She is a very generous photographer and had put her life’s work in the public domain, specifically so they could be used for no fee, by donating them to the Library of Congress while, at the same time, retaining the copyright (I didn’t know you could do that).
Sure you can. Millions of creative works, including photography, are licensed with non-exclusive licenses to the public, to reproduce, display, etc, under certain conditions set by the copyright holder, such as attribution or for non-commercial use only. If the user wants to use the work commercially, they can contact the author for a commercial license - which will likely be for payment of course.
Copyright gives authors a bundle of rights - to reproduce in copies, to distribute, to display or perform publicly - which means they're entitled to exclude everyone else from doing these things, or to authorize one or more people, or all people, to do these things, in exchange for something. It's the very basis for which you can license people to display, in exchange for money.
Creative Commons licenses are well known legal instruments designed for creative authors to share their work while retaining copyright, and requiring conditions for the uses:
https://creativecommons.org/share-your-work/This is an example of well known photographer licensing their work with CC-by-NC:
http://www.stuckincustoms.com/2012/02/13/why-photographers-should-stop-complaining-about-copyright-and-embrace-pinterest/Another post on his choice to not use watermarks too, and why:
http://www.stuckincustoms.com/2013/06/25/why-i-dont-use-watermarks/Another example of photographer deciding to use Creative Commons licenses:
https://medium.com/@samuelzeller/giving-my-images-for-free-8db40f96f292#.hmzg5o6eqUnfortunately, when Carol Highsmith gave her photos to the Library of Congress, Creative Commons didn't exist yet. It exists only from 2001, and she started in the 1980s IIRC. She uses a different legal instrument:
http://digitalcommons.law.scu.edu/cgi/viewcontent.cgi?article=2250&context=historicalIt's much more confusing, as you can see for yourself. It says she granted copyrights to the Library, then that she dedicated them to the public, then she makes restrictions on the uses, with credit, and statements on when the library can reproduce. The judge will need to interpret this document. And most of current lawsuit depends on that interpretation.