What is the legal basis for buying and selling used software licences? The legal basis for the market in second-hand software is the exhaustion doctrine, or the first sale doctrine, as it is referred to in the United States. Article 4(2) of Directive 2009/24 on the legal protection of computer programs states that: The first sale in the Community of a copy of a program by the rightholder or with his consent shall exhaust the distribution right within the Community of that copy, with the exception of the right to control further rental of the program or a copy thereof. This means that once a software vendor has put a software product into circulation in the market, the software vendor cannot prevent the further resale of that particular copy of the software on the second-hand market. The software vendor s copyright has been exhausted by that first sale. The principle of the exhaustion doctrine can be explained by analogy to the market for books. For example, once the purchaser of a paperback novel has finished reading the book, he or she can sell it on ebay or to a second-hand book shop, or simply pass it on to a friend. The publisher can do nothing to prevent this. The publisher would be able to prevent the original owner of the book from renting, reprinting or posting the entire contents of the book on the internet, but the publisher cannot prevent the sale of the book on the second-hand market if the original owner decides that they no longer have any use for it. In an attempt to prevent the emergence of a second-hand market for computer programs, software vendors have always insisted that their software was not sold, but was merely licensed to the user of the software. The assumption was that the user was not an owner, but was merely a licensee of the software. This assumption that software licences are not like normal physical products has meant that the restrictions on transferring software licences contained in almost all software licensing agreements has rarely been questioned. Software vendors have been always maintained that their software was not a product in the traditional sense. With software, it is difficult to point to a tangible object, especially if the software is distributed by means of digital download. Furthermore, software is constantly being augmented, enhanced, patched, bug fixed etc. by the software vendor. This has reinforced the notion of licence grant as opposed to product ownership. However, the ruling of the Grand Chamber of the Court of Justice of the European Union in C- 128/11 UsedSoft GmbH v Oracle International Corp has blown away these assumptions and has opened a second-hand market for sales of used software. The Court of Justice of the European Union is the highest court in the European Union. It will usually sit in chambers of either three or five judges, but for especially complex or important cases it will sit as a Grand Chamber of 15 judges, as it did in the UsedSoft v Oracle case. There is no right of appeal on a decision made by the CJEU, so the market in second-hand software is assured and the lower courts within the European Economic Area are likely to draw from the principles set out so forcefully by the CJEU in the UsedSoft v Oracle ruling. Copyright NearlyNewSoftware 2013. All rights reserved. www.nearlynewsoftware.com 1
Explanation of the UsedSoft v Oracle case UsedSoft dealt in second-hand software. It offered second-hand Oracle licences for sale, stating that these were current; meaning that the maintenance agreement between the original licence holder and Oracle was still active. UsedSoft advised its customers that they could download the software directly from Oracle s website after having acquiring a secondhand licence from UsedSoft. Oracle obtained an injunction preventing UsedSoft from dealing in second-hand licences. UsedSoft appealed to the German Federal Court which referred a number of questions on the interpretation of Directive 2009/24/EC (the Software Directive ) to the CJEU. Questions posed by the German Federal Court to the CJEU: 1. Is a person who was not granted a user right by the software vendor, but who has instead acquired a user right to a computer program on the second-hand market, a lawful acquirer within the meaning of Article 5(1) of Directive 2009/24? Article 5(1) of Directive 2009/24 gives the lawful acquirer the right to make a copy of the computer program, without requiring authorisation from the software vendor, for loading, displaying, running, transmission and storage of the computer program. Can the buyer of a used licence make a copy of the computer program without the software vendor s authorisation? Answer from the CJEU: Yes, the buyer can make a copy without the software vendor s authorisation. 2. Is the right to distribute a copy of a computer program exhausted when the program is delivered by download from the software vendor s website, as opposed to when the program is delivered on a physical medium such as a CD-ROM or DVD? Can the software vendor prevent the resale of a licence where the software is provided by digital download? Answer from the CJEU: No, the software vendor cannot prevent the resale of such a licence. 3. Can a person who has acquired a used licence rely on the exhaustion of the right of the software vendor to control distribution, in order to reproduce a copy of the software program by digital download, where that copy is necessary for the use of the computer program by the lawful acquirer in accordance with its intended purpose? Can the buyer of a used licence rely on the provisions of Article 5(1) of Directive 2009/24, or does the exhaustion of the right of distribution contained in Article 4(2) of Directive 2009/24 apply only to situations where the software is incorporated in a CD- ROM, DVD or other physical medium? Answer from the CJEU: Yes, the buyer of a second-hand licence can rely on those rights to reproduce the software where such reproduction is necessary for the use of that software program. Copyright NearlyNewSoftware 2013. All rights reserved. www.nearlynewsoftware.com 2
How Oracle s arguments were rejected by the CJEU 1) Oracle s first argument was that there was no product sale, rather the Oracle software was licensed to the licensee by means of a licensing agreement, and that that licence was defined as being non-transferable in the licensing agreement. The Court rejected this argument, finding that where the license is perpetual (i.e. for an indefinite period of time), it equates to a "sale" for purposes of Directive 2009/24. In relation to the exhaustion principle, the ruling explains that: the effectiveness of that provision would be undermined, since suppliers would merely have to call the contract a licence rather than a sale in order to circumvent the rule of exhaustion and divest it of all scope. The Court dismissed Oracle s insistence that the provision of the software was by licence rather than by sale, and suggested that an appropriate definition of sale might be: an agreement by which a person, in return for payment, transfers to another person his rights of ownership in an item of tangible or intangible property belonging to him. The CJEU s stance on this was perhaps predictable in hindsight, but on 3 July 2012, it revolutionised the software market in the European Economic Area. 2) Oracle claimed that it was providing a service rather than a product when it provided the installation package for the program via digital download as opposed to on a CD- ROM or DVD. Oracle argued that for the software to be considered a product, it must have been provided on a physical medium such as a CD-ROM or DVD. The Court rejected this argument asserting that it made no difference whether the installation files for program were made available via a download link or on a material medium such as a CD-ROM or DVD. from an economic point of view, the sale of a computer program on CD- ROM or DVD and the sale of a program by downloading from the internet are similar. The on-line transmission method is the functional equivalent of the supply of a material medium. The CJEU made it clear that to allow the software vendor to restrict the resale of downloaded copies would effectively allow vendors to circumvent the exhaustion principle by providing all their software via digital download, contrary to the intention of Directive 2009/24. 