For the half-year to 30 June 2014, the IPKat's regular team is supplemented by contributions from guest bloggers Alberto Bellan, Darren Meale and Nadia Zegze.

Two of our regular Kats are currently on blogging sabbaticals. They are David Brophy and Catherine Lee.

Tuesday, 3 July 2012

UsedSoft and the principle of exhaustion: CJEU ruling published today

It is well-known that speaking of used software
is the secret to a successful date
Dear IPKat readers,


   This is my first post as a guest Kat, and I am indeed looking forward to these months together.
The story I would like to start with may not be the most intriguing to tell, unless you believe that there is something sexy in the resale of downloaded software.
Apparently this is what the Court of Justice of the European Union believed, when this morning delivered its 89-paragraph judgment in Case 128/11 UsedSoft v Oracle, on which Advocate General Bot had given his Opinion a few months ago (see earlier posts here and here).

Background and questions referred
As is well-known, Oracle has not only been busy in various courts recently (eg with the Oracle v Google saga), but is also a software house, which develops and markets computer software. In 85% of cases, Oracle distributes its software by download directly from its own website.
The user right in those programs includes the right to store the software permanently on a server and to allow a number of users to access it by downloading the software to the main memory of their workstation. On the basis of a software maintenance agreement, updated versions of the software and programs for correcting faults (patches) can be downloaded from Oracle's website.
Oracle's licence agreements include, among the other things, the following proviso:
With the payment for services you receive, exclusively for your internal business purposes and for an unlimited period, a non-exclusive, non-transferable user right, free of charge, in respect of everything which Oracle develops and makes available to you on the basis of this agreement.
UsedSoft, as the name suggests, trades in used software licences. In 2005 it started offering used Oracle licences, stating that they were current in the sense that the maintenance agreement concluded between the initial licence holder and Oracle was still in force and that the legality of the sale was confirmed by a notarial certificate.
Customers who were not yet in possession of the Oracle software concerned, downloaded the software directly from Oracle’s website after acquiring the ‘used’ licences, while those who already had the software and wished to purchase licences for additional users (Oracle allowed a maximum of 25 users per licence) downloaded the software to the main memory of the workstations of those additional users.
Oracle was not particularly happy with this state of affairs. So it sought and obtained an injunction from the Landgericht München I (Regional Court, Munich I) to prevent the continuation of these practices. Following the dismissal of the appeal lodged by UsedSoft against that decision, UsedSoft lodged with the Bundesgerichtshof (Federal Court, Germany).
According to the Bundesgerichtshof, the actions of UsedSoft and its customers infringed Oracle’s exclusive right of permanent or temporary reproduction of computer programs within the meaning of Article 4(1)(a) of Directive 2009/24 (this is the codified version of the Software Directive). However, the Court decided to stay the proceedings and referred three questions to the CJEU:
(1) Is the person who can rely on exhaustion of the right to distribute a copy of a computer program a “lawful acquirer” within the meaning of Article 5(1) of Directive 2009/24 …? [“In the absence of specific contractual provisions, [most infringing acts, such as reproduction, translation, adaptation, and arrangement] shall not require authorisation by the rightholder where they are necessary for the use of the computer program by the lawful acquirer in accordance with its intended purpose, including for error correction.”]
(2) If the reply to the first question is in the affirmative: is the right to distribute a copy of a computer program exhausted in accordance with Article 4(2) of Directive 2009/24 [“The first sale in the Community of a copy of a program by the rightholder or with his consent shall exhaust the distribution right within the Community of that copy, with the exception of the right to control further rental of the program or a copy thereof.”] … when the acquirer has made the copy with the rightholder’s consent by downloading the program from the internet onto a data carrier?
It was rather exhausting for Henry
to understand the questions
referred by the Bundesgerichtshof ...
   
(3) If the reply to the second question is also in the affirmative: can a person who has acquired a “used” software licence for generating a program copy as “lawful acquirer” under Article 5(1) and Article 4(2) of Directive 2009/24 … also rely on exhaustion of the right to distribute the copy of the computer program made by the first acquirer with the rightholder’s consent by downloading the program from the internet onto a data carrier if the first acquirer has erased his program copy or no longer uses it?

