03/08/2012

By Rachel Cook, Commerce and Technology associate, Fox Williams LLP

A recent Judgment from the European Court has held that copyright law cannot be used to prevent the re-sale of legitimately acquired downloaded software.

Computer programs are protected by copyright under European law as literary works and the copyright owner has the exclusive right to control the distribution of that work. However, this does not always apply for example when such rights have been “exhausted”.

The concept of exhaustion of rights is a European legal term that also applies in other areas of intellectual property, for example in relation to the use of trade marks, and provides that once the first sale has been made in the European Union of a copy of the computer program with the copyright holder’s consent then it is not able to stop the resale of that work within the European Union. It does not allow the person acquiring the work to produce multiple copies and distribute these to third parties, however, if the original program purchased is sold on, for example a PS3 game, then there is no infringement of copyright.

The relevant law is Article 4(2) Directive 2009/24 on the Legal Protection of Computer Programmes

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.

Background

Oracle develops computer software and the majority of the software in issue was downloaded by its customers from its website. In addition, to the downloading of the software, users would separately download a licence agreement from Oracle which permitted them to access and use the program. The Oracle licence agreement (as is fairly standard for computer software) granted users, for a fee, a non-exclusive, non-transferable, perpetual right to use the software exclusively for their internal business purposes. Customers also acquired the right to have the software maintained, through patches and other updates. Oracle sold such licences in batches of 50.

Usedsoft acquired these licences from customers of Oracle, particularly where, for instance, they only required 25 so had 25 that they did not need. Oracle brought proceedings against Usedsoft in Germany for infringement, requiring them to cease and desist this business

First sale

Oracle initially argued that there was no “first sale” to which the exhaustion of the distribution right could attach as it did not “sell” copies of the computer programs at issue and only made them available free of charge on its website. Customers could download the program but they could only use it once they entered into a licence agreement with Oracle.

The definition of sale applied by the European Court was an agreement by which a person in return for payment was transferred the ownership in tangible or intangible property.

Adopting a broad approach, the Court quickly dismissed this submission by Oracle and said that the downloading of the copy and the licence agreement were an indivisible whole, which allowed the party on entering into the agreement to use the program for an unlimited period. Therefore, when examining this overall, it held that rights of ownership in the program had been transferred.

Internet download

Originally, European legislation on copyright in this area provided that a copyright owner could restrict the onward sale of downloads and transfers, Oracle argued that the exhaustion of distribution rights could not apply to copies downloaded through the internet.

However, the latest European legislation on the issue specifically related only to computer software, and stated that exhaustion of rights equally applied to downloads from the internet as it would to physical discs. This was on the basis that downloading a program from the internet and purchasing a CD Rom or DVD are not particularly different. It also noted that if these methods of providing software were treated differently then it would create a disparity where a copyright holder could control the distribution of its products more strictly online, demanding further payment for reselling products that it had already generated an economic benefit from, while not having the same rights in the physical article.

Following general principles on the application of European law, the Court viewed such a restriction as being beyond what was necessary to safeguard the copyright holder’s position.

The Court also considered that even if the software purchased was subsequently updated and/or patched, it would still be governed by the licence originally entered into. The party that had initially acquired it would still be able to continue using that copy, therefore, the Court saw no reason this should change the position on the transfer of ownership.

Change of status

While the Court did confirm that a party acquiring a program under these circumstances would be considered a lawful acquirer and, therefore, able to undertake all acts necessary to use the program for its intended purpose, the position of the seller is less clear.

The Court indicated that unless a party selling the program on made its copy unusable at the time of sale then if it continued to hold a copy and/or use that copy, it would be an infringer. However, while the Court acknowledged that it would be “difficult” for Oracle in practice to ascertain whether copies down the chain of ownership had been made unusable, it was not willing to give any concession to copyright holders on this matter.

The Court’s only concession to copyright holder’s was that if a licence was sold as a bulk licence, as in the case of Oracle, then this licence could not be split into separate parts with the unneeded licences being sold on.

Comment

What can we learn from the Court’s Judgment?

(a) even with unambiguous provisions stating that a licence cannot be transferred to a third party, once a copyright holder has transferred ownership in a program, these will not be effective;

(b) there may be scope to argue that a licence limited in time should be treated differently but commercially it may not be possible for a copyright holder to take this approach;

(c) it is difficult for copyright holder to avoid “selling” its product. There may be situations such as where the software is provided as part of a general contract to a company where employees of the company use the contractor’s software, it could be argued that no ownership is ever transferred but this will be very fact specific;

(d) it is permissible for copyright owners to use technical protective measures such as product keys to protect from unauthorised copying. Therefore, the onus will be on the software owner in the development process to ensure that a copy of software downloaded is only able to be used by one user at any time but this technical fix may not be straightforward.

Overall, particularly given the trend from tangible purchases to online purchases, the European Court’s decision is sensible and pragmatic, however, it is likely to be a headache for a copyright owner.

Rachel Cook can be contacted on rcook@foxwilliams.com.