The most significant IP/IT case since our last edition of IP Matters isUsedSoft GmbH v Oracle International. You may already have heard of it but, if you have found other commentaries hard to follow, this article tries to make it understandable.

It is well established that, if software is sold on, say, a CD for a one-off price, the buyer can resell it. This effectively makes the CD distributable like any other goods, unencumbered by IP law. As you would expect, the principle only applies where the buyer is allowed to use the software forever. It does not apply if the price only buys some limited licence.

The principle - known as "exhaustion" of distribution rights after the first sale - is important for the two reasons below, and it is enshrined for example in the United States'Copyright Act of 1976 (17 USC §109) and, in the Europe Union, under Article 4(2) of the"Software Directive" (2009/24/EC). In Europe for example, any attempt to get round the law by selling the software under a "non-transferrable" licence would fall foul of Article 4(2). If the licence was otherwise unlimited, the non-transferability would be unenforceable.

The principle is important because:

  • It is seen as essential for the distribution chain to function efficiently.
  • It also permits sale onto the second-hand market after the end user is done with it. This is important because - as in any sector - prices would be artificially high if producers could kill the second-hand market by prohibiting resale.

However, the principle of exhaustion was thought to be limited to software sold on a physical medium like a CD. In UsedSoft vs. Oracle, the Court of Justice of the European Union decided that it applied to downloads too.

The Decision

UsedSoft is a German company dealing in used software. It bought and resold second-hand licences for Oracle's database application. UsedSoft did not provide the software itself. Its customers got it the same way the first-hand buyers had, by downloading it from Oracle's website.

Oracle sued and, on 3 July 2012, the Court gave its judgment. It decided that Oracle's distribution rights were exhausted so it was not able to prevent second-hand resale.

Oracle had tried to argue that there was no first sale. No physical property changed hands, so the money it got was just a licence fee for rights which were limited (i.e. non-transferable); such limitation being lawful because Article 4(2) only applied if there was a first sale. See the circularity?

Unfortunately for Oracle, the Court went round the circle in the other direction. It decided that, provided (like with the CD) the licence was otherwise unlimited, the fee was effectively a sale of the software itself, so Article 4(2) did apply, making any non-transferability unlawful. In other words, it was a chicken/egg argument - which came first; non-transferability or Article 4(2)?- and Oracle lost.

The Consequences

The upshot is that any perpetual licence for downloaded software can be resold in the EU. If the licence contains a clause saying it is not transferable, that clause is invalid.

The right to resell is not the same as the right to copy, but the Court even suggested that the software could be copied so the reseller did not have to sell the hardware on which it sat. Thus the Court went out of its way to facilitate the second-hand market; although it was not relevant in this case. UsedSoft's customers downloaded their copy off Oracle's website.

The Court did, however, specify that the resale had to be all or nothing. A licence could not be resold in part - such as an unused surplus of permitted users. The Court also said that the reseller could not retain a copy of the software itself; so, for example, if it did copy the software onto new hardware in order to resell it, the first copy must be destroyed.

The case has sent something of a shockwave through the software industry given how common it is now to sell by download. A legitimate second-hand market has sprung up, giving first purchasers a windfall benefit at the expense of producers. Had the producers known, they could have factored it into the first sale price, as they presumably do with sales on a physical medium.

Add to this the fact that a second-hand market is more detrimental to software producers than, say, car manufacturers, because second-hand software is as good as new; at least until it is outdated by later releases, as is often the case with software on a physical medium. Once you buy the CD, that's usually it. However, download sales often do include a right to download updates, and the UsedSoft decision clarified that those updates were part of what the first buyer was permitted to resell, in which case the product enters the second-hand market "as new". In fact, that was UsedSoft's sales pitch.

The question is, where will software producers go from here? Will they try to circumvent the decision, for example by making their licences for a million years instead of perpetual; or by selling to the first purchaser not an individual licence but a segment of a block one? Such tactics would be risky. The Court would not want to see itself out-manoeuvred so, if a judgment which scotched such tactics was reasonable, the Court might take it. So perhaps software producers will shrug their shoulders and factor the new landscape into their first sale price.

Even in that case, further litigation seems likely, as the decision leaves questions unanswered. For example, the Software Directive does not define "computer program" - the phrase it uses instead of "software" - so it is unclear if games or music downloads are covered by the decision.

It is important to note that the decision does not apply to SaaS, and it gives another reason for producers to prefer the cloud computing model.