3) Thirdly, Oracle argued that the right to resell computer programs should not be extended where those programs include updates and enhancements provided through a maintenance agreement. Oracle contended that a maintenance agreement is a service agreement and that Article 4(2) of Directive 2009/24 does not apply to services. Copyright NearlyNewSoftware 2013. All rights reserved. www.nearlynewsoftware.com 3
The CJEU responded forcefully to this saying that updates to the product provided on the basis of a maintenance agreement formed an integral part of the product itself: None the less, the conclusion of a maintenance agreement, such as those at issue in the main proceedings, on the occasion of the sale of an intangible copy of a computer program has the effect that the copy originally purchased is patched and updated. Even if the maintenance agreement is for a limited period, the functionalities corrected, altered or added on the basis of such an agreement form an integral part of the copy originally downloaded and can be used by the acquirer of the copy for an unlimited period, even in the event that the acquirer subsequently decides not to renew the maintenance agreement. So a perpetual software licence which may have been originally purchased decades ago, and has been continually updated under a maintenance contract during all that time, can be sold on the second-hand market as an integral product together with all the corrections, alterations and additions that have been made to the product over that period. Restrictions imposed by the CJEU in UsedSoft v Oracle: The CJEU placed the following restrictions on the sale of second-hand software licences: 1) the software licence must be perpetual (i.e. for an unlimited period); 2) a licence sold as a package (e.g. in blocks of 100 users) cannot be divided; and 3) the software vendor has the right to implement technical measures to ensure that the original copy of the seller is made unusable. Let us examine each of these restrictions in more detail and look at what this means for the sale of second-hand software. Perpetual licences only The CJEU did not speculate on whether term or subscription licences could also fall into the scope of this ruling. Subsequently, some legal commentators have speculated that the principles of UsedSoft v Oracle could be applied to long-term subscription licences. However, the licences in question in the UsedSoft v Oracle case were perpetual and so the Court was content to confine its deliberation on licences granted for an unlimited period. Packaged licences Similar to many software vendors, Oracle sells its licences in blocks of named users. For example, the Oracle WebLogic Suite software may be sold in blocks of 500 users. The CJEU was very clear that a block of licences which was marketed as a package could not be divided and sold as separate portions. The CJEU said: It should be pointed out, however, that if the licence acquired by the first acquirer relates to a greater number of users than he needs, as stated in paragraphs 22 and 24 above, the acquirer is not authorised by the effect of the exhaustion of the distribution right under Article 4(2) of Directive 2009/24 to divide the licence and resell only the user right for the Copyright NearlyNewSoftware 2013. All rights reserved. www.nearlynewsoftware.com 4
computer program concerned corresponding to a number of users determined by him. This same logic would also apply to a licence covering a certain size of processor. For example, a licensee of a software product on an IBM mainframe of 2000 MIPS may wish to run that software on a smaller mainframe environment of only 700 MIPS. This does not mean that he or she can simply sell the excess 1300 MIPS on the second-hand market. However, if the 2000 MIPS licence was purchased in two blocks; for example, if first a 1000 MIPS licence was purchased and then this was supplemented with a further licence for 1000 MIPS, then, in the example above where the licensee moves the software to a 700 MIPS mainframe, the 1000 MIPS licence which was purchased to augment the original licence could be sold on the second-hand market. Technical measures Software vendors have always been interested in knowing where their software is installed and how it is being used. The use of product keys is common. Keys are often tied to the particular hardware that the software is licensed for or they may expire at the end of a period of time so that the user is required to contact the software vendor to request a new key are common. Whilst the cracking of product keys is possible, and whilst illicit key generators can be found online, this remains an effective way for software vendors to keep tabs on where their software is deployed. The CJEU simply stated that it was: permissible for the distributor whether classic or digital to make use of technical protective measures such as product keys. It is likely that, over time, software vendors will improve the effectiveness and sophistication of product keys. However, the use of product keys by software vendors to maintain an accurate database of where their software is being used should not hamper those legitimately trading in second-hand software licences following the UsedSoft v Oracle ruling. Copyright NearlyNewSoftware 2013. All rights reserved. www.nearlynewsoftware.com 5
Conclusion The market in second-hand software (and, more broadly, digital media in general) is definitely here to stay. Software vendors have been moving away from the perpetual software licensing model for over a decade for many reasons. The decision in UsedSoft v Oracle will provide further impetus to the trend towards software as a service and cloud based solutions. However, few customers are ready for having everything run in the cloud, and so such trends are likely to take time. It is often said that, as more and more economic activity moves from the high street to the desktop and the data centre, the regulations governing our new digital world must catch up with technology. But the CJEU, in UsedSoft v Oracle has reiterated that the old rules are not necessarily outdated; on the contrary, there is nothing wrong with the rules. The rules simply need to be reapplied to new digital circumstances in ways that remain true to their original intent. UsedSoft v Oracle has given software customers back their basic economic right to own something they have paid for, and for that the CJEU is to be commended. What will those customers do with that rediscovered right? Let s wait and see. Copyright NearlyNewSoftware 2013. All rights reserved. www.nearlynewsoftware.com 6