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Downloadable software can be re-sold by purchaser, but not for different number of users than originally licensed, ECJ rules

Companies can legitimately sell 'used' software licences for downloadable copyrighted computer programs but are prohibited from selling on any excess 'used' individual end user rights that are included in a licence for multiple users that they do not need, the European Court of Justice (ECJ) has said.03 Jul 2012

The ECJ said that software owners exhaust their rights to control the sale of their copyrighted products when they first sell them within the EU, regardless of whether the sale concerns a physical product or one downloaded from the internet.

It said that, as a result, the original purchaser of the software can sell on 'used' copies of the software to others but that they must delete any copy they have made for their own use at the when they make that sale. However, the Court said that the original purchaser cannot divide up the number of licenses for the software they buy from the copyright owner and then sell on the right to use those licences that they do not need.

"If the licence acquired by the first acquirer relates to a greater number of users than he needs ... the acquirer is not authorised by the effect of the exhaustion of the distribution right under [the EU's Computer Programs Directive] to divide the licence and resell only the user right for the computer program concerned corresponding to a number of users determined by him," the ECJ said in its ruling

Technology law expert Luke Scanlon of Pinsent Masons, the law firm behind Out-Law.com, said the ECJ had confused the concepts of a licence agreement and a right to use software.

"The judgment does not permit a customer to on-sell the individual rights of use that may make up a licence purchased," Scanlon said. "So if a business purchases 100 rights to use software under a licence and because of economic downturn, realises that it only needs 50 rights to use that software because it has made a number of employees redundant, it cannot on-sell those individual rights of use unless it on-sells the whole licence of 100."

"The ECJ here seems to have drawn a distinction between selling a licence and selling a right of use of intellectual property. What is important is selling the rights to use software purchased and not how many rights of use have been bundled together in one licence agreement. The judgment should have said that if you purchase a right to use software, you can on-sell that right of use so long as you delete the same number of copies that you have on-sold," he added.

The ECJ was ruling over questions referred to it from a German court in order that it could resolve a case involving software giant Oracle and rival firm usedSoft.

Oracle took action against usedSoft, arguing that its sale of used software licences was illegal. Customers who buy second hand licences from usedSoft download software from Oracle for their use.

The Federal Court of Justice in Germany asked the ECJ to clarify whether or not a company can sell second hand versions of downloaded business software. Oracle's licences say that they are not transferable. Oracle claims that second hand sales of the licences leads to copyright infringement and had asked the German court to stop usedSoft from selling them.

However, the ECJ said that a correct reading of EU law supported usedSoft's right to distribute used copies of Oracle's software. This was because Oracle lost its right to control that distribution after selling the licence for the product to the "original acquirer".

However, it said that Oracle can legitimately use "technical means", such as encryption technology, to prevent its software being downloaded multiple times.

"A copyright holder such as Oracle is entitled, in the event of the resale of a user licence entailing the resale of a copy of a computer program downloaded from his website, to ensure by all technical means at his disposal that the copy is made unusable," the ECJ said in its ruling.

Under the Computer Programs Directive copyright protection is given to "the expression in any form of a computer program" and generally provides rights holders with the exclusive right to authorise reproductions and "the translation, adaptation, arrangement and any other alteration of a computer program and the reproduction of the results thereof". However, consent is not required for reproduction or the other actions in relation to the computer program if those acts "are necessary for the use of the computer program by the lawful acquirer in accordance with its intended purpose, including for error correction".

The rights holders also generally have exclusive rights over the authorisation of "any form of distribution to the public, including the rental, of the original computer program or of copies thereof". However, the rights holders' ability to control the distribution is 'exhausted' following the "first sale" of a copy of their computer programs under the terms of the Directive "with the exception of the right to control further rental of the program or a copy thereof".

The ECJ said that companies buying used licences would be considered as making a reproduction of the software when they downloaded a copy of it, but that such reproduction would be considered legitimate.

"In the event of a resale of the copy of the computer program by the first acquirer, the new acquirer will be able ... to download onto his computer the copy sold to him by the first acquirer," the ECJ said. "Such a download must be regarded as a reproduction of a computer program that is necessary to enable the new acquirer to use the program in accordance with its intended purpose."

However, the ECJ said that the 'first acquirer' must, at the moment of re-sale, make "unusable" any copy they had downloaded in order to avoid infringing the rights of the copyright owner to control the reproduction of their software.

"The original acquirer of a tangible or intangible copy of a computer program for which the copyright holder's distribution right is exhausted ... who resells that copy must, in order to avoid infringing that rightholder's exclusive right of reproduction of his computer program ... make the copy downloaded onto his computer unusable at the time of its resale," it said.

The ECJ based its findings on the fact that a sale had occurred under the Computer Programs Directive. In the sale of copyrighted software downloaded from an online location the distribution rights of the owner are exhausted whenever software is transferred for an "unlimited period" of time in return for "payment of a fee", it had concluded. Such an arrangement properly remunerates a copyright holder "the economic value" of the copy of their work, it added.

In explaining the reasons for its view the ECJ said that "the effectiveness" of the principle of exhaustion to software owners' distribution rights would be "undermined" if it had defined 'sale' differently. This was because "suppliers would merely have to call the contract a 'licence' rather than a 'sale' in order to circumvent the rule of exhaustion and divest it of all scope," it ruled.

Scanlon said, though, that software developers could now find other ways to protect their interests by not giving licence users rights of use for an unlimited time.

"The ECJ has placed a lot of emphasis on the fact that the Oracle licences were 'perpetual' in nature," he said. "It tied their perpetual nature to their economic value and for this reason concluded that a 'sale' had occurred under the Computer Programs Directive."

"This means that software suppliers will have to think very carefully before giving perpetual licences. Instead of giving a perpetual licence, it may be preferable for a software company to give a licence that expires after a certain period of time with a positive obligation to provide an updated, but different version of their software, in order to avoid the implications of this judgment," he added.

Scanlon also said that the ECJ's confirmation of the difference between online service contracts and the making available of software for download could also enable software developers to strengthen their rights by licensing access to the software through cloud computing services.

Distribution rights, and the exhaustion of those rights, do not apply to the provision of services.

"The court was at pains to distinguish between an online service and the provision of software online by means of downloading," he said. "The decision therefore further encourages software providers to pursue a strategy of supplying software as a service and through the cloud in order to maximise revenues."

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Expertise in Copyright

Copyright is an extremely valuable, often unrecognised or misunderstood right which protects a whole range of original materials including written materials, software, artistic materials, music and dramatic works. It arises automatically without the need for registration in most countries and protects these materials from unauthorised copying. It is essential in business to identify such rights, ensure they are owned by the correct entity, properly protected, enforced and exploited.

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