Chillin'Competition

Relaxing whilst doing Competition Law is not an Oxymoron

Case C-128/11 UsedSoft v Oracle

with 9 comments

Note by Alfonso: The Court of Justice has published yesterday its long-awaited decision in UsedSoft v. Oracle. Even though the matters are issue are mainly IP-related (they concern the application of the so-called  “exhaustion doctrine” to computer programs), they have important competition law implications. Marcos Araujo  (a friend of ours and a partner at Garrigues) has followed closely this case as well all others concerning the intersection of IP and competition law. We’ve asked him to provide us with his first views on this very fresh Judgment. Here they are:

In a Grand Chamber judgment, the ECJ has taken a determined stance in favour of THE free movement of goods and the exhaustion doctrine. Today’s Judgment has dismissed not only Oracle’s arguments, but also those raised by the Commission and by the various intervening Member States, and has affirmed vigorously the right of licence holders to “resell” their rights of use of computer programs, supporting intermediaries and end customers in the way.

The case had attracted much attention given the contradictions in this area of European Law, which on the one hand declares that the sale of computer programs exhausts the rights of the owner (art. 4.2 of Directive 2009/24) and therefore that the program can freely be re-sold, and, on the other hand, states that the provision of services over the Internet does not cause exhaustion of rights (Recital 29, Directive 2001/29). In this situation, software companies which license (and arguably do not “sell”) software over the internet may claim that their IP rights should not be deemed to become “exhausted”, as they would be providing a service rather than selling a product.

In a decision that may change the manner in which computer programs are licensed in Europe, the European Court declares that where the software license contemplates a permanent right of use, it equates to a “sale” for the purposes of the Directive on the Legal Protection of Computer Programs 2009/24. The Court argues that “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” (Judgment, para. 49).

The Court also dismisses that internet and physical sales should be treated differently (“it must be considered that the exhaustion of the distribution right under Article 4(2) of Directive 2009/24 concerns both tangible and intangible copies of a computer program, and hence also copies of programs which, on the occasion of their first sale, have been downloaded from the internet onto the first acquirer’s computer”) ( Judgment, para. 59).

This “broad interpretation” of the exhaustion doctrine also serves the Court to dismiss the objection raised by Oracle, as the product being re-sold would not be the same as the one originally purchased as a result of service agreements which are, as indicated, not subject to the exhaustion doctrine. On that point, the Court notes, somewhat cryptically, that “(e)ven if the maintenance agreement is for a limited period, the functionalities corrected, altered or added on the basis of such an agreement form an integral part of the copy originally downloaded and can be used by the acquirer of the copy for an unlimited period, even in the event that the acquirer subsequently decides not to renew the maintenance agreement. (…) In such circumstances, 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.”

The Court has been careful to avoid that the judgment may be read beyond software licensing and extending to content distributed over the internet such as books or media. Stressing that the Software Directive 2009/24 is a “lex specialis”, it has sought to maintain the current exclusive right of the content owner to authorise the distribution and communication of content.

One may however wonder whether this distinction between “content and “program” will raise questions in the future, as new generations of software are marketed. It may also be questioned whether new forms of software licensing not entailing a “permanent right of use” would be subject to this rule.

Time will tell if this was a good or a bad decision. In the short term one may wonder if this ensures adequate protection for IP owners. However, as the Internet world evolves to cloud-based applications the practical effects of much of the judgment might become less relevant than it appears at first sight.

Written by Alfonso Lamadrid

4 July 2012 at 5:28 pm

9 Responses

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  1. que pelota eres colega…

    Milana Bonita

    4 July 2012 at 5:31 pm

    • 🙂 Marcos ha seguido el caso y conoce el tema mucho mejor que nosotros. Yo, francamente, aún no he leído la sentencia, así que tiene todo el sentido que le pidiéramos un post a él.
      Por cierto, si no te importa envíame un email para decirme quién eres; tus comentarios ya me están generando curiosidad!

      Un saludo

      Alfonso Lamadrid

      4 July 2012 at 5:35 pm

  2. Are there wider implications for resale of other goods? I’m thinking of concert and theatre tickets which are supposed to be used only by the named buyer, possibly also train tickets and maybe even air fares.

    Aoife White

    4 July 2012 at 6:20 pm

    • In my view no, at least directly. The judgment concerns resale bans on IP, which are governed by a public law status and an exhaustion of rights doctrine applies which may not be derogated by agreement. However, the mere provision of services (not encompassing licence/sale of IP rights) does not of itself raise exhaustion issues.
      Another matter is whether other sets of rules (esp. competition law) would affect resale bans on goods/services. If these are sold to intermediaries/wholesalers that will normally be the case (see the Football Cup tickets saga). However, where tickets are sold to ultimate customers directly one may wonder whether there is an agreement between undertakings, besides whether there is a restriction of competition at all. Consumer protection laws may have a say from that angle, but I am not aware of decisions that would grant consumers a general right to resell.

      Marcos Araujo

      5 July 2012 at 9:53 am

  3. Good to see you picked this up. I expect this to have considerable ramifications in the gaming industry. Publishers are increasingly concerned about the sale of second hand (physical) copies of games and the alleged causal link with lower sales of new software. A move towards a purely digital environment, which has started already and may well become a reality when the next generation of consoles hits shelves, would enable microsoft, nintendo and sony to hurt the used game market. With this judgement out however they may well be forced to change the way their online platforms work. Ie a user must be able to sell their digital copy of the game to a third party, as long as the original copy is removed from the harddrive/cloud/etc of the previous owner. I am sure this is not what microsoft, nintendo and sony had initially in mind doing. The ECJ did the right thing.

    Pieter van Osch

    4 July 2012 at 10:35 pm

  4. This court ruling puts a long awaited dent in the FUD (Fear, Uncertainty & Doubt) tactics employed by the software vendors. However, worth noting that Usedsoft’s use of a Notary (in part, to hide where the licences came from) was deemed illegal by the German courts and Usedsoft is now also going through insolvency proceedings. There are other secondary software licence suppliers whom adopt more transparent business models that do not rely on the Exhaustion Principle.

    Noel

    5 July 2012 at 1:40 pm

  5. Marcos, I share most of your analysis (http://www.howtocrackanut.blogspot.co.uk/2012/07/software-licence-is-contract-isnt-it.html). However, not sure that cloud computing would put an end to this line of development of the case, since there will always be ‘technical’ copies of programs under the ever broader definition of ‘copy’ that the CJEU has hinted at in UsedSoft. A very interesting filed to keep an eye on, anyway.

  6. Heya! I’m at work browsing your blog from my new iphone 3gs!
    Just wanted to say I love reading through your blog and look forward to all your posts!
    Carry on the superb work!


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