Software suppliers suffer second setback. The ECJ has heldin UsedSoft GmbH v Oracle International Corp (C-128/11) that distributors of second hand software may lawfully re-sell digital licences without infringing a developer’s copyright. The decision could also have wider implications for the motion picture and music industry.  But as with all things digital, the devil is in the detail and there are certain caveats which rights owners should be aware of. Background

Oracle develops and distributes client/server programs. The programs are distributed by means of a download from Oracle’s website to the licensee’s central server. The licence is limited to a specific number of end-users who may then download it to their local client workstation. The licence granted is perpetual for internal business purposes, but most importantly, it is non-transferable. UsedSoft (the clue’s in the name..) sells and distributes second hand licences which it has acquired from Oracle’s original licensee.

Oracle brought a claim against UsedSoft for copyright infringement and sought an injunction in respect of this practice.

Under the Protection of Computer Program Directive (2009/24/EC) (Software Directive), a rights holders’ exclusive right to distribute a copy of a computer program comes to an end when it is first sold in the EU, either by the copyright holder or with his/her consent. This concept is otherwise known as the ‘doctrine of exhaustion of rights’. Oracle claimed that this concept did not apply to digital sales, only physical copies.

HELD: You only licence once

Where a copyright holder makes available a copy, for a fee, for an unlimited period (i.e. where the digital licence constitutes a permanent licence) it will be a, ‘first sale’. Consequently, the doctrine of exhaustion of distribution rights applies equally to both digital downloads as well as physical sales. Therefore, even where the corresponding licence agreement prohibits a transfer of the licence of a computer program, the licensor cannot prevent its subsequent re-sale. In addition, the subsequent sale is of the program ‘as updated’ by the copyright owner under the corresponding maintenance agreement (even though such agreement was for a limited period) and is for an equal, perpetual licence period.

Licence revoked

For the licensee to benefit from this exemption, however, the original licensee must:

  • Not divide the licence and re-sell only part of the total licensed users; and
  • stop using the program at the time of sale.

Notably, the court held that Oracle and other software developers may employ technical measures to enforce such restrictions. Such measures could include measures such as including unique ID codes for each software so that only one item of hardware can run the software at any time or moving the software onto a cloud based application (see further below).

Die Another Day: its wider implications

Although the decision is specific to software, it is arguable that the ECJ may wish to follow a consistent interpretation of ‘first sale’ and that the film and music industry may consider taking practical steps to limit its application. The reason for this is that the judgment favours a consistent approach towards the definition of first sale. However, the court appears to limit this desire for uniformity solely to the Software Directive (which is referred to as a ‘lex specialis’ in comparison to the wider Harmonisation of Copyright and Related Rights in the Information Society Directive 2011/29/EC (Copyright Directive)). Nonetheless, the film and music industry may be well advised to review their current commercial practices as a precautionary measure.

Recitals 28 and 29 of the Copyright Directive highlight this distinction since they seek to limit the doctrine of exhaustion of rights to tangible products and exclude services and online services in particular. In contrast, the Software Directive makes no such distinction. This distinction seems difficult to justify in practice.

Will the Skyfall? What can be done now?

Software suppliers should explore innovative ways in which licences and commercial practices can be structured to fall outside the scope of this re-sale right. Measures may include limiting the duration of the licence and ensuring that the software licence is instead provided very much by way of a software as a service (with an integrated package of support and ancillary services, rather than a collateral maintenance agreement). In addition, software suppliers should seek to implement the technical restrictions to enforce the conditions of the exemption described above.

Epilogue – the first setback

In May earlier this year, the ECJ held that neither the underlying functionality of a computer program, the programming language it is written in, nor the format of data files used in it are protected by copyright (see SAS v WPL). In addition, the court held that the purchaser of a software licence may observe, study or test the functioning of that software to determine the ideas and principles which underlie any element of the program. Any contractual provisions that seek to restrict that right are unenforceable. Although at first sight, this seemed a momentous win for competitive developers and licensees, the judgment confirms the position following Navitaire v Easyjet, yet does provide greater insight: namely that, in the absence of copying the source code (and more detailed specifications and designs), a developer is unlikely to infringe the copyright in a computer program.