Yesterday, the European Court of Justice handed down its ruling in Oracle v. UsedSoft. The court followed largely the Advocate General’s trail (we reported), but at some – crucial – point, it took a different, rather surprising direction which will have considerable impact on the marketing of software (and maybe other copyright-protected works, too).

1.     The ruling

The decision answers three questions the German Federal Supreme Court (Bundesgerichtshof, BGH) had referred to the ECJ, all relating to the exhaustion doctrine under art. 4(2) and to the important (and often misunderstood) art. 5(1) of the Computer Program Directive, according to which

“(i)n the absence of specific contractual provisions, the acts referred to in points (a) and (b) of Article 4(1) [that is, the reproduction and the modification of the software] shall not require authorisation by the rightholder where they are necessary for the use of the computer program by the lawful acquirer in accordance with its intended purpose, including for error correction.”

The precise wording of the three questions posed by the German court is quite hard to digest; therefore I jump directly to the courts main dicta.

a)

First, the ECJ held that the exhaustion of the right to distribute a copy of a computer program was not limited to cases where the right holder distributes a copy of this program on a tangible medium (or someone else puts such a copy on the market with the right holders consent) and permits the use for an unlimited time. Rather, the distribution right was also subject to exhaustion when the users make authorized copies by downloading the software and pay a one-off fee in return for being permitted to use the software for an unlimited time.

The court discussed a number of quite technical arguments I will not address here. Instead I would like to point out only two aspects with possibly broader future consequences: First, it underscored that economically, “the sale of a program on CD-ROM or DVD and the sale of a program by downloading from the internet are similar.” The online-transmission was the “functional equivalent of the supply of a material medium” (paragraph 61). Secondly, the court drew upon an aspect it has often used in the past in order to limit the scope of intellectual property rights under the exhaustion principle, the so-called “specific subject-matter of the intellectual property concerned”. The court explained that

“(t)o limit the application … of the principle of the exhaustion of the distribution right … solely to copies of computer programs that are sold on a material medium would allow the copyright holder to control the resale of copies downloaded from the internet and to demand further remuneration on the occasion of each new sale, even though the first sale of the copy had already enabled the rightholder to obtain an appropriate remuneration. Such a restriction of the resale of copies of computer programs downloaded from the internet would go beyond what is necessary to safeguard the specific subject-matter of the intellectual property concerned.” (paragraph 63)

In my opinion this argument should have consequences that go beyond the software world; for more on that see below.

b)

Up to this point, the ruling stayed within the boundaries of the expected. The next step taken by the court, however, was probably a major surprise to most observers:

While the Advocate General had opined that the first acquirer was confined to pass on the precise copy made through downloading the program, the ECJ goes much further: The judges held that, as long as the first acquirer deletes the software from her computer systems, she may, based on exhaustion, transfer the right to make use of the software to a third party. And this third party may reinstall and even re-download the program. The court argued that the exhaustion of the distribution right had taken effect in such a case – and that the new download was covered by afore-quoted art. 5(1): The new acquirer had to be regarded as a “lawful acquirer” (paragraph 80) and the new download as “necessary for the use of the computer program” (paragraph 85).

In this context, the court made one important clarification that will put an end to one particular wide-spread practice of selling “used” software (which constitutes a major part of the UsedSoft’s business). It pointed out that dividing volume licenses and selling only the user rights the first acquirer does not need is not justified by exhaustion (parapgraphs 69f.).

Apart from that, the court rejected the following puzzling argument raised by the Advocate General (and Oracle and a few governments): The concept of the “lawful acquirer” related only to an acquirer who is authorized under a license agreement concluded directly with the copyright holder. As I have pointed out in my previous post on the case this argument would render the principle of exhaustion effectively moot. The ECJ now said just this (paragraphs 82f.).

2.     Comments and outlook

– Exhaustion takes only effect if software is transferred for use for an unlimited time. Will the ECJ ruling cause more software providers to rely on time-limited agreements? Two aspects make this unlikely. Point one, this would increase administration cost by a large margin – without providing much help as to unauthorized copying anyway. Point two, under German law at least, giving away software for a limited period of time would cause the agreement being governed by particularly burdensome warranty obligations that are effectively never time-barred.

– Looking at the court’s line of reasoning, according to which a sale requires the transfer of a right to use a copy of a computer program for unlimited time against payment of a fee, one might wonder whether transfers of software without payment may give rise to exhaustion. I am not sure whether the court really intended to limit exhaustion to remunerated transfers. It appears to me that the court looked to the compensation received by Oracle only because this was the specific fact pattern of the case. After all, if a right holder decides that she does not wish to be paid for handing over a right to use a copy of her software, why should in this case no exhaustion occur?

– Apart from that, the question remains open, whether the principles developed in the present case apply to other work categories (music,films, e-books, etc.) as well. The court elegantly avoided an answer to this question, relying on a few differences between the Information Society Directive on the one hand and the Computer Program Directive on the other. However, the two arguments I depicted above, are not limited to the sale of software. In particular by pointing to the well-tried “specific subject-matter of the intellectual property concerned” the court might have opened the gate to a future application of the UsedSoft principles to all other work categories as well. If you would like to counter that the recitals 28 and 29 of the InfoSoc Directive were pretty clearly in the way, consider this: The “specific subject-matter” comes from primary EU law, and this would trump the directive as secondary law. [Update: Then again, the EU court relied mainly on art. 5(1) which has no parallel outside the Computer Program Directive. As a consequence, it would be logical to apply exhaustion principles to online copies of copyrighted works other than software, but not to the extent that second acquirers would be permitted to make new copies of the works.]

– Finally: The ECJ mentioned in paragraph 79 of the opinion that software companies could protect their interests by using product keys. When I read this, I recalled the two year-old Half-Live 2  decision of the BGH. In that decision the court held as follows: If a computer game, that is sold on DVD, can only be used if the user has a valid online user account, it is no violation of the principle of exhaustion, if the distributor prohibits the transfer of the user account to an acquirer of a used DVD, even if this means that the second acquirer can in fact not play the game. So maybe the “exhaustion road” will soon be closed by simple technical solutions à la Half-Live 2. Or would the ECJ at some point strike down such practices as well?