A recent European Court of Justice ruling has opened the way for the sale of "second-hand software" across Europe. Restrictions on the transferability of software originally licensed in a way that is regarded as a sale cannot now prevent a buyer acquiring the right to use the software. The decision has a number of implications for software licensors in particular, and creates opportunities for licensees.
A recent European Court of Justice (ECJ) ruling has opened the way for the sale of "second-hand software" across Europe (UsedSoft GmbH v Oracle International Corp, C-128/11).
The ECJ held that the principle of exhaustion of rights (under Article 4(2) of the Software Directive (2009/24/EC)) applies to software sales, including the distribution via download from the internet (see box "Software Directive"). In Europe, restrictions on the transferability of software originally licensed in a way that is regarded as a sale cannot now prevent a buyer from acquiring the right to use the software.
The decision has a number of implications for software licensors in particular, and creates opportunities for licensees.
Oracle markets software mainly by internet downloads. Oracle's licence agreements provide that, in return for their payment, customers receive a non-exclusive, non-transferable user right for an unlimited period to everything Oracle makes available to the customer.
In 2005, UsedSoft started reselling used Oracle licences. New Oracle users downloaded the software directly from Oracle's website after buying the used licences from UsedSoft, while existing Oracle users who wished to buy licences for additional users from UsedSoft downloaded the software to the main memory of the workstations of those additional users.
Oracle obtained an injunction from the Munich Regional Court. UsedSoft appealed, and a number of questions on the interpretation of the Software Directive were referred to the ECJ.
The ECJ found that:
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.
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 is able to rely on exhaustion of the distribution right under Article 4(2) and so be regarded as a lawful acquirer of a copy of the program.
Software licensors that may be concerned by the implications of the decision may wish to consider the following options and issues:
Subscription-based model. It may be worth changing from offering perpetual, fully paid-up licence terms to a subscription-based model, where the licence would be granted for a specific time period. The ECJ ruling makes clear that the concept of "sale" that it applied to the Oracle licensing arrangements was as a result of Oracle granting the licence for an unlimited period at a fee designed to obtain the economic value of the copy of the software.
However, a merely formal "time limitation" to an extensively long period, which is beyond any typically expected useful life of the software (for example, 50 or 99 years), is highly unlikely to be of any help in this context.
The ECJ's rationale does not apply to software which is rented, as the concept of exhaustion of rights only applies to software first "sold" within the EU.
Moving to the cloud. It may be worth migrating to cloud-based service provision arrangements. This sort of arrangement is unlikely to have the economic characteristics of a "transfer of ownership" (which the ECJ held took place when a copy of Oracle's computer programs was downloaded). This may even apply where a cloud services solution requires the download of some software to the desktop, so long as the commercial terms are those of rental or a genuine service, rather than fully paid-up permanent use.
Enterprise licensing. Another option for licensors is licensing their software on a volume basis through "enterprise" type licensing arrangements for blocks of users, rather than providing separate licences for each individual purchase of software. The ECJ ruling makes clear that block licences cannot be split as part of the software "sale" processes. If separate software licences are provided each time there is a software purchase, it will be easier for a licensee to dispose of software that it subsequently does not need through "selling" the unused licences on the second-hand market.
Software already licensed. The ECJ ruling applies to software that has already been licensed within the EU. Where perpetual licences have already been granted to users, there would seem to be little that licensors can now do to avoid the licensees having the benefit of the rights identified in the ECJ ruling.
Impact on original licence. On the face of it, there is nothing in the ECJ ruling that would contractually bind the lawful buyer of software on a second-hand basis to the terms of the original software licence. The ECJ ruling states that lawful buyers benefit from the right of reproduction necessary for the use of the program under Article 5(1). However, this is unlikely to mean that all the original terms are irrelevant. It may be necessary to analyse which aspects of the original licence relate to the scope of the permissions granted under copyright in the program, as opposed to purely contractual obligations imposed on the original licensee.
The ruling also makes clear that software maintenance agreements which are separable from the sale are not transferred since the law on exhaustion of rights does not apply to contracts for services. The patches and upgrades released by the licensor to the date of the transfer will be covered by the ruling, but not support, and so third party users will not be able to obtain, for example, telephone or help desk support.
Technical solution. Software licensors should consider making clear in their licence terms when a licensor will be considered to have made "his own copy unusable at the time of its resale". The ECJ ruling states that the seller of the software must not retain any ongoing ability to use the software that it has sold on the second-hand market. Licensors may want to consider whether it would be worthwhile instigating technical arrangements which would prevent the original buyer using the software following the sale.
For licensees, there is an obvious benefit in being able to sell software no longer needed to third parties, or for the right of an administrator to sell software when selling the assets of an insolvent company. There are other benefits which perhaps will only become evident in time: for example, the development of a competitive market in software licensing.
Since "used" software is identical to software supplied by the licensor (that is, there is no degradation in use), so-called "used" software may well compete on price with software supplied by the licensor.
One thing this decision does for jurisdictions like the UK, where this had not been discussed previously, is to lay to rest the idea that a licensor who has granted a perpetual (or near-perpetual) licence for a one-time fee can prevent the sale of second-hand software either in the form of a digital download or on disc, at least where the software was originally sold on the basis of standard terms of business. This has major implications for consumer software.
Graham Smith and Roger Bickerstaff are partners, and Henriette Picot is a Senior European Consultant, at Bird & Bird LLP.
Under Article 4(1)(c) of the Software Directive (2009/24/EC), the computer program rights holder has the exclusive right to do or authorise any form of distribution to the public (including rental) of the original or copies of the program.
Under Article 4(2), the first sale of a copy of a program by the rights holder (or with its 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).