The freedom to resell, American Investor, Fall 2012

An unprecedented court decision makes it legal to resell “used” software

“I have a daughter (have while she is mine),” said Polonius. Apparently, the same may be said of downloaded software after the recent ruling by the European Court of Justice in UsedSoft GmbH v Oracle International Corp. (Case C‑128/11, judgment of July 3, 2012).

The issue was well-known. When we buy a book, we may read it, copy it or sell it. But when we buy and download software, the license agreement frequently states that we cannot resell it. Moreover, the software company typically offers extensive after-sale support, including major updates. As a result, after paying for a program we are willing to stick with it: doing otherwise would be prohibitively expensive, when comparing the costs of acquiring similar software with the sunk costs of the software we already have.

Polonius and his books

But our books we may always sell. Some books include certain restrictions, such as “This book is sold subject to the condition that it shall not, by way of trade or otherwise, be lent, re-sold, hired or otherwise circulated without the publisher’s prior consent in any form of binding or cover other than that in which it is published and without a similar condition including this condition being imposed on the subsequent purchaser.” Yet, no publisher or bookseller may prohibit resale of a book. Lawyers call this notion “exhaustion of copyright.”

Once a book, compact disc or other copy of a work is lawfully sold to Polonius, Polonius has the book (has while it is his) and may sell it without violating any copyright, because the copyright was exhausted when he bought the book.

You and your software

When we buy and download a program from the Internet, we do not obtain any physical copy of the program. Hence, there used to be a strong view that there is no exhaustion of copyright when buying programs online (downloading a file, rather than buying a CD-ROM or DVD containing the program).

The prevailing view was that a license for a downloaded program may be non-transferable. Such provisions were commonly used in licenses from the owner of the software to the purchaser when the purchaser ticked “Accept terms and conditions” and then clicked “Download.”

The ECJ has now wiped out this distinction between tangible and digital copies of software. Downloading of a program and conclusion of a license agreement, the judges held, “form an indivisible whole.” When the license is for an unlimited period and for a fee, this whole amounts to the sale of a copy of the program, just like the sale of a book. This is because there is an exchange of a copy in consideration of the fee. This led to the conclusion that a digital, intangible copy with a license for an unlimited period may be resold. The right of resale must not be excluded in the license agreement, and any terms to this effect are null and void.

Your software, your alternations

The court went even further. It ruled that maintenance of software, provided for a license fee, changes the copy already sold so that all alterations form a part of the copy. This has two important consequences. First, an agreement for maintenance services does not affect the possibility of reselling the software. Second, any patches or updates provided under the maintenance are also exhausted and are traded with the original copy.

The ECJ ruled therefore that when reselling a program, the previous owner should make the original copy unusable (most likely by uninstalling it altogether). The new acquirer is allowed to download another copy from the copyright holder’s website, and use it on the acquirer’s own computer. It remains to be seen whether the distributor may prevent exercise of this right.

There are two main restrictions on resale imposed by the ECJ ruling. First, in the case of a multiuser license, the licensee is not allowed to divide the original license and sell the program for each workstation to separate users. The licensee may only sell the whole package to one buyer. Second, the distributor may take measures to ensure that a given copy is not used simultaneously by the original buyer and a subsequent buyer. This may include product keys or other measures assuring that a copy is used by only one user at a time.

Intellectual property and electronic reality

The UsedSoft judgment is one of a series in which the ECJ has adapted intellectual property law to suit the changing reality of contemporary life online. It promotes the common sense notion of having something while we have it, instead of using something borrowed under a license agreement. The court noted particularly that “from an economic point of view, the sale of a computer program on CD-ROM or DVD and the sale of a program by downloading from the internet are similar. The on-line transmission method is the functional equivalent of the supply of a material medium.”

It is tempting to say that in this case the outlook of consumers prevailed over corporate interests. But in fact the UsedSoft ruling was issued in a case between two businesses: one producing software and the other reselling it. Further, the possibility of reselling programs that are no longer needed may be a boon to SMEs and also effectively reduce the commitment cost of investing in new software.

Questions remain

But some issues are left unresolved. The court was silent on mp3 files, e-books and all things digital that are not software. Surely, all these fell outside the scope of the case, but from a court so plucky as the ECJ one would nevertheless expect more general guidance. If one were to speculate, an educated guess would be that the court will expand its holding to cover all computer files.

There remains another problem, however, that is even harder to solve. The ECJ held that by selling a copy of software, the user is selling its license. The notion of exhaustion of copyright seems irreconcilable with the notion of transferring a license. These two notions were merged by the ECJ when it said that because of exhaustion a license may be transferred. The problem is that a license is a legal relationship, usually arising out of a contract, not necessitated by possession of a copy of the licensed work. In particular, a license for an unlimited period may be terminated. This leaves any acquirer of a copy at the mercy of the copyright holder.

It is yet to be seen whether the law will force copyright holders to be merciful.

Published in: American Investor, Fall 2012