The response of the CJEU
Question 2 – Exhaustion of the right of distribution
Following an explanation of the rationale underlying Article 5(1) (to safeguard the exhaustion of the distribution right under Article 4(2)), the CJEU decided to address the second question first. This concerned whether and under what conditions the downloading from the internet of a copy of a computer program, authorised by the copyright holder, can give rise to exhaustion of the right of distribution of that copy in the EU within the meaning of Article 4(2) of Directive 2009/24.
Wishing to praise the usual clarity of EU law provisions, the Court observed that “there are several possible interpretations” of Article 4(2).
As a first option, Article 4(2) could be interpreted as attaching the legal consequence of exhaustion of the distribution right to the first sale of a copy of the program and not necessarily presupposing the putting into circulation of a physical copy of the program.
Alternatively, Article 4(2) could be applicable by analogy in the case of the sale of a computer program by means of online transmission. This would be because of an unintended lacuna in the Directive, which does not regulate or contemplate online transmission of computer programs.
A third interpretation would be in the sense to make Article 4(2) inapplicable, in that the exhaustion of the distribution right under that provision always presupposes the putting into circulation of a physical copy of the program by the rightholder or with his consent. In other words, the authors of the Directive deliberately refrained from extending the rule on exhaustion to the online transmission of computer programs.
This said, the Court found that, in order to determine whether the copyright holder’s distribution right is exhausted, it must be ascertained first whether the contractual relationship between the rightholder and its customer may be regarded as a "first sale … of a copy of a program" within the meaning of Article 4(2).
... But to Bertrand the questions looked extremely
easy, being a streetwise downloader of used
software
Observing that the term ‘sale’ in Article 4(2) must be regarded as designating an autonomous concept of EU law to be interpreted in a uniform manner throughout the EU, the Court relied upon a commonly accepted and (as was also suggested by AG Bot) necessarily broad definition of it as “an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him.” As a consequence,
the commercial transaction giving rise, in accordance with Article 4(2) of Directive 2009/24, to exhaustion of the right of distribution of a copy of a computer program must involve a transfer of the right of ownership in that copy.


According to the Court, this is what happened in relation to the downloading of Oracle’s computer programs from the software house’s website. Indeed,
It makes no difference, in a situation such as that at issue in the main proceedings, whether the copy of the computer program was made available to the customer by the rightholder concerned by means of a download from the rightholder’s website or by means of a material medium such as a CD-ROM or DVD. Even if, in the latter case too, the rightholder formally separates the customer’s right to use the copy of the program supplied from the operation of transferring the copy of the program to the customer on a material medium, the operation of downloading from that medium a copy of the computer program and that of concluding a licence agreement remain inseparable from the point of view of the acquirer … 
According to the Court, to limit the application of the principle of the exhaustion under Article 4(2) solely to copies that are sold on a material medium would allow the copyright holder to control the resale of copies downloaded from the internet and to demand further remuneration on the occasion of each new sale, even though the first sale of the copy had already enabled the rightholder to obtain 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 intellectual property concerned.
Furthermore, considering the conclusion of a maintenance agreement aimed at patching and updating the copy originally purchased, the exhaustion of the distribution right under Article 4(2) of Directive 2009/24 extends to the copy of the computer program sold as corrected and updated by the copyright holder.
In any case, however, if the licence acquired by the first acquirer relates to a greater number of users than he needs, the acquirer is not authorised by the effect of the exhaustion of the distribution right under Article 4(2) of Directive 2009/24 to divide the licence and resell only the user right for the computer program concerned corresponding to a number of users determined by him.
According to the Court,
The judges of the CJEU turned into oracles
to address exhaustion issues
An original acquirer who resells a tangible or intangible copy of a computer program for which the copyright holder’s right of distribution is exhausted in accordance with Article 4(2) of Directive 2009/24 must, in order to avoid infringing the exclusive right of reproduction of a computer program which belongs to its author, laid down in Article 4(1)(a) of Directive 2009/24, make his own copy unusable at the time of its resale … Moreover, even if an acquirer of additional user rights for the computer program concerned did not carry out a new installation – and hence a new reproduction – of the program on a server belonging to him, the effect of the exhaustion of the distribution right under Article 4(2) of Directive 2009/24 would in any event not extend to such user rights. In such a case the acquisition of additional user rights does not relate to the copy for which the distribution right was exhausted at the time of that transaction. On the contrary, it is intended solely to make it possible to extend the number of users of the copy which the acquirer of additional rights has himself already installed on his server.

Questions 1 and 3 – Notion of ‘lawful acquirer’
By its first and third questions the referring court wished essentially to know whether, and under what conditions, an acquirer of used licences for computer programs may, as a result of the exhaustion of the distribution right under Article 4(2), be regarded as a ‘lawful acquirer’ within the meaning of Article 5(1) of Directive 2009/24 who, in accordance with that provision, enjoys the right of reproduction of the program concerned in order to enable him to use the program in accordance with its intended purpose.
Following the response provided to Question 2, the Court held that, since the copyright holder cannot object to the resale of a copy of a computer program for which that rightholder’s distribution right is exhausted, a second acquirer of that copy and any subsequent acquirer are ‘lawful acquirers’ of it. 

A sound judgment ... with some dark shadows
The judgment of the Court looks pretty sensible. In particular, it would have been fairly unreasonable to distinguish the situation in which the copy of a computer program is made available by means of a download from the rightholder’s website from that in which the copy is provided through a material medium such as a CD-ROM or DVD, also in consideration of current commercial practices and users' habits.
In any case, the Court did not interpret the principle of exhaustion in too a radical (pro-competitive?) manner. In particular, it is likely that controversy arises in relation to the part of the ruling in which the Court made it clear that the first purchaser of a licence is not authorised by the effect of the exhaustion of the distribution right to subsequently divide the licence he has acquired.

