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European Court upholds sale of used software products purchased online in UsedSoft v. Oracle


The European Court of Justice held in Case C-128/11 UsedSoft v. Oracle that the sale of “used” software is permissible when sold in the European Union.  However, the European Court of Justice stated that the owners of the software product are entitled to put in place security measures such as product keys to prevent the original user of the product from continuing to use the software product after its sale.  The ruling could transform not only the software market but also the sale of other on-line products, such as e-books and music, in the European Union.

Background

Oracle develops and distributes software programmes.  The case at issue concerned Oracle’s client server software programmes which could be downloaded by Orcale’s customers for use by up to twenty-five users.  In addition, Oracle also provided updates and corrected faults in previous versions (patches) of the software programmes.  However, the licensees are given a non-transferable right to the software programme.

UsedSoft is a German company which markets licences acquired from customers of Oracle.  Customers of UsedSoft download the licence directly from Oracle’s website after acquiring a ‘used’ licence.  Customers who already have the software can purchase a further licence or part of a licence for additional users.  In that case they download the software to the main memory of the work stations of those other users.  Oracle brought proceedings against UsedSoft in the German courts seeking an order for it to cease those practices.

UsedSoft argued that it was entitled to sell used software licences because Oracle’s right of distribution was “exhausted” after the first sale of its software products.  In particular, it relied upon the EU Directive on Computer Programmes which states that the first sale in the European Union of a copy of a computer programme by the copyright holder or with his consent exhausts the right of distribution of that copy in the European Union.  However, Oracle claimed that the principle of exhaustion does not apply to user licences of computer programmes downloaded from the internet (as opposed to those sold in tangible formats).  The German Federal Court referred the case to the European Court of Justice.

Judgment

In its judgment, the European Court of Justice stated that the principle of exhaustion of the distribution right applies not only where the copyright holder markets copies of its software on a material medium (CD-ROM or DVD) but also where its software is distributed by means of downloads from a website.

The European Court of Justice noted that the principle of exhaustion applies to the first “sale” of computer programmes.  In European Court of Justice’s view, such a “sale” is an “agreement by which a person in return for payment transfers to another person his rights of ownership in an item of tangible or intangible property”.  Consequently, it is irrelevant whether the sale of the software is effected by means of a tangible product such as a CD-ROM or an intangible product such as a download.  It is also irrelevant that minor changes are made to the software programme through subsequent updates or patches as these are ancillary to the main product.

The European Court of Justice noted that in the present case the software products are sold by Oracle for an unlimited period in return for payment of a fee.  As such, there is a transfer of ownership which constitutes the first sale of the software product.

The European Court of Justice also rejected the claim that internet sales do not exhaust the rights of the original rightholder on the basis that they involve the provision of services which are not capable of being exhausted (under the Copyright Directive).  According to the European Court of Justice, such an approach would mean that a right holder could control every sale through the internet for a software product whereas further sales could not be controlled if the product is simply sold in a tangible format (such as a CD-ROM).  This would amount to an artificial distinction in treatment between the different forms of sale.

However, the European Court of Justice held that the used software product cannot be sub-divided amongst different users when it is being sold on as this would infringe the right of reproduction.   Furthermore, the seller of the used licence must make the copy downloaded onto its own computer unusable at the time of resale.  The European Court of Justice held that security measures, such as product keys, are justifiable to ensure that the used software product is unusable by the seller after its sale.

Comment

This judgment confirms that the sale of software programmes through the internet should be treated in the same manner as software products sold in a tangible format.  This opens up the software market to parallel imports and secondary market in the European Union.  However, the rationale of this judgment could have major implications for other digitally available products, such as e-books and music, which are increasingly purchased through internet sites rather than in tangible formats.

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