Background

Software owners will generally provide that software licenses are non-transferable in the expectation that this will prevent licenensee from selling on the licensed software. A decision of the European Court of Justice (ECJ) has established that a software owner who grants a licensee a perpetual royalty free licence for use of its software cannot prevent the licensee from selling on the software. The restrictions on the transfer of software contained in the licence will not be enforceable.

This has far reaching implications for software owners whose revenue models may be impacted by the release of second had software.

The decision

The ruling by the ECJ (C-128/11, "UsedSoft v. Oracle") concerned Oracle’s attempts to stop UsedSoft selling on second hand software licence acquired from legitimate licensees who no longer had a requirement for the Oracle software. Oracle sought to rely on its licence terms which contained the following provision:

“With the payment for services you receive, exclusively for your internal business purposes and for an unlimited period, a non-exclusive, non-transferable user right, free of charge, in respect of everything which Oracle develops and makes available to you on the basis of this agreement.”

UsedSoft successfully argued that under EU copyright law a software supplier who sells a copy of a software programme cannot oppose the further sale of such copy based on his copyright in the software. The rights of the software owner were held to be “exhausted” as a result of the first sale. This is the same principle which allows paperback books and DVD’s to be sold second hand without the original purchaser having to get permission of the publishers.

Oracle argued that the exhaustion principle does not apply to electronic copies which are downloaded subject to terms of a licence. The ECJ concluded that the method of delivery is irrelevant and that a software owner who makes available to his customer an electronic copy and at the same time concludes a perpetual licence agreement exhausts its exclusive distribution rights. This was subject to the proviso that the original licensee who sells on its licensed software must not retain any workable copy.

Consequences

Software owners concerned that the ability of licensees to put second hand software on the market may undermine its revenue models going forward, should review their licence terms to see whether the way that their software is licensed could qualify as a “sale”. Software owners may wish to consider alternative licensing models to give them increased control over resale. For example:

  • Licensing the software for defined periods for a set fee with a renewal fee payable at the end of the licence term. Excessively long licence terms relative to the lifespan of the software may still be viewed as equivalent to a sale.
  • Provide access to software on a pay as you go, software as a service basis where the copy of the software is remotely hosted on the cloud and the client accesses the functionality of the software via the internet.
  • Selling blocks of licences for a lump sum will also make it more difficult for unused licences to be sold on as the UsedSoft ruling makes it clear that licensees cannot sell individual licences out of a block.
  • Support, maintenance and upgrade contracts are not subject to this ruling so they will not transfer except with the express agreement of the software owner. Frequent upgrades may quickly reduce the attractiveness of “old” versions of the software.