The 2012 UsedSoft v Oracle ruling was for many lawyers and software businesses unexpected and shocking. How could it be that limited rights to use software, downloaded from the internet, would now be equated with the purchase of physical goods? Surely even the judges would understand that commercial software was never, in truth, ever ‘bought’ but only licensed? How then could simple well-understood principles of contract and intellectual property licensing be swept away?
The judgment of the European Court (Case C 128/11 25 July 2012) was that, in summary, the distribution right held by the relevant copyright owner in respect of computer software was ‘exhausted’ once a grant of a licence had been made by the owner for the online download of computer software, in return for a fee, when the right to use that copy had been granted for an unlimited period. Furthermore, any person to whom the licence is transferred was to be seen as a ‘lawful acquirer’.
The practical effect was that software licences were now to be freely transferable within the EU – provided the software was current and the seller’s copy was made unusable at the time of transfer. This was the case even if there were explicit contractual provisions declaring that the software was to be used only by the named user and was non-assignable.
In the aftermath of the case, there was significant comment, not least because, even if the copyright owner’s right of distribution had been exhausted, the software owner’s separate right of reproduction (necessary to use the software program) was not evidently exhausted. Indeed, this limitation had been highlighted by the Advocate General in his Opinion three months earlier – effectively denying the possibility of resale where further copies of the program needed to be downloaded. But the European Court felt that the reproduction right must necessarily also be exhausted as an ancillary point to give effect to the exhaustion of the distribution right.
It was expected that the ruling would immediately precipitate changes in licensing policies by the major software vendors and, secondly, create a substantial market across Europe for used software. Little has happened in either respect in the last three years, but it appears that matters are now changing.
As the highest court in Europe, whose rulings are directly applicable across all Member States, the European Court ruling in UsedSoft cannot be appealed or superseded. The main software vendors have not been able to marshal any arguments that UsedSoft was fundamentally flawed or that, somehow, it did not apply to them – the case after all related to resale of Oracle licences which had been granted on standard terms by one of the world’s largest software vendors.
Nevertheless, there has been some low-level litigation which indicates that the case still remains a matter of concern for some software vendors and that, if possible, proceedings should be brought against sellers if they step outside outside the permissive scope of UsedSoft.
Post-UsedSoft litigation
In SusenSoftware v SAP (LG Hamburg 315 449/12 25 October 2013) , a German broker specialised in the resale of used SAP licences. It brought proceedings against the software giant on the basis of newly-introduced provisions in SAP’s standard licence agreement that customers were contractually required to obtain the written permission of SAP before they could resell their SAP software.
In this case, SAP had blocked a deal worth about €30,000 and then sought to defend its right to impose the consent condition. SusenSoftware’s assertion that such imposition was anti-competitive was it appears finally accepted when SAP withdrew its appeal before the matter was to be heard by the Higher Regional Court of Hamburg.
Another device to limit the effect of the UsedSoft case was covered in Corporate Web Solutions v Vendorlink BV in March 2015. Here, CWS (a Canadian software company) asserted that the licensee, in selling on, had secured ‘unjust enrichment’ and that, under the Dutch Civil Code, the payment received on the resale should be surrendered up to CWS. The Dutch High Court in Utrecht however declared first that the explicit contractual provision prohibiting the transfer was invalid in accordance with the UsedSoft principle and second that the request by the vendor for the compensatory fee was also to be denied.
In Flexsoft v Desatel (26 January 2015 Case No 2012/AR/3254), the Court of First Instance in Ghent confirmed the application of UsedSoft and further declared that exhaustion does not relate solely to one physical copy of the program, but could relate to multiple licence keys if delivered to a reseller for the explicit purpose of resale.
