ECJ Advocate General on Used Software and Used Licenses

Is it legal to sell so-called “used software” when this software has been obtained via download? And what about “used licenses”? These questions have been a hot topic for quite some time now for IT businesses and lawyers – and finally they have been brought to the attention of the European Court of Justice. This week, the Advocate General of the European Court of Justice (ECJ), Mr. Yves Bot, published an opinion dealing with some of the intricate problems of the exhaustion (or “first sale”) doctrine.

Mr. Bot answered questions posed by the German Federal Supreme Court (Bundesgerichtshof, BGH) that were relevant in a lawsuit between software giant Oracle and Usedsoft, a company trading “used” software licenses for business software. Typically, Orcale’s initial licensees had downloaded client-server software from Oracle’s website and had received a certain number of volume licenses to use the software within their businesses. At some point, when the initial licensees realized that they had acquired more licenses than actually needed, they wished to pass on the unnecessary licenses. This is where Usedsoft came into play, acquiring the redundant licenses and selling them to their own customers (who might have owned copies of the software already – situation A – or who were asked to download the software anew from Oracle’s servers – situation B).

This business model only works if Oracle loses its right to control either the sale and distribution of the software once downloaded, or of the licenses to use the software once granted. And this will only be the case if Usedsoft can rely on the EU Computer Program Directive, which provides in article 4(2) 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.”

So what did Mr. Bot say? First, according to him, “the assignment of a right of use over a copy of a computer program does indeed constitute a sale” within the meaning of the clause above, if the recipient is granted the right to use the program for an unlimited period of time. Secondly, the distribution of a computer program by download from the internet does constitute “distribution”. Thus, the distribution right is exhausted, as far as the specific copy of the software is concerned. Therefore, anyone who buys software online may sell the precise copy she created this way without the rightholder being able to interfere. This is far from being the only obvious result:  many scholars and German courts have in fact argued in the alternative, that putting a computer program online for download is not distribution but rather a “communication to the public” (as provided by another EU directive).

According to the Advocate General, the situation is, however, different when the licensee does not hand over her own program copy but tries to exclusively pass on the rights to use the software. Such a case, Mr. Bot says, touches upon the reproduction right rather than the distribution right. Consequently, the exhaustion of the distribution right does not come into play. This means that the Usedsoft model of selling licenses without handing out actual copies of the software will no longer be feasible if the Advocate General’s opinion prevails. This is probably even true in cases where the license recipient already owns a copy of the software, but wishes to acquire additional licenses for her employees (situation B). However, it is not entirely clear whether or not the Advocate General expressly addressed this latter situation.

I agree with most parts of the Advocate General’s opinion. This is not the place to delve deeper into the legal technicalities, but most of Mr. Bot’s arguments convince me. In particular, I believe that treating online and offline sales equally makes good sense, and importantly, corresponds to the current economic reality, where online sales are the common way for selling software (Oracle claimed, for example, that in 85% of cases they sell their software by download from the internet.). The current situation –– where the sale of hard copies of computer programs is clearly subject to exhaustion whereas the prevailing way of distributing software online might not –– to me appears to be absurd.

However, should the ECJ follow Mr. Bot’s path, one practical result of this opinion is that the “used software/licenses” industry will lose a major part of its business. The mere sale of “licenses”, currently a legal grey area, would no longer be possible. This outcome might look odd from a policy perspective. However, I do not see how this could be avoided under the current law in force.

One of Mr. Bot’s arguments, however, is highly surprising, and contains a proposition that I could not disagree more with.  In paragraph 98 of his opinion he states:  “Furthermore, that provision, which is conditional on the absence of specific contractual provisions, can … apply only to an acquirer who has a contractual relationship with the rightholder.” “That provision” he refers to is in fact section 5(1) of the Computer Program Directive, which safeguards lawful software owners’ right to use software for its intended purpose. This clause makes it possible to run software within the boundaries of its actual purpose, once the copy is lawfully acquired, even if the rightholder opposes it. According to Mr. Bot’s argument, however, this would only apply when the user has some sort of contract with the rightholder of the software. Second-hand acquirers would therefore not benefit from section 5(1)’s essential exception. The consequence would be that they could effectively not use the software except if they enter into a license agreement with the rightholder. Such an approach would render the principle of exhaustion meaningless. Hopefully, this aspect of the Advocate General’s argument will not be adopted by the ECJ, or any other court.

 

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