CJUE Judgement “UsedSoft”: the exhaustion of rights applies to software licenses
The Court of Justice of the European Union (CJUE) has adopted its second decision on software copyright protection in a very short-term. The first was its decision of 2 May 2012, “SAS” (here is a comment in our web site). Now it’s the turn of Judgement of 3 July 2012, C-128/11, “UsedSoft”. This new decision is highly interesing not only because it affirms the application of the principle of exhaustion of rights to software licenses but also because of the consequences it may have for the commercialisation of digital goods in the Internet.
The facts of the case are as follows: Oracles commercialise software in the Internet. Its Customers download copies of the software directly to their computers from Oracle’s website. The software license includes the user right to store a copy of the program permanently on a server and to allow a certain number of users to access it by downloading it to the main memory of their work-station computers. On the basis of a maintenance agreement, Oracle provides updated versions of the software and patches to correct faults.
UsedSoft markets used software licences, including Oracle’s. UsedSoft acquires from customers of Oracle such user licences, or parts of them, and offers them to third parties. In doing so UsedSoft tells their customers that they still benefit from the maintenance agreement concluded between the original licence holder and Oracle. Furthermore, the lawfulness of the original sale is confirmed by a notarial certificate.
Oracle understood that UsedSoft activity constitutes a copyright infringment so they brought proceedings in Munich. On appeal, the Bundesgerichtshof considered that to adopt a decision an interpretation by the CJUE of certain provisions of Directive 2009/24 on protection of computer software was needed.
In particular, it was necessary to determine whether Art. 4.2 was applicable to software licenses. According to this provision “[t]he 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”.
The CJUE has answered on the affirmative based on these two interesting reasonings:
a) regardless of what national laws say, software licenses are to be considered “sales” for the purpose of this provision. Oracle sustained that it does not sell copies of its computer programs at issue in the main proceedings. It says that it makes available to its customers a copy of the program concerned free of charge. Neither the making available of the copy nor the conclusion of the user licence agreement involves a transfer of the right of ownership of that copy. The Court disagreed: the downloading of a copy of a computer program and the conclusion of a user licence agreement for that copy form an indivisible whole. Those two operations must therefore be examined as a whole for the purpose of their legal classification. In a situation such as that at issue in the main proceedings, the transfer by the copyright holder to a customer of a copy of a computer program, accompanied by the conclusion between the same parties of a user licence agreement, constitutes a ‘first sale … of a copy of a program’. If the term ‘sale’ within the meaning of Article 4(2) Directive 2009/24 were not given a broad interpretation, the effectiveness of that provision would be undermined, since suppliers would merely have to call the contract a ‘licence’ rather than a ‘sale’ in order to circumvent the rule of exhaustion. The fact that the software owner also provide maintenance services is irrelevant for the purpose of this classification.
b) the principle of exhaustion of rights in Art. 4.2 applies even if the software is downloaded from the Internet. As Oracle and the European Commission point out, the making available of a copy of a computer program on the copyright holder’s website constitutes a ‘making available to the public’ within the meaning of Article 3(1) of Directive 2001/29 on copyright in the information society, which, in accordance with Article 3(3) of that directive, cannot give rise to exhaustion of the right of distribution of the copy. The distribution right relates only to tangible property and not to intangible copies of works of art downloaded from the Internet. This is established not only in Directive 2001/29 but also in the WIPO Internet Treaties. Furthermore, according to the Commission, recital 29 in the preamble to Directive 2001/29 confirms that ‘[t]he question of exhaustion does not arise in the case of services and on-line services in particular’. None of these arguments are hold by the Court: following art. 1.2 a) Directive 2001/29, the provisions of Directive 2009/24 constitute a lex specialis in relation to the provisions of Directive 2001/29. Even if the downloading of software from the Internet might also be covered by the concept of ‘communication to the public’ within the meaning of Article 3(1) of the latter directive, the ‘first sale … of a copy of a program’ within the meaning of Article 4(2) of Directive 2009/24 would still give rise, in accordance with that provision, to exhaustion of the right of distribution of that copy. It does not appear from Article 4(2) of Directive 2009/24 that the exhaustion of the right of distribution of copies of computer programs mentioned in that provision is limited to copies of programmes on a material medium such as a CD-ROM or DVD. On the contrary, that provision, by referring without further specification to the ‘sale … of a copy of a program’, makes no distinction according to the tangible or intangible form of the copy in question. The intention of the European Union legislature was to assimilate, for the purposes of the protection laid down by Directive 2009/24, tangible and intangible copies of computer programs.
The decision has a direct consequence: it legitimates a new market, that of second-hand software, an activity that can be highly profitable having in mind the high prices of certain specialized software. It is to be seen what strategy will software developers adopt to reduce the adverse effect this decision may have on their business. Probably, this is accelerate the transfer to “cloud computing” business models. But more important that is, even if the CJUE has restricted its interpretation to Directive 2009/24, the discussion on whether the exhaustion of rights principle applies in the Internet environment has been reopened. Even if they are governed by different directives, iIt would be difficult to justify why the CJUE decision can be applied to software and not to multimedia works.
