The legal right to resell used software licences: the second hand software market and its implications for software licensors
19 Jul 2012
Following a referral from the Bundesgerichtshof (German Federal Court of Justice), the Court of Justice of the European Union (CJEU) recently handed down a judgment concerning the legal protection of computer programs and resale of computer licences (UsedSoft GmbH v Oracle International Corp).
In short, an owner of software cannot oppose the resale of perpetual licences allowing the use of its computer programs which have been downloaded from the internet. Accordingly, it seems that it is legal to resell software licences, along with the programs to which they relate, despite their having already been used by the original purchaser.
Under the EU Directive which covers the legal protection of computer programs, the first sale in the EU of a copy of a computer program by or with the consent of the copyright holder exhausts the right of distribution of that copy of the program in the EU. Accordingly, a rightholder – such as a software developer - who has licensed a copy in a Member State of the EU loses the right to rely on its monopoly of exploitation and cannot oppose the resale of that copy within the EU.
Oracle, a large international software company, develops and distributes computer programs which function as ‘client server software’. They are usually downloaded by a customer from the Oracle website. An accompanying licence agreement grants a perpetual, non-transferable right to permanently store the software on a server, and for up to 25 users to download and use it on their local computers for business purposes.
UsedSoft is a German undertaking which markets licences already acquired from customers of Oracle. Oracle brought proceedings against UsedSoft in the German courts, seeking an order for it to cease such activities. Oracle claimed that the principle of exhaustion laid down by the Directive did not apply to user licences for computer programs which had been downloaded from the internet.
The CJEU found that the principle of exhaustion of the distribution right applies when the copyright holder distributes copies of its software whether these are on a physical medium or have been downloaded from its website.
If a copyright holder makes available to its customer a copy – whether physical or otherwise– and at the same time, in return for a fee, grants a licence allowing the customer to use that copy for an unlimited period, that rightholder has sold the copy to the customer and thus exhausted its exclusive right of distribution.
Such a transaction involves a transfer of the right of ownership of the copy. Therefore, even if the licence agreement appears to prohibit a further transfer, the rightholder cannot in fact oppose the resale of that copy.
The Court observed in particular that limiting the application of the principle of exhaustion of the distribution right solely to copies of computer programs that are sold on a material medium would allow the copyright holder to demand further remuneration on the occasion of each new sale of copies downloaded from the internet, even though the first such sale had already secured appropriate remuneration for the rightholder Such a restriction on the resale of copies of software downloaded from the internet would go beyond what is necessary to safeguard the specific subject-matter of the intellectual property concerned.
The court also held that the exhaustion of the distribution right extends to the copy of a program sold and then updated by the original developer/owner. Regardless of the duration of any applicable maintenance agreement, the aspects of any piece of software which are amended or corrected form an integral part of the original program and can be used by the customer – including a second or indeed subsequent purchaser - for an unlimited period.
Qualifications and limitations
It is important to understand that this judgment does not permit copying and reselling in a way which increases the number of copies of the program (and its accompanying licence) which are in circulation. The original acquirer of a copy of a program (whether tangible or intangible) where the distribution right is exhausted must render its own copy of the software “unusable at the time of its resale”. If he continues to use his own original copy(ies), this will infringe the copyright holder’s exclusive right of reproduction of its software. By contrast to the exclusive right of distribution, the exclusive right of reproduction is not exhausted by the first sale. An analogy may be that it is legal to buy a music CD, and re-sell it second hand. It is not, though, legal to make a copy, sell it, and also keep and use the original.
There is a further restriction, relating to licences which permit multi-person use by the original purchaser: if the licence acquired by the first purchaser permits a greater number of users than it in fact uses, that purchaser is not authorised by the effect of the exhaustion of the distribution right to divide the licence and resell only part of it.
The CJEU found that the Directive does authorise reproduction if it is necessary for the use of the computer program by the lawful acquirer, and such reproduction may not be prohibited by contract. Therefore the new acquirer of the user licence, such as a customer of UsedSoft, may, as a lawful acquirer of the computer program concerned, download a corrected and updated copy of that program.
For many software licensors within Europe, this case is likely to fundamentally impact on their distribution models. The CJEU judgment, which seems to permit (and perhaps even promote) a secondary market for downloaded software, will clearly affect many current software distribution arrangements.
There may, however, be alternative methods of exploiting and commercialising software for businesses which should not attract the characteristics of a sale or ownership transfer. Licences could be granted for a fixed duration, with further fixed-term renewals on additional payment – note that this case only considered instances where licensors grant a licence for an unlimited period. Alternatively, developers could move their software provision to the cloud, with subscription-based access. Since block licences cannot be split on resale, volume licensing may have increasing attractions for software developers. It will not be surprising if we soon see software developers and owners migrating to these models.
Now it appears that it is legal to resell software licences, will we see eBaysoft, Gumtreesoft or Alibabasoft sprouting on the web, reselling used software to the highest bidder? Clearly UsedSoft thinks so!