The Court of Justice of the European Union (the "CJ") handed down a landmark decision on 3 July 2012 in the case of software licence reseller UsedSoft v Oracle that opens up the market for second-hand software licences.
Oracle's business model is not to "sell" software but to provide an intangible copy of its software, which can be downloaded from its website, and to grant a perpetual licence for this intangible copy. The licence terms prohibit the customer from transferring the licence to third parties. This system prevents a market for second-hand software licences. Based on this licensing model, Oracle opposed the resale of "used" Oracle licences by UsedSoft, a reseller of second-hand software. UsedSoft argued that under EU copyright law a software supplier who sells a copy of a software program cannot oppose the further sale of such copy based on his copyright (the "exhaustion doctrine"). Oracle argued that the exhaustion doctrine does not apply to intangible copies which are licensed rather than sold. The CJ now concluded that when a copyright holder makes available to his customer a copy – tangible or intangible – and at the same time concludes a perpetual licence agreement in lieu of payment of a fee this equals a "sale" of the software and the copyright holder exhausts its exclusive distribution rights.
Oracle develops and distributes "client-server software". Customers download this software directly from Oracle's website. The relevant licence agreements of Oracle grant a non-transferrable right (thus limiting transfer to third parties) to permanently store the software on a server and allow up to 25 users to access it by downloading it to their workstation computers. On the basis of maintenance agreements, updates and corrections can also be downloaded from Oracle's website. UsedSoft, a German company trading in 'used' software licences, offers 'used' Oracle licences to its customers. Customers of UsedSoft subsequently download the software directly from Oracle's website after acquiring the 'used' licence rights. Oracle brought proceedings against UsedSoft before the German courts to end UsedSoft's practices. The Bundesgerichtshof referred three questions to the CJ in order for it to interpret Directive 2009/24 on the legal protection of computer programs (the "Directive").
The key question was whether the exhaustion doctrine of Article 4(2) of the Directive would apply in this case. That article provides that the first sale in the Community of a copy of a program by the right holder or with his consent exhausts the distribution right within the Community of that copy.
The CJ provides not only valuable and rather straightforward answers to this question, but also guidance on the scope of exhaustion, for example, whether this also pertains to upgrades and updates and to partial re-licensing.
With the other two questions the referring court was seeking clarification whether, and under what conditions, an acquirer of used licences for computer programs should be regarded as a "lawful acquirer". Such "lawful acquirer" enjoys the right of reproduction of the program concerned in order to enable it to use the program in accordance with the program's intended purpose. We will not address this topic below; the bottom line is that pursuant to the CJ acquirers of "exhausted" copies of software are to be considered lawful acquirers that may reproduce such computer programs.
- "Intangible", downloaded copies of software are eligible for exhaustion
To determine under what conditions the downloading from the internet of a copy of a computer program, authorised by the copyright holder, can give rise to exhaustion of the right of distribution of that copy in the European Union, the CJ first ascertained whether the licence agreement between Oracle and its customer may be regarded as a ‘first sale … of a copy of a program’ within the meaning of Article 4(2) of the Directive.
The CJ ruled that this is the case if a customer can download a copy of software and concludes a perpetual licence agreement for the use of such copy in return for payment. We interpret the decision to mean that this should be a one-off payment. The CJ stated that it makes no difference whether the customer obtains a material medium with the software (as used to be the case when software was provided on a CD-ROM or DVD) or can download the copy from a website of the software vendor. Making available copies – tangible or intangible – leads to exhaustion of the distribution rights of such copy.
- Updates and upgrades under maintenance agreement also exhausted
The CJ made helpful observations whether the exhaustion of the distribution right extends to updates and upgrades of the software that have been provided under a maintenance agreement. It ruled that the functionalities corrected, altered or added on the basis of such an agreement form an integral part of the copy originally downloaded, even if the maintenance agreement is for a limited period.
As such, the updates and upgrades can be used by the acquirer of the copy for an unlimited period, even if the acquirer subsequently decides not to renew the maintenance agreement. This means that the exhaustion of the distribution right extends to the copy of the computer program sold as corrected and updated by the copyright holder. Please note that the CJ made clear that exhaustion does not apply to contracts for services, such as the maintenance agreement itself.
- Limitations to exhaustion
In its decision, the CJ imposed two important limitations to the right of exhaustion. First, if the licence acquired by the first acquirer relates to a greater number of users than it actually needs, the acquirer is not authorised to divide the licence and resell only part of the user rights for the computer program concerned. This means that licensees cannot just simply resell a surplus of licences they have available under a licence agreement. Secondly, the first acquirer should make its own copy unusable at the time of the resale. Thus, such licensee should either erase such copy or make it unavailable for further use.
Conclusion and practical implications
Practically all software vendors "sell" software by granting perpetual licences for a one-off licence fee. Consequently, revenues are generated by concluding maintenance agreements under which licensees have to pay yearly fees, mostly calculated as a percentage of the value of the acquired licences. Software vendors generally impose contractual prohibitions on the transferability of the software licence. As follows from the CJ's decision, software vendors cannot rely on these prohibitions in the circumstances set out above.
The market for used software licences may develop rapidly as a consequence of this decision. All software that has been "sold" for a lump sum payment in combination with a perpetual licence is in principle eligible for resale. It will be interesting to see how software vendors will respond. This decision may lead to licence models that focus on temporary licence rights, or to the introduction of recurring licence fees in lieu of one-off payments. This decision could also lead to broader application of SaaS models, where no copy of software is provided to the licensee at all but only access is provided to the software. In any event this decision will force software vendors to rethink their sales and marketing strategies. The business model of selling software under "non-transferable" licences is undermined by this landmark decision.