The Court of Justice of the European Union has now ruled that software developers may no longer block the resale of online licensed software. UsedSoft GmbH v. Oracle International Corp., Case C-128/11 (CJEU, July 3, 2012). This new development will significantly affect the market strategies of software developers.
Internet software sales, whereby the customer directly downloads software from the developer’s website, have become a common transaction mode. Such sales eliminate the need for a physical carrier for the software, such as a DVD or CD-ROM. As a consequence, second-hand sales have become a significant challenge for developers, who try to exclude such sales by outlining relevant restrictions in their licensing agreements. Specifically, typical click-through terms give a customer the right to use the software and to permanently store a copy of it on his computer. The terms also enable the use of the software by a limited number of users (e.g., employees), but the customer’s rights are non-transferable. In other words, the click-through license terms typically provide that software is usable only for the customer’s own business purposes, but prohibit resale of the license rights to someone else. However, under certain circumstances, such as cuts in business segments or insolvencies, an internet-based software customer may be interested in selling its license. Second-hand dealers, such as UsedSoft, model their businesses based on such situations. Despite the non-transferability stipulation in the license agreements, they buy these licenses with the intent of selling them (for a significantly lower price) into a second-hand market.
Business Model at Issue
The reseller (the original licensee) provides a written document stating that he is entitled to use the software by virtue of an agreement. In addition, the reseller declares that he no longer intends to use the software. No further proof of the reseller’s entitlement to resell the license is provided. The second-hand dealer forwards this declaration to a notary, who notarizes that the reseller’s declaration was presented to him, without naming the reseller. The notarized statement together with an agreement prepared by the dealer is then used to resell the software. The new customer directly procures the software from the reseller. Oracle launched proceedings against UsedSoft in an attempt to stop such business. Oracle relied on the non-transferability clause of the license agreement as the basis for its argument.
Opinion of the CJEU
The crux of the decision hinges on the issue of copyright exhaustion. If rights are exhausted, the non-transferability clauses found in a typical license has no effect. For off-the-shelf software sold on physical carriers, it is accepted that once the developer sells the carrier, its exclusive distribution rights are exhausted and the acquirer may resell the software to anyone. Whether this also applies to software acquired through downloading from the developer’s website is the question posed. German courts were of the opinion that such dealings violate the developer’s copyrights.
The highest German Court then referred the question to the CJEU which has now ruled that, once the developer had sold a copy of his software, its exclusive distribution rights as to that copy are exhausted regardless of whether it is done through a download or on a carrier. On the other hand, where the copy is resold, the original customer is no longer allowed to use the software and must make its copy unusable at the time of resale. In addition, the CJEU pointed out that if the license acquired by the first customer relates to a greater number of users, the effect of the exhaustion of the distribution right cannot be used to divide the license and resell only a part of it. In addition, the CJEU ruling does not force the developer to provide support, particularly when it comes to updates, to purchasers of second-hand licenses.
The CJEU’s ruling will likely stimulate growth in the secondary market, but there may also be some negative consequences for developers. For example, developers will no longer be able to rely on their records to determine who owns a license. This is because the resale documents in the hands of the second-hand customer do not indicate the name of the first customer. The developer will also lack the ability to determine whether the license to the original customer was in fact legally acquired, and there are no effective means for the developer to ascertain whether or not the first customer is still using the software (i.e., after the license was resold). Enterprise software developers should review their license practice and investigate whether the situation may be addressed by remedial clauses being introduced into their new contracts, for instance, to require that the developer be notified in the event of any change in license ownership.