Resale of downloaded software permitted in EU in certain circumstances
USEDSOFT v ORACLE [2011]
The European Court of Justice (ECJ) has recently ruled that perpetual software licences granted for a single up-front payment are treated as ‘sales’. This means licensees can now transfer the right to use the software to a third party despite any express contractual provisions to the contrary. There are several important ramifications for software owners whilst it possibly opens up opportunities for licensees.
Background:
It has been a long-established principle of the free market for goods and services in the European Union that once a product has been sold to a customer in the EU, the original owner’s rights to control further, onward distribution of that product are said to be ‘exhausted’. Historically that concept has been thought not to apply to software because it was not regarded as ‘goods’ which had been ‘sold’.
Under the Software Directive on the Legal Protection of Computer Programs (2009/24/EC), the owner of copyright in a computer program has the exclusive right to do or authorise any form of distribution to the public of the original or copies of the program (Article 4(1)(c)). However, under Article 4(2), the first sale of a copy of a program by the copyright holder in the EU (or with their consent) ‘exhausts’ the distribution right of that copy within the EU (except the right to control rental of the program).
Even so, software owners have tried to make sure that this exhaustion principle does not apply to computer programs. They have done this in two ways:
- by always ensuring that software is the subject of a licence and is therefore, arguably, not ‘sold’; and
- where the software was supplied on some physical medium (such as a CD), by including a provision that the ownership of that physical medium remains with the software owner and is only licensed to the user. Again, this was aimed at supporting an argument that there had been no ‘sale’, since a sale traditionally requires some outright transfer of ownership in a tangible item.
These days more and more software is downloaded via the internet and no tangible item on which the software is recorded is delivered by the supplier. Customers are subject to licence agreements which grant a non-exclusive licence in their favour. Often such a licence is without limit of time and it is typically subject to a prohibition or restriction upon assignment.
Facts:
- O, the well-known international IT company, markets a range of widely used business applications and, like many software owners, it sometimes grants a perpetual licence to use an intangible copy of a program via its website for a single fee. Its licence agreement prohibits assignment to third parties.
- U is a German company which resells software licences and in 2005 it started offering second hand personal and 'non-transferable' licences that O had originally issued. O obtained an injunction from the Munich Regional Court restraining U from doing this. U appealed to the German Federal Court which in turn referred a number of questions on the interpretation of the Software Directive to the ECJ, which gave its ruling in July 2012.
Decision:
- The ECJ ruled as follows:
- O’s restrictions on the transferability of software licences were unenforceable because it was held that the granting of a permanent licence for a fee could be a ‘first sale’ under the Software Directive. The right to distribute a copy of a computer program is ‘exhausted’ if the software owner who permitted the download of the copy via the internet granted a right to use the software for a one-off payment for an unlimited period of time;
- following the resale or assignment of the right to use the software, the initial (or any subsequent) acquirer can be regarded as a ‘lawful acquirer’ of that copy of the program by relying on the exhaustion of the distribution right. This is the case provided that all prior licensees delete or disable all copies of the software that they retain; and
- the method of delivery of the software does not matter. There is no difference between software delivered on a physical media such as a CD and software downloaded from the internet.
- ‘Sale’ was therefore given a very broad interpretation and extended to intangible property such as software. The name or badge given to the transaction and the fact that the copy was made available via the internet were both irrelevant.
- Importantly for software companies the ECJ went on to rule that the original licensee cannot ‘split’ its rights. If the initial licensee has a licence covering more users than it needs (such as under a block or enterprise licence arrangement), it cannot sell off only the rights that it no longer needs and keep the rest.
Points to Note:
- Long-term - this decision has important potential implications for licensors as it will open up the possibility of markets for second hand software being created. However, query how many business customers will be interested in trying to sell old software and how many businesses will want to buy it, particularly if support may be difficult to acquire. In any event we suspect the primary effects of this judgment will be overcome in the future through a combination of:
- software owners not granting indefinite, perpetual software licences but instead agreeing some finite period which, although for all intents and purposes amounts to the same thing, will not technically be unlimited;
- software owners preferring a subscription type model involving periodic payments;
- software owners refusing to agree to a transfer of associated maintenance and support agreements. The patches and upgrades released by the software owner to the date of the transfer will be covered by the ECJ ruling, but any subsequent acquirers may not get the benefit of ongoing support;
- licensees increasingly using hosted or cloud-based service solutions, which may bypass the ‘transfer of ownership’ issues if the transaction is in reality a service (since the law on exhaustion of rights does not apply to contracts for services); and/or
- licensees possibly being able to sell software they no longer require and administrators being better able to pass on software when selling the assets of an insolvent company.
- Short-term - in the shorter term, the judgment is of potentially greater significance. Licensors may find it more difficult to control second hand markets as users who have already been granted a perpetual licence will have the benefit of the rights identified in the ECJ ruling. This could be most important possibly in circumstances where a price differential operates in different vertical or even geographical market sectors. We came across a real life example recently where a software company was granting software licences to a public sector organisation at rates which were apparently significantly discounted against those it offered to customers in other market sectors. This would be more difficult to maintain if prohibitions on assignment are unenforceable.
- It remains to be seen how great the impact of this judgment may be. The potential adverse effect on software owners may be more theoretical than real particularly in a business to business context. The impact may, however, be felt more heavily in other areas where companies license their intellectual property in the expectation that contractual restrictions on subsequent transfers will be enforceable. There is, of course, always the possibility that O may appeal and the decision may be overturned. We will keep you posted of any future legal developments and any resulting recommended drafting changes.