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Re: [upcoming] The European Court of Justice on 'Software' First Sale

From: Alexander Terekhov
Subject: Re: [upcoming] The European Court of Justice on 'Software' First Sale
Date: Tue, 25 Sep 2012 18:27:51 +0200

Official death of copyleft in EU:


The case related to a dispute between software companies Oracle and
UsedSoft over whether UsedSoft could sell businesses and consumers used
licences for Oracle software without Oracle’s permission (previously
discussed here).  Oracle therefore took UsedSoft to court in Germany,
which was referred to the Court of Justice of the European Union


Key Issue 1: is the sale of software a "first sale"?

The CJEU held that 'sale' means "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 belonging to him" (para

Whether there is a first sale of software therefore depends on whether
that "right of ownership" is transferred by the software developer to
the purchaser.

Oracle argued that there is no right of ownership transferred to its
purchasers, and therefore no "first sale" of its software at all,
because it makes its software available for free download and separately
enters into licence agreements with a downloader in return for that
downloader paying a fee.  Oracle argued therefore that this was
therefore a licence arrangement, not a sales arrangement.

The CJEU disagreed.  It held "the downloading of a copy of a computer
program and the conclusion of a user licence agreement for that copy
form an indivisible whole. Downloading a copy of a computer program is
pointless if the copy cannot be used by its possessor. Those two
operations must therefore be examined as a whole for the purposes of
their legal classification" (para 44).

The CJEU therefore decided that making software available for download
while at the same time entering into a licence agreement with the
downloader and receiving payment for it "examined as a whole, involve
the transfer of the right of ownership of the copy of the computer
program in question" (para 45).

So, the CJEU held that since the sale of software involved a "transfer
of ownership" in the software from the developer to the purchaser, that
means it also constitutes a "first sale" under the InfoSoc Directive. 
That in turn means that the developer's right of distribution is
exhausted by that first sale (para 48).

Key Issue 2: so if the sale of software by the developer to a first
purchaser constitutes a first sale that exhausts the right of
distribution, can the developer still control second hand sales using
its right of reproduction?  

The key to understanding this issue is to remember that there are
separate rights of distribution and rights of reproduction in EU
copyright law.  By this stage in the case, the CJEU had decided that
rights of distribution weren't a problem for second hand sales.  Now it
had to decide whether software developers retain an exclusive right to
control reproduction under Article 5(1) of Directive 2009/24 (aka the
'Computer Programs Directive') (which, if they do, could still be used
to prohibit second hand sales).

Essentially, the CJEU decided that the right to control reproduction is
lost against the second purchaser (the reasons why take some explaining,
but essentially it is because a second purchaser is held to be a "lawful
acquirer" of the software under Article 5(1) of the Computer Program

Other issues discussed:

Issue 3: can the wording of the EU legislation be read such that the
first sale/exhaustion of rights principle only applies to tangible

No, said the CJEU following some slightly complex discussion of the
relevant legislation (paragraphs 55 – 58).  Later, it said:  "…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" (para 69).

And even more clear still: "To limit the application…of the principle of
the exhaustion of the distribution right …solely to copies of computer
programs that are sold on a material medium would allow the copyright
holder to control the resale of copies downloaded from the internet and
to demand further remuneration on the occasion of each new sale, even
though the first sale of the copy had already enabled the rightholder to
obtain an appropriate remuneration. Such a restriction of the resale of
copies of computer programs downloaded from the internet would go beyond
what is necessary to safeguard the specific subject-matter of the
intellectual property concerned" (para 63).

Issue 4: does it matter that the software has been
patched/updated/changed between being bought by the first purchaser and
then transferred to the second purchaser?

Oracle argued that, because the software in question had been updated
under a maintenance agreement since it was bought by the first
purchaser, it could not be said that the second purchaser was purchasing
the same software.  Therefore, Oracle said, there could not be an issue
of exhaustion of rights here.
The CJEU disagreed.  It said: "the exhaustion of the distribution right
under Article 4(2) of Directive 2009/24 extends to the copy of the
computer program sold as corrected and updated by the copyright holder"
(para 68).

Issue 5: what happens if the first purchaser acquires more licences than
he actually needs?

The CJEU said that the first purchaser couldn't then slice and dice the
licences into piece and sell them off individually – they had to be
transferred en masse (para 69).  (This is only likely to be relevant in
block licence deals of course).

Issue 6: what happens to the first purchaser's installed copy of the
software once he has sold it to a second purchaser?

The CJEU held that the first purchaser needs to "make his own copy
unusable at the time of its resale…in order to avoid infringing the
exclusive right of reproduction of a computer program which belongs to
its author", laid down in Article 4(1)(a) of Directive 2009/24".

(This makes sense – if you sell the software on you shouldn't have the
right to keep using it – otherwise you won't really have sold it at

Later on, the CJEU acknowledged that in practice this could impose
difficulties on the software developer because it'd be hard to know
whether the first purchaser has made his copy "unusable".  The CJEU
therefore briefly commented "to solve that problem, it is permissible
for the distributor – whether ‘classic’ or ‘digital’ – to make use of
technical protective measures such as product keys".

Issue 7: can a software developer stop second hand sales on the basis
that the second purchaser hasn't signed a licence agreement with the

Some EU governments argued that a "lawful acquirer" could only be
someone who had signed a licence agreement with the developer (i.e. if
you don't sign a EULA, you can't sell the game on).
The CJEU disagreed and said: "that argument would have the effect of
allowing the copyright holder to prevent the effective use of any used
copy in respect of which his distribution right has been exhausted …by
relying on his exclusive right of reproduction … and would thus render
ineffective the exhaustion of the distribution right under Article 4(2)"
(para 83).

Issue 8: does it change things if the developer calls the software
transfer a 'licence' not a 'sale'?

No.  The CJEU held "if the term ‘sale’ within the meaning of Article
4(2) of Directive 2009/24 were not given a broad interpretation as
encompassing all forms of product marketing characterised by the grant
of a right to use a copy of a computer program, for an unlimited period,
in return for payment of a fee designed to enable the copyright holder
to obtain a remuneration corresponding to the economic value of the copy
of the work of which he is the proprietor, 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 and divest it of all scope" (para 49)."

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