9 comments:

guido said...

The Court has made clear that online transactions can be considered as fully-fledged transfers of ownership even when they are dressed up as "services" agreements. It will be interesting to see whether the same applies to subject matter other than computer programs. The Copyright Directive does not seem to preclude this reading when it says "The question of exhaustion does not arise in the case of services and on-line services in particular." (Rec. 35)

Anonymous said...

And now we arrived at diversity of the national systems once again. Copyright Act, Bulgaria:
Art.18a (1) The first sale or other transfer of ownership in the original of the work or a copy thereof by the right owner or with his consent on the territory of [EEA]shall terminate the distribution right regarding the work or copies thereof with the exception of the right to authorize further rental.
...
(3) The provision of paragraph 1 shall not refer to transmission of originals of the
work or copies thereof in a digital form with regard to material copies of the work made by the user with the consent of the right owner.

Anonymous said...

This is a really interesting first post. Could I make one small request though, which is for a one-line executive summary of the implications of the judgement, for those of us who only sometimes have time to skim read IPKat posts? Thanks!

Discount-Licensing.com said...

I just want to clarify the point on dividing licences and distinguish against other software vendors as I have read various articles and there is confusion of this point: “the first purchaser of a licence is not authorised by the effect of the exhaustion of the distribution right to subsequently divide the licence he has acquired”, which specifically refers to an Oracle ‘licence’ block of 25 CALs. This does not mean that Microsoft Volume Licence Agreements cannot be broken down eg: Select / Enterprise (an LA containing 1000 x Office 2010 can be sold off in parts). However, you cannot break down the Office 2010 PRO and sell off as Word, Excel, PowerPoint, Access etc. The closest Microsoft example to the Oracle ruling is the old Windows SBS blocks of 5 or 20, which you cannot break down and sell off.

In any case, this court ruling puts a massive dent in the FUD (Fear, Uncertainty & Doubt) tactics employed by the software vendors. However, worth noting that Usedsoft's use of a ‘Notary’ (in part, to hide where the licences came from) was deemed illegal by the German courts and Usedsoft is now also going through insolvency proceedings. There are other secondary software licence suppliers whom adopt more transparent business models that do not rely on the Exhaustion Principle eg: www.Discount-Licensing.com.

Anonymous said...

Info-Directive: "(29) The question of exhaustion does not arise in the case of services and on-line services in particular. This also applies with regard to a material copy of a work or other subject-matter made by a user of such a service with the consent of the rightholder. Therefore, the same applies to rental and lending of the original and copies of works or other subject-matter which are services by nature. Unlike CD-ROM or CD-I, where the intellectual property is incorporated in a material medium, namely an item of goods, every on-line service is in fact an act which should be subject to authorisation where the copyright or related right so provides."
The Software Directive is not autonomous.
Court: "Sell a license"? Some systems do not allow transfer of copyright yet assignment only.

Anonymous said...

Would this apply to wholly cloud based services? Probably not in my view. In such a case there would be no "distribution" of software.

Mark said...

"Observing that the term ‘sale’ in Article 4(2) must be regarded as designating an autonomous concept of EU law to be interpreted in a uniform manner throughout the EU, the Court relied upon a commonly accepted and (as was also suggested by AG Bot) necessarily broad definition of it as “an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him.”"

Mmmm... this seems to raise questions of national property law, despite the above comment.

Even if we accept the statement quoted above, in what sense can you "own" a licence, when it is merely a contractual right and not an "item of intangible property" (under English law, at least)? You can own the underlying "intangible property" in the copyright, but not in the licence itself.

More fundamentally, the legal principle of exhaustion of rights (whether under national or EU law) is murky and unclear. It was a bad idea for EU software copyright law to dabble in some areas of contractual relationships (rather than just stick to IP issues) but not others. It looked odd at the time of the original software directive and looks even odder now. There is no intellectual coherence in legislating for exhaustion of rights in one very specific factual situation, ie resale of a copy of a software product. If this is appropriate for software, why not for diagnostic kits, which are often accompanied by limited label licences?

Anonymous said...

If the terms of the license agreement providing that the licence is not transferable may be overridden by the courts, what about licences reqiring an annual payment? If I stop paying, am I entitled to "sell" the software to a third party for their use? Or even, am I entitled to continue using the software?

Anonymous said...

Mark - when you "buy" a piece of software then, as well as possibly getting a physical disc or whatever, you also get the right to use the software at least to some extent. You can't copy it for your friends, and you don't own the copyright, but you can use it on your computer which involves copies being made. The seller is not allowed to simply say "Sucker!", withdraw his permission and sue you for copyright infringement while still keeping your money. So in this sense, you "own" the right to use the software. If you're a company with an imaginative accountant, you might even show this right in your accounts as an asset, seeing as it cost you money and it is presumably worth more money to you than the purchase price (otherwise you wouldn't have bought it in the first place).

Subscribe to the IPKat's posts by email here

Just pop your email address into the box and click 'Subscribe':