Second-hand software licences and the European Court’s judgment in UsedSoft v Oracle

Software companies cannot prevent the sale of “second-hand” software licences, where those licences are for a one-off fee and an unlimited period. Clauses in these licences stating that they are non-transferable 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 licences.

UsedSoft is a Munich-based company (www.usedsoft.com) which on-sells used software licences for Oracle and other products. Oracle’s licences were expressly stated to be non-transferable and it 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.

Relevant clause of Oracle licence

“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 Community of 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.”

The decision

When Oracle’s original customer downloaded software from the Oracle website, 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 licence where the licence was:

  • For a fee which represents the value of the software (which seems to mean a one-off fee i.e. not a recurring licence fee which is still payable after the sale of the second-hand licence) and
  • For an unlimited period.

The person who buys the second-hand licence in this situation is a “lawful acquirer” (as is anyone to whom he on-sells the licence), which means that the software house cannot use its copyright to object to the buyer using the software or on-selling the licence.

Not all bad news for software companies

However, there are limits to this freeing up of the second-hand market in software licences.

  • 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 licence is for a single block of users, you cannot split it up into chunks and sell off only part of the licence for the excess number of users. So “enterprise” licences, as opposed to individual licences, 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 licence 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 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.

  • 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 licence 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 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.