It works when you're editing text. Press it & keep it down, while in a text field, move left or right with the arrows (depending where you are) & you see "Copy" appear on the left softkey. When you've selected enough (still keeping the pencil key down, push "Copy" & release both. Now, if you go someplace, press and hold the pencil again, and you'll see the right softkey read "Paste".
I believe its use is explained in the User's Guide, too.