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ECJ rules on exhaustion of rights in downloaded software and resale of licences
Practical Law UK Legal Update Case Report 8-520-1725 (Approx. 6 pages)
ECJ rules on exhaustion of rights in downloaded software and resale of licences
by PLC IPIT & Communications
| Published on 05 Jul 2012 • European Union |
The ECJ has ruled on the extent to which the distribution right in downloaded software might be exhausted and opined that purchasers of software licences cannot rely on the exhaustion principle to create new software copies. (UsedSoft GmbH v Oracle International Corp, Case C-128/11, 3 July 2012.)
Speedread
In a case which deals with the extent to which the distribution right in downloaded software may be exhausted and the legitimacy of software licence reselling where the software has been downloaded, the ECJ has ruled that, under the Software Directive (2009/24/EC), the right to distribute a copy of a computer program which had been downloaded from the internet with the permission of the rights-holder, was exhausted if the rights-holder had also granted the acquirer the right to use the copy for consideration for an unlimited period of time. The court further ruled (in contrast to the Advocate General) that, since the copyright-holder could not object to the resale of a copy of a computer program for which its distribution right was exhausted, a second acquirer of that copy and any subsequent acquirer were lawful acquirers and hence could resell it. The ECJ's ruling follows a reference from the German Federal Court of Justice and may free up the market in used software licences. For more information on the distribution of electronic copies of copyright works and the application of the doctrine of exhaustion of rights to distribution, see Practice Notes, Overview of Copyright: Issuing copies to the public and Management and exploitation of copyright: EU law on the free movement of goods and doctrine of exhaustion of rights. (UsedSoft GmbH v Oracle International Corp, Case C-128/11, 3 July 2012.)
Background
Information Society Directive
Article 3(1) of Council Directive 2001/29/EC on the harmonisation of certain aspects of copyright and related rights in the information society (Information Society Directive) provides that authors have the exclusive right to authorise or prohibit the communication to the public of their works by wire or wireless means including making available their works to the public in such a way that members of the public may access them from a place and at a time individually chosen by them.
Article 3(3) provides that the communication right under Article 3(1) is not exhausted by any such act of communication.
Software Directive
Under Article 4(1) of the Software Directive (2009/24/EC) (codifying Directive 91/250/EEC on the legal protection of computer programs), the computer program rights-holder has the exclusive right to do or authorise:
- The permanent or temporary reproduction of the program (Article 4(1)(a)).
- Translation or other alteration of the program (Article 4(1)(b)).
- Any form of distribution to the public (including rental) of the original or copies of the program (Article 4(1)(c)).
Under 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, with the exception of the right to control rental of the program (or a copy of it).
Under Article 5(1), unless the contract specifies otherwise, the acts 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 the lawful acquirer in accordance with its intended purpose.
International Treaties
Article 6(1) (under the title "Right of Distribution") of the WIPO Copyright Treaty provides that authors of literary and artistic works shall enjoy the exclusive right of authorising the making available to the public of the original and copies of their works through sale or other transfer of ownership.
Facts
Oracle International Corp (Oracle) markets software mainly by download from the internet. Customers downloading the software are subject to what Oracle describes as licence agreements which provide that, in return for their payment, customers receive a non-exclusive, non-transferable user right for an unlimited period in respect of everything Oracle makes available to the customer.
UsedSoft resold 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, 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 obtained an injunction from the Landgericht München (Munich Regional Court) restraining UsedSoft from carrying out its activities. UsedSoft appealed to the Bundesgerichthof (German Federal Court) which referred a number of questions on the interpretation of the Software Directive to the ECJ.
The referred questions
The ECJ summarised the referred questions as follows:
- Whether the right to distribute a copy of a computer program was exhausted within Article 4(2) of the Software Directive where the acquirer had made a copy with the rights-holder's consent by downloading the program from the internet onto a data-carrier.
