In a groundbreaking judgment of 3 July 2012, the Court of Justice of the European Union (CJEU) seriously undermined the online sales model used by software developers. The EU's highest court ruled that under certain conditions the "resale of software licences" is allowed, despite contractual provisions to the contrary. In short, the general idea is that, in certain cases, the licensing of computer programs can be treated as the sale of a copy of the program, in which case it is possible to rely on the rule of exhaustion. The defendant (Oracle) argued, on the other hand, that the software had never been sold but rather had entered the market under limited usage rights.

Facts of the case

UsedSoft, a German software company, sells "second-hand" licences for standard Oracle software which it acquires from the original Oracle licensees. After purchasing the second-hand licences, UsedSoft's customers, which included German public authorities, can download the software from Oracle's website.

Oracle objected to the resale of its software licences, inter alia on the ground that its standard licence agreements stipulated that the licence was non-transferable, and decided to take legal action before a German court. The court asked the CJEU to clarify whether the rule of exhaustion of the right of distribution, as laid down in the Software Directive (2009/24), applies.

The CJEU's decision

According to the CJEU, the rule of exhaustion does indeed apply in this case. Pursuant to the rule of exhaustion, if a copy of a software program is first sold in the EU by or with the consent of the right holder (in this case Oracle), the latter's rights to the copy are exhausted and further distribution thereof cannot be prevented. Although most software is licensed rather than actually sold, the CJEU held that if the licence is granted for an unlimited period of time and for a one-time fee (representing the economic value of the software), the transaction actually entails a transfer of title to the software copy and therefore constitutes a sale under EU law. In this respect the Court ruled that the phrase "sale of a copy", as used in the Software Directive, is an autonomous concept of EU law which must be interpreted uniformly through the EU, since the Software Directive does not provide that this phrase can be interpreted in accordance with national law. Consequently, according to the CJEU, a contractual provision that a licence is non-transferable will no longer be enforceable.

The CJEU added that the rule of exhaustion applies regardless of whether the software was initially made available as a hard copy or a download. In addition, the second-hand licence includes any updates and upgrades provided for by a maintenance agreement, as these have become part of the software. However, the CJEU did set some limits on the rule of exhaustion: the original licensee/reseller may not sell only part of the licence (for example, an unused surplus of permitted users) and must stop using the software itself (i.e., disable or destroy own copies). The right holder may seek to enforce this requirement by technical or other means, such as product keys, registration codes and audits.

Next steps / alternatives

More litigation is sure to follow as the implications of the CJEU's decision in day-to-day business unfold. However, for the time being, it appears that the rule of exhaustion does not apply if the licence is granted for a limited period of time in exchange for a recurring fee or if software is offered as a service rather than a product, since the CJEU differentiates between the product as such and services offered in respect of that product.

Consequently, the decision will not affect SaaS business models (whereby the user is only granted access to the software but not provided with a copy). This could lead to an increase in cloud computing and offers of integrated packages (i.e. packages that bundle software and maintenance together, rather than offering maintenance separately as an optional service).

Another option for licensors to avoid the consequences of the decision, would be to license their software on a volume basis through enterprise-type licensing arrangements for blocks of users, rather than granting separate licences for each individual purchase. The CJEU makes clear that block licences cannot be split as part of the software "sales" process. If separate licences are granted each time software is purchased, it is easier for the licensee to dispose of software it doesn't need by subsequently "selling" the unused licences on the second-hand market.