IP, Technology & Data

Last week, the European Court of Justice (ECJ) published its decision in a long-running German case between a company called UsedSoft and the US software giant Oracle.

The case hit the headlines because the ECJ held that a software company such as Oracle could not stop a licensee from reselling his “used” licences for software distributed by means of a download from a website.

If you have already read a summary of the decision, or aren’t interested in the background facts, then skip down to the key points below.

The background
Under the directive on the legal protection of computer programs, the licensor of a computer program loses his right to control onward distribution of a copy of that program when that copy is first sold in the EU. This is known as the principle of exhaustion.

So, if I go to PC World and buy a copy of a Microsoft product on a CD, then Microsoft cannot stop me subsequently selling that copy on to someone else. This has led to a buoyant market for, amongst other things, second hand computer games, where national retailers sell second hand games alongside “new” games.

UsedSoft’s business provided a means of users selling unused licences for Oracle software.

Under the licence granted by Oracle for its client server software, licensees download the computer program from the Oracle website. The user is then licensed to store that program permanently on a server and allow up to 25 users to access it, downloading it onto their workstations.

Oracle argued that UsedSoft’s business breached the terms of its licence, as the licence contractually restricts the licensee from transferring its rights to a third party, and that the provisions in the EU software directive did not apply to downloads.

The ECJ’s decision
The ECJ disagreed with Oracle’s argument, holding that the principle of exhaustion applies regardless of the means by which software is distributed.

In other words, the licensor of a computer program (whether on CD or a download) cannot stop a user in the EU from “selling” on his licenced copy to a third party, and any licence term purporting to vary that right is invalid.

The principle behind the decision is good news for those that buy computer programs online (pretty much anyone these days). Remember – this applies not just to enterprise software like Oracle, but also to games, consumer software and mobile apps.

Key points to note
There are some key points to note from this decision:

  • The decision only applies to software that is licensed on a perpetual basis – this point appears to have been overlooked in many commentaries. In other words it applies only to licences that are not limited in duration. So this decision does not apply to any software that is, say, subject to renewal by payment of an annual licence fee.
  • This means that many organisations’ Microsoft licences may fall outside its scope – for example, where those products are licensed under Microsoft’s Software Assurance model, as the licence under SA only becomes a perpetual licence at the end of the SA contract and upon satisfaction of certain conditions.
  • The principle established by the court applies to the copy of the program “as corrected and updated”. So the copy that may be transferred is the version as updated under any maintenance agreement, even if that agreement has now expired.
  • The principle does not extend so as to allow a licence for multiple users to be subdivide a licence (such as the block of 25 licences sold by Oracle) and resell only part of it, but depending on how the licence is structured you may be able to sell a number of seats where the software is licensed on a per seat basis.
  • Once you have sold your licence for a downloaded program to a third party, you have to delete it from your device and stop using it. This should go without saying (and applies equally to software that has been installed from a CD that is subsequently resold), but it’s worth re-emphasing the point. It may be easier said than done. How will software companies manage the risk that licensees just skip this step and sell on the licence regardless?
  • This decision has no impact on applications provided on a SaaS or cloud basis, even where the user has locked into that cloud vendor’s service for a fixed period of time.

Will software companies change their licensing/distribution models?
The move to providing software through website downloads allowed vendors to try and avoid some of the legal issues associated with distributing a copy of their software in a tangible form, such as a CD or DVD. Restricting the ability of users to sell on licences for downloaded software has provided vendors with another revenue stream.

With this ruling, it will be interesting to see whether software vendors once again restructure their distribution models to try and regain control over the rights of users to dispose of surplus licences.

For that reason, I wouldn’t be surprised if perpetual licences for enterprise software become a thing of the past for some vendors, with a move towards combined licence and maintenance agreements that are subject to ongoing payments.

Will the decision affect the price of software?
It will also be interesting to see what impact this has on the price of both “new” and “second-hand” licenses.

I remember attending a talk a few years ago by the chief economist at the PRS, who highlighted the impact that Amazon’s marketplace had on the price of new CDs on Amazon, as the (cheaper) price of the second-hand CD was displayed alongside the cost of buying the CD new. From a user’s perspective, there is no degradation in quality, so why buy the more expensive “new” copy? Conversely, the cost of the new CD included the artist’s royalties, production costs and other commissions for the record label, which did not need to be factored into the cost charged by the seller of a second-hand CD.

Could similar economics impact upon the cost of software?

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Martin Sloan

Partner at Brodies LLP
Martin is a partner in Brodies Technology, Information and Outsourcing group and has wide experience of advising clients on technology procurement and IT and business process outsourcing projects. Martin also advises on data protection (including the GDPR), and general technology and intellectual property law, and has a particular interest in the laws applying to social media and new technology such as mobile apps, contactless/mobile payments, and smart metering.
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