Yesterday, 3 July 2012, the Court of Justice of the European Union (CJEU) ruled in UsedSoft v. Oracle that online purchasers of software may resell copies of their downloads provided that they render the original download usable. The Court also endorsed software developers' use of "technical protective measures" to enforce that restriction.
In making this decision, the Court essentially said that there was no difference between physical and digital delivery methods and that a "licence" of software could constitute a sale.
Although, strictly speaking, the Court was addressing only the resale of downloaded software, aspects of the Court's judgment indicate that it would be willing to allow music and movie downloads to also be resold.
The background to this case is set out in our earlier Client Advisory, which can be found here. Briefly, Oracle sued UsedSoft for copyright infringement after UsedSoft began reselling licences to use copies of software downloaded from the Oracle website. These licences had been expressed to be personal and "non-transferable," and Oracle did not permit new copies of their software to be run on users' computers without a new licence. UsedSoft relied on the exception under EU copyright law that an owner of copyright in a computer program cannot prevent the resale of copies of that computer program if those copies have been sold within the EU with the copyright owner's consent.
At issue in this case was whether a copy of a computer program is "sold" when it has been downloaded by the customer directly to his hard drive. A further issue is whether further copies of the software can be made for onward resale.
A Licence Can Be A "First Sale"
The Court has adopted what it calls an "independent and uniform interpretation" of "sale" in the context of downloaded copyright works. The essence of a sale, says the Court, is that "a person, in return for payment, transfers to another person his rights of ownership in an item". As of today, downloaded materials are "sold" where the terms of the download (i.e. 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".
The Court states that its interpretation of sale is intended to be "a broad interpretation … encompassing all forms of product marketing" conforming to these characteristics. It placed no weight on the fact that Oracle's licences are personal to the purchaser alone (indeed this is what prompted the proceedings in the first place) nor the fact that they are explicitly identified as "non-transferable": the Court still found that Oracle had transferred its ownership of the copy of the software to the purchaser.
There Is No Difference Between Physical And Digital Delivery Methods
The Court then found that, contrary to the views of several Member States as well as the Commission, it was "abundantly clear" that the EU legislature intended there to be no distinction between works delivered on physical media or via the Internet when it comes to a customer's resale rights. Oracle, relying on legislative provisions that exclude online services from the operation of the doctrine of exhaustion, had argued that a resale right only arose in respect of programs originally sold on physical media and that downloads did not exhaust Oracle's right. The Court rejected that argument, in part because "from an economic point of view … the online transmission method is the functional equivalent of the supply of a material medium." That statement may be doubted, however, given that counterfeiting is an economic issue and the genuine origin of physical media can be much more easily assured than that of digital files.
A Reseller May Be Permitted To Make Further Copies For Resale
Perhaps surprisingly, the Court has also indicated that when reselling a copy of a computer program, a reseller appears to be allowed to create a further copy of the work in order to avoid having to sell the hardware onto which he originally downloaded the software, in effect transferring the exhausted copy of the program from one piece of hardware to another. In allowing a reseller this convenience, the Court stressed that he must make his own copy of the program "unusable" at the time of resale. The Court also specifically endorsed the use of "technical protective measures" to mitigate the likelihood that some resellers will not comply with this requirement and the difficulties of enforcing it. A copyright holder is entitled, said the Court, "to ensure by all technical means at his disposal that the copy is made unusable". This could include DRM to prevent the software from being copied at all, so that the resale of the software can only take place on the original hardware, or to uniquely identify each download to ensure that only one piece of hardware can run it at any given time. Another option would be moving towards cloud-based business models.
The Resale Must Relate To The Licence And Copy Originally Sold
If there is any good news for software developers in this judgment, it is that the resale of copies of software must be coupled with the resale of the relevant user licence. A reseller is not 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 licence 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. In practice, however, it is expected that technical measures will provide developers with greater protection than legal remedies in all but the most egregious circumstances.
The judgment is the second major setback for software developers in as many months, after the same court ruled, in May 2012, that a computer program's functionality, language and data formats are not protected by copyright under the Software Directive, as we noted here. There are, however, practical steps which will allow developers to mitigate some of the effects of this ruling.
In defining where there is a "sale" of downloaded software, the Court has emphasised, above all other criteria, that the transaction must involve a fee and a licence for an unlimited period of time. It may be, then, that limiting the length of a licence will mean that there is no "sale" of the software, and therefore no right to resell it.
Many developers, however, will feel that the writing is on the wall when it comes to relying on copyright to protect their work. Certainly, the tenor of the Court's recent judgments on computer programs has been to encourage competition and the secondary market, seemingly at the expense of extending developers' copyright protections.
It is therefore expected that the next big issue to come before the Court will involve other industries, such as music and film, in light of comments in the judgment that the exhaustion of rights applies not only to physical media - the doctrine which permits DVDs and CDs to be lawfully resold at car boot sales - but also to digital media. The Court was careful to note that it was ruling only on the first sale question as it applied to computer software, but it also affirmed its desire to adopt a uniform interpretation of "first sale" across all relevant legislation, a position which is also consistent with its earlier case-law. Together, these statements suggest that the next time the Court looks at this question, it will involve music downloads and/or digital copies of movies.
Those who deliver copyright protected content via the Internet, wherever they are based, should now consult with their legal and commercial advisers to assess the impact of recent rulings on their business models.
The case is Axel W. Bierbach, administrator of UsedSoft GmbH v. Oracle International Corp. Case C-128/11. The Court's judgment can be read in full here.