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Legal resale of used software licences – a blow for copyright holders?

12 July 2012

The distribution of software around the world is generally underpinned by the ownership of copyright in the software.  Use of software requires a copy of the software to be made to the user's hard drive or central server drives or other forms  of storage and has, therefore, required the user to take a licence.  This in turn has enabled the licensor to impose contractual terms on the licensee's use, onward sale and copying of the software.

The ability of software businesses to prevent the second hand sale and associated copying of their software has been severely impaired by the recent judgment of the Court of Justice of the European Union (CJEU), Europe's highest court, in the case of UsedSoft v Oracle[1].  In this case, the CJEU ruled that the sale of second hand software licences must be permitted – in other words, the copyright holder cannot oppose the resale of software where that software has been licensed for an unlimited period.  While licensees will welcome this decision, the same cannot be said for software businesses, who may be left wondering how they can control the distribution of their software and in particular the number of unlicensed copies of their software in use.

Alleged infringement

The dispute arose from UsedSoft's business of acquiring used software licences from Oracle customers who no longer require their licence or are not using the full number of licences granted to them.  UsedSoft resells those second hand licences to new customers, who then visit Oracle's website to download the applicable software.

EU copyright law provides a certain degree of protection for authors of computer programs.  In particular, copyright holders are granted the exclusive right, among other things, to reproduce and distribute copies of their software.  However, this protection is subject to the principle of "exhaustion of rights" within the EU, whereby a copyright holder's exclusive distribution right is exhausted as soon as the first sale of a copy of the software takes place within the EU.  Once distribution rights are exhausted, a copyright holder has no right of recourse against third party resellers of the copies on the grounds of copyright infringement.  On this basis it is legal to sell on a music CD for example without infringing copyright.

When considering whether Oracle's distribution rights were exhausted, the CJEU stated that a "sale" involves the transfer of ownership in exchange for payment.  Therefore, for distribution rights to be exhausted, there must be a transfer of ownership in the copy of the software.  For its part, Oracle argued that its business arrangements did not result in any transfer of ownership in its software, as the software was made available free of charge on its website, with the customer required to enter into and pay for a licence agreement if it wanted to use the software. 

However this argument proved unsuccessful, as the court looked at the transaction as a whole, and concluded that where the customer downloads a copy of the software and obtains a licence to use it for an unlimited period, that amounted to a transfer of ownership and therefore a "sale".  It followed that this sale "exhausted" Oracle's EU copyright protection in relation to that copy.

A blow for software businesses?

This judgment by the CJEU is likely to alarm software businesses, who had until now believed that, by concluding licence agreements for software distributed by online download, rather than selling physical copies of their products, they could control the distribution of their protected products.  However, this judgment suggests that the grant of a licence for an unlimited period in return for payment constitutes a sale and transfer of ownership, in the same way as providing a tangible CD copy in return for payment.  

In a limited concession, the CJEU ruled that resellers are not permitted, on the basis of exhaustion of distribution rights, to divide the licence and sell parts on to a number of customers, for example where the original licence was for 20 users.  When reselling a copy of a software programme, be it in physical (e.g. CD) or intangible (e.g. downloadable file) format, the reseller must render his own copy unusable at the time of sale.  Should a usable copy be kept, this would be considered reproduction, rather than distribution, and consequently the reseller would infringe the copyright holder's exclusive rights of reproduction, which are not exhausted.

What are the implications for businesses distributing their software online?

As a result of this case, software businesses distributing software for use under licence for an unlimited period will need to consider the basis on which they license their software.  One option may be to consider including a fixed term in the licence as well as language that makes it clear that the licensor retains the right of ownership over the copy downloaded.

However, this may not be feasible for marketing/customer relations reasons.  If a fixed term is not a feasible option then businesses will need to consider enabling the onsale of software by their licensees.  Their failure to do so could put them in the firing line of competition authorities.  In doing so, however, they will need to give consideration to how they administer and keep records of assignments of software (if at all) and how to monitor who is using unlicensed software.  In these circumstances they will need to give some thought to the following issues:

1.    Contractual terms

One of the standard terms in software contracts is a provision prohibiting the assignment of the software licence.  As a result of this decision, provisions preventing the assignment of the licence are likely to be unenforceable.  Software businesses will, therefore, need to consider the assignment language in their contracts.  In particular they will need to consider provisions which allow assignment, whilst placing obligations on the assignor to allow the software business to satisfy itself that the assignor has not retained any copies of the software, such as some sort of notification of assignment and ongoing rights of audit.

In addition, licensing terms which seek to limit the licence territorially within the EEA may also be unenforceable under EU competition rules, opening up the possibility for open distribution of software across the EEA.

2.    Technical measures

The ECJ decision specifically acknowledges that technical measures can be utilised by software houses in controlling the onward distribution of copies of the software.  Again, however, software businesses will need to focus the technical measures they employ on rendering any copies retained by the original licensee unusable.  The consequence of this decision is that any technical measures which prevent the lawful onward copying of software in conjunction with the assignment of the licence are likely to be anti-competitive.

Will fixed term licences overcome this problem?

A central plank to the CJEU's reasoning was that downloading a copy of the software in conjunction with the licensing of the software for an unlimited period was equivalent to an outright sale of the software.  As a result fixed term licences would appear to be unaffected by this decision.  However, it is not beyond the bounds of possibility that the CJEU may revisit the issue of fixed term licences in the future.  For this reason software businesses who distribute software on a fixed term basis should also consider reviewing their terms and conditions. Where terms and conditions include provisions which prohibit onward sale of the software by licensees or assignment of the associated licence, businesses should consider having backup provisions which apply in the event the non-assignment provisions prove to be unenforceable, so that they are at least able to maintain visibility of their licensed user-base. 

What are the implications for Cloud services?

It is unlikely that this case will affect 'software as a service business' models.  In those business models, software is retained on the copyright proprietor's server and customers are granted use rights on a subscription basis.  In this situation, no copy of the software is retained by the subscriber and there can be no question, therefore, of any transfer of ownership in any copy of the software in this situation which would lead to an exhaustion of rights.

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These materials are written and provided for general information purposes only. They are not intended and should not be used as a substitute for taking legal advice. Specific legal advice should be taken before acting on any of the topics covered.