In Adobe v UsedSoft (18 December 2012 – AZ.11 U 68/11), the German Federal Court of Justice (BGH) had to consider whether a licence set – in this case rights to use copies of Adobe Creative Suite for Web Premium – could legitimately be split so that different numbers could be sold to different buyers. Here, the user had originally obtained 40 licences restricted to educational uses, but a single uniform serial number had been allocated to the licence set. The applicant maintained that the grant was effectively for 40 autonomous usage rights and it was admitted that the software could be installed on 40 stand-alone work stations. The court contrasted the position with the original Oracle/ UsedSoft case where the program, although available to multiple users, was loaded, singly, into the main memory of the client server. It was held in this case that the licence rights could be split.
In early 2014, a UK-based broker, Discount-Licensing, was subject to court proceedings brought by Microsoft in respect of the resale of various licences sourced by Discount-Licensing from the USA. The Microsoft proceedings were first threatened in April 2013 following the US ruling in Capitol Records LLC v Re-Digi inc 934 F Supp 2d 640 [2013], which declared that the resale of pre-owned digital music infringed copyright in the USA – one of its effects being that a UsedSoft transfer right, available in Europe, was not similarly applicable in the USA. Discount-Licensing paid an undisclosed sum to Microsoft in respect of damages and legal costs in February 2014.
In July 2015, the UsedSoft litigation itself concluded with the case reverting to the Higher Regional Court of Munich. Rather surprisingly, before trial UsedSoft could not prove its title to the software, produce the original licence nor even identify the original licensee. It has now been reported that UsedSoft entered into a settlement with Oracle.
Prospective changes at EU level
The European Commission launched a public consultation as part of its ongoing efforts to review and modernise EU copyright rules in December 2013. At the time of writing, its report has not yet been issued, but a leaked internal draft of a White Paper called ‘A Copyright Policy for Creativity and Innovation in the European Union‘ was made available through the IPKat blog last year.
The draft sets out those policy questions which, in the Commission’s view, should be considered for the 2014-2019 legislative period. There is no mention of exhaustion or any legislative intention to limit or displace the effect of the UsedSoft case.
Commercial developments
Following the ECJ case, some intermediaries have set up to resell software, either acting as agents for sellers or principals on their own account. Some, like SusenSoftware, specialise in one particular vendor such as SAP; others like Discount-Licensing choose to focus on volume SME licensing, such as Microsoft.
One interesting newcomer is softcorner, a French start-up incubated by the Université Paris-Dauphine and CIGREF. They report that, in their first year of trading since mid-2014, they have achieved over 100 customers and €1m sales.
The issue of support and maintenance
One hesitancy amongst buyers is to what extent they can obtain continuing support and maintenance after acquisition of the software licences. The UsedSoft case related only to the transferability of software licences based on the principle of exhaustion; support and maintenance contracts are, of course, typically renewed year by year and their non-assignment provisions are generally enforceable.
There are a number of ways under which purchasers have sought to ameliorate the situation. First, the vendor is often agreeable to carrying on the support and maintenance contract, changing only the Customer Support Identifier (CSI) to enable the customer to carry on the same maintenance at the same rate. The main software vendors have different divisions dealing with new business and support and, accordingly, any disinclination to endorse the purchase of used software in one business division may be an irrelevant consideration to the sales team(s) in support and maintenance.
A more serious consideration for the vendors if they were to take any steps to inhibit the offering and delivery of support is the jeopardy of their being in breach of EU and local competition (anti-trust) laws.
Although rarely admitted by the software vendors, there are good arguments that the main suppliers are indeed dominant in their particular markets. The Spanish competition authority (CNC), for instance, opened formal proceedings in 2011 against Oracle in relation to an alleged abuse of dominant position in relational databases, following a complaint by Hewlett Packard about the suspension by Oracle of software development for a processor relied on by HP for its servers.
The case was closed in 2013 without any findings (it seems because Oracle were able to give good reasons for the suspension), but the Spanish competition authority did comment in July 2011 that there appeared to be prima facie evidence Oracle had abused its dominant position.
Oracle, for instance, appears to have some 48.3% of the relational database market globally, (it is larger in this market than its four closest competitors combined). This is a relevant – if not absolutely determinative – indicator of dominance.
