On 3 July 2012, the ECJ handed down its landmark decision in UsedSoft GmbH v Oracle International Corp (C-128/11), ruling that the owner of copyright in software cannot prevent a perpetual licensee who has downloaded the software from the internet from selling his ‘used’ licence. This decision has significant implications for the software and other digital industries.
Oracle develops and markets computer software, most of which is downloaded by its customers from the internet. Each customer’s right to use the software is governed by a licence agreement which provides that, in return for payment of a one-off fee, the customer receives a non-exclusive, non-transferable right to use the software for an unlimited period. Pursuant to a separate maintenance agreement, customers can also download updates and patches (programs for correcting faults) from Oracle’s website.
UsedSoft deals in second-hand software. It began to offer for sale ‘used’ Oracle licences, stating that these were ‘current’ in the sense that the maintenance agreement between the original licence holder and Oracle was still in force.
Oracle obtained an injunction from the Munich Regional Court restraining UsedSoft from carrying out these activities. UsedSoft appealed to the German Federal Court which referred a number of questions on the interpretation of Directive 2009/24/EC on the legal protection of computer programs (codifying Directive 91/250/EEC) (the “Software Directive”) to the ECJ. The relevant provisions of the Software Directive are summarised below:
- Article 4(1): the computer program rights holder has the exclusive right to do or authorise: (a) the reproduction of the program; (b) the translation or other alteration of the program; and (c) any form of distribution to the public of the program.
- Article 4(2): the first sale of a copy of a program by the rights holder or with their consent in the EU exhausts the distribution right of that copy within the EU (such that the rights holder loses its right to rely on its copyrights to oppose the resale of that copy).
- Article 5(1): unless the contract specifies otherwise, the acts of reproduction and translation (under Article 4(1)(a) and (b)) do not require authorisation by the rights holder where they are necessary for the use of the computer program by a lawful acquirer.
The German Federal Court asked the ECJ whether:
- the right to distribute a copy of a computer program was exhausted under Article 4(2) where the acquirer had made a copy with the rights holder's consent by downloading the program from the internet; and
- an acquirer of the user licence was a “lawful acquirer” within the meaning of Article 5(1) such that it could rely on the exhaustion rule under Article 4(2) to run the program on its own systems.
ECJ’s decision on exhaustion: what is a ‘sale of a copy’?
The ECJ ruled that in order for a copyright holder’s distribution right to be exhausted under Article 4(2) in respect of a copy of software (such that the copyright holder can no longer oppose the resale of that copy), the transaction between it and its customer must amount to a ‘sale of a copy’ of the program. Where a customer downloads a copy of Oracle’s software and enters into a licence agreement under which it receives the right to use that copy for an unlimited period in return for payment of a fee, such a transaction amounts to a ‘sale’ for the purposes of Article 4(2) and involves a transfer of the right of ownership in that copy.
This broad interpretation of Article 4(2) is necessary as otherwise the effectiveness of the rule of exhaustion would be undermined since suppliers would merely have to call the contract a “licence” rather than a “sale” in order to circumvent it.
The ECJ said that the term ‘sale of a copy’ in Article 4(2) encompasses all situations in which there is a grant of a right to use a copy of a computer program for an unlimited period in return for payment of a fee, and any such ‘sale’ would trigger the exhaustion provisions of the Software Directive. Therefore, even if the licence agreement prohibits further transfer, the copyright holder can no longer oppose the resale of that copy.
It is immaterial whether the computer program is made available in some physical form (e.g. a CD or DVD) or by way of internet download; in either case the transaction is a ‘sale’ of the relevant copy of the software.
Moreover, the exhaustion of the distribution right extends to any corrections or updates made by the copyright holder under a maintenance agreement. Even if the maintenance agreement is for a limited period, the functionalities corrected, altered or added on the basis of such an agreement form an integral part of the copy originally sold and which can be used by the customer for an unlimited period.
Restrictions on the reseller
In order for a resale not to infringe, the original licensee must render his own copy unusable at the time of its resale. The ECJ said that it would be permissible for the copyright holder to make use of technical protective measures (e.g. product keys) to ensure that this is the case. This preserves the right of reproduction of the program which is not exhausted by the first sale.
If the licence acquired by the first acquirer is in a “block” and relates to a greater number of users than he needs, that acquirer is not authorised by the effect of the exhaustion of the distribution right to divide the licence and resell only part of it.
Is a second acquirer a ‘lawful acquirer’?
Since the copyright holder cannot object to the resale of a copy of software for which that rights holder’s distribution right was exhausted, a second acquirer of that copy (and any subsequent acquirers) were “lawful acquirers” for the purposes of Article 5(1) who could download that copy from the copyright holder’s website and copy it as required to use it on their own systems.
How should the software industry respond?
This is a landmark decision which effectively creates a secondary market for licensed software, regardless of the terms of the licence agreement. However, the judgment contains a number of important qualifications which should be borne in mind by software providers and resellers alike:
- Limited term licences - The ECJ placed a lot of emphasis on the fact that the Oracle licences were not limited in time, and for this reason concluded that a ‘sale’ of the copy of the program had occurred. This leaves it open for software providers to argue that they have not exhausted their distribution rights in software which is licensed for a limited time via a rental model. However, any such time limits are likely to have to be real and enforced, not merely nominal or formal, as courts (at both national and European level) are unlikely to allow the doctrine of exhaustion to be circumvented by mere formalities. For the same reason, very long licences (e.g. 99 years) are unlikely to persuade the courts that the arrangement is not in substance a ‘sale’ for the purposes of the Software Directive.
- Contracts for services - The ECJ was clear that the doctrine of exhaustion does not apply to maintenance agreements and contracts for services. We may therefore see more reliance on software being provided through online services such as ‘the cloud’ where the arrangement is less likely to be tantamount to a ‘sale of a copy’ of software.
- Multi-user licences - The principle of exhaustion does not allow licensees to divide and sell parts of multi-user licences. This may discourage software providers from ‘selling’ their software under block licences for small numbers of (or even individual) users, which would presumably be more readily tradable on the secondary market than single enterprise licences.
- Technical protective measures - Any acquirer who resells its licence must make his own copy unusable prior to the resale. The ECJ said expressly that copyright holders may make use of technical protective measures (e.g. product keys) to ensure that this is the case. Software providers may therefore wish to investigate the technical solutions available to them to monitor and police usage in this regard to avoid a free-for-all in respect of their software. It is not clear to what extent software providers can put measures in place to use technology to prevent the transfer of software - although given the free movement of goods principles behind the ruling, it appears unlikely that the courts would be sympathetic to such practices.
The judgment also leaves a number of questions unanswered, perhaps most significantly: what usage terms apply to a second acquirer of software? The ECJ observed that, in considering whether a ‘sale’ had occurred, the downloading of a copy of a computer program and the conclusion of a user licence agreement form an “indivisible whole”. Further, the rights acquired under Article 5(1) are those necessary for use of the computer program by the lawful acquirer “in accordance with its intended purpose” - which could only be ascertained by reference to the original licence terms. So it seems likely that the usage right transferred to the second and any subsequent acquirers will be limited by the scope of the permissions set out in the original user licence. However, there is nothing in the judgment that suggests that any other contractual obligations should apply as between the software provider and any new acquirer. Moreover, the ECJ was clear that any separate agreements such as maintenance and support agreements will not be transferred as these are not subject to the doctrine of exhaustion. As such, it is unlikely any new acquirer could demand any future patches, upgrades or support from the software provider without entering into a new agreement with the software provider directly.
By Kathy Berry, London