In its recent ruling in Case C-128/11 UsedSoft v Oracle, the Court of Justice of the European Union has ruled that a software developer cannot use copyright to prevent the re-distribution of downloaded computer programs once it has granted a prospective reseller a perpetual licence, for a fee, to use it. The CJEU also appears to have granted reproduction allowances to software resellers with the sole intent of facilitating the secondary market in ‘used’ software. Developers are afforded two concessions. First, if resellers exercise this reproduction allowance they must render their original download unusable. Second, developers are entitled to use ‘technical protective measures’ to enforce the first concession.
Although the judgment addresses only the resale of downloaded computer programs under the Software Directive, aspects of the Court’s judgment indicate that it would also be willing to allow music, movie and other downloads to be resold regardless of whether they too, strictly speaking, are computer programs. Whether the judgment is good for consumers or the European software industry remains to be seen.
Background
Subject to limited exceptions, owners of copyright in computer programs can exclude others from distributing or reproducing their software without permission. One important exception is that under Article 4(2) of the Software Directive (2009/24/EC), a copyright owner cannot prevent the re-distribution of any copy of software that it has ‘sold’ within the EU. This principle of ‘exhaustion’ of rights is well-established, and in the EU it is seen as essential to maintaining the Internal Market. Another exception is that, under Article 5(1) of the Directive and in the absence of specific contractual provisions, a ‘lawful acquirer’ of a copy of a computer program does not require a rightholder’s permission to reproduce the software when it is technically necessary to use the program as intended, e.g. to load and run it.
Facts
Oracle sued UsedSoft in Germany for copyright infringement after UsedSoft began reselling personal and ‘non-transferable’ licences to use Oracle’s database software. UsedSoft argued that Oracle’s distribution right in respect of the software covered by these licences had been exhausted, and the German Court referred questions on the interpretation of the Software Directive to the CJEU.
At issue in UsedSoft is whether a copy of a computer program is ‘sold’ when a free download is accompanied by a permanent licence that attracts a fee, and whether a copyright owner can prevent re-distribution in these circumstances. A further issue is whether additional copies of the software can be made following re-distribution.
The Judgment
A Licence Can Be A ‘First Sale’
Broadly speaking, the CJEU followed the Advocate General in finding that an ‘independent and uniform interpretation’ of what constitutes a ‘sale’ was required. According to the Court, downloaded materials are ‘sold’ where the terms of the download (ie the licence agreement) are ‘intended to make the copy usable by the customer, permanently, in return for payment of a fee designed to enable the copyright holder to obtain remuneration corresponding to the economic value of the copy of the work of which it is the proprietor’. It says this is a ‘commonly accepted definition’ of sale, but cites no sources.
The Court states that its interpretation of sale is intended to be ‘a broad interpretation … encompassing all forms of product marketing’ conforming to the characteristics of sale. It made no difference that Oracle’s licences are personal to the purchaser (indeed this is what prompted the proceedings in the first place), nor the fact that they are explicitly identified as ‘non-transferable’. Any other interpretation, said the Court, would allow suppliers to use language to ‘circumvent the rule of exhaustion and divest it of all scope’.
There Is No Difference Between Physical And Digital Delivery Methods
The Court then found that the Software Directive does not distinguish, for exhaustion purposes, between works distributed on physical media and those distributed via the Internet. Oracle had argued that downloads are not exhaustive because the InfoSoc Directive (2001/29/EC) referred to ‘the exclusive right to control distribution of the work incorporated in a tangible article‘ (emphasis added) (Recital 28) and excluded ‘on-line services’ from the question of exhaustion since ‘every on-line service is in fact an act which should be subject to authorisation’ (Recital 29). Oracle also relied on Article 4, which provides that there is no exhaustion without the first sale of an ‘object’.
The Court held that ‘even supposing’ that Oracle was correct, the argument was irrelevant because Article 1(2) of the InfoSoc Directive provides that it ‘shall leave intact and shall in no way affect existing Community provisions relating to the legal protection of computer programs’. Since the Software Directive was a codification of the 1991 Computer Programs Directive (91/250/EEC), the InfoSoc Directive could have no bearing on its provisions on exhaustion.
Therefore, a customer can resell downloaded computer programs provided that at the same time as he downloads the program he enters into a perpetual licence for the use of that program, and the terms of the licence include a fee that corresponds to the economic value of the download. Such a reseller is not, however, allowed to divide a multi-user licence and resell only the rights for some, but not all, users covered by it, nor can he resell licences separately from the copies downloaded when those licences were entered into. This is so even if the second purchaser only requires a new licence because he already has, or can otherwise obtain, his own copy of the program.
