Second-hand Software Licenses and the European Court’s Judgment in UsedSoft v. Oracle
Software companies cannot prevent the sale of “second-hand” software licenses where those licenses are for a one-off fee and an unlimited period. Clauses in these licenses stating that they are nontransferable will not be enforceable. This is the effect of a recent judgment by the Court of Justice of the European Union in the case of UsedSoft GmbH v. Oracle International Corp. (3 July 2012).
The case is based on EU competition law “exhaustion of rights” principles, according to which, once a product incorporating intellectual property rights has been sold inside the EU by the rights owner (or with his consent), the rights owner cannot object to the product then being sold to someone else. The European Court has now looked at how that principle applies to software licenses.
UsedSoft is a Munich-based company (www.usedsoft.com) that on-sells used software licenses for Oracle and other products. Oracle’s licenses were expressly stated to be nontransferable, and Oracle sued UsedSoft in Germany. The German court referred a number of questions up to the European Court back in April 2009 to determine whether or not UsedSoft’s business model was legitimate.
When Oracle’s original customer downloaded software from the Oracle web site, was this a “first sale”, which would mean that Oracle could not object to the on-sale? “First sale,” in this context, the Court said, means a transfer of the right of ownership in the particular copy of the software.
The Court went on to say that, if the copyright holder (i.e., Oracle), who has authorised the downloading of the software (even if free of charge) has also conferred a right to use that copy for an unlimited period in return for “payment of a fee intended to enable him to obtain a remuneration corresponding to the economic value” of that copy of the software, the right of distribution of a copy of a computer program is exhausted. It does not make any difference whether the first customer acquired the software on a tangible medium, such as a CD, or downloaded a soft copy.
In other words, the software company cannot sue the buyer of a second-hand license where the license was:
- For a fee that represents the value of the software, which seems to mean a one-off fee (i.e., not a recurring license fee that is still payable after the sale of the second-hand license) and
- For an unlimited period.
The person who buys the second-hand license in this situation is a “lawful acquirer” (as is anyone to whom he on-sells the license), which means that the software house cannot use its copyright to object to the buyer using the software or on-selling the license.
Not All Bad News for Software Companies
However, there are limits to this freeing up of the second-hand market in software licenses.
- As noted above, it does not apply where the software is licensed for a recurring fee or for a limited time (nor where software is rented). So those business models are not affected.
- Where the license is for a single block of users, you cannot split it up into chunks and sell off only part of the license for the excess number of users. So “enterprise” licenses, as opposed to individual licenses, are not affected unless the original licensee wants to sell off the right to use the whole block.
- You cannot sell a services agreement (such as a software maintenance agreement) in this way, since the exhaustion principle does not apply to services. So the acquirer of the license cannot oblige the software company to provide services.
- The original licensee must not carry on using the software after the sale; otherwise it will be infringing copyright. It must make its own copy of the software “unusable.” Technical protection measures may provide some help, but, in practice, it will be hard for Oracle and other software houses to be absolutely sure whether the original customer is still using the software in parallel with the acquirer of the second-hand copy.
These limits on the judgment may influence the business models adopted in the software industry wherever the existence of a second-hand market is seen as posing a significant threat.
Relevant Clause of Oracle License
“With the payment for services you receive, exclusively for your internal business purposes, for an unlimited period a non-exclusive non-transferable user right free of charge for everything that Oracle develops and makes available to you on the basis of this agreement.”
Key Legal Provisions
Recital (28) of InfoSoc Directive1 “The first sale in the Communityof the original of a work or copies thereof by the rightholder or with his consent exhausts the right to control resale of that object in the Community.”
Article 4(2) of Software Directive2 “The first sale in the Community of a copy of a program by the rightholder or with his consent shall exhaust the distribution right within the Community of that copy …”.
Article 5(1) of Software Directive “In the absence of specific contractual provisions … [acts such as running, copying, translating etc., the program] shall not require authorisation by the rightholder where they are necessary for the use of the computer program by the lawful acquirer in accordance with its intended purpose, including for error correction.”