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If written to help disseminate information, choice 2 is it.
I think that is the point of the law. Universities here operate under something called the CanCopy agreement, which makes provisions like the one in the original query. In reading that agreement, it seemed clear to me that (2) was intended, becuase universities are in the special position where the material is used for either teaching or research.
I've just Googled for CanCopy and of course, it's been changed since I last read it, and the 1-chapter-or-10% rule has been altered to just 10%, period. There are slightly different rules for textbooks (5% or 1 chapter, whichever is less). But I maintain that the previous version of CanCopy was consistent with (2) above.
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