BusinessWeek gets it right when it argues that digital fingerprinting is the best bet for striking a reasonable balance between protecting copyrighted material and allowing users fair use:

The technology is being deployed and it is fairly good," says Mark Kirstein, president of research firm MultiMedia Intelligence. The U.S. market for such technology will grow to more than $500 million by 2012, he estimates. "It is not going to prevent everything, but it is vastly superior to the alternative, which is largely the content companies monitoring content almost manually and issuing takedown notices."

I suspect Google and Viacom could spend a fraction of their legal budgets on improving this technology and end in a far better position than if they try squander time and money arguing marginally relevant legal precedents to legal questions that didn't exist when those precedents were established.

Even with limitations of content filtering, Google and Viacom could establish a revenue sharing agreement once Google figures out how to moneterize YouTube. When protected content slips past the filters, Viacom or other content owners could be compensated in proportion to the number of views and monetary value of the content as measured by ad revenue.