A Reseller May Be Permitted To Make Further Copies For Resale
Perhaps surprisingly, the Court suggests that resellers are allowed to transfer an exhausted download from one piece of hardware to another, in order to facilitate its resale. This goes well beyond the legislative provisions that exclude the copyright owner’s reproduction right where such copying is a technical necessity for a lawful acquirer to use the program. The Court tries to balance its expansion of this exception by requiring the reseller to make his own copy of the program ‘unusable’ at the time of resale. Acknowledging, barely, developers’ difficulties in enforcing that requirement, the Court endorses their right to use ‘technical protective measures’ to enforce it.
Practical Considerations
One interpretation of UsedSoft is that it is a precedent for an inroad into digital secondary markets. Support for this view is found in the Court adopting a ‘uniform interpretation’ of the law to avoid divesting the exhaustion doctrine of its scope, and its creative interpretation of what is ‘technically necessary’ seems to have been a deliberate device to facilitate the resale of downloaded works, enabling a reseller to avoid having to sell hardware onto which the software was originally downloaded. The Court’s apparent scepticism of Oracle’s analysis of the InfoSoc Directive also suggests the likely direction of its jurisprudence on other legislation.
If this is correct, it raises two significant questions. The first is that, because the Software Directive does not define it, will the Court interpret ‘computer program’ to include computer games? It is possible that it will. The second, whether music, video and other downloads are ‘computer programs’, is a more difficult question. These are, obviously, written in a language that is readable by a computer, yet they are not ‘of fundamental importance for the Community’s industrial development‘ (emphasis added), which Recital 3 says is the subject matter of the Software Directive. If they are not computer programs then whether their sale online may exhaust their owners’ distribution rights will depend on the CJEU’s interpretation of ‘tangible articles’ and ‘objects’ in, and the exclusion of ‘online services’ from, the operation of the InfoSoc Directive’s exhaustion provisions. Those holding the view that the Court will not allow legislation to unduly restrict its efforts to expand secondary markets will certainly find support in UsedSoft.
This view should be balanced, however, against indications that the Court’s treatment of software is a special case. In Case C-406/10 SAS Institute Inc v World Programming Limited, the Court handed down a much criticised judgment that avoided making any definitive findings on the principle issues relating to copyright in software. Could it be that the CJEU is simply uncomfortable with IP in software? In any event, and perhaps more significantly, the Court adopted as part of its reasoning the Advocate General’s statement that copyright provides rightsholders with a ‘monopoly’ right. While this may be true of patent rights, it is not true of copyrights, where independent creation is a complete defence. If the Court essentially believes that copyright gives developers the same rights as much-vilified so-called ‘software patents’ then it is perhaps no surprise that the Court has determined the limits of software copyrights in the way that it has, and it may even offer an alternative explanation as to why it was so careful to restrict both SAS and UsedSoft to a single piece of legislation rather than tackling the issues from a more general point of view.
Regardless of whether UsedSoft paves the way for the resale of any copyright work purchased online, or is so narrow that its effects can be easily averted by minor alterations of fact, many developers will feel that technical measures are their surest defence against counterfeiting and unauthorised reproduction in all but the most egregious circumstances.
Whatever its ultimate impact for secondary markets, there can be little argument that the remodelling of licences as sales, and the interpretation of ‘technically necessary’ as inclusive of ‘practically convenient’, is the work of a Court willing to be creative for the greater good. Yet the assumption that consumers are better off as a result of UsedSoft‘s creativity may or may not be true. Developers will undoubtedly amend their licences and/or their delivery mechanisms, eg toward cloud-based models, as a result of this decision, and pricing structures determined in the belief that there would be no secondary market in downloads are also likely to change. Developers, and their investors, have obviously suffered setbacks, but both SAS and UsedSoft leave a few doors open and DRM has always driven innovation (first to make it, then to break it), so there will be development in this area too.
Conclusion
It is currently quite fashionable to be in favour of wholesale IP reform. Perhaps this is a result of ongoing economic hardship that seems to feed a desire to curb perceived excess. Certainly some will see both SAS and UsedSoft as good evidence that software houses in Europe are being punished for the perceived excesses of so-called ‘software patents’ in the US.
That may or may not be true, and may never be known. What will very shortly become clear, however, is the impact on investment in the European IT sector of Europe refusing to protect non-literal elements of software for which a developer in the US may very well obtain a patent. The long-standing argument that strong IP protection nurtures commercial success in the creative industries is about to be put to the test.
Gareth Dickson is a litigator in the Litigation practice in Edwards Wildman’s London office. He is a UK qualified solicitor and New York admitted attorney whose practice focuses on the resolution of technology and intellectual property disputes.
