UsedSoft GmbH v. Oracle International Corp. European Court of Justice, Case -128/11, 3 July 2012
An industry has grown up around the sale of second-hand software as a result of re-sellers seeking to acquire full or partial multi-user software licences from the original licensee and to "on-sell" those licenses to customers. There has been substantial debate in Europe as to whether or not this practice is valid on the basis that the exhaustion principle in European copyright law was only thought to apply to the distribution right where software was distributed on a tangible medium. This decision of the CJEU has been keenly awaited by an industry seeking to clarify the position and will change the way in which software is licensed and maintained.
Essentially, the CJEU has held that where licensed software is distributed by non-tangible means (for example by download over the Internet) then, subject to certain pre-requisites, this equates to a "first sale" for the purposes of the exhaustion principle and the copyright owner is not entitled to control further on-sales of the licensed software. The new acquirer may therefore freely download, reproduce, run and store the software and where updates or patches to the transferred software are provided under a maintenance contract, then the new acquirer also has the right to receive and use them on a similar basis. Importantly, this principle will not operate according to the CJEU where the licensee retains the right to use the licensed software itself. This means, for example, that a licensee of a multi-user licence will not be able to assign unused licences unless the user ceases using the software product altogether, and it will not be possible to divide and re-sell part of a multi-user licence. However where a company goes into liquidation and therefore ceases to use the software altogether then a liquidator will have the option of selling the licensed software to a third party without the software owner's authority. In this regard, the concept of a software licence being "personal" and "non-transferable" has largely been thrown out the window by this decision.
Further, where the software is licensed other than on a perpetual basis, then the exhaustion principle will not operate according to the CJEU as this presumably this would amount to less than a "sale" of the licensed software. The consequence is that if software is licensed for a finite period (which a Court would not in the particular circumstances consider to equate to a transfer of ownership), say 5 years, then the distribution right will not be exhausted by the initial licensing arrangement and the licensee will not be entitled to "on-sell" the licensed software without the licensor's authority.
Software vendors will now need to re-consider the basis on which they license software on a volume basis. Making the licence term finite instead of perpetual will be a good start to avoid exhausting their distribution right in the software. Ensuring that software upgrades and patches are provided on similar terms will also be crucial.
From a copyright lawyer's perspective, the CJEU's determination that a first licence can be equated to a "sale" of a tangible object for the purposes of the distribution right seems an odd result. The purpose of copyright law is fundamentally to secure a fair remuneration for copyright owners and in doing so to encourage further creation and development. By definition, a licence of a copyright work is a contractual right which enables a copyright owner to do just this by providing a limited usage right in exchange for payment. Up until now a copyright owner could deliver software, or other works in electronic format, on tangible media with the risk that the distribution right could be exhausted and that the medium could be re-sold and the work used by third parties without payment of an additional fee. Alternatively, the copyright owner had the option of delivering the work in downloadable format subject to "personal" and "non-transferable" licence terms and without any such risk. Obviously, certain works were more susceptible to be delivered in one way than the other, with differing remuneration consequences but this was properly the choice of the copyright owner.
This decision also has potential consequences across other industry sectors. Does it mean that the distribution right in an electronic book that is downloaded from a website will be exhausted upon download and therefore an acquirer could "on-sell" a copy of the electronic book provided that they did not retain a copy themselves? Unless the legislature steps in to alter the position vendors in the software and on-line copyright based industries will now need to look very carefully at their method of delivery and the way in which this decision could alter their business model.
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