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Advocate General considers exhaustion of rights in downloaded software and resale of licences
Practical Law UK Legal Update 5-519-1346 (Approx. 6 pages)
Advocate General considers exhaustion of rights in downloaded software and resale of licences
by PLC IPIT & Communications
| Published on 25 Apr 2012 • European Union |
Advocate General Bot has considered the extent to which the distribution right in downloaded software might be exhausted and opined that purchasers of software licences cannot rely on the exhaustion principle to create new software copies. (Bierbach, administrator of UsedSoft GmbH v Oracle International Corp, Case C-128/11, 24 April 2012.) (Free access.)
Speedread
Advocate General (AG) Bot has given his opinion in a case which deals with the extent to which the distribution right in downloaded software may be exhausted and the legitimacy of software licence reselling where the software has been downloaded. AG Bot opined that under the Software Directive (2009/24/EC), the right to distribute a copy of a computer program, which had been downloaded from the internet with the permission of the rights-holder, was exhausted if the rights-holder had also granted the acquirer the right to use the copy for consideration for an unlimited period of time. However, he further opined that where a licensee of a right to use a copy of a computer program sold the licence, the purchaser of the licence could not rely on the principle of exhaustion to make a new copy of the program. The opinion follows a reference from the German Federal Court of Justice and, if followed by the ECJ, would be likely to severely restrict the market in used software licences, at least where they concerned software for download (a large part of the market). For more information on the distribution of electronic copies of copyright works and the application of the doctrine of exhaustion of rights to distribution, see Practice Notes, Overview of Copyright: Issuing copies to the public and Management and exploitation of copyright: EU law on the free movement of goods and doctrine of exhaustion of rights. (Bierbach, administrator of UsedSoft GmbH v Oracle International Corp, Case C-128/11, 24 April 2012.)
NOTE: On 3 July 2012, the ECJ ruled that the right under the Software Directive (2009/24/EC) to distribute a copy of a computer program which had been downloaded from the internet with the permission of the rights-holder, was exhausted if the rights-holder had also granted the acquirer the right to use the copy for consideration for an unlimited period of time. The court further ruled (in contrast to the Advocate General) that, since the copyright-holder could not object to the resale of a copy of a computer program for which its distribution right was exhausted, a second acquirer of that copy and any subsequent acquirer were lawful acquirers and hence could resell it. See Legal update, ECJ rules on exhaustion of rights in downloaded software and resale of licences.
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Background
Software Directive
Under Article 4(1) of the Software Directive (2009/24/EC) (codifying Directive 91/250/EEC on the legal protection of computer programs), the computer program rights-holder has the exclusive right to do or authorise:
- The permanent or temporary reproduction of the program (Article 4(1)(a)).
- Translation or other alteration of the program (Article 4(1)(b)).
- Any form of distribution to the public (including rental) of the original or copies of the program (Article 4(1)(c)).
Under Article 4(2), the first sale of a copy of a program by the rights-holder (or with their consent) in the EU exhausts the distribution right of that copy within the EU, with the exception of the right to control rental of the program (or a copy of it).
Under Article 5(1), unless the contract specifies otherwise, the acts under Article 4(1)(a) and (b) do not require authorisation by the rights-holder where they are necessary for the use of the computer program by the lawful acquirer in accordance with its intended purpose.
Information Society Directive
Article 3(1) of Council Directive 2001/29/EC on the harmonisation of certain aspects of copyright and related rights in the information society (Information Society Directive) provides that authors have the exclusive right to authorise or prohibit the communication to the public of their works by wire or wireless means including making available their works to the public in such a way that members of the public may access them from a place and at a time individually chosen by them.
Article 3(3) provides that the communication right under Article 3(1) is not exhausted by any such act of communication.
International Treaties
Article 6(1) (under the title 'Right of Distribution') of the WIPO Copyright Treaty provides that authors of literary and artistic works shall enjoy the exclusive right of authorising the making available to the public of the original and copies of their works through sale or other transfer of ownership.
Facts
Oracle International Corp (Oracle) markets software by download from the internet. Customers downloading the software are subject to what Oracle describes as licence agreements which provide that, in return for their payment, customers receive a non-exclusive, non-transferable user right for an unlimited period in respect of everything Oracle makes available to the customer.
UsedSoft resells software licences, including Oracle's. Once a customer has bought the licence from UsedSoft, they download the software directly from Oracle's website.
Oracle obtained an injunction from the Landgericht München (Munich Regional Court) restraining UsedSoft from carrying out its activities. UsedSoft appealed to the Bundesgerichthof (German Federal Court) which referred a number of questions on the interpretation of the Software Directive to the ECJ.
The referred questions
AG Bot summarised the referred questions as follows:
- Whether the right to distribute a copy of a computer program was exhausted within Article 4(2) of the Software Directive where the acquirer had made a copy with the rights-holder's consent by downloading the program from the internet onto a data-carrier.
- Whether an acquirer of the user licence, as a lawful acquirer within Article 5(1), may rely on the exhaustion rule under Article 4(2) to make a new copy of the program if the first acquirer has erased their copy or no longer uses it.
Decision
AG Bot proposed that the ECJ answer the questions as follows:
- Under Article 4(2) of the Software Directive, the right to distribute a copy of a computer program is exhausted if the rights-holder permitting the download of the copy from the internet to a data-carrier also granted a right to use that copy for consideration for an unlimited period of time. This followed from the preliminary conclusion that a sale under Article 4(2) comprised any act by any means making a copy of a computer program available in the EU in any form for use for an unlimited period and in return for a lump-sum payment.
