A briefing note relating to the recent judgment in UsedSoft GmbH v Oracle International Corp and, in particular, the effect of the case on the exhaustion of rights in software.
As a result of the recent judgment in UsedSoft GmbH v Oracle International Corp (the “UsedSoft Case”), licensors will no longer be able to rely on the WIPO Copyright Treaty (the “WCT”) to retain their intellectual property rights in software being distributed via a perpetual, fully paid licence (a “Full Licence”).
The ECJ held in the UsedSoft Case that a Full Licence of software will, from now on, constitute a “sale” of the software and, as a result, the doctrine of exhaustion will apply. The effect of this is that the licensor of that software will no longer be able to prevent the resale of that software by the licensee following first purchase.
It is therefore important that software developers and vendors appreciate the effects of the UsedSoft Case and consider alternative licensing arrangements for their software. Some practical alternatives are discussed below.
Background – the WIPO Copyright Treaty
According to the principle of exhaustion, once a copy of a work is sold or distributed within the EU with the consent of the owner of the copyright, he or she will no longer be able to control or prevent further distribution of that copy.
The WCT, which was ratified by all European countries in 2001, expressly allows in Article 6(2) for exhaustion of the right of distribution of tangible physical copies. The WCT does not, however, allow for exhaustion of the Article 8 right of communication of digital files.
Article 8 of WCT gives copyright owners the right to exclusively communicate their works “by wire or wireless means”. In relation to the definition of “works”, Article 4 confirms that a computer program is a copyright work. Furthermore, Article 22 states that no member state can implement Article 8 in a manner which would vary the contents of WCT.
The decision in the UsedSoft Case goes against these principles, and appears to blur the previously distinct line between distribution (which applies to tangible objects) and communication (which applies to digital or digitised works) in relation to computer software. The effect of the decision is that all European countries will, from now on, technically be in breach of WCT, which does not permit the exhaustion of the right to communicate computer software.
The UsedSoft case
Oracle is a software house which develops and markets computer software. In the majority of cases, the software is distributed by download directly from the Oracle website. The rights of the software licensee include the right to store the software permanently on a server so that other users can download and access it.
UsedSoft trades in used software licences. It purchased licences from Oracle’s licensees in order to re-sell them as second hand. Customers downloaded the software directly from Oracle’s website after purchasing the used licences. Some customers who already had the software and wanted to purchase licences for additional users downloaded the software to the additional users’ workstations.
In its ruling the ECJ held that, even though the software was only transferred to the licensees over the internet in digital form, this amounted to distribution and therefore Oracle’s distribution right (as owner of the copyright) was exhausted in each copy which had been downloaded. Therefore, the copies in question could be freely sold on. This was in spite of the fact that the Oracle licence agreement provided for, in return of payment of a one-off fee, a non-exclusive, non-transferable right to use the software for an unlimited period.
Various arguments were put forward at the time from the European Commission and EU governments that the ECJ should consider the communication right as set out in WCT Article 8 as opposed to the Article 6 distribution right which relates to physical objects. The ECJ held, however, that the EU Software Directive 2009/24/EC (the “Directive”) (Article 4(2) of which confirms that first sale of software exhausts the distribution right) overrode the WCT, despite the fact that the Directive does not refer specifically to the right to communicate after first sale.
In summary, the two main implications of the ECJ’s decision are as follows:
• from now on, a software licence should be classed as a sale; and
• the downloading of software over the internet to the licensee “exhausts” the exclusive right to communicate that copy of the software.
As a result of the decision in the UsedSoft Case, European copyright law no longer complies with Article 8 of the WCT, which states that exhaustion of the copyright owner’s right to communicate does not occur either by sale or licence.
Consequences of the judgment
Unfortunately, it is likely that little can be done in relation to existing software licences, which, if licensed by way of a Full Licence, will be classed as “sales” following the ruling. As such, the licensor will have little recourse to prevent the resale of such licenses by the licensee.
Any company or organisation contemplating the future distribution of software should, however, consider the following alternatives to a Full Licence:
• Subscription based / limited term licences - in this case, the licence would be granted for a specific period of time only and therefore would be unlikely to be classed as a “sale”. This is supported by the fact that the ECJ made several references in the judgment to the concept of a “sale” as applying to the grant of a licence for an unlimited period of time.
The specific period of time stated would need to not stretch beyond the useful life of the software in order for it to prevent the licence being treated as a sale.
• Cloud computing - the software provider could consider offering software delivered via a cloud platform. In this case, the software is resident in the cloud and not with the end user. The end user would, for example, pay a certain amount as “rent” as opposed to a lump sum to purchase a licence to use the software. Ownership of the software would continue to rest with the copyright owner.
• Protective measures - the ECJ held in the UsedSoft Case that copyright holders may use technical protective measures to ensure that an acquirer who resells a licence makes his copy unusable prior to the resale. While not preventing the resale of software by the licensee, such measures would give the licensor some comfort that duplicate copies of the software were not being used under one licence.
Perhaps unsurprisingly, the judgment in the UsedSoft Case has received criticism, not only with regards to the decision itself and its apparent inconsistency with the WCT, but also due to the number of questions it left unanswered.
For example, as a result of the decision, a software licensor can no longer prevent onward sale of its licences but the judgment does not explain whether a licensor should positively facilitate the onward sale by licensees. Furthermore, the judgment does not define the usage terms which will apply to a second acquirer of software, and the ECJ held that any separate agreements (for example, maintenance and support) will not transfer and are not subject to the exhaustion doctrine.
The commercial implications of the UsedSoft Case are that the market for second hand, “used” licences is likely to expand dramatically with companies such as UsedSoft potentially offering support and installation services alongside the used licences.
Further advice or information
If you would like advice or further information regarding the judgment, how the judgment might affect your business or an informal discussion about any of the above please do not hesitate to us using the details below. Members of our Commercial or Intellectual Property team would be pleased to speak to you.
Disclaimer: Anything posted on this blog is for general information only and is not intended to provide legal advice on any general or specific matter. Please refer to our terms and conditions for further information. Please contact the author of the blog if you would like to discuss the issues raised.