Summary

In a decision that makes software developers' fight against piracy more difficult, a preliminary ruling by Advocate-General Bot in Case C-128/11 UsedSoft v. Oracle has determined that users are allowed to re-distribute not only software that has been initially delivered on physical media whose ultimate origin can be verified, but also software that has been acquired by purely online means and whose legitimacy cannot be ascertained by consumers.

The case, which is being heard before the Court of Justice of the European Union, concerns whether a software developer can use copyright to prevent its customers from re-distributing downloaded computer programs within the EU without first obtaining permission from the original distributor. AG Bot's view is that it cannot.

Background

As is commonly known, software code is afforded copyright protection as a literary work. Subject to limited exceptions, the owners of that copyright can exclude others from performing certain acts in relation to their software, including reproducing or distributing it without permission.

One important exception is that a "lawful acquirer" of a copy of a computer program does not require a rightholder's permission to reproduce the software as part of its use in accordance with its intended purpose.

In accordance with the exhaustion of rights principle within the EU, a copyright owner has no right to prevent the re-distribution of any copy of software that it has sold within the EU. Methods of distribution other than sale, such as rental, do not limit the copyright owner's distribution rights in this way. This principle of "exhaustion" of rights is well-established in IP law, and in the EU it is seen as essential to creating an Internal Market where goods and services can move freely across national borders. A copyright owner's distribution rights are still exhausted, however, in respect of further distribution which involves no cross-border element.

At issue in UsedSoft v. Oracle is whether a copy of a computer program is "sold" when it has been downloaded by the customer directly to his hard drive (and so, whether a copyright owner can prevent re-distribution in these circumstances). A further issue is whether further copies of the software can be made following re-distribution.

The "Sale" Of A Computer Program

The Advocate-General, who gives a non-binding Opinion to the full Court on how it should rule, has said that a transaction involving the "transfer of ownership of a copy of the computer program, for an unlimited period of time, in return for a one-off fee" is a "sale" within the meaning of EU law. He arrives at this conclusion in part because such a transaction enables the rightholder to realise the economic value of his right, and because to rule otherwise would frustrate the purpose of the principle of exhaustion.

AG Bot's characterisation of a download as a "transfer" of ownership is surprising, and the Opinion does not explain what precisely it is that Oracle had ownership of before the transaction, but no longer has after the transaction. Neither does the Opinion sit comfortably with provisions of European law which tie exhaustion to the transfer of ownership of an "object", or which provide that the question of exhaustion "does not arise" in the case of online services, each of which "should be subject to authorisation" under normal copyright principles.

The Making of Further Copies Following Re-Distribution

Although it is not entirely clear, the Advocate-General's ruling on this point seems to be that even though a customer may re-distribute his copy of a computer program to a third party, that third party cannot install or run the software since that involves an act of reproduction which requires the rightholder's authorisation. Even when this reproduction is for the limited purpose of the third party installing and running the program, Advocate-General Bot has held that the rightholder's authorisation is still required because the third party in this situation is not a "lawful acquirer", in part because he has no direct contractual relationship with the rightholder. If the Court affirms this aspect of the Opinion it will have two significant consequences.

First, if it is correct that a third party can acquire but cannot install and run a copy of a computer program, then not only do the policy justifications for a broad interpretation of "sale" fall away, but so too does the relevance of any distinction between physical and digital delivery methods.

Second, only the media on which the first copy of the computer program was created can be used as the carrier in the event of its re-distribution. Any transfer to another medium would involve an unauthorised reproduction, regardless of whether the customer deletes his original copy or no longer uses it.

Practical Impact

The implications of the Advocate-General's Opinion for the level of protection to be afforded to online services is too significant for the Court to avoid dealing with the issue of what constitutes a "sale" more fully. Furthermore, the decision potentially makes sales of hard drives carrying "second-hand" software more likely to be viewed as permissible, at least in the absence of obvious facts or circumstances to the contrary, with the result that it will become more difficult for consumers to know which copies of computer programs are lawful and which are pirated. But for the cost involved, suppliers may well be better protected by restricting their distribution of software to physical means which are more readily identifiable as genuine.

The judgment of the full Court is expected by the end of this year, so now is a good time for software developers to start reviewing the terms of their licences. In particular, they should: check whether their terms grant users a perpetual right to use software in return for a one-off fee; ensure that their terms do not create any direct contractual relationship with a subsequent acquirer of the program; and continue the development of technical measures to ensure that software can only run on its original (non-removable) carrier and not on one onto which it has been reproduced without authorisation.