May a software licence be freely sold on and can the purchaser then download and use the software? The European Court of Justice gave a ground-breaking ruling on these question on 3 July 2012 (the UsedSoft ruling). Software suppliers have always strongly opposed such trade but now the European Court has ruled that material and immaterial (downloaded) copies of licenced software are in principle exhausted and the licence and copy may be freely sold on provided it concerns the whole licence.
The case that the Court was ruling on was between Oracle and UsedSoft. Oracle sells licences for its database software and distributes them via downloads on its website. New updates can also be downloaded based on this licence. UsedSoft sells used Oracle software licences or parts of them. The UsedSoft customers then download a copy of the Oracle software directly from the Oracle website. Oracle was opposed to this and asked the German court to prohibit this action by UsedSoft. In first instance, Oracle was granted its prohibition but UsedSoft appealed and the appellate court raised questions of interpretation at the European Court.
The Court considers the matter of whether the Oracle customer downloading a copy of the software led to Oracle no longer being able to oppose further distribution of that copy. This is called exhaustion of the distribution right: article 4(2) of the European software directive says on this that “the first sale in the Community of a copy of a program by a rightholder or with his consent shall exhaust the distribution right”.
Can the download of the Oracle software by the Oracle customer be deemed a first sale? The Court believes it can. According to the Court, “sale” means transfer of ownership of a tangible or non-tangible item. Oracle’s defence was that there was no case of transfer of ownership because it only offered its customers a free copy of the software, which they could download via the Internet. The customer was only allowed to use this copy if it had taken out a licence. Neither action implied transfer of ownership according to Oracle.
The Court does not follow Oracle. According to the Court, the licence agreement and downloading the copy form an indivisible whole. Without a right of use there is no point to the download. The Oracle customer receives a right of use not limited in time to the copy of the Oracle software for payment. This means, according to the Court, that Oracle can obtain a payment corresponding to the economic value of the copy of the software. According to the Court this implies that ownership of this copy has been transferred.
Whether this copy of the software is made available to the customer as a CD-ROM or DVD or a download is irrelevant, because in both cases a copy of the software is made available to the customer and the use of the copy is inseparably linked to the licence agreement, as ruled by the Court.
The licence and the download of a copy of the software by the Oracle customer is the “first sale” in the meaning of article 4(2) of the Software Directive so that Oracle’s distribution right to this copy is exhausted. This is a broad interpretation of the term sale. This is justified according to the Court because otherwise merely indicating the agreement as a licence could get around this rule, making the exhaustion rule of article 4(2) meaningless.
No making available to the public but distribution
Oracle had argued that making the software available for download on its website should be seen as “making available to the public” in the meaning of article 3(1) of the Copyright Directive. This article concerns publishing music or film via cable or satellite but also works on the internet. Oracle’s argument is the prelude to article 3(3) of the Copyright Directive being applicable which says that the rule of exhaustion of the distribution right does not apply for such publications.
The Court refutes Oracle’s argument. Firstly, because the Software Directive gives special rules which take precedence over the more general rules of the Copyright Directive and secondly, because the availability for the public in the meaning of the Copyright Directive in combination with a transfer of ownership is a distribution act eligible for exhaustion in the meaning of article 4 of the Copyright Directive. This was already decided by the Court in the Peek & Cloppenburg ruling of 2008 and confirmed in the Donner ruling of 2012.
Exhaustion applies both for material and immaterial copies of software
Oracle also puts forward that the rule of exhaustion only refers to the sale of tangible items and therefore not to the sale of immaterial copies downloaded from the Internet. The Court does not follow and says that the exhaustion doctrine applies for both material and immaterial copies of software, also with the argument that this follows from the intention of the Software Directive.
Trading parts of licences is not permitted
UsedSoft also traded parts of licences. This meant that the Oracle customer did not use all user rights and UsedSoft sold the part of the licence that concerned the unused user rights, The Court resolutely puts paid to this. The exhaustion rule of the distribution right does not entitle the customer to split its licence and sell on the part of the licence that it is not using. That would lead to the existence of two copies being used by different parties. It is then in fact a reproduction. For reproduction of a copy consent from Oracle as the rightholder is required and this consent is lacking. For the same reason the original customer of Oracle may no longer use his own copy after sale of his licence and must make it unusable, according to the Court.
May the purchaser of the licence use the downloaded software?
The Court then rules on a second matter, namely whether the purchaser of the used Oracle license is entitled to download and use a copy of the Oracle software.
This is a relevant question because the departure point is that the exclusive reproduction right (the right to copy) accrues to Oracle. Hence Oracle must give consent to make this copy. However, there is an exception to this (article 5(1) Software Directive) meaning that no consent is required for copying software if this copy is necessary for the legitimate acquirer to use the software for the intended objective unless otherwise agreed.
Downloading a bought copy of Oracle software from the internet falls under the exception to the exclusive reproduction right referred to here above, provided this copy is used for the intended objective.
However, Oracle had asserted that only the party that had directly entered into a licence contract with Oracle may be seen as the “legitimate acquirer”. The Court does not follow Oracle. If Oracle’s reasoning were to be followed then Oracle could make the rule of exhaustion without effect for its software by invoking its exclusive reproduction rights against any purchaser of a copy of the software who had not directly entered into a licence contract with Oracle. The Court deems this undesirable.
Furthermore, the Court already ruled (see here above) that Oracle cannot oppose the selling on of a material or immaterial copy of its software that it has sold to its customer in the EU (exhaustion of the distribution right). In this situation, therefore, any further purchaser can be seen as a “legitimate acquirer”.
UsedSoft however did not sell copies of the software but sold used Oracle licenses. The question is whether the same applies as for copies of the software. The Court rules affirmatively, because the copy and the licence form an inseparable whole (see also here above). Selling on of the licence therefore implies selling on of a copy of the software.
The new acquirer of the licence as “legitimate acquirer” can therefore make a copy of the software by downloading it from the Oracle website and enable himself to use this software for the intended objective. The Court emphasises here that the licence may not be split which was frequently the case at UsedSoft.
Oracle’s control right
Because Oracle must be able to check whether the person selling on the licence is not still using the software himself, the Court rules here that Oracle may confirm with all available technical means that the seller’s own original copy of the software was made unusable.
It can be concluded that with this ruling the Court has given a ground-breaking judgment on the exhaustion of immaterial copies. In fact it is not even about the sale of a copy but the sale of a licence which according to the Court implies that a new copy may be downloaded on the website of the rightholder. The original seller must have made his copy unusable and the rightholder may use all available technical means to check this. Splitting licences moreover is not permitted. The ruling will certainly lead to discussion even if only on the issue of how this licence sale must be interpreted in national law. Possibly an increase of the trade in (non-split) licences will arise. How extensive that trade will be is hard to estimate. I do not expect large figures. Should this inconvenience software suppliers, then technical measures will certainly be thought of to make this trade in licences unattractive. From now on, the trade in split licences in the EU has been stopped in any case.