The Court of Justice of the European Union (CJUE) has adopted its second decision on software copyright protection in a very short-term. The first was its decision of 2 May 2012, “SAS” (here is a comment in our web site). Now it’s the turn of Judgement of 3 July 2012, C-128/11, “UsedSoft”. This new decision is highly interesing not only because it affirms the application of the principle of exhaustion of rights to software licenses but also because of the consequences it may have for the commercialisation of digital goods in the Internet.
The facts of the case are as follows: Oracles commercialise software in the Internet. Its Customers download copies of the software directly to their computers from Oracle’s website. The software license includes the user right to store a copy of the program permanently on a server and to allow a certain number of users to access it by downloading it to the main memory of their work-station computers. On the basis of a maintenance agreement, Oracle provides updated versions of the software and patches to correct faults.
UsedSoft markets used software licences, including Oracle’s. UsedSoft acquires from customers of Oracle such user licences, or parts of them, and offers them to third parties. In doing so UsedSoft tells their customers that they still benefit from the maintenance agreement concluded between the original licence holder and Oracle. Furthermore, the lawfulness of the original sale is confirmed by a notarial certificate.
Oracle understood that UsedSoft activity constitutes a copyright infringment so they brought proceedings in Munich. On appeal, the Bundesgerichtshof considered that to adopt a decision an interpretation by the CJUE of certain provisions of Directive 2009/24 on protection of computer software was needed.
In particular, it was necessary to determine whether Art. 4.2 was applicable to software licenses. According to this provision “[t]he 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”.
The CJUE has answered on the affirmative based on these two interesting reasonings:
a) regardless of what national laws say, software licenses are to be considered “sales” for the purpose of this provision. Oracle sustained that it does not sell copies of its computer programs at issue in the main proceedings. It says that it makes available to its customers a copy of the program concerned free of charge. Neither the making available of the copy nor the conclusion of the user licence agreement involves a transfer of the right of ownership of that copy. The Court disagreed: the downloading of a copy of a computer program and the conclusion of a user licence agreement for that copy form an indivisible whole. Those two operations must therefore be examined as a whole for the purpose of their legal classification. In a situation such as that at issue in the main proceedings, the transfer by the copyright holder to a customer of a copy of a computer program, accompanied by the conclusion between the same parties of a user licence agreement, constitutes a ‘first sale … of a copy of a program’. If the term ‘sale’ within the meaning of Article 4(2) Directive 2009/24 were not given a broad interpretation, the effectiveness of that provision would be undermined, since suppliers would merely have to call the contract a ‘licence’ rather than a ‘sale’ in order to circumvent the rule of exhaustion. The fact that the software owner also provide maintenance services is irrelevant for the purpose of this classification.
b) the principle of exhaustion of rights in Art. 4.2 applies even if the software is downloaded from the Internet. As Oracle and the European Commission point out, the making available of a copy of a computer program on the copyright holder’s website constitutes a ‘making available to the public’ within the meaning of Article 3(1) of Directive 2001/29 on copyright in the information society, which, in accordance with Article 3(3) of that directive, cannot give rise to exhaustion of the right of distribution of the copy. The distribution right relates only to tangible property and not to intangible copies of works of art downloaded from the Internet. This is established not only in Directive 2001/29 but also in the WIPO Internet Treaties. Furthermore, according to the Commission, recital 29 in the preamble to Directive 2001/29 confirms that ‘[t]he question of exhaustion does not arise in the case of services and on-line services in particular’. None of these arguments are hold by the Court: following art. 1.2 a) Directive 2001/29, the provisions of Directive 2009/24 constitute a lex specialis in relation to the provisions of Directive 2001/29. Even if the downloading of software from the Internet might also be covered by the concept of ‘communication to the public’ within the meaning of Article 3(1) of the latter directive, the ‘first sale … of a copy of a program’ within the meaning of Article 4(2) of Directive 2009/24 would still give rise, in accordance with that provision, to exhaustion of the right of distribution of that copy. It does not appear from Article 4(2) of Directive 2009/24 that the exhaustion of the right of distribution of copies of computer programs mentioned in that provision is limited to copies of programmes on a material medium such as a CD-ROM or DVD. On the contrary, that provision, by referring without further specification to the ‘sale … of a copy of a program’, makes no distinction according to the tangible or intangible form of the copy in question. The intention of the European Union legislature was to assimilate, for the purposes of the protection laid down by Directive 2009/24, tangible and intangible copies of computer programs.
The decision has a direct consequence: it legitimates a new market, that of second-hand software, an activity that can be highly profitable having in mind the high prices of certain specialized software. It is to be seen what strategy will software developers adopt to reduce the adverse effect this decision may have on their business. Probably, this is accelerate the transfer to “cloud computing” business models. But more important that is, even if the CJUE has restricted its interpretation to Directive 2009/24, the discussion on whether the exhaustion of rights principle applies in the Internet environment has been reopened. Even if they are governed by different directives, iIt would be difficult to justify why the CJUE decision can be applied to software and not to multimedia works.