Papers that students legitimately write and no third party ever gains access to, are still inflating their essay counts and therefore making some guy rich.
The courts upheld that it isn't a copyright violation since they decided it was fair use, but I have to say even if it is legal it is morally abhorrent for schools to go along with it. Plagiarism is unavoidable from individuals that are trying to scam their way through school, and something that needs to be combated, but universities are supposed to be bastions of enlightenment not cronies for privately held corporations.
To be clear, I don't see any problem with automatic plagiarism detection. I do see a problem with very significant profits being made due to usage of students work that they cannot possibly opt out of (especially high school students who don't even have the option of transferring schools if they don't want their work being used that way)
I wonder if laws would change if we were talking about combatting plagiarism in film schools by keeping a database of all films to match against.
There're various other cases of fair use that make this fairly obvious, eg. when you DVR a TV show, that's fair use, but it doesn't mean that the MPAA has lost copyright over that show and can no longer go after people who share it on Bittorrent.
What you mention was a very big problem for the adoption of services like Turnitin. In fact, when there is a match, there is no way of seeing the "source" of the homework, unless you get a permission from the "owner" of the homework.
Also, students when they submit the assignment to Turnitin, they assign a license to index the content for plagiarism detection purposes, and for nothing else.
And students have the right to remove their assignments from the index, if I understand the language of the agreement correctly.
I thought you said it was integrated into Blackboard, thus not requiring students to directly submit their assignments to Turnitin?