EU allows resale of downloaded software

snIPpets – October 2012

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• EU allows resale of downloaded software

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Introduction

In a judgment that has significant implications for the software and digital media industries in Europe, the European Court has ruled that, in principle, the owner of copyright in software cannot stop someone who has purchased and downloaded that software online from reselling it.  In UsedSoft GmbH v Oracle International Corp, the Court held that a copyright owner's exclusive distribution right in respect of a computer program is exhausted on its first sale, whether that is made online or on a physical medium.

Background

Oracle mainly distributes its software by downloading directly onto the customer's computer from Oracle's website.  The user licence for those programs includes the right to store a copy of the software program permanently on a server and to allow up to 25 users to access it. Under a maintenance agreement, updates and software patches can also be downloaded from Oracle's website.  The licence grants the customer a non-transferable user right for an unlimited period, exclusively for its internal business purposes.

UsedSoft is a German company which markets and sells software licences acquired from Oracle's customers ("used licences").  In 2005, UsedSoft offered used licences that were still 'current', in the sense that the maintenance agreement concluded between the initial licence holder and Oracle was still in force.  Customers of UsedSoft who were not yet in possession of the software downloaded it directly from Oracle’s website after acquiring a used licence from UsedSoft.  Customers who already had the software could purchase a further licence for additional users by downloading the software to the workstations of those additional users.

Oracle obtained an injunction from the German courts requiring UsedSoft to cease these practices on the basis that they infringed Oracle's rights of reproduction under the Computer Programs Directive (2009/24/EC).  On appeal by UsedSoft, the Bundesgerichtshof (Federal Court of Justice) agreed with Oracle but stayed the proceedings pending a reference to the Court of Justice of the European Union ("CJEU") on a number of questions relating to the Directive.  Those questions raised the issue of whether Oracle's right to distribute a copy of its program had been exhausted on the first sale of that copy to the initial licence holder where that first sale had taken place by way of digital download.

The CJEU Ruling

The Court held that the first sale in the EU of a copy of a computer program by the right holder, or with his consent, exhausts the distribution right within the EU of that copy.  Specifically, the CJEU confirmed two points:

• When a copyright owner makes available to a customer a copy – tangible or intangible – and at the same time concludes, in return for payment of a fee, a license agreement granting the customer the right to use that copy for an unlimited period, that right holder sells the copy to the customer and thus exhausts his exclusive distribution right; and
• Such a transaction involves a transfer of the right of ownership of the copy. Therefore, even if the license agreement prohibits a further transfer, the right holder can no longer oppose the resale of that copy.

A right holder who has marketed a copy on such terms in the EU therefore loses the right to rely on his monopoly of exploitation to oppose the resale of that copy.

This has historically been the case in relation to copies that are sold on a physical medium, such as a DVD or CD-ROM, but the Court for the first time confirms that the exhaustion principle also applies in the case of digital downloads.  It said that limiting the application of the exhaustion principle solely to copies that are sold on a physical medium would allow the copyright holder to control the resale of copies downloaded from the internet and to demand further remuneration on each new sale, even though the first sale of the copy had already provided the right holder with an appropriate remuneration. Such a restriction of the resale of copies of computer programs downloaded from the internet would go beyond what is necessary to safeguard the specific subject-matter of the IP concerned.

In these circumstances the copyright holder could not rely on a contractual prohibition on transfer in a licence agreement to oppose the resale of that copy.   

Exhaustion applied even where there was a maintenance agreement between the first acquirer and the copyright holder.   This, said the Court, was because exhaustion extends to the copy of the computer program sold as corrected and updated by the copyright holder. Even if the maintenance agreement is for a limited period, the functionalities altered or added form an integral part of the copy originally downloaded and can be used by the acquirer of the copy for an unlimited period.

However, the Court also made two important qualifications to the exhaustion principle in relation to digital downloads:

• The principle would not enable the original acquirer to divide its licence and resell only part of it; and
    
• The original acquirer who resells a tangible or intangible copy must make his own copy unusable at the time of resale.  This is in order to avoid infringing the copyright holder's exclusive right of reproduction which is not exhausted by the first sale.

It follows that, since the copyright holder cannot object to the resale of a copy of a computer program for which that right holder’s distribution right is exhausted, any subsequent acquirer of that copy constitutes a 'lawful acquirer' under Article 5(1) of the Computer Programs Directive.  He can therefore download onto his computer the copy sold to him by the first acquirer. Such a download must be regarded as a reproduction of a computer program that is necessary to enable the new acquirer to use the program in accordance with its intended purpose.

The ruling is of potentially huge significance not just to the software industry but to any digital business that makes copyright material available for download such as music, e-books, or games.   It means that whenever a copy of a copyright work is sold by way of digital download to an end-user in the EU for a fee, that end user will in principle be able to resell that copy to any third party anywhere in the EU without infringing the rights of the copyright owner, irrespective of the terms of any user licence prohibiting transfer or resale.

It is therefore a significant step towards a single EU market in digitally available content. 

However, the ruling does not herald a free-for-all.  The Court recognised that the original licensee must make his copy unusable at the time of resale.  A copyright holder is entitled, in the event of such resale, to use technical protective measures such as product keys to ensure that the copy is made unusable. This preserves the right of reproduction which is not and never has been exhausted on first sale.  

It is also to be noted that the ruling applies only to downloaded material; online services, to which the distribution right and exhaustion do not apply, are unaffected.  This therefore raises the question of whether we will see still faster migration of software licensing models to 'the cloud', since software owners in Europe are not exposed to the exhaustion doctrine in relation to online services / software 'rental' models.  There is also scope, of course, for copyright owners to explore other licensing models that do not involve the 'sale' of software copies, whether online or on physical media.

Another question left by the ruling is whether it remains open to copyright holders to use digital rights management techniques to physically prevent the resale of software or other copyright material.  Given that the Court's ruling specifically authorises the purchaser of "used" licence to download a new copy from the copyright holder's website, provided that the original copy has been made unusable, it would appear that such techniques may become difficult to sustain.

In summary, this is a significant decision.  Copyright owners should review their licensing models and the technological and contractual protections they have in place if they wish to minimise their exposure to this ruling.  Similarly, those who wish to build resale businesses may find that there are now materially better opportunities to do so.  In either case, the ruling is likely to have a material impact for all players in the European software industry and everyone should now be considering their next moves with great care.

For further information, please contact David Naylor, Philipp Plog or Nick Pimlott