When a new website is being built for a client, it often begins as a "development" site that uses one or more methods to make sure that it is not accessible by normal and customary means. You can use a robots.txt file to let search engines know not to index it, you can password protect the whole thing so that only privileged users can see it, you can put it on a an unregistered subdomain so that it can only be accessed by computers using local DNS rules, etc. Whatever the method, the outcome is the same: it prevents the site from having any effect on the market outside of the relationship between the developer, content creator, and client.
With this context in mind, many websites are built using stock media that you have to purchase licenses for from online libraries. Many web developers will begin by downloading a watermarked, unpurchased version of a copyrighted image and upload this to thier under construction websites so that they can decide if they will purchase the image because they need to first make sure that it will crop well, fit the color pallet of the website, fit well with other stock images that are being considered, etc. As such, it is a common practice to completely build a development site using these unpurchased, watermarked images, get client approval on the design, and then purchase and swap out the approved images for fully licensed versions before going live with the website.
Is this practice allowed under fair-use or other similar laws, and are there any court cases where this practice has been ruled on one way or the other?
My confusion here comes from the 4th factor of Fair Use: the effect of the use upon the potential market for or value of the copyrighted work. My understanding of this provision (and I may be wrong here) is that the copyright holder needs to be able to demonstrate damages to be able to sue. In this case, the content creator would need to prove that the developer is causing them damages when in effect, the developer is advocating the purchase of the stock image to thier client from the content creator. Since this activity increases the creator's market value, there should be no damages to sue for regardless of if the developer violated the copyright.