- Under Articles 4(2) and 5(1) of the Software Directive, following the resale of the right to use a copy of a computer program, the second acquirer cannot rely on exhaustion of the right to distribute the copy to reproduce the program by creating a new copy, even if the first acquirer has erased their copy or no longer uses it.
The reasons for AG Bot's proposal are set out below.
Did the licence terms exhaust the distribution right?
AG Bot approached the first question by dividing it into two:
- As a preliminary matter, it was necessary to decide whether Oracle's licensing arrangements amounted to a sale of a copy of a program under Article 4(2) so that Article 4(2) was engaged.
- If the licensing arrangements did amount to a sale engaging Article 4(2), it was still necessary to decide whether downloading Oracle's software amounted to a distribution for the purpose of Article 4(2) so that the exhaustion rule could apply.
Was there a sale of a program?
AG Bot considered that the application of the exhaustion rule in Article 4(2) turned on whether the relevant transaction was a sale or rental. Further, the expression "sale of a copy" in Article 4(2) was an autonomous concept of EU law which had to be interpreted uniformly throughout the EU, since the Software Directive did not provide that its meaning was a matter of national law.
AG Bot opined that the right of use of a computer program bore the hallmarks of a rental where it had been conferred temporarily in return for a periodic fee and the supplier had not relinquished ownership of the copy of the program. In contrast, the right of use bore the hallmarks of a sale where the customer secured permanent acquisition of the right to copy the program, which the supplier relinquished in return for a lump-sum payment. He further opined that an excessively restrictive interpretation of the term 'sale' would undermine the efficacy of Article 4(2), since the marketing of computer software mostly took the form of user licences and, if the restrictive interpretation were correct, suppliers would only need to call their customer agreements "licences" rather than sales to be able to circumvent the exhaustion rule.
The AG concluded that Oracle's assignment of a right of use over its software to customers comprised a sale within the meaning of Article 4(2).
Did downloading Oracle's software amount to a distribution?
AG Bot rejected the argument that the distribution by download of a computer program from the internet was not a distribution for the purposes of Article 4(2) and instead a communication to the public for the purposes of Article 3 of the Information Society Directive (rights in respect of which could not be exhausted). His reasons included the following:
- The Information Society Directive did not affect existing EU provisions on the legal protection of computer programs (see Article 1(2)(a), Information Society Directive). Therefore, since Article 4(1)(c) of the Software Directive did not refer to any right of communication and defined the distribution right in the broadest terms, it was difficult to conclude that Article 3(1) of the Information Society Directive applied to computer programs.
- In the absence of any definition of the communication and distribution rights in the Information Society Directive, it was necessary to interpret Article 3(1) of the Information Society Directive in accordance with the WIPO Copyright Treaty (see Peek & Cloppenburg KG v Cassina SpA, Case C-456/06; Legal Update, ECJ rules on distribution right in Copyright Directive). Article 6(1) of the Treaty was unequivocal: the transfer of ownership changed an act of communication into one of distribution.
AG Bot considered that interpreting Article 4(2) of the Software Directive so that the exhaustion rule did not apply to internet downloads, when downloading was used extensively to distribute computer programs, would significantly limit the scope of the rule and restrict freedom of movement. While Article 36 of the Treaty on the Functioning of the European Union provided that restriction on freedom of movement might be justified on the grounds of the protection of industrial and commercial property, it was well established that such a justification could be relied on only to the extent necessary to protect the specific subject matter of the right in the property. Allowing a rights-holder to demand further payment on the resale of a copy of a computer program on the pretext that the copy was fixed on a data-carrier by the customer after being downloaded from the internet, instead of being incorporated by the rights-holder in the data-carrier which was put on sale, would not have the effect of protecting the specific subject matter of the copyright. Instead it would have the effect of extending the monopoly on the exploitation of the right (see Football Association Premier League Ltd and others v QC Leisure and others; Karen Murphy v Media Protection Services Ltd, Joined cases C-403/08 and C-429/08; Legal Update, ECJ rules foreign decoder cards can be used to view Premier League games in UK: TFEU rules on competition).
The distribution by download of a computer program from the internet was therefore a distribution for the purposes of Article 4(2).
Can licence resellers rely on exhaustion rules?
It was common ground that Oracle's user licence permitted a user to download and reproduce a program on a computer. AG Bot opined therefore that assigning the user licence to another to allow them to download a program for the first time concerned the exercise of the reproduction right (under Article 4(1)(a), Software Directive) which, on the basis of the clear wording of Article 4(2), could not be exhausted.
AG Bot further opined that Article 5(1) of the Software Directive did not assist UsedSoft, since its purpose was to enable a person who had already lawfully acquired a copy of a program to reproduce the copy so that it could be used for its intended purpose; it did not authorise a person who had not already lawfully acquired a copy of the program to reproduce it simply in order to use it. The AG acknowledged that restricting the application of the exhaustion rule to copies which had been incorporated on a data-carrier following download would severely limit its scope. However, while an extension of the rule to the reproduction right might preserve the efficacy of the rule and give precedence to the free movement of goods and services, it would go beyond the scope of the rule envisaged by the legislature.
Comment
As the AG acknowledged, if his recommendations are followed by the ECJ, it would be likely to severely restrict the market in used software licences, at least where they concern software for download (a large part of the market) rather than on fixed media, such as CD-ROMs. Conversely, software developers would find that the opportunities for restricting the onward sale of software downloaded by their customers would be significantly reduced. The ECJ's decision may also help to shed further light on the question of whether software constitutes goods (see Practice Note, Main issues in software licensing and maintenance contracts: Does software constitute "goods"?).