Where there is dominance then abuse may be found where there is ‘refusal to supply’. Reasoning, by analogy, may be taken from an older ECJ abuse of dominance case Volvo v Veng (1988), where the ECJ stated:
‘the exercise of an exclusive right by the proprietor of a registered design in respect of car body panels may be prohibited by Article 86 [now Article 102] if it involves, on the part of an undertaking holding a dominant position, certain abusive conduct such as the arbitrary refusal to supply spare parts to independent repairers, the fixing of prices for spare parts at an unfair level or a decision no longer to produce spare parts for a particular model even though many cars of that model are still in circulation, provided that such conduct is liable to affect trade between Member States.’[i]
There is, therefore, a good argument that if a major software vendor were to vary its normal support policy and prices to disadvantage users of its lawfully-transferred licences that would indeed be abusive, in the sense of being discriminatory behaviour by a dominant firm towards a certain class of users and/or a constructive refusal to supply. Categories of abuse tend to shade into one another, so behaviour can be classified in one of a number of related ways.
Such abusive conduct in relation to its support policy, could trigger a complaint to a competition authority – in the UK the UK Competition and Markets Authority. Enforcement action of some kind by the CMA is a possibility, including turnover-related fines. Alternatively, there is the possibility of proceedings for competition law-based damages, either in the High Court or (since 1 October) in the Competition Appeals Tribunal.
If there is any cogent and convincing evidence of likely effect on trade across member states of the EU, then complaint may be made, formally or informally, to the European Commission. It has wide powers to investigate and issue fines of up to 10% of an undertaking’s global turnover in cases of abuse as well as power to impose other ‘structural and behavioural remedies’.
Matching service levels
Customers may alternatively take support and maintenance for some applications, whilst leaving other applications unsupported. However, most vendors are not willing to continue support if, for the same program or application, there is a limited number in support and a further number out of support. The reason for this is obvious: the vendor cannot tell to which particular licence and support called for relates: the vendors therefore insist on ‘matching service levels’.
Suspending support
Support can be suspended (or not renewed) but some vendors build in penalties to reinstate – a fee, up to 150% of the previous year’s support and maintenance – and then additionally the support and maintenance charge, at market rates, going forward.
Accordingly, shelving licences and then reinstating support at a later date using official vendor support is not usually a commercially attractive option.
Is there a need for a support and maintenance contract?
There is a question as to whether in most cases support is indeed needed in practice. Much enterprise software has been developed over a number of years and is not only robust but also well-recognised and familiar to users. It is notable that even major corporates and public bodies rarely download patches and updates, preferring to maintain a known stability in their software rather than risk unnecessary and unproven upgrades.
Any decision as to the value of official vendor support may be seen in the context that the costs of the major software vendors in supplying support and maintenance is as little as 6% of the cost invoiced to the customer. Support and maintenance can sometimes therefore just be an insurance policy and rarely utilised.
Independent support
There are a number of companies such as Rimini Street that offer independent support – and generally, in order to win and sustain business, they seek to offer very high standards of support and response times and costs substantially less (up to 50% less) than the major software vendors. Such suppliers of support do not have access to any patches, updates or new versions of the software that are running. They offer telephone and onsite support, together with recommendations for work-arounds if there are problems, but they have no entitlement to additional downloads from the vendor.
UK Government Memoranda of Understanding
One way in which vendors have sought to manage transferability, at least at governmental level, is through the use of Memoranda of Understanding.
The UK government has long urged software suppliers to treat the UK government as a single customer despite its being constituted as over 850 separate departments, agencies, trusts, statutory bodies and other NDPBs (Non-Departmental Public Bodies).
Memoranda have therefore been signed between Microsoft and the UK Government on a regular basis since 2002 (most recently in February 2015) and also between Oracle and the Cabinet Office/Crown Commercial Services (in March 2012 and August 2015).
These memoranda set out agreed levels of discount, governance and relationship principles and, in the case of the Oracle MoUs, a license-sharing mechanism enabling transfer between any eligible government organisation following an approval process and payment of a fee.
