EU Court of Justice Rules First Sale Doctrine Applies to Software Downloads

On July 3, the Court of Justice of the European Union in UsedSoft GmbH v. Oracle International Corp. held that a licensor of software made available for download over the Internet may not prevent the resale of perpetual licenses by its licensees. The court based its holding on a conclusion that a licensor’s exclusive right of distribution of a copy of a software program is exhausted when the licensor first makes that copy available on a perpetual basis in exchange for a fee.

Background

Oracle distributes the majority of its database software by download through the Oracle website, and customers purchase the right to use this software pursuant to license agreements that grant them a non-transferable right for an unlimited period. Customers may, under maintenance agreements, download updates to the software. UsedSoft, a German company that markets used software licenses, sells “used” user licenses to Oracle computer programs. Following purchase of a “used” license, UsedSoft customers download software directly from the Oracle website and use the software under the purchased licenses. Oracle filed a lawsuit in Germany against UsedSoft seeking an order prohibiting these activities.

Directive 2009/24

The German court referred the case to the Court of Justice of the European Union to interpret Directive 2009/24/EC of the European Parliament and of the Council of 23 April 2009 on the Legal Protection of Computer Programs (“Directive 2009/24”). Under Article 4(2) of Directive 2009/24, the first lawful sale within the European Union of a computer program provided on DVD or other tangible media “exhausts” the distribution right within the European Union of that particular copy, allowing the original purchaser to further distribute the computer program. In other words, under Directive 2009/24, the lawful purchaser of a computer program may resell or give away a purchased computer program just as he or she could do so with a book purchased from a book store. This is known as “first sale” doctrine in the United States.

Rationale and Decision of the EU Court

The question before the court was whether the download of a computer program from the Internet triggers this exhaustion right. In determining whether a “sale” takes place with respect to downloads, the court looked first to the commonly accepted definition of “sale” as being an agreement where a person, in return for payment, transfers to another person his or her rights of ownership in an item of property.

In response, Oracle argued that it does not sell copies of its computer programs but instead makes them available for free through its website; users, however, may only use these programs by entering into Oracle’s standard license agreement, which is non-transferable. Under this reasoning, Oracle took the position that neither of these activities involves a transfer of the right of ownership in the software. The court rejected this argument explaining that, taken together, the making available by Oracle of a copy of its computer program and the entering into of a license for an unlimited period in return for payment involves a transfer of ownership that constitutes a “sale.”  The court further stated that if the term “sale” was not given a broad interpretation, the effectiveness of Directive 2009/24 would be undermined since software suppliers could instead refer to any contract merely as a “license” rather than a “sale” in order to circumvent first sale doctrine.

Oracle also argued that Directive 2009/24 should only apply to tangible embodiments (such as DVDs and CDs) and not to intangible embodiments (such as downloads). The court rejected this argument as well, on grounds that Article 4(2) is silent on embodiments and that Article 1(2), which explains the objectives of Directive 2009/24, states that protection under Directive 2009/24 applies to any form of expression of a computer program.

Oracle further argued that patches and updates issued under a maintenance agreement prevent exhaustion because the copy of the computer program that the first acquirer may transfer to a second acquirer no longer corresponds to the copy the first acquirer downloaded but to a new copy of the program. The court explained that the end result of maintenance agreements is that the corrections, alterations and additions form an integral part of the copy originally downloaded and can be used by the original purchaser even if the purchaser subsequently decides not to renew the maintenance agreement. Under this reasoning, the court held that the distribution right of these patches and updates is exhausted along with the underlying program.

In summary, the court held that Directive 2009/24 must be interpreted to mean that the right of distribution of a copy of a computer program is exhausted if the licensor authorizes – even free of charge – the downloading of that copy from the Internet and grants a right to use that copy for an unlimited period in return for payment of a fee.

Limitations

There are several limitations to this holding:

• As the court explained, if the license acquired by the first acquirer covers a multiple number of users, the acquirer may not – under the theory of exhaustion – divide up the license and resell only a subset of the use rights.
• To avoid infringing the copyright holder’s exclusive right to reproduce the program, the court cautioned that the original acquirer must make his or her own copy of the computer program unusable at the time of its resale. The court stated that to solve the problem of proving whether such a copy has been made unusable, it is permissible for the software supplier to make use of technical protective measures such as product keys.
• For Directive 2009/24 to apply, the first sale must occur within the European Union and the exhaustion right only applies within the European Union.

Implications

The judgment of the court potentially opens up a significant secondary market in the European Union for the resale of previously downloaded computer programs. As suggested by the court, software companies may want to implement procedures tracking the ownership and use of its product keys, which will also assist in ensuring that any downstream purchasers of a computer program cease use of it once further resold.

Given this potential secondary market, when a U.S.-based licensor appoints a reseller or distributor located in the European Union, the licensor should consider including provisions in the license agreement requiring that the reseller or distributor pay the licensor compensation in the event that the reseller, distributor or an affiliate begins operating a secondary market in the applicable software licenses. The goal would be to mitigate the effects of the reseller or distributor avoiding royalty payments by reselling “used” licenses rather than by selling “new” licenses for which compensation to the licensor is due.

The Court acknowledged that this holding did not apply to “services and on-line services.” Companies may wish to avoid this secondary market altogether by moving their offerings into the cloud on a Software-as-a-Service basis. Alternatively, another potential option might be to offer the computer program on a subscription basis, which may under certain circumstances prevent the offering from being designated a “sale” and would avoid triggering first sale doctrine.

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Those interested in learning more about Goodwin Procter’s technology transactions expertise and practice, or the issues discussed above, should contact Steve Charkoudian or Joel Lehrer, partners in Goodwin Procter’s Technology Transactions Practice.