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Thursday, 5 July 2012

UsedSoft ruling: exhaustion rules okay

The judgment of the Court of Justice of the European Union in Case C-128/11 UsedSoft GmbH v Oracle International Corp was given on Tuesday, while this blogger was offline.  Eleonora Rosati very quickly posted a full and helpful comment on the IPKat, where she is guesting for the next six months, so the following -- based on the Curia media release -- is more or less for the record. According to the media release:
"An author of software cannot oppose the resale of his ‘used’ licences allowing the use of his programs downloaded from the internet

The exclusive right of distribution of a copy of a computer program covered by such a licence is exhausted on its first sale

Oracle develops and distributes, in particular by downloading from the internet, computer programs functioning as ‘client-server software’. The customer downloads a copy of the program directly onto his computer from Oracle’s website. The user right for such a program, which is granted by a licence agreement, includes the right to store a copy of the program permanently on a server and to allow up to 25 users to access it by downloading it to the main memory of their work-station computers. The licence agreement gives the customer a non-transferable user right for an unlimited period, exclusively for his internal business purposes. On the basis of a maintenance agreement, updated versions of the software (updates) and programs for correcting faults (patches) can also be downloaded from Oracle’s website.

UsedSoft is a German undertaking which markets licences acquired from customers of Oracle. Customers of UsedSoft who are not yet in possession of the software download it directly from Oracle’s website after acquiring a ‘used’ licence. Customers who already have that software can purchase a further licence or part of a licence for additional users. In that case they download the software to the main memory of the work stations of those other users.

Oracle brought proceedings against UsedSoft in the German courts, seeking an order for it to cease those practices. The Bundesgerichtshof (Federal Court of Justice, Germany), which has to rule on the dispute as court of final instance, made a reference to the Court of Justice for it to interpret, in this context, the directive on the legal protection of computer programs.

Under that directive, the first sale in the EU of a copy of a computer program by the copyright holder or with his consent exhausts the right of distribution of that copy in the EU. A rightholder who has marketed a copy in the territory of a Member State of the EU thus loses the right to rely on his monopoly of exploitation in order to oppose the resale of that copy. In the present case, Oracle claims that the principle of exhaustion laid down by the directive does not apply to user licences for computer programs downloaded from the internet.

By its judgment delivered today, the Court explains that the principle of exhaustion of the distribution right applies not only where the copyright holder markets copies of his software on a material medium (CD-ROM or DVD) but also where he distributes them by means of downloads from his website.

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

The Court observes in particular that limiting the application of the principle of the exhaustion of the distribution right solely to copies of computer programs 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 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.

Moreover, the exhaustion of the distribution right 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 corrected, altered or added on the basis of such an agreement form an integral part of the copy originally downloaded and can be used by the customer for an unlimited period.

The Court points out, however, that if the licence acquired by the first acquirer 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. 
Furthermore, the Court states that an original acquirer of a tangible or intangible copy of a computer program for which the copyright holder’s right of distribution is exhausted must make the copy downloaded onto his own computer unusable at the time of resale. If he continued to use it, he would infringe the copyright holder’s exclusive right of reproduction of his computer program. In contrast to the exclusive right of distribution, the exclusive right of reproduction is not exhausted by the first sale. However, the directive authorises any reproduction that is necessary for the use of the computer program by the lawful acquirer in accordance with its intended purpose. Such reproduction may not be prohibited by contract.

In this context, the Court’s answer is that any subsequent acquirer of a copy for which the copyright holder’s distribution right is exhausted constitutes such a lawful acquirer. 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.

Therefore the new acquirer of the user licence, such as a customer of UsedSoft, may, as a lawful acquirer of the corrected and updated copy of the computer program concerned, download that copy from the copyright holder’s website".
If you wondered whatever happened to the well-known proposition that exhaustion only applied to goods and not to intangibles, the Court dealt with it like this:
"62 As to the Commission’s argument that European Union law does not provide for the exhaustion of the distribution right in the case of services, it must be recalled that the objective of the principle of the exhaustion of the right of distribution of works protected by copyright is, in order to avoid partitioning of markets, to limit restrictions of the distribution of those works to what is necessary to safeguard the specific subject-matter of the intellectual property concerned (see, to that effect, Case C‑200/96 Metronome Musik [1998] ECR I‑1953, paragraph 14; Case C‑61/97 FDV [1998] ECR I‑5171, paragraph 13; and Football Association Premier League and Others, paragraph 106).

63 To limit the application, in circumstances such as those at issue in the main proceedings, of the principle of the exhaustion of the distribution right under Article 4(2) of Directive 2009/24 solely to copies of computer programs 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 (see, to that effect, Football Association Premier League and Others, paragraphs 105 and 106)".
For the Advocate General's Opinion click here.

4 comments:

Andrew Robinson said...

Very interesting, I expect software companies will respond by simply moving some of the functionality server-side, but it does hold out the intriguing possibility of re-selling used MP3 files in the EU.

Stephen Milsont said...

I agree with you Andrew. All the software company will move their functionality to server side.

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Anonymous said...

I want to clarify the point on dividing licences and how this ruling relates to other software vendors. For transparency purposes, my business created the first second-hand Microsoft Volume software (Discount-Licensing.com) back in 2004.

This ruling refers to an Oracle ‘licence’ blocks (of 25 CALs) i.e.: a company that purchased 100 blocks (2500) CALs can sell off those 100 blocks to 100 different customers but it cannot break down the individual licence blocks e.g.: a ‘licence’ block cannot be broken down into 5 x 5 user licences. Similarly, with Microsoft Volume LA’s (Select / Enterprise), such LA’s can also be broken down to licence level e.g.: an LA containing 1000 x Office 2010 PRO can be broken down and sold off in smaller quantities but you cannot break down at the individual Office 2010 PRO licence level and then sell off as individual components (Word, Excel, PowerPoint, Access etc). Another Microsoft product example would be the Windows SBS CALs, which could be purchased in licence blocks of 5 or 20 – a company may purchase a 2 licences, 1 containing 20 CALs + the other containing 5 CALs –whilst the ECJ ruling is not as clear as it should be on this point, the intent could only be that you cannot then break down the licence block of 20 and sell off to two different customers in smaller quantities such as 10 + 10 CALs but you can sell the 2 licence blocks to 2 different customers. The key caveat to take away from the ruling is that first acquirer must ensure the quantity of software licences being divested must have been de-installed and not in use any further on its machines.

In any case, this court ruling puts a long awaited 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.

Pawel said...

"Anonymous Andrew Robinson said...

Very interesting, I expect software companies will respond by simply moving some of the functionality server-side, but it does hold out the intriguing possibility of re-selling used MP3 files in the EU."

mp3 is not a computer program, so this judgement cannot act as a shield against copyright holder claims. downloading mp3 from the website is probably still treated as a service (directive 2001/29) and not subject to exhaustion.