Value of the market
IDC have placed the value of the enterprise software market in Europe at some US$900bn, a substantial part of which relates to new licence grants on a perpetual basis, together with related support and maintenance. Although alternative cloud services are now being marketed heavily, values still remain low (less than, for instance, 5% of Oracle and 11% of SAP revenues).
A number of anecdotal estimates give out that many corporates and public sector bodies, whilst grappling continually with inadvertent under-licensing, also have, at the same time, a serious residue of over-licensing. It is evident, therefore, that the value of software – amortised but currently unused – is significant. But, still, the used software market has not lifted off in the way that was expected in 2012.
It is apparent that many business and public sector organisations know little, if anything, about the possibility of resale of their software licences. Naturally, the major software vendors (and their multiple resellers) have had no incentive or interest in promulgating this market – none mention the possibility or indeed the UsedSoft case on their websites. The few used-software brokers created to date have generally been small-scale and have not been able to obtain the level of publicity needed to establish the market and then sell into it. However, with softcorner in France, and others launching, it may be that this situation begins to change quite rapidly.
Residual issues
There is still some legal debate over whether the UsedSoft ruling legitimised the sale of software or the sale of software licences. Some take the view that the licences are personal and that an acquirer only obtains the software on a kind of statutory bare license. However the court’s final rulings specifically referred to ‘the resale of a user license’ as giving the acquirer lawful rights to the software.
Why is this distinction relevant? A user may be interested in selling some surplus licences whilst still retaining a right to use the software on a client server but with a lesser number of licences. Here, the software will not be disposed of – only the licences. It would seem perverse that the ECJ’s broad idea that software can be resold would depend on how many times and where the software was installed. A licensee could of course, with the facility of multiple license rights, download the software either to CDs or onto different servers and then sell on, deleting only those copies. Until the ruling is further scrutinised, this may be a practical device for sellers of partially-surplus licences where the software usage is not wholly discontinued.
Conclusion
The UsedSoft case remains current law: in the EEA, pre-owned software may be freely sold and the buyer will be a lawful acquirer provided that the software is current, the licence was perpetual, sold originally for a fee, and the seller makes its own copy ‘unusable’ when the sale completes. Any prohibitions on assignment are void and demands for transfer fees unenforceable. Importantly, the burden of proof is on the seller to prove that the UsedSoft conditions are satisfied.
Understandably, the software vendors have not been interested in mentioning the possibility of resales to their customers. If asked, they prefer to intimate uncertainty as to the legal position and doubts as to support. But with a combination of legal, technical and commercial advice, buyers and sellers can successfully navigate this area and obtain high cost savings. The software vendors are in any case constrained in seeking to inhibit the market in indirect ways by, for instance, discriminating against their customers, refusing support or seeking higher prices from those using pre-owned software: the jeopardy is a finding of abuse, damages and fines of up to 10% of the undertaking’s global turnover. None of the low-level litigation has found any flaws in the UsedSoft case although paradoxically UsedSoft itself could not comply with the ECJ requirements for valid transfer when the case reverted back to the German court.
All the major software vendors are focussed very strongly now on moving their customers to cloud services. Logically, one might argue that the cost to switch from installed systems using perpetual licences to cloud services (no such licences needed) would be far less if the customer were told that value in its redundant licences could be obtained by reselling. Furthermore support costs on software generally exceed, over time, the initial licence fees paid meaning that, if there were a new user of redundant software, then there is the possibility of extending the vendor’s customer base and increasing rather than damaging its income.
The determined focus on cloud services may also, in part, explain why the vendors have not altered their software licences by changing perpetual terms to shorter eg 10-year licences which would then arguably have taken these licences outside the scope of the UsedSoft exhaustion regime. But the vendors will also have looked at their revenue recognition policies and seen that any switch to term licences would severely affect the value of declared new licence revenue.
There has been negligible visibility as to the options for used software. However now that the dust has settled from UsedSoft, and the few pieces of litigation against brokers ended, the position is far more certain and a public market may begin to develop more prominently.
Robin Fry is a partner at DAC Beachcroft, London
With thanks to David Harrison for the competition law aspects of this article.