- Whether an acquirer of the user licence, as a lawful acquirer within Article 5(1), may rely on the exhaustion rule under Article 4(2) to make a new copy of the program if the first acquirer has erased their copy or no longer uses it.
For Advocate General (AG) Bot's opinion in the proceedings, see Legal update, Advocate General considers exhaustion of rights in downloaded software and resale of licences.
Decision
The ECJ ruled on the referred questions as follows:
- Under Article 4(2) of the Software Directive, the right to distribute a copy of a computer program is exhausted if the rights-holder permitting the download of the copy from the internet to a data-carrier also granted a right to use that copy for consideration for an unlimited period of time. This followed from the preliminary conclusion that a sale under Article 4(2) comprised any act by any means making a copy of a computer program available in the EU in any form for use for an unlimited period and in return for a lump-sum payment.
- Under Articles 4(2) and 5(1) of the Software Directive, following the resale of the right to use a copy of a computer program, the second acquirer is able to rely on exhaustion of the distribution right under Article 4(2) and hence be regarded as a lawful acquirer of a copy of the program.
The reasons for the ECJ's ruling are summarised below.
Was there a sale of a program?
The ECJ considered that the application of the exhaustion rule in Article 4(2) turned on whether the relevant transaction was a sale within Article 4(2). It ruled that "sale of a copy" in Article 4(2) was an autonomous concept of EU law which had to be interpreted uniformly throughout the EU, since the Software Directive did not provide that its meaning was a matter of national law.
The court agreed with the AG that the term "sale" should be given a broad interpretation 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. It followed that the downloading of a copy of Oracle’s computer programs involved a transfer of the right of ownership in that copy. The court noted that if the term "sale" were not given a broad interpretation, as encompassing all forms of product marketing, the effectiveness of Article 4(2) would be undermined, since suppliers would merely have to call the contract a licence rather than a sale in order to circumvent the rule of exhaustion and divest it of all scope.
The court went on to rule that it made no difference whether the copy of the computer program was made available to the customer by the right-holder by means of a download from the right-holder’s website or by means of a material medium such as a CD-ROM or DVD.
Consequently, the court ruled that the transfer by the copyright-holder to a customer of a copy of a computer program, accompanied by the conclusion between the same parties of a user licence agreement, constituted a first sale of a copy of a program within the meaning of Article 4(2).
Did downloading Oracle's software amount to a distribution?
The ECJ rejected the argument that the distribution by download of a computer program from the internet was not a distribution for the purposes of Article 4(2), and instead a communication to the public for the purposes of Article 3 of the Information Society Directive (rights in respect of which could not be exhausted). It concluded that:
"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."
The court went on to rule, moreover, that the exhaustion of the distribution right extended to the copy of the computer program sold as corrected and updated by the copyright-holder under a maintenance agreement.
However, the court ruled that if the licence acquired by the first acquirer related to a greater number of users than it needed, that acquirer was not authorised by the effect of the exhaustion of the distribution right to divide the licence and resell only part of it. Furthermore, 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 was not exhausted by the first sale.
Can licence resellers rely on exhaustion rules?
The court went on to consider whether, and under what conditions, an acquirer of used licences for computer programs, such as those sold by UsedSoft, could, 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) who enjoyed the right of reproduction of the program in order to enable him to use the program in accordance with its intended purpose.
The ECJ ruled that, since the copyright-holder could not object to the resale of a copy of a computer program for which that right-holder’s distribution right was exhausted, a second acquirer of that copy and any subsequent acquirers were lawful acquirers who could download that copy from the copyright owner's website.
Comment
The ECJ's ruling may free up the market in used software licences. It could also have broader ramifications for other digital products such as film, music and e-books according to some commentators, since publishers have sought to license, as well as sell, digital content to their customers, and restrict second-hand sales via the terms in their licensing agreements.
One avenue that software developers might adopt would be to offer their products on a time-limited basis, so allowing them to argue that the transaction was not a sale within the terms of Article 4(2) of the Software Directive.