I have just (goes to show how much time I really have to scan the law journals for relevant stuff) stumbled upon a very interesting decision by the District Court of Cologne published in the February edition of Germany’s famed “C&R” (i.e. “Computer & Recht” = “Computer & Law”) regarding the terminability of perpetual software licenses under German law for material breaches of contract. As per the District Court of Cologne the answer is: Sure you can! Which is a bit surprising, really.

In short, the case was this: The plaintiff had, against a one-off payment, been granted a perpetual software license, restricted to certain CPUs and to a number of Named Users. Later, the plaintiff took matters into his own hands, installing the software on an additional system to provide training for third parties, plus creating some 100 “virtual” users circumventing the named user restrictions, plus, possibly, some other things. The defendant (the German subsidiary of a U.S: software manufacturer), as a consequence, terminated the license agreement (as well as the maintenance agreement) on the basis of a clause in the contract that provided for such right in cases of unremedied material breaches of contract (you know the type of clause). The plaintiff (i.e. the customer) brought the case to court asking the court to, inter alia, declare that both agreements were, in fact, still in full force and effect because the termination notices were null and void. The court, however, came to the conclusion that the agreements had indeed been effectively terminated.

Now, why should a software license agreement not be terminable if the licensee uses the software in serious breach of the license restrictions, whether perpetual license or not? Should be a clear cut case, shouldn’t it?

Well, German law is a bit difficult in this regard, because the notion “license agreement”, though widely used in practice, does not really fit into the system of our law of obligations. The problem is this: German law knows only a limited amount of “types of obligations” that each work with a certain set of particular characteristics (sections 433 et seqq. of the German Civil Code if your masochistically inclined). “Rental contracts”, for instance, are, in abstract terms, contracts where one party gives (and owes as an obligation) you the right to take possession of a certain thing and use it according to its purpose for the term of the contract, and the other party pays rent for that privilege. “Sales contracts” on the other hand are contracts where one party gives the other party possession of the certain thing for goodand transfers ownership in that thing, and other party pays a certain amount of money for possession and ownership.

It is not necessary to insist that an agreement fits in only one particular category; there are “mixed” contracts. But in the end, the courts will at the very least connect the individual contractual obligation in question (if not the whole agreement) to one set of rules, i.e. one particular type of obligation.

That superstructure is so important for whether or not you can terminate a perpetual license for material breach of contract because of theh German “Law of Terms and Conditions”, in particular section 307 (2) of the Civil Code which reads:

 “An unreasonable disadvantage is, in case of doubt, to be assumed to exist if a provision

 1. is not compatible with essential principles of the statutory provision from which it deviates, or

 2. limits essential rights or duties inherent in the nature of the contract to such an extent that attainment of the purpose of the contract is jeopardized.”

“Unreasonable disadvantage” means: The contractual clause is invalid and will not apply to the agreement if the agreement is a standard agreement (as they are commonly used by software manufacturers and distributors). The invalid clause will be substituted by what the statutory law says about the question that the clause had been trying to answer, the statutory law being the applicable subset of provisions of the specific “type of obligation” that fits best.

All this leads to the following question: What “type of obligation” is a contract by which you grant your customer a perpetual license to use a piece of software for a one-off payment? There has been, and still is, a lot of discussing going on amongst learned professors and lawyers. As of now, the best bet, though, is to (rightly or wrongly) go with the still standing, if a bit outdated, jurisdiction of the Supreme Court and assume that such agreements are “sales contracts”. Makes one cringe, given that no software company will ever voluntarily transfer ownership in the software to their customers, but the idea is this: You pay a particular sum of money once and receive the right to use the software in your company for as long as you want – which, of the “types of obligations”, most closely resembles a sale. The usual provision “This software is licensed, not sold” therefore does not have the desired effect under German law.

A “sales contract”, in turn, cannot be terminated. Says I. There are colleagues (such as Till Jaeger who knows much more about all things license than I and whom I hereby challenge to submit his dissenting opinion) who argue that sales contracts can be “contracts for the performance of a continuing obligation” in software licensing scenarios, thus making them terminable. I don’t think so, though. If you consider such agreements terminable you have to come up with a solution for why the customer paid money for a particular use of the software which, by virtue of the termination, is now being taken away from him. You might say “Deservedly so! That’s what you get for your copyright infringement!” The problem is, though, that neither the law of obligations nor German copyright law knows such punishment. In simple terms, the idea is that, aside from the fact that it’s a criminal offense, one must stop the infringement and pay damages for it. And that’s it.

A provision that allows you to terminate a perpetual license is therefore “not compatible with essential principles of the statutory provision from which it deviates” – making it invalid and inapplicable.

The Cologne court, strangely, did not say a word about all this. First, I figured that the court had to apply U.S. state law. The court, however, makes reference to certain provisions of the German Civil Code, thus clearly applying German law. The only good reason left for ignoring the issue would therefore have been that the termination clause was actually not part of a standard agreement of the software vendor but a clause that the parties had negotiated individually. I don’t think that was the case, though, as the clause clearly reads like your typical standard license termination clause. Apparently, the plaintiff had not introduced that particular defense, and the court, who should have dealt with the issue ex officio, simply missed it.

I don’t know if any of the parties filed an appeal against the judgment (they could both have). Either way, it will be interesting to see what will be made of the decision.

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