maybe but to me this seems like an ad hominem argument - just because he did it for money doesn't mean there isn't some value in his argument. As I mentioned in another comment, if we substitute student work for music tracks then this wouldn't even be an argument. This ruling is saying it is within my fair use rights to profit from dealing with copyrighted media abstractly, so long as I don't distribute the media itself.

What I haven't seen mentioned is that when there is a match on plagiarism then the teachers do get access to the plagiarised document - so they are profiting from using and distributing copyrighted material they have no rights to.

Turnitin is generally evil. They don't just keep the work of students without the student's permission, but they crawl sites for any potential school work they don't already have: http://turnitin.com/robot/crawlerinfo.html
That sounds approximately as generally evil as Google, Yahoo, and any other Web search service that crawls sites.
I'm actually kind of torn over the result in this case. On the one hand, it's great that the court adopted an expansive view of fair use. In particular, I'm glad that the court strongly approved Pierre Leval's transformativeness test, which is a great standard for internet services that use copyrighted works in innovative ways.

On the other hand, you have to admit that it's weird for the students, who are forced to submit their personal works to this third-party service.

Consider an analogy: your startup got a great valuation from a VC, you're signing the papers, and suddenly the lead partner says to you, "Oh, one more thing. You have to submit copies of all of your software to Microsoft for archive purposes. But don't worry, they promised not to do anything with it!"

Sure, Microsoft will probably just leave your source code on an archive disk and never look at it. But still, it's a weird feeling.

students, who are forced to submit their personal works to this third-party service

The value the students gain from this service is authentication that their school papers are their own work, which makes their school credentials more valuable. It is a good trade-off for the students, who lose no rights at all to produce further derivative works from their original works.

Interesting commentary on cultural differences regarding plagiarism in academic papers:

http://www.voanews.com/specialenglish/2009-04-15-voa1.cfm

Do you think this is a cultural difference or an educational difference? Many students may not see what is wrong with representing the thoughts of others until it is explained to them (something that occurs typically at a high school level in Australia).