The CJEU has delivered its decision in Case C-128/11 UsedSoft GmbH v Oracle International Corp answering questions referred to it by the German court on the permissibility of selling on software licences, and whether the principle of exhaustion of distribution rights in the Copyright Directive (2001/29) applies to software downloaded via the internet under the provisions of the Software Directive (2009/24).
Oracle opposed the sale by UsedSoft of "already used" Oracle software licences. UsedSoft acquired licences from customers who had already purchased the software from Oracle but no longer required it. On purchase from UsedSoft, the second users would download a copy of the program directly from Oracle's website. Oracle claimed that this was an infringement of its reproduction right.
Oracle won at first instance due to the term in its licence stating that the right to use the program was non-transferable by customers. On appeal, the German court referred questions to the CJEU asking it to determine:
- whether the first sale by Oracle of software when it was provided by a download from the internet would exhaust its distribution rights under European law so that it could not prevent its customer or UsedSoft from further distribution of the software licence, and
- whether UsedSoft's customers were "lawful acquirers" and therefore could use, and reproduce, the software without infringing Oracle's reproduction rights, despite the contractual restriction in the licence imposed by Oracle.
The CJEU held that
Provision of software over the internet by Oracle did amount to a first sale, and so did exhaust Oracle's distribution rights. Oracle could not prevent its customers or UsedSoft from further distributing its software.
- The court found that the download of software via the internet was a sufficient first sale and transfer of ownership of property required for exhaustion of the distribution right, where the licence was for a right to use the copy of the software for an unlimited period in return for payment. There was no relevant distinction for exhaustion of the distribution rights between downloaded software and that provided on a CD or other physical medium.
- The court rejected arguments that downloading from the internet was akin to the provision of services, or that the presence of a maintenance agreement as the provision of services affected the application of the exhaustion of rights. The court stressed that if the doctrine of exhaustion of the distribution right did not apply to downloaded material, then the copyright holder could control resale of copies of downloaded material and demand further fees. This would go beyond what was necessary to safeguard Oracle's intellectual property rights.
Further, acquirers of used licences were lawful acquirers and could reproduce the software without infringing Oracle's reproduction rights. The contractual provision seeking to restrict transfer was void.
- The second acquirers were lawful acquirers and could reproduce the software in order to use it without infringing Oracle's reproduction rights, even where they downloaded the software directly from Oracle's website.
- On resale, the original licensee must make his copy of the software unusable, or Oracle's reproduction right would be infringed.
- Whilst the court acknowledged it was difficult for rights holders to determine whether a copy of software had been disabled, it did not change the analysis. The court thought the problem was exactly the same as that where software had been sold in a tangible form such as a CD. The court acknowledged that the rights holder was entitled to use technical protective measures.
This decision will not please software licensors, as it gives a green light to the business of selling-on software licences within certain parameters.
However, the decision also leaves a number of unanswered questions. For example, while the decision means that a software licensor cannot prevent the onward sale of its licences, does it also mean that it must positively enable licensees to do so, for example by removing any technical protective measures in its software that would prevent its licensees from transferring ownership? If so, then the video games industries and other consumer centric software industries will be particularly affected.
Enterprise software licensors will also be affected to the extent that they offer unlimited licences for their software. It may be that software licensors begin to move to alternative licensing structures, such as mixed lump sum/annual licences, in order to try to avoid the consequences of the UsedSoft decision. While the decision does suggest that the presence of a maintenance agreement does not change the position on exhaustion, it does not clarify whether a software licensor would be obliged to provide on-going maintenance (for example updates) to a second user. In a commercial environment, the absence of available updates for second user software could be significant.
The decision is also likely to give rise to companies like UsedSoft, who collect used licences in bulk and sell them on, becoming more prevalent. Such companies could also offer support and installation services to go with the used licences, as a "one-stop-shop".
Licensors will need to pay particular attention to technical protective measures to ensure that the first user of software does not continue to use the software once it has been sold on. Otherwise, unauthorised reproduction, rather than the on-selling contemplated by the court, may become more widespread.
It is to be expected that there will be further cases on this area as businesses seek to take advantage of at least a limited ability to deal in used licences.
The case arose on a reference from the German courts, between UsedSoft (represented by its administrator) and Oracle International Corp. UsedSoft had been engaged in a business which traded "used" software licences, including "already used" Oracle licences. These were Oracle licences purchased by customers through execution of a licence agreement for a fee and for which software and subsequent updates (pursuant to a maintenance agreement) were downloaded from the web. The licences gave use of that copy of the software for an unlimited period of time. When customers no longer required the licences, they would sell them on to UsedSoft, who would sell them. UsedSoft's customers would acquire the used licence and then visit the Oracle website to download the then current software directly. In addition, some of UsedSoft's customers were only looking to increase the number of licences they held (one licence permitting use by up to 25 users), so in those cases, the customer would then download the software to the additional users' workstations.
Oracle sought and obtained an injunction to prevent UsedSoft continuing its sales. UsedSoft appealed on a point of law, saying that Oracle's distribution right had been exhausted on its first sale and further downloading did not infringe its distribution right in the circumstances.
