First off, I want to set the record straight here. I'm not out to "get" anyone here. In fact I'm out to help LiveJournal. I also don't think that each of us arguing what we think is the law is going to help. Therefore, I've done a little research over the past few hours to backup my claims and I've contacted a lawyer to see what he thinks. As of right now, he had no reason to believe what I was saying to be wrong, however, he was going to double check and see if there were and stray details. At the same time, I've been reading over a white paper on IP law and the Internet. I strongly suggest you look it over (http://library.lp.findlaw.com/scripts/getfile.pl?FILE=firms/fenwick/fw000012&TITLE=Subject&TOPIC=intellectual%20property_copyright_1). You'll notice that a lot of this is up in the air. Internet law is something that's hit most lawyers by surprise. What I'm presenting here is the current practice based on a few somewhat inconclusive cases. Nonetheless, we should respect it as the law.
If you look at that document, you'll see how in depth lawyers like to get. Not only do they talk about whether copy exists on the user's computer when they load up an image, but if a copy exists on each an every server and network that touches even 1 packet of that information along the way. Obviously, this is not infringement, but it gives you an idea of how far this has been analyzed. The idea of a "copy" is broken down into multiple definitions, not just the definition meaning creating a new file.
In my last comment, I made reference to a radio station playing songs without a license. You claim that since radio waves are being created as a result, it is not applicable. But at the same time, packets are generated when I call an image from a remote server. But let's ignore that point and consider a person who runs a web site where when I click on the name of a song, I get the song streamed to me. We'll assume that Real Audio files cannot be saved and once you hear the music you would have to re-stream it from the source. The operator of this site is distributing, without a license, copyrighted material. There is no copying going on, in fact, he could have an array of CD-ROM drives reading the music off the original music CD. But the fact that he's distributing it publicly makes it infringement.
This is not so much the idea of copying, but the idea of display and transmission. Under copyright law, only the copyright holder has the right to do those two things. If I provide what the document refers to as an "inline link," pulling an image or other media from another server and displaying it on my site, I am displaying the media without the right to do so. I am also fostering the transmission of the media, to which I also do not have the rights. The key, however, is the fact that I am displaying something to which I do not have the rights on my page. This has the potential to confuse users as to who is the owner and creator. Read about trademark law. Trademark law is often a test of what confuses people. If I create a company and I make my logo look not exactly like another log, but close enough that it confuses people, I am infringing upon the other company's trademark.
I think that presents sufficient evidence for why inline linking without giving a source can be infringement. Now on to why LiveJournal has the obligation to listen to copyright holders when they complain. The document talks about the DMCA and how OSPs and ISPs are not necessarily liable for infringement going on within their services if they don't know about it. I'll be honest with you, I have worked on the abuse team (I even started it) pretty much since LiveJournal started receiving abuse complaints. I bet in total, we've never dealt with copyright issues more than 25-30 times, and that could be a high estimate. If we go to a journal to investigate something else and we happen upon an image which is "copied" from somewhere else, we generally don't pursue it.
I hope this has been enough to convince you that, yes, saying that there is no copying or display infringement going on due to a technical definition is splitting hairs. Distribution and display is the issue here, and by inline linking, you are breaking copyright law.