UsedSoft's argument was based on the detail of the Software Directive (Directive 2009/24 on the Legal Protection of Computer Programs) and the interplay with the principle of exhaustion of distribution rights in the Copyright Directive (2001/29), including whether exhaustion can apply to software distributed via the internet.
The questions referred by the German court
The German court referred three questions to the CJEU concerning the scope of rights conferred by the Software Directive.
- Is the person who can rely on exhaustion of rights to distribute a copy of a computer program a "lawful acquirer" within Article 5(1) of the Software Directive?
- If yes, is the right to distribute a copy of a computer program exhausted under Article 4(2) of the Software Directive when the acquirer has made the copy with the right holder's consent by downloading the program from the internet?
- If yes, then can that person with a "used" software licence for generating a program copy as a "lawful acquirer" also rely on exhaustion of the right to distribute the copy of the computer program made by the first acquirer, if the first acquirer has erased his program copy or no longer uses it?
Neither the Advocate General, nor the CJEU took these questions in the order they were put. The Court started with question 2
Can downloading a computer program amount to exhaustion of the right of distribution?
The Court looked first to see whether the contractual relationship between the copyright owner and the customer was to be properly regarded as the "first sale….of a copy of a program" within Article 4(2) of the Software Directive.
It found that the word "sale" was not defined in the Software Directive but must be uniform across all Member States to ensure that protection did not vary from State to State. On that basis, it took a "sale" to be "an agreement by which a person in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him". The Court concluded that any exhaustion of the right of distribution of a copy of a computer program must therefore involve a transfer of the right of ownership in that copy.
The downloading of the Oracle software met this test because it was coupled with a licence agreement which, in return for payment of a fee provided the customer with a right to use that copy for an unlimited period of time. The downloading of software and the execution of the licence were to be considered together and as such were a sale of software. The position was no different for downloading the software as it would have been for obtaining the software by means of a CD or DVD. The Court stated that the Software Directive was the more specific law, compared to the Copyright Directive, ("lex specialis"), and the Software Directive expressly provided for protection of computer programs in any form.
'No exhaustion for services' isn't applicable
Further, the court rejected arguments based on the Copyright Directive Recitals that exhaustion of distribution rights did not apply in the case of services and that downloading software was the provision of services. The court noted that the principle of exhaustion of right of distribution of works protected by copyright limits restrictions on distribution only insofar as necessary to protect the subject matter of the intellectual property concerned. If a restriction on further distribution was placed on the resale of copies of computer programs downloaded from the internet, it would go beyond what was necessary.
Effect of maintenance
Oracle also argued that there was no exhaustion when a maintenance agreement was sold with the software because the computer program the first acquirer transferred to the second acquirer would not be the same as the one he originally downloaded as it had been patched and/or updated under the maintenance agreement. On that basis, the rights could not be exhausted because what was reproduced was a different product. The CJEU rejected this argument. Although there was no exhaustion principle applicable to the provision of services such as maintenance, where maintenance was sold with the computer program in these circumstances, any updates or enhancements added formed an integral part of the copy originally downloaded which the user would be able to use for the unlimited licence period, even if the maintenance agreement subsequently lapsed. On that basis, the right of exhaustion did cover the computer program as corrected and updated by the copyright holder which was passed on to the second acquirer.
However, the court did apply some restrictions and limits on the exhaustion of rights. Where a user had taken a block licence from Oracle (i.e. one that licensed up to 25 users), it was not permitted to divide the number of users and seek to sell on only part of the licence. Furthermore, on seeking to resell the licence, the original acquirer must make his own copy unusable at the time of the re-sale, or the right of reproduction would be infringed.
Is the second user a "lawful acquirer" and do they have a right to reproduce the program?
The court then looked at questions 1 and 3 referred by the German Court which essentially sought to establish whether someone with the benefit of a used licence was a lawful acquirer under Article 5 of the Software Directive and so could reproduce the computer program to enable him to use it in accordance with its intended purposes.
The 'no transfer' provision in the Oracle licence
At first instance in Germany, Oracle had succeeded in relying upon the contractual restriction in its Oracle licence that the first acquirer could not transfer the licence. The CJEU reasoned that the downloading by a second licensee from the copyright holder's website was an authorised reproduction as it was necessary for the use of the program by the second licensee in accordance with its intended purpose. The Software Directive prevents the acts of loading and running software necessary for its use from being restricted by contract. Therefore, despite the contractual terms in the Oracle licence, Oracle could not oppose the resale of the copy of the computer program – as long as the original licensee made his copy unusable at the time of its resale.
The court acknowledged Oracle's argument that determining whether the earlier copy of the software had been disabled would be difficult, but this was no different from where the program was distributed by CD or DVD and did not affect the analysis. Rights holders are permitted to use technical protective measures to police this.
The Court therefore concluded that second acquirers were lawful acquirers within the meaning of the Directive, and therefore a download of the copy of software by the second acquirer was a reproduction of a computer program necessary to enable the acquirer to use the program in accordance with its intended purpose. There was no requirement that the lawful acquirer must be in a direct relationship with the copyright holder and so Oracle could not prevent the resale of used licences by UsedSoft.